10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2012

Commission File No.: 000-52195

BANK OF THE CAROLINAS CORPORATION

(Exact name of registrant as specified in its charter)

NORTH CAROLINA	20-4989192
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
135 Boxwood Village Drive Mocksville, North Carolina	27028
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (336) 751-5755

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

Indicate by check mark whether the registrant 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 (Section 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  x    No  ¨

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.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

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

On November 14, 2012 there were 3,895,840 outstanding shares of the registrant’s common stock.

BANK OF THE CAROLINAS CORPORATION

FORM 10-Q

September 30, 2012

INDEX

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements	3
Consolidated Balance Sheets at September 30, 2012 and December 31, 2011	3
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2012 and 2011	4
Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2012 and 2011	5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011	6
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2012 and 2011	7
Notes to Consolidated Financial Statements	8
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3. Quantitative and Qualitative Disclosures about Market Risk	37
Item 4. Controls and Procedures	37
Part II. OTHER INFORMATION
Item 1. Legal Proceedings	37
Item 1A. Risk Factors	37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3. Defaults Upon Senior Securities	37
Item 4. Mine Safety Disclosures	37
Item 5. Other Information	37
Item 6. Exhibits	38
SIGNATURES	39
EXHIBIT INDEX	40

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Bank of the Carolinas Corporation

Consolidated Balance Sheets

(amounts in thousands, except share and per share data)

	September 30 2012			December 31 2011*
	(Unaudited)			(As restated)
Assets:
Cash and due from banks, noninterest-bearing	$	3,987		$	5,044
Interest-bearing deposits in banks		3,843			2,557
Cash and cash equivalents		7,830			7,601
Federal funds sold		13,710			28,165
Investment securities		121,387			112,404
Loans receivable		280,671			307,907
Less: Allowance for loan losses		(7,450	)		(8,101	)
Total loans, net		273,221			299,806
Premises and equipment		11,911			12,229
Other real estate owned		5,424			8,524
Bank owned life insurance		10,447			10,732
Deferred tax assets		—			—
Prepaid FDIC insurance assessment		998			2,200
Accrued interest receivable		1,393			1,503
Other assets		1,952			2,803
Total Assets	$	448,273		$	485,967
Liabilities:
Deposits:
Noninterest-bearing demand deposits	$	34,756		$	34,034
Interest-checking deposits		39,138			37,306
Savings and money market deposits		106,541			106,308
Time deposits		204,095			238,565
Total deposits		384,530			416,213
Securities sold under agreements to repurchase		45,379			45,381
Subordinated debt		7,855			7,855
Other liabilities		1,919			1,903
Total Liabilities		439,683			471,352
Commitments and contingencies (Note 6)		—			—
Stockholders’ Equity:
Preferred stock, no par value		13,179			13,179
Discount on preferred stock		(496	)		(716	)
Common stock, $5 per share par value		19,479			19,479
Additional paid-in capital		12,991			12,991
Retained deficit		(37,463	)		(31,871	)
Accumulated other comprehensive income		900			1,553
Total Stockholders’ Equity		8,590			14,615
Total Liabilities and Stockholders’ Equity	$	448,273		$	485,967
Preferred shares authorized		3,000,000			3,000,000
Preferred shares issued and outstanding		13,179			13,179
Common shares authorized		15,000,000			15,000,000
Common shares issued and outstanding		3,895,840			3,895,840

* Derived from audited consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

3

Bank of the Carolinas Corporation

Consolidated Statements of Operations

(Unaudited)

(dollars in thousands, except per share data)

	Three Months Ended September 30						Nine Months Ended September 30
	2012			2011			2012			2011
Interest income
Interest and fees on loans	$	3,571		$	4,276		$	10,905		$	13,415
Interest on securities		723			823			2,043			2,422
Other interest income		13			16			59			42
Total interest income		4,307			5,115			13,007			15,879
Interest expense
Interest on deposits		779			1,075			2,530			3,405
Interest on borrowed funds		570			571			1,698			2,075
Total interest expense		1,349			1,646			4,228			5,480
Net interest income		2,958			3,469			8,779			10,399
Provision for loan losses		1,471			5,650			2,996			14,567
Net interest income (loss) after provision for loan losses		1,487			(2,181	)		5,783			(4,168	)
Noninterest income
Customer service fees		297			318			867			951
Increase in value of bank owned life insurance		89			91			685			269
Gains on sales of investment securities		—			—			2,147			6
Other income		5			6			20			16
Total noninterest income		391			415			3,719			1,242
Noninterest expense
Salaries and benefits		1,723			1,757			5,266			4,947
Occupancy and equipment		468			502			1,451			1,571
FDIC insurance assessments		405			345			1,225			949
Data processing services		257			218			737			654
Valuation provisions and net operating costs associated with foreclosed real estate		1,324			1,053			2,415			4,050
Other		1,048			1,205			3,371			3,591
Total noninterest expense		5,225			5,080			14,465			15,762
Loss before income taxes		(3,347	)		(6,846	)		(4,963	)		(18,688	)
Provision for income taxes		(383	)		—			409			996
Net loss		(2,964	)		(6,846	)		(5,372	)		(19,684	)
Dividends and accretion on preferred stock		(239	)		(234	)		(714	)		(698	)
Net loss available to common stockholders	$	(3,203	)	$	(7,080	)	$	(6,086	)	$	(20,382	)
Loss per common share:
Basic	$	(0.82	)	$	(1.82	)	$	(1.56	)	$	(5.23	)
Diluted	$	(0.82	)	$	(1.82	)	$	(1.56	)	$	(5.23	)

The accompanying notes are an integral part of these consolidated financial statements.

4

Bank of the Carolinas Corporation

Consolidated Statements of Comprehensive Loss

(Unaudited)

(dollars in thousands)

	Three Months Ended September 30						Nine Months Ended September 30
	2012			2011			2012			2011
Net loss	$	(2,964	)	$	(6,846	)	$	(5,372	)	$	(19,684	)
Other comprehensive income (loss):
Unrealized holding gains on securities available-for-sale		996			1,121			1,085			2,125
Reclassification adjustment for gains realized in net loss		—			—			(2,147	)		(6	)
Income tax effect		(383	)		(431	)		409			(815	)
Total other comprehensive income (loss), net of income tax effect		613			690			(653	)		1,304
Total comprehensive loss	$	(2,351	)	$	(6,156	)	$	(6,025	)	$	(18,380	)

The accompanying notes are an integral part of these consolidated financial statements.

5

Bank of the Carolinas Corporation

Consolidated Statements of Cash Flows

(Unaudited)

(dollars in thousands)

	Nine Months Ended September 30
	2012			2011
Cash flows from operating activities:
Net loss	$	(5,372	)	$	(19,684	)
Adjustments to reconcile net loss to net cash provided by operating activitites:
Provision for loan losses		2,996			14,567
Stock based compensation benefit		—			(4	)
Loss on disposal of premises and equipment		—			3
Depreciation and amortization		627			751
Change in valuation allowance on other real estate owned		1,965			3,191
(Gain) loss on sale of other real estate owned		(33	)		125
Gains on sales of investment securities		(2,147	)		(6	)
Decrease (increase) in bank owned life insurance		285			(269	)
Net amortization/accretion of premiums and discounts on investments		464			572
Net change in other assets		1,730			1,361
Net change in other liabilities		16			93
Net cash provided by operating activities		531			700
Cash flows from investing activities:
Net change in federal funds sold		14,455			(13,300	)
Purchases of premises and equipment		(309	)		(96	)
Purchases of securities		(118,959	)		(31,533	)
Proceeds from sales, calls, maturities and principal repayments of securities available for sale		110,597			29,691
Redemption of FHLB stock		842			298
Proceeds from sales of other real estate owned		4,711			2,855
Net decrease in loans		20,046			20,975
Net cash provided by investing activities		31,383			8,890
Cash flows from financing activities:
Net increase (decrease) in deposits		(31,683	)		1,389
Net repayments of other borrowings		—			(12,000	)
Net decrease in repurchase agreements		(2	)		(191	)
Cash dividends paid on preferred stock		—			—
Net cash used by financing activities		(31,685	)		(10,802	)
Net increase (decrease) in cash and cash equivalents		229			(1,212	)
Cash and cash equivalents at beginning of period		7,601			10,565
Cash and cash equivalents at end of period	$	7,830		$	9,353
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	4,338		$	4,900
Noncash investing and financing activities:
Change in fair value of securities available for sale, net of tax	$	653		$	1,304
Transfer from loans to other real estate owned	$	3,543		$	7,682

The accompanying notes are an integral part of these consolidated financial statements.

6

Bank of the Carolinas Corporation

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

(dollars in thousands)

					Discount							Additional						Accumulated Other			Total
	Preferred Stock				on Preferred			Common Stock				Paid-In			Retained			Comprehensive			Stockholders’
	Shares		Amount		Stock			Shares		Amount		Capital			Deficit			Income			Equity
Balance, December 31, 2010		13,179	$	13,179	$	(991	)		3,897,174	$	19,486	$	12,988		$	(3,268	)	$	310		$	41,704
Net loss		—		—		—			—		—		—			(19,684	)		—			(19,684	)
Other comprehensive income		—		—		—			—		—		—			—			1,304			1,304
Total comprehensive loss		—		—		—			—		—		—			—			—			(18,380	)
Stock based compensation benefit		—		—		—			—		—		(4	)		—			—			(4	)
Discount accretion on preferred stock		—		—		204			—		—		—			(204	)		—			—
Dividends accrued on preferred stock		—		—		—			—		—		—			(77	)		—			(77	)
Balance, September 30, 2011		13,179	$	13,179	$	(787	)		3,897,174	$	19,486	$	12,984		$	(23,233	)	$	1,614		$	23,243
Balance, December 31, 2011		13,179	$	13,179	$	(716	)		3,895,840	$	19,479	$	12,991		$	(31,871	)	$	1,553		$	14,615
Net loss		—		—		—			—		—		—			(5,372	)		—			(5,372	)
Other comprehensive loss		—		—		—			—		—		—			—			(653	)		(653	)
Total comprehensive loss		—		—		—			—		—		—			—			—			(6,025	)
Discount accretion on preferred stock		—		—		220			—		—		—			(220	)		—			—
Dividends accrued on preferred stock		—		—		—			—		—		—			—			—			—
Balance, September 30, 2012		13,179	$	13,179	$	(496	)		3,895,840	$	19,479	$	12,991		$	(37,463	)	$	900		$	8,590

The accompanying notes are an integral part of these consolidated financial statements.

7

Bank of the Carolinas Corporation

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

In the opinion of management, the financial information included in these unaudited financial statements reflects all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial information as of September 30, 2012 and December 31, 2011 and for the three- and nine-month periods ended September 30, 2012 and 2011, in conformity with accounting principles generally accepted in the United States of America.

The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. Actual results could differ from those estimates. Operating results for the three- and nine-month periods ended September 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012.

The results presented here are for Bank of the Carolinas Corporation (“the Company”), the parent company of Bank of the Carolinas (“the Bank”). The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the financial statements filed as part of the Company’s annual report on Form 10-K for the year ended December 31, 2011. This quarterly report should be read in conjunction with the annual report. Because the Company has no separate operations and conducts no business on its own other than owning the Bank, this discussion concerns primarily the business of the Bank. However, because the financial statements are presented on a consolidated basis, the Company and the Bank are collectively referred to as “the Company” unless otherwise noted.

Reclassifications

Certain 2012 and 2011 accounts have been reclassified to conform to the September 30, 2012 presentations. There was no impact on earnings or stockholders’ equity as a result of the reclassifications.

Restatement of Previously Issued Financial Statements

The Corporation has restated its previously issued financial statements to correct the accounting for dividends on preferred stock. The preferred stock issued to the U.S. Treasury pursuant to the Capital Purchase Program has a cumulative dividend rate of 5% per year. Although the Corporation had deferred payment of all dividends, a liability was recorded for each of the quarters in the period March 31, 2011 – June 30, 2012. The accounting guidance for recording dividends prohibits a dividend from being accrued until it has been declared. The Corporation and the Bank are prohibited from declaring dividends as a result of a written agreement between the Corporation and the FDIC and the North Carolina Commissioner of Banks. (See the Corporation’s Management Discussion and Analysis for further discussion.) As a result, since the dividend was never declared, a liability should not have been established and other liabilities was overstated and retained earnings was understated as outlined below. Because of the nature of the misclassification, there was no impact on the net loss available to common shareholders. The following is a summary of the effects of the restatement for December 31, 2011 (dollars in thousands):

	As of December 31, 2011
Consolidated Balance Sheets	As Previously Reported			Preferred Dividend Adjustment			Restated
Other liabilities	$	2,485		$	(582	)	$	1,903
Total Liabilities		471,934			(582	)		471,352
Retained deficit		(32,453	)		582			(31,871	)
Total Stockholders’ Equity		14,033			582			14,615

See Note 13 for the further effects of the restatement on the quarterly financial information.

8

NOTE 2. EARNINGS PER SHARE

Basic earnings (loss) per share represents income (loss) available to common stockholders divided by the weighted average number of common shares outstanding during the period. When applicable, the weighted average shares outstanding for the diluted earnings per share computations are adjusted to reflect the assumed conversion of shares available under stock options using the treasury stock method.

Earnings (loss) per share have been computed based on the following (dollars in thousands):

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Net loss applicable to common stockholders	($	3,203	)	$	(7,080	)	($	6,086	)	$	(20,382	)
Weighted average number of common shares outstanding		3,895,840			3,897,174			3,895,840			3,897,174
Weighted average number of diluted common shares outstanding		3,895,840			3,897,174			3,895,840			3,897,174
Common stock options and common stock warrants - anti-dilutive		497,605			502,205			497,605			502,205

The common stock warrants referred to above were issued to the United States Treasury in connection with the Company’s April 17, 2009 participation in the Capital Purchase Program, which was authorized as a part of the TARP legislation passed by Congress during 2008.

9

NOTE 3. INVESTMENT SECURITIES

The amortized cost, estimated fair values and carrying values of the investment securities portfolios at the indicated dates are summarized as follows (dollars in thousands):

	September 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Carrying Value
Investment securities available for sale:
U.S. Government agencies securities	$	55,793	$	463	$	19	$	56,237	$	56,237
State and municipal bonds		8,487		3		99		8,391		8,391
Corporate securities		—		—		—		—		—
Mortgage-backed securities		53,686		1,090		4		54,772		54,772
Total investment securities available for sale		117,966		1,556		122		119,400		119,400
Investment securities held to maturity:
Corporate securities		1,987		29		235		1,781		1,987
Total investment securities	$	119,953	$	1,585	$	357	$	121,181	$	121,387
	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Carrying Value
Investment securities available for sale:
U.S. Government agencies securities	$	43,131	$	1,128	$	—	$	44,259	$	44,259
State and municipal bonds		3,433		157		—		3,590		3,590
Corporate securities		963		54		—		1,017		1,017
Mortgage-backed securities		60,415		1,188		32		61,571		61,571
Total investment securities available for sale		107,942		2,527		32		110,437		110,437
Investment securities held to maturity:
Corporate securities		1,967		67		235		1,799		1,967
Total investment securities	$	109,909	$	2,594	$	267	$	112,236	$	112,404

Management of the Bank believes all unrealized losses on available-for-sale securities as of September 30, 2012 represent temporary impairments related to market fluctuations. The unrealized losses on our securities are a nominal portion of the total value of the portfolio. The Bank has no intention of selling these securities before their maturity and has the appropriate sources of liquidity to hold these securities until maturity in order to minimize the likelihood that recognized losses will occur.

10

The fair values of securities with unrealized losses at September 30, 2012 and December 31, 2011 are as follows (dollars in thousands):

September 30, 2012:

	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Temporarily impaired securities:
U.S. Government agency securities	$	1,971	$	19	$	—	$	—	$	1,971	$	19
State and municipal securities		7,468		99		—		—		7,468		99
Mortgage-backed securities		1,331		4		—		—		1,331		4
Corporate securities		—		—		1,000		235		1,000		235
Total	$	10,770	$	122	$	1,000	$	235	$	11,770	$	357

December 31, 2011:

	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Temporarily impaired securities:
U.S. Government agency securities	$	—	$	—	$	—	$	—	$	—	$	—
State and municipal securities		—		—		—		—		—		—
Mortgage-backed securities		3,071		32		—		—		3,071		32
Corporate securities		—		—		1,000		235		1,000		235
Total	$	3,071	$	32	$	1,000	$	235	$	4,071	$	267

NOTE 4. LOANS

The loan portfolio as of the dates indicated is summarized below (dollars in thousands):

	September 30, 2012			December 31, 2011
Real estate loans:
1-4 family residential	$	74,033		$	78,631
Commercial real estate		114,502			126,849
Construction and development		30,740			33,081
Home equity		29,417			29,727
Total real estate loans		248,692			268,288
Commercial business and other loans		24,459			34,271
Consumer loans:
Installment		3,373			3,490
Other		4,147			1,858
Total consumer loans		7,520			5,348
Gross loans receivable		280,671			307,907
Allowance for loan losses		(7,450	)		(8,101	)
Loans, net	$	273,221		$	299,806

11

Impaired loans, segregated by class of loans, are summarized as follows as of the dates indicated (dollars in thousands):

	September 30, 2012										December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate	$	1,190	$	1,469	$	—	$	1,581	$	61	$	1,533	$	2,413	$	—	$	2,518	$	121
Commercial Real Estate
Owner occupied		3,258		3,582		—		3,608		131		4,352		8,513		—		9,402		319
Income producing		3,310		3,412		—		3,431		96		4,226		4,634		—		4,677		279
Multifamily		—		—		—		—		—		708		826		—		829		44
Construction & Development
1 - 4 Family		—		—		—		—		—		387		387		—		393		20
Other		3,581		4,273		—		3,092		118		3,288		3,702		—		3,883		203
Farmland		362		362		—		362		12		—		—		—		—		—
Residential
Equity Lines		140		143		—		237		5		38		39		—		41		2
1 - 4 Family		7,481		8,983		—		9,043		310		7,920		9,491		—		9,577		563
Junior Liens		239		257		—		260		12		58		73		—		75		6
Consumer - Non Real Estate		74		86		—		87		4		58		58		—		59		4
Total loans with no allowance	$	19,635	$	22,567	$	—	$	21,701	$	749	$	22,568	$	30,136	$	—	$	31,454	$	1,561
With an allowance recorded:
Commercial - Non Real Estate	$	2,348	$	2,348	$	52	$	2,416	$	75	$	2,409	$	2,408	$	74	$	2,482	$	105
Commercial Real Estate
Owner occupied		4,207		4,207		173		4,255		164		1,836		1,886		64		1,902		119
Income producing		6,939		6,994		146		7,047		258		6,424		6,479		224		6,586		278
Multifamily		1,319		1,352		50		1,364		38		1,282		1,316		68		1,345		31
Construction & Development
1 - 4 Family		390		397		8		400		15		380		380		9		396		21
Other		3,380		3,382		140		3,446		101		2,920		2,920		91		2,955		130
Farmland		—		—		—		—		—		980		980		—		982		50
Residential
Equity Lines		—		—		—		—		—		—		—		—		—		—
1 - 4 Family		6,329		6,343		203		6,400		193		7,201		7,212		237		7,265		277
Junior Liens		322		324		2		326		13		398		398		3		469		24
Consumer - Non Real Estate		13		13		—		15		1		—		—		—		—		—
Total loans with an allowance	$	25,247	$	25,360	$	774	$	25,669	$	858	$	23,830	$	23,979	$	770	$	24,382	$	1,035
Total:
Commercial - Non Real Estate	$	3,538	$	3,817	$	52	$	3,997	$	136	$	3,942	$	4,821	$	74	$	5,000	$	226
Commercial Real Estate	$	19,033	$	19,547	$	369	$	19,705	$	687	$	18,828	$	23,654	$	356	$	24,741	$	1,070
Construction & Development	$	7,713	$	8,414	$	148	$	7,300	$	246	$	7,955	$	8,369	$	100	$	8,609	$	424
Residential	$	14,511	$	16,050	$	205	$	16,266	$	533	$	15,615	$	17,213	$	240	$	17,427	$	872
Consumer - Non Real Estate	$	87	$	99	$	—	$	102	$	5	$	58	$	58	$	—	$	59	$	4
Totals	$	44,882	$	47,927	$	774	$	47,370	$	1,607	$	46,398	$	54,115	$	770	$	55,836	$	2,596

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Impaired loans include loans whose contractual terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. Troubled debt restructurings (TDRs) are a subset of impaired loans and totaled $41.2 million at September 30, 2012 and $35.6 million at December 31, 2011.

The following tables illustrate TDR information for the three and nine months ended September 30, 2012 and 2011 (dollars in thousands):

	For the three months ended September 30, 2012						For the nine months ended September 30, 2012
Troubled Debt Restructuring	Number of Contracts		Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Contracts		Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Commercial - Non Real Estate		3	$	82	$	82		13	$	603	$	603
Commercial - Real Estate		4		2,326		2,326		9		5,461		5,461
Construction & Development		2		445		445		8		1,576		1,576
Residential		3		1,293		1,293		22		3,325		3,325
Consumer - Non Real Estate		1		14		14		2		32		32
Totals		13	$	4,160	$	4,160		54	$	10,997	$	10,997
	For the three months ended September 30, 2011						For the nine months ended September 30, 2011
Troubled Debt Restructuring	Number of Contracts		Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Contracts		Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Commercial - Non Real Estate		5	$	315	$	315		18	$	2,195	$	2,195
Commercial - Real Estate		4		693		693		12		3,656		3,656
Construction & Development		1		902		902		6		2,311		2,311
Residential		8		3,891		3,891		25		6,270		6,270
Consumer - Non Real Estate		—		—		—		—		—		—
Totals		18	$	5,801	$	5,801		61	$	14,432	$	14,432

For the purposes of this report, default is defined as being 90-days past due or on non-accrual status without performance. The following tables illustrate loans restructured in the twelve months prior to September 30, 2012 that went into default during the three- and nine-month periods ended September 30, 2012 and 2011 (dollars in thousands).

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	Three months ended September 30, 2012				Nine months ended September 30, 2012
Troubled Debt Restructuring That Subsequently Defaulted	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Commercial - Non Real Estate		—	$	—		—	$	—
Commercial - Real Estate		—		—		—		—
Construction & Development		—		—		—		—
Residential		—		—		1		69
Consumer - Non Real Estate		—		—		—		—
Totals		—	$	—		1	$	69
	Three months ended September 30, 2011				Nine months ended September 30, 2011
Troubled Debt Restructuring That Subsequently Defaulted	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Commercial - Non Real Estate		—	$	—		—	$	—
Commercial - Real Estate		—		—		—		—
Construction & Development		—		—		—		—
Residential		—		—		—		—
Consumer - Non Real Estate		—		—		—		—
Totals		—	$	—		—	$	—

Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and may result in potential incremental losses. These potential incremental losses have been factored into our overall allowance for loan losses estimate. The level of any re-defaults will likely be affected by future economic conditions. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is ultimately repaid in full, reclassified to loans held for sale, or foreclosed and sold. Included in the allowance for loan losses at September 30, 2012 and 2011 was an impairment reserve for TDRs in the amount of $774,000 and $443,000, respectively.

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Non-accrual loans and an age analysis of past due loans, segregated by class of loans, were as follows (dollars in thousands):

	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing		Non-accrual Loans
September 30, 2012:
Commercial - Non Real Estate	$	136	$	30	$	106	$	272	$	24,187	$	24,459	$	—	$	446
Commercial Real Estate
Owner occupied		217		2,466		—		2,683		57,915		60,598		—		358
Income producing		385		—		—		385		46,223		46,608		—		1,443
Multifamily		—		—		—		—		7,296		7,296		—		—
Construction & Development
1 - 4 Family		46		—		—		46		1,816		1,862		—		—
Other		—		433		—		433		28,083		28,516		—		2,004
Farmland		—		—		—		—		362		362		—		—
Residential
Equity Lines		—		35		—		35		29,382		29,417		—		140
1 - 4 Family		1,235		293		1,225		2,753		69,882		72,635		—		3,690
Junior Liens		—		—		—		—		1,398		1,398		—		35
Consumer - Non Real Estate		4		—		9		13		3,360		3,373		—		9
Other		—		—		—		—		4,147		4,147		—		—
Total	$	2,023	$	3,257	$	1,340	$	6,620	$	274,051	$	280,671	$	—	$	8,125
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing		Non-accrual Loans
December 31, 2011:
Commercial - Non Real Estate	$	785	$	559	$	429	$	1,773	$	32,498	$	34,271	$	—	$	1,246
Commercial Real Estate
Owner occupied		319		270		957		1,546		74,706		76,252		—		4,438
Income producing		2,250		—		2,848		5,098		38,896		43,994		—		4,021
Multifamily		59		708		—		767		5,836		6,603		—		708
Construction & Development
1 - 4 Family		—		—		24		24		3,056		3,080		—		24
Other		—		—		976		976		27,683		28,659		—		1,740
Farmland		—		—		—		—		1,342		1,342		—		—
Residential
Equity Lines		137		99		—		236		29,491		29,727		—		38
1 - 4 Family		1,442		1,458		2,938		5,838		71,182		77,020		—		6,779
Junior Liens		14		—		19		33		1,578		1,611		—		58
Consumer - Non Real Estate		31		5		—		36		3,454		3,490		—		10
Other		—		—		—		—		1,858		1,858		—		—
Total	$	5,037	$	3,099	$	8,191	$	16,327	$	291,580	$	307,907	$	—	$	19,062

The Bank categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. This categorization is made on all commercial, commercial real estate, and construction and development loans. The Bank uses the following definitions for risk ratings:

Special Mention - Loans and leases classified as special mention, while still adequately protected by the borrower’s capital adequacy and payment capability, exhibit distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment. These exposures require management’s close attention so as to avoid becoming undue or unwarranted credit exposures.

Substandard - Loans and leases classified as substandard are inadequately protected by the borrower’s current financial condition and payment capability or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

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Doubtful - Loans and leases classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined. The Company’s practice is to charge-off the portion of the loan amount determined to be doubtful in the quarter that the determination is made if the repayment of the loan is collateral dependent.

Loss - Loans and leases classified as loss are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Losses are taken in the period in which they surface as uncollectible.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. As of September 30, 2012 and December 31, 2011, and based on the most recent analysis performed, the loans and leases were categorized as follows (dollars in thousands):

	September 30, 2012
Internal Risk Rating Grades	Pass		Special Mention		Substandard		Doubtful		Loss
Commercial - Non Real Estate	$	17,872	$	3,691	$	2,896	$	—	$	—
Commercial Real Estate
Owner occupied		36,390		15,505		8,703		—		—
Income producing		24,873		11,441		10,294		—		—
Multifamily		5,267		710		1,319		—		—
Construction & Development
1 - 4 Family		1,238		255		369		—		—
Other		12,835		12,306		3,375		—		—
Farmland		—		—		362		—		—
Totals	$	98,475	$	43,908	$	27,318	$	—	$	—
Total:
Commercial - Non Real Estate	$	17,872	$	3,691	$	2,896	$	—	$	—
Commercial Real Estate	$	66,530	$	27,656	$	20,316	$	—	$	—
Construction & Development	$	14,073	$	12,561	$	4,106	$	—	$	—
Totals	$	98,475	$	43,908	$	27,318	$	—	$	—
	December 31, 2011
Internal Risk Rating Grades	Pass		Special Mention		Substandard		Doubtful		Loss
Commercial - Non Real Estate	$	26,552	$	3,606	$	3,727	$	386	$	—
Commercial Real Estate
Owner occupied		54,739		8,547		12,854		112		—
Income producing		29,583		3,604		10,807		—		—
Multifamily		3,820		793		1,990		—		—
Construction & Development
1 - 4 Family		1,081		1,255		744		—		—
Other		18,191		8,199		1,988		281		—
Farmland		—		362		980		—		—
Totals	$	133,966	$	26,366	$	33,090	$	779	$	—
Total:
Commercial - Non Real Estate	$	26,552	$	3,606	$	3,727	$	386	$	—
Commercial Real Estate	$	88,142	$	12,944	$	25,651	$	112	$	—
Construction & Development	$	19,272	$	9,816	$	3,712	$	281	$	—
Totals	$	133,966	$	26,366	$	33,090	$	779	$	—

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All consumer-related loans, including residential real estate and non-real estate, are evaluated and monitored based upon payment activity. Once a consumer-related loan becomes past due on a recurring basis, the Company will pull that loan out of the homogenized pool and evaluate it individually for impairment. At this time, the consumer-related loan may be placed on the Company’s internal watch list and risk rated either special mention or substandard, depending upon the individual circumstances. Consumer-related loans at September 30, 2012 and December 31, 2011, segregated by class of loans, were as follows (dollars in thousands):

	September 30, 2012				December 31, 2011
Risk Based on Payment Activity	Performing		Non- Performing		Performing		Non- Performing
Residential
Equity Lines	$	29,277	$	140	$	29,689	$	38
1 - 4 Family		70,758		1,877		73,427		3,593
Junior Liens		1,398		—		1,592		19
Consumer - Non Real Estate
Credit Cards		—		—		—		—
Other		3,373		—		3,480		10
Totals	$	104,806	$	2,017	$	108,188	$	3,660
Total:
Residential	$	101,433	$	2,017	$	104,708	$	3,650
Consumer - Non Real Estate	$	3,373	$	—	$	3,480	$	10
Totals	$	104,806	$	2,017	$	108,188	$	3,660

NOTE 5. ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance is necessary to reserve for, in the judgment of management, estimated loan losses and risks inherent in the loan portfolio. The Company’s allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans.

The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The Company’s allowance for loan losses consists of three elements: (i) specific valuation allowances determined in accordance with accounting principles regarding receivables based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with accounting principles regarding contingencies based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with accounting principles regarding contingencies based on general economic conditions and other qualitative risk factors both internal and external to the Company.

17

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans at the time they were charged-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. The Company’s pools of similar loans include commercial and industrial loans, commercial real estate loans, construction and development loans, residential real estate loans, and consumer and other loans. General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such valuation allowances are determined by evaluating, among other things: (i) levels and trends in delinquencies and impaired loans; (ii) levels of and trends in charge-offs and recoveries; (iii) levels of non-impaired substandard loans; (iv) trends in volume and terms of loans; (v) effects of changes in risk selection and underwriting practices; (vi) experience, ability, and depth of lending management and staff; (vii) national and local economic trends and conditions; (viii) industry conditions; and (ix) effect of changes in credit concentrations. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Loans identified as losses by management, internal loan review and/or regulatory examiners are charged-off.

Changes in the allowance for loan losses by segment, since their respective year-end, are as follows (dollars in thousands):

	September 30, 2012												September 30, 2011
	Beginning Balance		Chargeoffs			Recoveries		Provision			Ending Balance		Beginning Balance		Chargeoffs			Recoveries		Provision		Ending Balance
Commercial - Non Real Estate	$	2,247	$	(382	)	$	306	$	(773	)	$	1,398	$	2,252	$	(4,085	)	$	427	$	4,280	$	2,874
Commercial Real Estate
Owner occupied		1,794		(550	)		67		237			1,548		1,055		(5,731	)		21		6,290		1,635
Income producing		547		(1,170	)		47		1,359			783		99		(101	)		—		190		188
Multifamily		80		—			—		5			85		—		—			—		—		—
Construction & Development
1 - 4 Family		58		(99	)		1		121			81		181		(212	)		4		168		141
Other		661		(1,019	)		166		939			747		486		(492	)		99		785		878
Farmland		—		—			—		—			—		—		—			—		—		—
Residential
Equity Lines		279		(25	)		7		20			281		459		(692	)		2		483		252
1 - 4 Family		1,168		(1,073	)		114		1,073			1,282		1,078		(1,922	)		43		1,902		1,101
Consumer - Non Real Estate		143		(62	)		25		26			132		161		(115	)		15		93		154
Unallocated		1,124		—			—		(11	)		1,113		1,092		—			—		376		1,468
Total	$	8,101	$	(4,380	)	$	733	$	2,996		$	7,450	$	6,863	$	(13,350	)	$	611	$	14,567	$	8,691

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As of September 30, 2012 and December 31, 2011, loans were evaluated for impairment as follows (dollars in thousands):

	Individually Evaluated for Impairment
	September 30, 2012				December 31, 2011
	Allowance		Total Loans		Allowance		Total Loans
Commercial - Non Real Estate	$	52	$	3,538	$	74	$	5,451
Commercial Real Estate
Owner occupied		173		7,465		64		6,188
Income producing		146		10,249		224		10,650
Multifamily		50		1,319		68		1,990
Construction & Development
1 - 4 Family		8		390		9		1,668
Other		140		6,961		91		5,307
Farmland		—		362		—		—
Residential
Equity Lines		—		140		—		38
1 - 4 Family		205		14,371		240		15,048
Consumer - Non Real Estate		—		87		—		58
Unallocated		—		—		—		—
Total	$	774	$	44,882	$	770	$	46,398
	Collectively Evaluated for Impairment
	September 30, 2012				December 31, 2011
	Allowance		Total Loans		Allowance		Total Loans
Commercial - Non Real Estate	$	1,346	$	20,921	$	2,173	$	28,820
Commercial Real Estate
Owner occupied		1,375		53,133		1,730		70,064
Income producing		637		36,359		323		33,344
Multifamily		35		5,977		12		4,613
Construction & Development
1 - 4 Family		73		1,472		49		1,412
Other		607		21,555		570		23,352
Farmland		—		—		—		1,342
Residential
Equity Lines		281		29,277		279		29,689
1 - 4 Family		1,077		59,662		928		63,583
Consumer - Non Real Estate		132		3,286		143		3,432
Unallocated		1,113		4,147		1,124		1,858
Total	$	6,676	$	235,789	$	7,331	$	261,509

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NOTE 6. COMMITMENTS AND CONTINGENCIES

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, lines of credit and standby letters of credit. These instruments involve elements of credit risk in excess of amounts recognized in the accompanying financial statements.

The Company’s risk of loss related to unfunded loan commitments and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments under such instruments as it does for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The following table presents a summary of outstanding financial instruments whose contract amounts represent credit risk as of September 30, 2012 (dollars in thousands):

Unfunded loan commitments	$	28,060
Financial standby letters of credit		212
Total unused commitments	$	28,272

NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2011, the FASB (also referred to in this note as the “Board”) issued Accounting Standards Update 2011-01, Receivables: Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. Under the existing effective date in Update 2010-20, public-entity creditors would have provided disclosures about troubled debt restructurings for periods beginning on or after December 15, 2010. The amendments in this Update temporarily deferred the effective date for interim and annual periods ending after June 15, 2011, enabling public-entity creditors to provide those disclosures after the Board clarifies the guidance for determining what constitutes a troubled debt restructuring. The deferral in this Update will result in more consistent disclosures about troubled debt restructurings. This amendment does not defer the effective date of the other disclosure requirements in Update 2010-20. The deferral in this amendment was effective upon issuance and did have a significant impact on the Company.

In April 2011, the FASB issued Accounting Standards Update 2011-02, Receivables: A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This update provides additional guidance and amendments to Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: the restructuring constitutes a concession, and the debtor is experiencing financial difficulties. The amendments clarify the guidance on a creditor’s evaluation of whether it has granted a concession, and on a creditor’s evaluation of whether a debtor is experiencing financial difficulties.

The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. An entity should disclose the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired under Section 310-10-35 for which impairment was previously measured under Subtopic 450-20, Contingencies—Loss Contingencies. An entity should disclose the information required by paragraphs 310-10-50-33 through 50-34, which was deferred by Accounting Standards Update No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this update are for interim and annual periods beginning on or after June 15, 2011. The amendments did not have a significant impact on the Company.

In April 2011, the FASB issued Accounting Standards Update 2011-03, Transfers and Servicing: Reconsideration of Effective Control for Repurchase Agreements. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that

20

criterion. Other criteria applicable to the assessment of effective control are not changed by the amendments in this Update.

Those criteria indicate that the transferor is deemed to have maintained effective control over the financial assets transferred (and thus must account for the transaction as a secured borrowing) for agreements that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity when all of the listed conditions have been met. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments did not have a significant impact on the Company.

In May 2011, the FASB issued Accounting Standards Update 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the Board does not intend for the amendments in this Update to result in a change in the application of the requirements in Topic 820.

Some of the amendments clarify the Board’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments did not have a significant impact on the Company.

In June 2011, the FASB issued Accounting Standards Update 2011-05, Comprehensive Income: Presentation of Comprehensive Income. Under the amendments to Topic 220, Comprehensive Income, in this Update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income.

Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.

The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments do not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items. In both cases, the tax effect for each component must be disclosed in the notes to the financial statements or presented in the statement in which other comprehensive income is presented. The amendments do not affect how earnings per share is calculated or presented. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments did not have a significant impact on the Company.

In December 2011, the FASB issued Accounting Standards Update 2011-12, Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. Under the amendments in Update 2011-05, entities are required to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive income. In addition, the amendments in Update 2011-05 require that reclassification adjustments be presented in interim financial periods.

The amendments in this Update supersede changes to those paragraphs in Update 2011-05 that pertain to how, when, and where reclassification adjustments are presented.

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The objective of Update 2011-05 was to help financial statement users better understand the causes of an entity’s change in financial position and results of operations. However, it is important that the benefits of improving the usefulness of financial statement information to users of financial statements be justified by the related costs. The Board received more information about the systems challenges for preparers to comply with the presentation requirements for reclassifications out of accumulated other comprehensive income by the effective date since the issuance of Update 2011-05. The information received caused the Board to reassess the costs and benefits of those provisions in Update 2011-05 related to reclassifications out of accumulated other comprehensive income. Due to the time required to properly make such a reassessment and to evaluate alternative presentation formats, the Board decided that it is necessary to reinstate the requirements for the presentation of reclassifications out of accumulated other comprehensive income that were in place before the issuance of Update 2011-05. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments did not have a significant impact on the Company.

In July 2012, the FASB issued Accounting Standards Update 2012-02, Intangibles – Goodwill and Other (Topic 350). The amendments in this Update are intended to reduce cost and complexity by providing an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The amendments also enhance the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing an indefinite-lived intangible asset for impairment, which is equivalent to the impairment testing requirements for other long-lived assets. The amendments are not expected to have a significant impact on the Company.

From time to time the FASB issues Proposed Accounting Standards Updates. Such proposed updates are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as Accounting Standards Updates. Management considers the effect of the proposed updates on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of proposed updates.

NOTE 8. FAIR VALUE

Accounting principles generally accepted in the United States of America require that companies measure and record certain assets and liabilities at fair value and record any adjustments to the fair value of those assets. Securities are recorded at fair value on a recurring basis while other assets, such as impaired loans, are recorded at fair value on a non-recurring basis.

The Company uses three levels of measurement to group those assets measured at fair value. These groupings are made based on the markets the assets are traded in and the reliability of the assumptions used to determine fair value. The groupings include:

• Level 1 pricing for an asset or liability is derived from the most likely actively traded markets and considered very reliable. Quoted prices on actively traded equities, for example, fall into this category.

• Level 2 pricing is derived from observable data including market spreads, current and projected rates, prepayment data and credit quality. Our bond price adjustments fall into this category as well as impaired loans and other real estate owned that use appraisals or brokered price opinions to determine fair value.

• Level 3 pricing is derived without observable data. In such cases, mark-to-market strategies are typically employed. These types of instruments often have no active market, possess unique characteristics and are thinly traded.

The Company’s investment securities are measured on a recurring basis through a model used by our bond agent. All of our bond price adjustments meet Level 2 criteria. Prices are derived from a model which uses actively quoted rates, prepayment models and other underlying credit and collateral data.

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The following table summarizes the Company’s assets measured at fair value at the dates indicated (dollars in thousands):

	At September 30, 2012
	Total		Level 1		Level 2		Level 3
Assets valued on a recurring basis
Investment securities:
U.S. government and agency	$	56,237	$	—	$	56,237	$	—
State and municipals		8,391		—		8,391		—
Mortgage-backed		54,772		—		54,772		—
Assets valued on a non-recurring basis
Impaired loans		44,108		—		44,108		—
Other real estate owned		5,424		—		5,424		—
Total	$	168,932	$	—	$	168,932	$	—
	At December 31, 2011
	Total		Level 1		Level 2		Level 3
Assets valued on a recurring basis
Investment securities:
U.S. government and agency	$	44,259	$	—	$	44,259	$	—
State and municipals		3,590		—		3,590		—
Corporate		1,017		—		1,017		—
Mortgage-backed		61,571		—		61,571		—
Assets valued on a non-recurring basis
Impaired loans		45,628		—		45,628		—
Other real estate owned		8,524		—		8,524		—
Total	$	164,589	$	—	$	164,589	$	—

NOTE 9. BORROWED FUNDS

A summary of the Company’s outstanding borrowings and the annual rate of interest currently payable on each category is presented in the following table at the dates indicated (dollars in thousands):

	September 30, 2012					December 31, 2011
	Outstanding Balance		Annual Interest Rate			Outstanding Balance		Annual Interest Rate
Securities sold under overnight repurchase agreements	$	379		0.10	%	$	381		0.10	%
Securities sold under term repurchase agreements		45,000		4.38			45,000		4.38
Trust preferred securities		5,155		3.29			5,155		3.49
Subordinated debt		2,700		4.00			2,700		4.00
Total borrowed funds	$	53,234		4.22	%	$	53,236		4.24	%

The Bank engages from time-to-time in federal funds purchases from upstream correspondent institutions to meet temporary funding needs. There were none of these transactions outstanding at the close of either period presented in the above table.

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The Bank had a total of $45.0 million of borrowings in the form of securities sold under term repurchase agreements that were entered into during 2008. These borrowings are secured by marketable investment securities equal to approximately 109.5% of the principal balances outstanding plus accrued interest and the value of an imbedded interest rate cap. The following table contains certain pertinent information with respect to these agreements at September 30, 2012 (dollars in thousands):

	Outstanding Principal Balance		Annual Effective Interest Rate			Final Maturity Date		Beginning Quarterly Call Dates		Collateral Requirement
Agreement dated 7/8/2008	$	25,000		4.85	%		7/8/2018		7/8/2013	$	8,796
Agreement dated 8/20/2008		20,000		3.78			8/20/2015		8/20/2011		4,356
Total	$	45,000		4.38	%					$	13,152

The Bank utilizes borrowings from the Federal Home Loan Bank (“FHLB”) as a source of liquidity. At September 30, 2012, the Bank had immediately available credit of $8.4 million. There were no advances from the FHLB at quarter-end.

During 2008, the Company issued $5.2 million of junior subordinated debentures to its wholly owned capital trust, Bank of the Carolinas Trust I (the “Trust”), which, in turn, issued $5.0 million in trust preferred securities having a like liquidation amount and $155,000 in common securities (all common securities are owned by the Company). The Company has fully and unconditionally guaranteed the Trust’s obligations related to the trust preferred securities. The Trust has the right to redeem the trust preferred securities in whole or in part, on or after June 15, 2013 at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest.

In addition, the Trust may redeem the trust preferred securities in whole (but not in part) at any time within 90 days following the occurrence of a tax event, an investment company event, or a capital treatment event at a special redemption price (as defined in the debenture). Interest is payable quarterly on the trust preferred securities at the annual rate of 90-day LIBOR plus 300 basis points. In February 2011, the Company announced its election to defer its regularly scheduled interest payments on the junior subordinated debentures related to the trust preferred securities. Furthermore, the Company is now party to a written agreement with the Federal Reserve, which restricts the Company’s ability to make interest payments on subordinated debt, as described below.

The Company also has issued $2.7 million of subordinated debt in a private transaction with another financial institution. This subordinated note has a floating interest rate equal to 75 basis points over the Prime Rate published by Wall Street Journal and a maturity date of August 13, 2018. This debt can be repaid in full at any time with no penalty.

Under the terms of a written agreement between the Company and the Federal Reserve Bank of Richmond, the Company and the Trust may not make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without the prior written approval of the Federal Reserve Bank of Richmond and the Director of the Division of Banking Supervision and Regulation of the Federal Reserve Board of Governors.

NOTE 10. STOCKHOLDERS’ EQUITY

Preferred Stock:

The Company has 3.0 million shares of preferred stock authorized. There were 13,179 shares of preferred stock issued and outstanding with a $1,000 per share liquidation preference on September 30, 2012 and December 31, 2011. All of the shares were issued on April 17, 2009 in connection with the Company’s participation in the U.S. Treasury’s TARP Capital Purchase Program.

In February 2011, the Company notified the Treasury of its intent to defer the payment of its regular quarterly cash dividend on its Series A Preferred Stock sold to the Treasury. In addition, the Company has entered into a written agreement with the Federal Reserve Bank of Richmond, which prohibits the Company’s payment of any dividends without the prior approval of the Federal Reserve Bank of Richmond and the Director of the Division of Banking Supervision and Regulation of the Federal Reserve Board of Governors.

At September 30, 2012 and December 31, 2011, the cumulative amount of dividends in arrears not declared was $1.1 million and $582,000, respectively.

Common Stock:

The Company has 15.0 million shares of $5 par value common stock authorized. There were 3,895,840 shares of common stock issued and outstanding at September 30, 2012 and December 31, 2011, respectively.

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Warrants:

In connection with the issuance of the preferred shares under the U.S. Treasury’s TARP Capital Purchase Program, the Company issued the U.S. Treasury a warrant to purchase 475,204 shares of its common stock for $4.16 per share. The warrant expires April 17, 2019.

NOTE 11. INCOME TAXES

The Company utilizes the liability method of computing income taxes. Under the liability method, deferred tax liabilities and assets are established for future tax return effects of the temporary differences between the stated value of assets and liabilities for financial reporting purposes and their tax bases. The focus is on accruing the appropriate balance sheet deferred tax amount, with the statement of income effect being the result of the changes in the balance sheet amounts from period to period. The current portion of income tax expense is provided based upon the actual tax liability incurred for tax return purposes.

An evaluation of the probability of being able to realize the future benefits of deferred tax assets is made. A valuation allowance is provided for the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. Management has established a deferred tax asset valuation allowance as of September 30, 2012 of $15.0 million. There was a $12.7 million valuation allowance as of December 31, 2011. The valuation allowance has been established because management believes current overall credit trends, as well as actual and forecasted performance, raise significant concern over the ability of the Company to realize the components of its deferred tax assets relating to net operating losses and the allowances for losses on loans and OREO.

NOTE 12. GOING CONCERN

Going Concern Considerations

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. It is the responsibility of management to assess the Company’s ability to continue as a going concern. In making this assessment, the Company has taken into account all available information about the future, which is at least, but is not limited to, twelve months from the balance sheet date of September 30, 2012. The Company had a history of profitable operations prior to 2008 and sufficient sources of liquidity to meet its short-term and long-term funding needs.

The effects of the current economic environment are being felt across many industries, with financial services and real estate being particularly hard-hit, and have been particularly severe during the last 45 months. The Bank, with a loan portfolio consisting of a concentration in commercial real estate loans, including residential construction and development loans, has seen a decline in the value of the collateral securing its portfolio as well as rapid deterioration in its borrowers’ cash flow and ability to repay their outstanding loans made by the Bank. As a result, the Bank’s level of nonperforming assets increased substantially during 2010 and 2011. The significant losses in 2010, 2011, and the first nine months of 2012, which were primarily related to credit losses and the valuation allowance on deferred tax assets, reduced the Company’s capital levels. In order to again become well capitalized under federal banking agencies’ guidelines, management believes that the Company will need to raise additional capital to recapitalize the Bank and to absorb the potential future credit losses associated with the disposition of its nonperforming assets. Accordingly, management is in the process of evaluating various alternatives to increase tangible common equity and regulatory capital through the issuance of additional equity in public or private offerings. Management is actively evaluating a number of potential capital sources, asset reductions, and other balance sheet management strategies with the goal of increasing its level of regulatory capital to support its balance sheet long-term. Management is currently attempting to reduce and otherwise restructure the Company’s balance sheet to improve capital ratios.

Current market conditions for banking institutions, the overall uncertainty in financial markets, and a depressed stock price are significant barriers to the success of any plan to issue additional equity in public or private offerings. An equity financing transaction would result in substantial dilution to the Company’s current stockholders and could adversely affect the market price of the Company’s common stock. There can be no assurance as to whether these efforts will be successful, either on a short-term or long-term basis. Should these efforts be unsuccessful, due to existing regulatory restrictions on cash payments and dividends between the Bank and the holding company, the Company may be unable to discharge its liabilities in the normal course of business. There can be no assurance that the Company will be successful in any efforts to raise additional capital.

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Both the Company and the Bank actively manage liquidity and cash flow needs. The Bank is prohibited from declaring or paying dividends without prior approval of the FDIC or the North Carolina Commissioner of Banks and the Company is prohibited from declaring or paying dividends without the prior approval from the Federal Reserve. Even if these requirements were not in place, the Company does not intend to declare or pay dividends to shareholders at any time in the foreseeable future. At September 30, 2012, the Company had $7.8 million of cash and cash equivalents. The Company has no long-term debt maturing in 2012 or 2013.

Based on current capital levels and continued operating losses, management believes the Company will require additional capital to be able to remain viable. Management has implemented various strategies to provide this needed capital. In spite of management’s best efforts, there is no assurance management will be successful in raising additional capital. The accompanying consolidated financial statements for the Company have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and does not include any adjustments to reflect the possible future effects on the recoverability or classification of assets.

Management’s Plans and Intentions

The Company incurred significant net losses in 2010 and 2011, which have continued in 2012, primarily from the higher provisions for loan losses due to the significant level of nonperforming assets and increases in foreclosed real estate. The FDIC and the Commissioner issued the Consent Order in April 2011. The Company entered into a written agreement with the FRB in August 2011. The Company’s independent registered public accounting firm issued a report with respect to the Company’s audited financial statements for the fiscal year ended December 31, 2011, which contained an explanatory paragraph indicating that there is substantial doubt about the Company’s ability to continue as a going concern. The Company is attempting to implement the following strategies to improve its financial condition:

Deferring Preferred Stock and Trust Preferred Securities Payments – The Company began deferring the payment of cash dividends on its outstanding Fixed Rate Cumulative Perpetual Preferred Stock, Series A, in February 2011, as well as the payment of interest on the junior subordinated notes related to its outstanding trust preferred securities to enhance the Company’s liquidity. The expense associated with trust preferred securities continues to accrue and is reflected in the Company’s Consolidated Statements of Operations. Accrued but unpaid dividends on preferred stock are shown as an increase to net loss to derive net loss to common shareholders in the Consolidated Statements of Operations.

Balance Sheet Reduction – Management currently is implementing strategies to improve capital ratios through the reduction of assets and off-balance sheet commitments. At September 30, 2012, risk-weighted assets had been reduced by $103.4 million since December 31, 2010. Reductions occurred primarily in the commercial loan portfolio. Management expects future reductions in risk-weighted assets to be moderate and occur primarily in the loan portfolio. To offset the majority of asset reductions, liabilities declined primarily through reductions in other borrowings by $22.0 million and non-core deposits by $9.6 million.

Earnings – In June 2011, the Bank retired $10.0 million in FHLB advances and paid an early redemption penalty of $273,000 to the FHLB for the retirement of these advances. In November 2011, the Bank retired an additional advance of $10.0 million due to the FHLB and paid an early redemption penalty of $7,000. The advances had a remaining average life of 1.0 year and an average interest rate of 1.21%. The Bank is prohibited from accepting or rolling over any brokered certificates of deposit. Since April 2011, the brokered certificates of deposit had maturities ranging from 2 months to 27 months with interest rates ranging from 0.75% to 2.40%. As these matured and continue to mature, the Bank replaced and will continue to replace these funds with institutional certificates of deposit with average interest rates of 0.50%. As a result of these changes, the interest expense savings during 2012 should have a positive impact on net interest margin.

Additional Capital – The Company has engaged investment banking firms and is working to secure investors in a capital raise plan that may include issuing common stock, preferred stock or a combination of both, debt, or other financing alternatives that may be treated as capital for capital adequacy ratio purposes. Currently, the Company is working diligently to raise additional capital; however, there are no assurances that an offering will be completed or that the Company will succeed in this endeavor. In addition, a transaction would more likely than not involve equity financing, resulting in substantial dilution to current shareholders and an adverse effect on the price of the Company’s common stock. The Company’s ability to raise capital depends to a large degree on the current capital markets and on its financial performance. Available capital markets are not currently favorable, and the Company can offer no assurance that it will be able to raise capital on terms that are acceptable, if at all.

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NOTE 13. SELECTED QUARTERLY FINANCIAL INFORMATION (Unaudited)

	September 30, 2012			June 30, 2012 (As  Restated)			March 31, 2012 (As  Restated)			December 31, 2011 (As Restated)			September 30, 2011 (As Restated)			June 30, 2011 (As  Restated)			March 31, 2011 (As  Restated)
	(in thousands)
Assets:
Cash and due from banks, noninterest-bearing	$	3,987		$	3,884		$	4,674		$	5,044		$	4,922		$	10,172		$	4,174
Interest-bearing deposits in banks		3,843			3,226			2,562			2,557			4,431			4,256			4,208
Cash and cash equivalents		7,830			7,110			7,236			7,601			9,353			14,428			8,382
Federal funds sold		13,710			48,465			44,245			28,165			22,630			8,175			14,985
Investment securities		121,387			105,609			103,682			112,404			113,768			118,534			116,879
Loans receivable		280,671			285,186			296,092			307,907			324,757			345,617			359,561
Less: Allowance for loan losses		(7,450	)		(7,541	)		(8,048	)		(8,101	)		(8,691	)		(6,685	)		(8,314	)
Total loans, net		273,221			277,645			288,044			299,806			316,066			338,932			351,247
Premises and equipment		11,911			12,091			12,256			12,229			12,448			12,681			12,859
Other real estate owned		5,424			7,403			7,502			8,524			9,825			6,066			9,375
Bank owned life insurance		10,447			10,359			10,823			10,732			10,640			10,549			10,460
Deferred tax assets		—			—			—			—			3,509			3,941			4,409
Prepaid FDIC insurance assessment		998			1,396			1,790			2,200			2,759			3,095			3,418
Accrued interest receivable		1,393			1,263			1,389			1,503			1,700			1,720			1,862
Other assets		1,952			2,265			2,791			2,803			3,179			2,922			3,182
Total Assets	$	448,273		$	473,606		$	479,758		$	485,967		$	505,877		$	521,043		$	537,058
Liabilities:
Deposits:
Noninterest-bearing demand deposits	$	34,756		$	38,486		$	36,087		$	34,034		$	34,446		$	38,176		$	36,411
Interest-checking deposits		39,138			38,363			38,349			37,306			38,527			37,139			35,221
Savings and money market deposits		106,541			103,613			104,733			106,308			103,163			107,717			110,401
Time deposits		204,095			226,986			233,816			238,565			241,422			243,066			241,706
Total deposits		384,530			407,448			412,985			416,213			417,558			426,098			423,739
Securities sold under agreements to repurchase		45,379			45,249			45,418			45,381			45,412			45,710			45,458
Federal Home Loan Bank advances		—			—			—			—			10,000			10,000			20,000
Subordinated debt		7,855			7,855			7,855			7,855			7,855			7,855			7,855
Other liabilities		1,919			2,111			1,947			1,903			1,809			1,981			1,731
Total Liabilities		439,683			462,663			468,205			471,352			482,634			491,644			498,783
Commitments and contingencies (Note 6)		—			—			—			—			—			—			—
Stockholders’ Equity:
Preferred stock, no par value		13,179			13,179			13,179			13,179			13,179			13,179			13,179
Discount on preferred stock		(496	)		(570	)		(644	)		(716	)		(787	)		(856	)		(923	)
Common stock, $5 per share par value		19,479			19,479			19,479			19,479			19,486			19,486			19,486
Additional paid-in capital		12,991			12,992			12,992			12,991			12,984			12,983			12,984
Retained deficit		(37,463	)		(34,424	)		(34,419	)		(31,871	)		(23,233	)		(16,317	)		(6,627	)
Accumulated other comprehensive income		900			287			966			1,553			1,614			924			176
Total Stockholders’ Equity		8,590			10,943			11,553			14,615			23,243			29,399			38,275
Total Liabilities and Stockholders’ Equity	$	448,273		$	473,606		$	479,758		$	485,967		$	505,877		$	521,043		$	537,058

	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011			September 30, 2011			June 30, 2011			March 31, 2011
	(in thousands)
Other liabilities as previously stated	$	1,919		$	3,023		$	2,694		$	2,485		$	2,226		$	2,235		$	1,819
Prior period adjustment (See Note 1)		—			(912	)		(747	)		(582	)		(417	)		(254	)		(88	)
Other liabilities as restated	$	1,919		$	2,111		$	1,947		$	1,903		$	1,809		$	1,981		$	1,731
Retained deficit as previously stated	$	(37,463	)	$	(35,336	)	$	(35,166	)	$	(32,453	)	$	(23,650	)	$	(16,571	)	$	(6,715	)
Prior period adjustment (See Note 1)		—			912			747			582			417			254			88
Retained deficit as restated	$	(37,463	)	$	(34,424	)	$	(34,419	)	$	(31,871	)	$	(23,233	)	$	(16,317	)	$	(6,627	)

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Introduction

Bank of the Carolinas Corporation (“the Company”) is the parent holding company of Bank of the Carolinas (“the Bank”). Because the Company has no separate operations and conducts no business on its own other than owning the Bank, the discussion contained in this Management’s Discussion and Analysis concerns primarily the business of the Bank. However, because the financial statements are presented on a consolidated basis, the Company and the Bank are collectively referred to herein as “the Company” unless otherwise noted.

The Bank began operations in December 1998 as a state chartered bank and currently has ten offices in the Piedmont region of North Carolina. The Bank competes for loans and deposits throughout the markets it serves. The Bank, like most community banks, derives most of its revenue from net interest income which is the difference between the income it earns from loans and securities and the interest expense it incurs on deposits and borrowings.

Written Agreement with Federal Reserve

The Company entered into a written agreement (the “Agreement”) with the Federal Reserve Bank of Richmond on August 26, 2011. The description of the Agreement set forth below is qualified in its entirety by reference to the full text of the Agreement, a copy of which is included as Exhibit 10.01 to the Company’s Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission on November 14, 2011, and incorporated herein by reference.

Source of Strength. The Agreement requires that the Company take appropriate steps to fully utilize its financial and managerial resources to serve as a source of strength to the Bank and ensure that the Bank complies with the requirements of the consent order entered into between the North Carolina Commissioner of Banks, the FDIC, and the Bank.

Dividends, Distributions, and other Payments. The Agreement prohibits the Company’s payment of any dividends without the prior approval of the Federal Reserve Bank of Richmond and the Director of the Division of Banking Supervision and Regulation of the Federal Reserve Board of Governors. It also prohibits the Company from directly or indirectly taking any dividends or any other form of payment representing a reduction in capital from the Bank without the prior written approval of the Federal Reserve Bank of Richmond.

Under the terms of the Agreement, the Company and Bank of the Carolinas Trust I may not make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without the prior written approval of the Federal Reserve Bank of Richmond and the Director of the Division of Banking Supervision and Regulation.

Debt and Stock Redemption. The Agreement requires that the Company and any non-bank subsidiary of the Company not, directly or indirectly, incur, increase or guarantee any debt without the prior written approval of the Federal Reserve Bank. The Agreement also requires that the Company not, directly or indirectly, purchase or redeem any shares of its capital stock without the prior written approval of the Federal Reserve Bank of Richmond.

Capital Plan, Cash Flow Projections and Progress Reports. The Agreement requires that the Company file an acceptable capital plan and certain cash flow projections with the Federal Reserve Bank of Richmond. It also requires that the Company file a written progress report within 30 days after the end of each calendar quarter while the Agreement remains in effect.

The Agreement will remain in effect until modified or terminated by the Federal Reserve Bank of Richmond.

Consent Order with Regulators

The Bank entered into a Stipulation to the Issuance of a Consent Order (the “Stipulation”) with the Federal Deposit Insurance Corporation (the “FDIC”) and the North Carolina Office of the Commissioner of Banks (the “Commissioner”) and the FDIC and the Commissioner issued the related Consent Order (the “Order”), effective April 27, 2011. The description of the Stipulation and the Order set forth below is qualified in its entirety by reference to the Stipulation and the Order, copies of which are included as exhibits 10.1 and 10.2, respectively, to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 3, 2011, and incorporated herein by reference.

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Management. The Order required that the Bank have and retain qualified management, including a chief executive officer, senior lending officer, and chief operating officer with qualifications and experience commensurate with their assigned duties and responsibilities within 60 days from the effective date of the Order. Within 30 days of the effective date of the Order, the board of directors was required to retain a bank consultant to develop a written analysis and assessment of the Bank’s management needs. Within 60 days from receipt of the consultant’s management report, the Bank was required to formulate a written management plan that incorporated the findings of the management report, a plan of action in response to each recommendation contained in the management report, and a time frame for completing each action.

Capital Requirements. While the Order is in effect, the Bank must maintain a leverage ratio (the ratio of Tier 1 capital to total assets) of at least 8% and a total risk-based capital ratio (the ratio of qualifying total capital to risk-weighted assets) of at least 10%. If the Bank’s capital ratios are below these levels as of the date of any call report or regulatory examination, the Bank must, within 30 days from receipt of a written notice of capital deficiency from its regulators, present a plan to increase capital to meet the requirements of the Order. At September 30, 2012, the Bank was not in compliance with the capital requirements contained in the Order.

Allowance for Loan and Lease Losses and Call Report. Upon issuance of the Order, the Bank was required to make a provision to replenish the allowance for loan and lease losses (“ALLL”). Within 30 days of the effective date of the Order, the Bank was required to review its call reports filed with its regulators on or after December 31, 2010, and was required to amend those reports if necessary to accurately reflect the financial condition of the Bank. Within 60 days of the effective date of the Order, the Bank was required to submit a comprehensive policy for determining the adequacy of the ALLL.

Concentrations of Credit. Within 60 days of the issuance of the Order, the Bank was required to perform a risk segmentation analysis with respect to its concentrations of credit and develop a written plan for systematically reducing and monitoring the Bank’s commercial real estate and acquisition, construction, and development loans to an amount commensurate with the Bank’s business strategy, management expertise, size, and location.

Charge-Offs, Credits. The Order required that the Bank eliminate from its books, by charge-off or collection, all assets or portions of assets classified “loss” and 50% of those assets classified “doubtful.” If an asset is classified “doubtful,” the Bank may alternatively charge off the amount that is considered uncollectible in accordance with the Bank’s written analysis of loan or lease impairment. The Order also prevents the Bank from extending, directly or indirectly, any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been charged off or classified, in whole or in part, “loss” or “doubtful” and is uncollected. The Bank may not extend, directly or indirectly, any additional credit to any borrower who has a loan or other extension of credit from the Bank that has been classified “substandard.” These limitations do not apply if the Bank’s failure to extend further credit to a particular borrower would be detrimental to the best interests of the Bank.

Asset Growth. While the Order is in effect, the Bank must notify its regulators at least 60 days prior to undertaking asset growth that exceeds 10% or more per year or initiating material changes in asset or liability composition. The Bank’s asset growth cannot result in noncompliance with the capital maintenance provisions of the Order unless the Bank receives prior written approval from its regulators.

Restriction on Dividends and Other Payments. While the Order is in effect, the Bank cannot declare or pay dividends, pay bonuses, or pay any form of payment outside the ordinary course of business resulting in a reduction of capital without the prior written approval of its regulators. In addition, the Bank cannot make any distributions of interest, principal, or other sums on subordinated debentures without prior regulatory approval.

Brokered Deposits. The Order provides that the Bank may not accept, renew, or roll over any brokered deposits unless it is in compliance with the requirements of the FDIC regulations governing brokered deposits. These regulations prohibit undercapitalized institutions from accepting, renewing, or rolling over any brokered deposits and also prohibit undercapitalized institutions from soliciting deposits by offering an effective yield that exceeds by more than 75 basis points the prevailing effective yields on insured deposits of comparable maturity in the institution’s market area. An “adequately capitalized” institution may not accept, renew, or roll over brokered deposits unless it has applied for and been granted a waiver by the FDIC. As of September 30, 2012, the Bank was classified as “significantly undercapitalized.”

29

Written Plans and Other Material Terms. Under the terms of the Order, the Bank was required to prepare and submit the following written plans or reports to the FDIC and the Commissioner:

• Plan to improve liquidity, contingency funding, interest rate risk, and asset liability management

• Plan to reduce assets of $500,000 or greater classified “doubtful” and “substandard”

• Revised lending and collection policy to provide effective guidance and control over the Bank’s lending and credit administration functions

• Effective internal loan review and grading system

• Policy for managing the Bank’s other real estate

• Business/strategic plan covering the overall operation of the Bank

• Plan and comprehensive budget for all categories of income and expense for the year 2011

• Policy and procedures for managing interest rate risk

• Assessment of the Bank’s information technology function

Under the Order, the Bank’s board of directors agreed to increase its participation in the affairs of the Bank, including assuming full responsibility for the approval of policies and objectives for the supervision of all of the Bank’s activities. The Bank was also required to establish a board committee to monitor and coordinate compliance with the Order.

The Order will remain in effect until modified or terminated by the FDIC and the Commissioner.

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CHANGES IN FINANCIAL CONDITION

Total Assets

At September 30, 2012, total assets were $448.3 million, a decrease of 7.8% compared to $486.0 million at December 31, 2011. The asset decrease was primarily the result of reductions in the loan portfolio, including net charge-offs of $3.6 million. The Company had earning assets of $419.6 million at September 30, 2012 consisting of $280.7 million in loans, $121.4 million in investment securities, and $17.5 million in temporary investments. Stockholders’ equity was $7.5 million at September 30, 2012 compared to $14.0 million at December 31, 2011.

Investment Securities

Investment securities totaled $121.4 million at September 30, 2012, compared to $112.4 million at December 31, 2011. The increase was primarily a result of reinvesting the proceeds from the sales of investment securities during the second quarter of 2012 and preparing for anticipated calls during the fourth quarter. A summary of the Company’s investment securities holdings by major category at September 30, 2012 and December 31, 2011 is included in Note 3 of “Notes to Consolidated Financial Statements”.

Loans and Allowance for Loan Losses

At September 30, 2012, the loan portfolio totaled $280.7 million and represented 62.6% of total assets compared to $307.9 million or 63.4% of total assets at December 31, 2011. Total loans at September 30, 2012 decreased $27.2 million or 8.8% from December 31, 2011. The decrease in loans outstanding in the nine-month period is the result of net charge-offs of $3.6 million and principal repayments in excess of new loans originated due to slower loan demand under the current economic conditions. Real estate loans, including commercial real estate, constituted approximately 89% of the loan portfolio, and commercial business and other loans comprised approximately 11% of the total loan portfolio at both September 30, 2012 and December 31, 2011.

The allowance for loan losses is created by direct charges to income. Losses on loans are charged against the allowance in the period in which such loans, in management’s opinion, become uncollectible. Recoveries during the period are credited to this allowance. The factors that influence management’s judgment in determining the amount charged to operating expense include past loan experience, composition of the loan portfolio, current economic conditions and probable losses.

The appropriateness of the allowance for loan losses is measured on a quarterly basis using an allocation model that assigns reserves to various components of the loan portfolio in order to provide for probable inherent losses. It must be emphasized, however, that the determination of the reserve using the Company’s procedures and methods rests upon various judgments and assumptions about current economic conditions and other factors affecting loans. No assurance can be given that the Company will not in any particular period sustain loan losses that are sizable in relation to amounts reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. In addition, bank regulatory agencies, as an integral part of their routine examination process, periodically review the Company’s allowance. Those agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examinations. The Company believes the allowance is appropriate based on management’s current analysis.

The allowance for loan losses at September 30, 2012, amounted to $7.5 million, a decrease of $651,000, or 8.0% from December 31, 2011. The allowance consists of specific reserves of $774,000 and a general allowance $6.7 million. The Bank’s provisions for loan losses amounted to $3.0 million during the nine months ended September 30, 2012 compared to $14.6 million during the nine months ended September 30, 2011. While the Company has not participated in “subprime” lending activities, we have been affected by the economic downturn in our markets. We continue to work with our customers with troubled credit relationships to the extent that it is reasonably possible.

Certain credit risks are inherent in making loans, particularly commercial and consumer loans. Management prudently assesses these risks and attempts to manage them effectively. The Company also attempts to reduce default risks by adhering to internal credit underwriting policies and procedures. These policies and procedures include officer and customer limits, periodic loan documentation review and follow up on exceptions to credit policies. A loan is placed in nonaccrual status when, in management’s judgment, the collection of interest appears doubtful.

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The following table summarizes information regarding our nonaccrual loans, other real estate owned, and 90-day and over past due loans as of September 30, 2012 and December 31, 2011 (dollars in thousands):

	September 30, 2012			December 31, 2011
Loans accounted for on a nonaccrual basis:
Real estate loans:
1-4 family residential	$	3,865		$	6,875
Commercial real estate		1,801			9,167
Construction and development		2,004			1,764
Total real estate loans		7,670			17,806
Commercial business and other loans		446			1,246
Consumer loans		9			10
Total nonaccrual loans		8,125			19,062
Accruing loans which are contractually past due 90 days or more		—			—
Total nonperforming loans		8,125			19,062
Other real estate owned		5,424			8,524
Total nonperforming assets	$	13,549		$	27,586
Total nonperforming loans as a percentage of loans		2.89	%		6.19	%
Allowance for loan losses as a percentage of total nonperforming loans		91.69	%		42.50	%
Allowance for loan losses as a percentage of total loans		2.65	%		2.63	%
Total nonperforming assets as a percentage of loans and other real estate owned		4.74	%		8.72	%
Total nonperforming assets as a percentage of total assets		3.02	%		5.68	%

Deposits

The Company’s deposit services include business and individual checking accounts, interest bearing checking accounts, savings accounts, money market accounts, IRA deposits and certificates of deposit. At September 30, 2012, total deposits were $384.5 million compared to $416.2 million at December 31, 2011. The September 30, 2012 amount represents a decrease of 7.6% from December 31, 2011, which is mainly recognized in customer time deposits and brokered CDs. At September 30, 2012, the deposit mix was comparable to December 31, 2011.

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The following table presents a breakdown of our deposit base at September 30, 2012 and December 31, 2011 (dollars in thousands):

	September 30, 2012			December 31, 2011
Noninterest bearing demand deposits	$	34,756		$	34,034
Interest checking deposits		39,138			37,306
Savings deposits		12,777			10,854
Money market deposits		93,764			95,454
Customer time deposits		176,490			195,841
Brokered certificates of deposit		27,605			42,724
Total deposits	$	384,530		$	416,213
Time deposits $100,000 or more:
Brokered certificates of deposit	$	27,605		$	42,724
Customer time deposits issued in denominations of $100,000 or more		102,829			109,780
Total time deposits issued in denominations of $100,000 or more	$	130,434		$	152,504
As a percent of total deposits:
Noninterest bearing demand deposits		9.04	%		8.18	%
Interest checking deposits		10.18			8.96
Savings deposits		3.32			2.61
Money market deposits		24.38			22.93
Customer time deposits		45.90			47.05
Brokered certificates of deposit		7.18			10.26
Total time deposits issued in denominations of $100,000 or more		33.92			36.64

Liquidity

Liquidity management is the process of managing assets and liabilities, as well as their maturities, to ensure adequate funding for loan and deposit activities. Sources of liquidity come from both balance sheet and off-balance sheet sources. We define balance sheet liquidity as the relationship that net liquid assets have to unsecured liabilities. Net liquid assets are the sum of cash and cash items, less required reserves on demand and interest checking deposits, plus demand deposits due from banks, plus temporary investments, including federal funds sold, plus the fair value of investment securities, less collateral requirements related to public funds on deposit and repurchase agreements. Unsecured liabilities are equal to total liabilities less required cash reserves on noninterest-bearing demand deposits and interest checking deposits less the outstanding balances of all secured liabilities, whether secured by liquid assets or not. We consider off-balance sheet liquidity to include unsecured federal funds lines from other banks and loan collateral which may be used for additional advances from the Federal Home Loan Bank. As of September 30, 2012 our balance sheet liquidity ratio (net liquid assets as a percent of unsecured liabilities) amounted to 19.78% and our total liquidity ratio (balance sheet plus off-balance sheet liquidity) was 21.52%.

In addition, we have the ability to borrow $10.0 million from the discount window of the Federal Reserve, as well as a line of credit from a correspondent bank of $4.0 million subject to our pledge of marketable securities, which could be used for temporary funding needs. We also have the ability to borrow from the Federal Home Loan Bank on similar terms. While we consider these arrangements sources of back-up funding, we do not consider them as liquidity sources because they require our pledge of liquid assets as collateral. We regularly borrow from the Federal Home Loan Bank as a normal part of our business. These advances, of which there were none at September 30, 2012, are secured by various types of real estate-secured loans. The Company closely monitors and evaluates its overall liquidity position. The Company believes its liquidity position at September 30, 2012 is adequate to meet its operating needs.

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Interest Rate Sensitivity

Fluctuating interest rates, increased competition, and changes in the regulatory environment continue to significantly affect the importance of interest rate sensitivity management. Rate sensitivity arises when interest rates on assets change in a different period of time or in a different proportion to interest rates on liabilities. The primary objective of interest rate sensitivity management is to prudently structure the balance sheet so that movements of interest rates on assets and liabilities are highly correlated and produce a reasonable net interest margin even in periods of volatile interest rates. The Company uses an asset/liability simulation model to project potential changes to the Company’s net interest margin, net income, and economic value of equity based on simulated changes to market interest rates, namely the prime rate. Our goal is to maintain an interest rate sensitivity position as close to neutral as practicable whereby little or no change in interest income would occur as interest rates change. On September 30, 2012, we were cumulatively asset sensitive for the next twelve months, which means that our interest bearing assets would reprice more quickly than our interest bearing liabilities. Theoretically, our net interest margin will increase if market interest rates rise or decrease if market interest rates fall. However, the repricing characteristic of assets is different from the repricing characteristics of funding sources. Therefore, net interest income can be impacted by changes in interest rates even if the repricing opportunities of assets and liabilities are perfectly matched.

Capital Adequacy

Regulatory guidelines require banks to hold minimum levels of capital based upon the risk weighting of certain categories of assets as well as any off-balance sheet contingencies. Federal regulators have adopted risk-based capital and leverage capital guidelines for measuring the capital adequacy of banks and bank holding companies. All applicable capital standards must be satisfied for the Company and the Bank to be considered in compliance with regulatory requirements.

As described above, the Bank is subject to a consent order issued by the FDIC and the North Carolina Office of the Commissioner of Banks and the Company is party to a written agreement with the Federal Reserve Bank of Richmond. These regulatory agreements require that the Bank maintain capital levels in excess of normal regulatory minimums, including a Leverage Capital Ratio of at least 8.0% and a Total Risk-Based Capital Ratio of at least 10.0%, and that the Company and the Bank seek the approval of their respective regulators prior to the payment of any cash dividend. At September 30, 2012, the Bank was not in compliance with the minimum capital requirements set forth in the consent order. As a result, the Bank was required to present its federal and state regulators with a plan to increase its capital ratios to the required percentages. The Bank hired a consultant to help formulate this plan and assist in the exploration of other strategic alternatives.

At September 30, 2012, the Company’s leverage and Tier 1 risk-weighted Capital Ratios were 2.30% and 3.23%, respectively, which are below the minimum level required by regulatory guidelines. At September 30, 2012, the Company’s Total risk-weighted Capital Ratio was 5.98%, which is below the minimum level required by regulatory guidelines. At September 30, 2012, the Bank’s leverage and Tier 1 risk-weighted Capital Ratios were 3.37% and 4.73%, respectively, which are below the minimum levels required by regulatory guidelines. At September 30, 2012, the Bank’s Total risk-weighted Capital Ratio was 5.99%, which is below the minimum level required by regulatory guidelines. At September 30, 2012, the Bank’s leverage and Total risk-weighted Capital Ratios were both non-compliant with the levels specified in the above referenced consent order with bank regulators. Banks are placed into one of five capital categories based on the above three separate capital ratios. The five categories are “well-capitalized,” “adequately capitalized,” “under-capitalized,” “significantly under-capitalized,” and “critically under-capitalized.” The Bank was considered “significantly under-capitalized” as of September 30, 2012.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2012 and 2011

Overview. For the three months ended September 30, 2012, the Company incurred a net loss available to common shareholders of $3.2 million, or $0.82 per common share. This compares to a net loss of $7.1 million, or $1.82 per common share, for the three months ended September 30, 2011. The third quarter of 2012 had an increased level of costs related to foreclosed real estate compared to the third quarter of 2011. Other noninterest expenses are still elevated due to costs in conjunction with compliance with the Consent Order with the FDIC and the North Carolina Office of the Commissioner of Banks and the Written Agreement with the Federal Reserve Bank of Richmond, but are improved compared to the third quarter of 2011.

Net Interest Income. The Company’s net interest income for the three months ended September 30, 2012 totaled $3.0 million compared to $3.5 million at September 30, 2011. Net interest income decreased due to the reduction of $46.1 million in interest earning assets compared to September 30, 2011. The net interest margin decreased 22 basis points from 2.93% in the third quarter of 2011 to 2.71% in the third quarter of 2012.

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Provision for Loan Losses. The loan loss provision amounted to $1.5 million for the quarter ended September 30, 2012, a decrease of $4.2 million, or 74.0%, from the $5.7 million provision recorded in the comparable quarter of 2011. Net charge-offs totaled $1.6 million in the third quarter of 2012 compared to $3.6 million in the third quarter of 2011.

Noninterest Income. Noninterest income totaled $391,000 for the three months ended September 30, 2012 compared to $415,000 for the comparable three-month period of 2011. Noninterest income includes customer service charges on deposit accounts, bank owned life insurance, and gains on investment securities. Noninterest income decreased $24,000, or 5.8%, for the third quarter of 2012 compared to the third quarter of 2011.

Noninterest Expenses. Noninterest expenses totaled $5.2 million and $5.1 million for the three months ended September 30, 2012 and 2011, respectively. Excluding the increase of other real estate expenses of $271,000, noninterest expenses for the three months would have decreased by $126,000. The increase in other real estate expense is primarily due to sales of said real estate and having current valuations performed on foreclosed assets over the last twelve months. Other noninterest expenses affecting overhead cost were: (1) FDIC insurance assessments, which increased $60,000 due to increased rates; (2) salaries and benefits, which decreased $34,000 due to staff reductions; and (3) consultant fees, which decreased $117,000 as a result of decreased needs regarding the consent order.

Income Taxes. Provisions for income taxes for each quarter were made to decrease the valuation allowance related to deferred tax assets, resulting in income tax benefit of $383,000 during the three months ending September 30, 2012 compared to no income tax expense in the third quarter of 2011.

Nine Months Ended September 30, 2012 and 2011

Overview. For the nine months ended September 30, 2012, the Company incurred a net loss available to common shareholders of $6.1 million, or $1.56 per common share. This compares to a net loss of $20.4 million, or $5.23 per common share, for the nine months ended September 30, 2011. Year-to-date 2012 had an improved level of costs related to foreclosed real estate. Other noninterest expenses are still elevated due to costs in conjunction with compliance with the Consent Order with the FDIC and the North Carolina Office of the Commissioner of Banks and the Written Agreement with the Federal Reserve Bank of Richmond, but are also improved compared to the first nine months of 2011.

Net Interest Income. The Company’s net interest income for the nine months ended September 30, 2012 totaled $8.8 million compared to $10.4 million at September 30, 2011. Net interest income decreased due to the reduction of $46.1 million in interest earning assets compared to September 30, 2011. The net interest margin decreased 17 basis points from 2.88% at September 30, 2011 to 2.71% at September 30, 2012.

Provision for Loan Losses. The loan loss provision amounted to $3.0 million for the nine months ended September 30, 2012, a decrease of $11.6 million, or 79.4%, from the $14.6 million provision recorded in the comparable period of 2011. Net charge-offs totaled $3.6 million in the first nine months of 2012 compared to $12.7 million in the first nine months of 2011.

Noninterest Income. Noninterest income totaled $3.7 million for the nine months ended September 30, 2012 compared to $1.2 million for the comparable nine-month period of 2011. Noninterest income includes customer service charges on deposit accounts, bank owned life insurance, and gains on investment securities. Excluding gains on sale of investment securities of $2.1 million in 2012 and $6,000 in 2011 and a nonrecurring gain on bank owned life insurance of $415,000 in 2012, noninterest income decreased by $79,000, or 6.4%, for the nine months ended September 30, 2012 and 2011.

Noninterest Expenses. Noninterest expenses totaled $14.5 million and $15.8 million for the nine months ended September 30, 2012 and 2011, respectively. Excluding the decrease of other real estate expenses of $1.6 million, noninterest expenses for the nine months would have increased by $338,000. The decrease in other real estate expense is primarily due to having current valuations performed on foreclosed assets over the last twelve months. Other noninterest expenses affecting overhead cost were: (1) FDIC insurance assessments, which increased $276,000 due to increased rates; (2) director and shareholder expenses, which increased $128,000 due to increased premiums for director and officer liability insurance; (3) salaries and benefits, which increased $319,000 due to fully recognizing the addition of our special assets department; and (4) consultant fees, which decreased $61,000 as a result of decreased needs regarding the consent order.

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Income Taxes. Provisions for income taxes for the nine months ended September 30, 2012 were made to increase the valuation allowance related to deferred tax assets, resulting in income tax expense of $409,000 compared to an income tax expense of $996,000 for the nine month period ended September 30, 2011.

DISCLOSURES ABOUT FORWARD LOOKING STATEMENTS

Statements in this Report relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts, may be forward-looking statements as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors. Forward-looking statements may be identified by terms such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “ feels,” “believes,” “estimates,” “predicts,” “forecasts,” “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of our management about future events. Factors that could influence the accuracy of forward-looking statements include, but are not limited to (a) pressures on our earnings, capital and liquidity resulting from current and future conditions in the credit and capital markets, (b) continued or unexpected increases in nonperforming loans and credit losses in our loan portfolio, (c) continued adverse conditions in the economy and in the real estate market in our banking markets (particularly those conditions that affect our loan portfolio, the abilities of our borrowers to repay their loans, and the values of collateral that secures our loans), (d) the financial success or changing strategies of our customers, (e) actions of government regulators, or changes in laws, regulations or accounting standards, that adversely affect our business, (f) changes in the interest rate environment and the level of market interest rates that reduce our net interest margins and/or the values of loans we make and securities we hold, and changes in general economic conditions and real estate values in our banking market (particularly changes that affect our loan portfolio, the abilities of our borrowers to repay their loans, and the values of loan collateral), (g) changes in competitive pressures among depository and other financial institutions or in our ability to compete effectively against other financial institutions in our banking markets, and (h) other developments or changes in our business that we do not expect. Although we believe that the expectations reflected in the forward-looking statements included in this Report are reasonable, they represent our management’s judgments only as of the date they are made, and we cannot guarantee future results, levels of activity, performance or achievements. As a result, readers are cautioned not to place undue reliance on these forward-looking statements. All forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements in this paragraph. We have no obligation, and do not intend to update these forward-looking statements.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Smaller reporting companies such as the Company are not required to provide the information required by this item.

Item 4. CONTROLS AND PROCEDURES

The Company’s management, under the supervision and with the participation of its principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based on their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that it is able to record, process, summarize and report in a timely manner the information required to be disclosed in reports it files under the Exchange Act.

In connection with the above evaluation of the effectiveness of the Company’s disclosure controls and procedures, no change in the Company’s internal control over financial reporting was identified that occurred during the most recent quarterly period that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings to which the Company or the Bank is a party, or of which any of their property is the subject other than routine litigation that is incidental to their business.

Item 1A. Risk Factors

Smaller reporting companies such as the Company are not required to provide the information required by this item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities.

As disclosed on its Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 18, 2011, the Company has notified the United States Department of the Treasury of its intent to defer the payment of its regular quarterly cash dividends on its fixed rate cumulative perpetual preferred stock, series A, issued to the Treasury in connection with the Company’s participation in the Treasury’s TARP Capital Purchase Program. Therefore, the Company is currently in arrears with the dividend payments on the series A preferred stock. As of September 30, 2012, the amount of the arrearage on the dividend payments for the series A preferred stock was $1,241,022.50.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

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Item 6. Exhibits

The following exhibits are filed with this report.

31.01	Certification of our principal executive officer pursuant to Rule 13a-14(a)
31.02	Certification of our principal financial officer pursuant to Rule 13a-14(a)
32.01	Certification of our principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350
101	Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012, in XBRL (eXtensible Business Reporting Language)*

* Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BANK OF THE CAROLINAS CORPORATION

Date: November 14, 2012	By:	/s/ Stephen R. Talbert
		Stephen R. Talbert
		President and Chief Executive Officer
		(principal executive officer)
Date: November 14, 2012	By:	/s/ Megan W. Patton
		Megan W. Patton
		Vice President and Controller
		(principal financial officer)

39

EXHIBIT INDEX

Exhibit Number	Description
31.01	Certification of our principal executive officer pursuant to Rule 13a-14(a)
31.02	Certification of our principal financial officer pursuant to Rule 13a-14(a)
32.01	Certification of our principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350
101	Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012, in XBRL (eXtensible Business Reporting Language)*

* Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.

40

EX-31.01

EXHIBIT 31.01

CERTIFICATION

(Pursuant to Rule 13a-14(a))

I, Stephen R. Talbert, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Bank of the Carolinas Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2012	/s/ Stephen R. Talbert
	Stephen R. Talbert
	President and Chief Executive Officer
	(principal executive officer)

EX-31.02

EXHIBIT 31.02

CERTIFICATION

(Pursuant to Rule 13a-14(a))

I, Megan W. Patton, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Bank of the Carolinas Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2012	/s/ Megan W. Patton
	Megan W. Patton
	Vice President and Controller
	(principal financial officer)

EX-32.01

EXHIBIT 32.01

CERTIFICATIONS

(Pursuant to 18 U.S.C. Section 1350)

The undersigned hereby certifies that (i) the foregoing Quarterly Report on Form 10-Q filed by Bank of the Carolinas Corporation (the “Registrant”) for the quarter ended September 30, 2012, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date: November 14, 2012	/s/ Stephen R. Talbert
	Stephen R. Talbert
	President and Chief Executive Officer
	(principal executive officer)
Date: November 14, 2012	/s/ Megan W. Patton
	Megan W. Patton
	Vice President and Controller
	(principal financial officer)

XML

Loans (Details 3) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Troubled debt restructuring that subsequently defaulted
Number of Contracts			$ 1
Recorded Investment			69,000
Consumer - Non Real Estate [Member]
Troubled debt restructuring that subsequently defaulted
Number of Contracts
Recorded Investment
Residential Mortgage [Member]
Troubled debt restructuring that subsequently defaulted
Number of Contracts			1
Recorded Investment			69,000
Commercial - Non Real Estate [Member]
Troubled debt restructuring that subsequently defaulted
Number of Contracts
Recorded Investment
Commercial - Real Estate [Member]
Troubled debt restructuring that subsequently defaulted
Number of Contracts
Recorded Investment
Construction & Development [Member]
Troubled debt restructuring that subsequently defaulted
Number of Contracts
Recorded Investment

XML

Selected Quarterly Financial Information (Unaudited) (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012		Dec. 31, 2011		Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2010
Assets:
Cash and due from banks, noninterest-bearing	$ 3,987	$ 3,884	$ 4,674		$ 5,044	[1]	$ 4,922	$ 10,172	$ 4,174
Interest-bearing deposits in banks	3,843	3,226	2,562		2,557	[1]	4,431	4,256	4,208
Cash and cash equivalents	7,830	7,110	7,236		7,601	[1]	9,353	14,428	8,382	10,565
Federal funds sold	13,710	48,465	44,245		28,165	[1]	22,630	8,175	14,985
Investment securities	121,387	105,609	103,682		112,404	[1]	113,768	118,534	116,879
Loans receivable	280,671	285,186	296,092		307,907	[1]	324,757	345,617	359,561
Less: Allowance for loan losses	(7,450)	(7,541)	(8,048)		(8,101)	[1]	(8,691)	(6,685)	(8,314)	(6,863)
Total loans, net	273,221	277,645	288,044		299,806	[1]	316,066	338,932	351,247
Premises and equipment	11,911	12,091	12,256		12,229	[1]	12,448	12,681	12,859
Other real estate owned	5,424	7,403	7,502	[1]	8,524	[1]	9,825	6,066	9,375
Bank owned life insurance	10,447	10,359	10,823		10,732	[1]	10,640	10,549	10,460
Deferred tax assets						[1]	3,509	3,941	4,409
Prepaid FDIC insurance assessment	998	1,396	1,790		2,200	[1]	2,759	3,095	3,418
Accrued interest receivable	1,393	1,263	1,389		1,503	[1]	1,700	1,720	1,862
Other assets	1,952	2,265	2,791		2,803	[1]	3,179	2,922	3,182
Total Assets	448,273	473,606	479,758		485,967	[1]	505,877	521,043	537,058
Deposits:
Noninterest-bearing demand deposits	34,756	38,486	36,087		34,034	[1]	34,446	38,176	36,411
Interest-checking deposits	39,138	38,363	38,349		37,306	[1]	38,527	37,139	35,221
Savings and money market deposits	106,541	103,613	104,733		106,308	[1]	103,163	107,717	110,401
Time deposits	204,095	226,986	233,816		238,565	[1]	241,422	243,066	241,706
Total deposits	384,530	407,448	412,985		416,213	[1]	417,558	426,098	423,739
Securities sold under agreements to repurchase	45,379	45,249	45,418		45,381	[1]	45,412	45,710	45,458
Federal Home Loan Bank advances							10,000	10,000	20,000
Subordinated debt	7,855	7,855	7,855		7,855	[1]	7,855	7,855	7,855
Other liabilities	1,919	2,111	1,947		1,903	[1]	1,809	1,981	1,731
Total Liabilities	439,683	462,663	468,205		471,352		482,634	491,644	498,783
Commitments and contingencies (Note 6)						[1]
Stockholders' Equity:
Preferred stock, no par value	13,179	13,179	13,179		13,179	[1]	13,179	13,179	13,179
Discount on preferred stock	(496)	(570)	(644)		(716)	[1]	(787)	(856)	(923)
Common stock, $5 per share par value	19,479	19,479	19,479		19,479	[1]	19,486	19,486	19,486
Additional paid-in capital	12,991	12,992	12,992		12,991	[1]	12,984	12,983	12,984
Retained deficit	(37,463)	(34,424)	(34,419)		(31,871)	[1]	(23,233)	(16,317)	(6,627)
Accumulated other comprehensive income	900	287	966		1,553	[1]	1,614	924	176
Total Stockholders' Equity	8,590	10,943	11,553		14,615	[1]	23,243	29,399	38,275	41,704
Total Liabilities and Stockholders' Equity	448,273	473,606	479,758		485,967	[1]	505,877	521,043	537,058
Other liabilities as previously stated	1,919	3,023	2,694		2,485		2,226	2,235	1,819
Prior period adjustment (See Note 1)	0	(912)	(747)		(582)		(417)	(254)	(88)
Other liabilities	1,919	2,111	1,947		1,903	[1]	1,809	1,981	1,731
Retained deficit as previously stated	(37,463)	(35,336)	(35,166)		(32,453)		(23,650)	(16,571)	(6,715)
Prior period adjustment (See Note 1)	0	912	747		582		417	254	88
Retained deficit	$ (37,463)	$ (34,424)	$ (34,419)		$ (31,871)	[1]	$ (23,233)	$ (16,317)	$ (6,627)

[1] Derived from audited consolidated financial statements.

XML

Fair Value (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Company's assets measured at fair value
Total	$ 168,932	$ 164,589
U.S. Government agency securities [Member]
Company's assets measured at fair value
Assets valued on a recurring basis	56,237	44,259
State and municipal bonds [Member]
Company's assets measured at fair value
Assets valued on a recurring basis	8,391	3,590
Corporate securities [Member]
Company's assets measured at fair value
Assets valued on a recurring basis		1,017
Mortgage-backed [Member]
Company's assets measured at fair value
Assets valued on a recurring basis	54,772	61,571
Impaired Loans [Member]
Company's assets measured at fair value
Assets valued on a non-recurring basis	44,108	45,628
Other real estate owned [Member]
Company's assets measured at fair value
Assets valued on a non-recurring basis	5,424	8,524
Level 1 [Member]
Company's assets measured at fair value
Total
Level 1 [Member] | U.S. Government agency securities [Member]
Company's assets measured at fair value
Assets valued on a recurring basis
Level 1 [Member] | State and municipal bonds [Member]
Company's assets measured at fair value
Assets valued on a recurring basis
Level 1 [Member] | Corporate securities [Member]
Company's assets measured at fair value
Assets valued on a recurring basis
Level 1 [Member] | Mortgage-backed [Member]
Company's assets measured at fair value
Assets valued on a recurring basis
Level 1 [Member] | Impaired Loans [Member]
Company's assets measured at fair value
Assets valued on a non-recurring basis
Level 1 [Member] | Other real estate owned [Member]
Company's assets measured at fair value
Assets valued on a non-recurring basis
Level 2 [Member]
Company's assets measured at fair value
Total	168,932	164,589
Level 2 [Member] | U.S. Government agency securities [Member]
Company's assets measured at fair value
Assets valued on a recurring basis	56,237	44,259
Level 2 [Member] | State and municipal bonds [Member]
Company's assets measured at fair value
Assets valued on a recurring basis	8,391	3,590
Level 2 [Member] | Corporate securities [Member]
Company's assets measured at fair value
Assets valued on a recurring basis		1,017
Level 2 [Member] | Mortgage-backed [Member]
Company's assets measured at fair value
Assets valued on a recurring basis	54,772	61,571
Level 2 [Member] | Impaired Loans [Member]
Company's assets measured at fair value
Assets valued on a non-recurring basis	44,108	45,628
Level 2 [Member] | Other real estate owned [Member]
Company's assets measured at fair value
Assets valued on a non-recurring basis	5,424	8,524
Level 3 [Member]
Company's assets measured at fair value
Total
Level 3 [Member] | U.S. Government agency securities [Member]
Company's assets measured at fair value
Assets valued on a recurring basis
Level 3 [Member] | State and municipal bonds [Member]
Company's assets measured at fair value
Assets valued on a recurring basis
Level 3 [Member] | Corporate securities [Member]
Company's assets measured at fair value
Assets valued on a recurring basis
Level 3 [Member] | Mortgage-backed [Member]
Company's assets measured at fair value
Assets valued on a recurring basis
Level 3 [Member] | Impaired Loans [Member]
Company's assets measured at fair value
Assets valued on a non-recurring basis
Level 3 [Member] | Other real estate owned [Member]
Company's assets measured at fair value
Assets valued on a non-recurring basis

XML

Allowance for Loan Losses (Details 2) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Allowance for loan losses, collectively evaluated for Impairment
Allowance	$ 6,676	$ 7,331
Total Loans	235,789	261,509
Unallocated [Member]
Allowance for loan losses, collectively evaluated for Impairment
Allowance	1,113	1,124
Total Loans	4,147	1,858
Consumer - Non Real Estate [Member]
Allowance for loan losses, collectively evaluated for Impairment
Allowance	132	143
Total Loans	3,286	3,432
Commercial - Non Real Estate [Member]
Allowance for loan losses, collectively evaluated for Impairment
Allowance	1,346	2,173
Total Loans	20,921	28,820
Commercial real estate [Member] | Owner occupied [Member]
Allowance for loan losses, collectively evaluated for Impairment
Allowance	1,375	1,730
Total Loans	53,133	70,064
Commercial real estate [Member] | Income Producing [Member]
Allowance for loan losses, collectively evaluated for Impairment
Allowance	637	323
Total Loans	36,359	33,344
Commercial real estate [Member] | Multifamily [Member]
Allowance for loan losses, collectively evaluated for Impairment
Allowance	35	12
Total Loans	5,977	4,613
Residential Mortgage [Member] | Equity Lines [Member]
Allowance for loan losses, collectively evaluated for Impairment
Allowance	281	279
Total Loans	29,277	29,689
Residential Mortgage [Member] | 1-4 family residential [Member]
Allowance for loan losses, collectively evaluated for Impairment
Allowance	1,077	928
Total Loans	59,662	63,583
Construction & Development [Member] | 1-4 Family [Member]
Allowance for loan losses, collectively evaluated for Impairment
Allowance	73	49
Total Loans	1,472	1,412
Construction & Development [Member] | Construction & Development, Other [Member]
Allowance for loan losses, collectively evaluated for Impairment
Allowance	607	570
Total Loans	21,555	23,352
Construction & Development [Member] | Farmland [Member]
Allowance for loan losses, collectively evaluated for Impairment
Total Loans		$ 1,342

XML

Earnings Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Computation of earnings (loss) per share
Net loss applicable to common stockholders	$ (3,203)	$ (7,080)	$ (6,086)	$ (20,382)
Weighted average number of common shares outstanding	3,895,840	3,897,174	3,895,840	3,897,174
Weighted average number of diluted common shares outstanding	3,895,840	3,897,174	3,895,840	3,897,174
Common stock options and common stock warrants - anti-dilutive	497,605	502,205	497,605	502,205

XML

Loans (Tables)

9 Months Ended

Sep. 30, 2012

Loans [Abstract]

Loan portfolio

	September 30, 2012			December 31, 2011
Real estate loans:
1-4 family residential	$	74,033		$	78,631
Commercial real estate		114,502			126,849
Construction and development		30,740			33,081
Home equity		29,417			29,727
Total real estate loans		248,692			268,288
Commercial business and other loans		24,459			34,271
Consumer loans:
Installment		3,373			3,490
Other		4,147			1,858
Total consumer loans		7,520			5,348
Gross loans receivable		280,671			307,907
Allowance for loan losses		(7,450	)		(8,101	)
Loans, net	$	273,221		$	299,806

Impaired loans, segregated by class of loans

	September 30, 2012										December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate	$	1,190	$	1,469	$	—	$	1,581	$	61	$	1,533	$	2,413	$	—	$	2,518	$	121
Commercial Real Estate
Owner occupied		3,258		3,582		—		3,608		131		4,352		8,513		—		9,402		319
Income producing		3,310		3,412		—		3,431		96		4,226		4,634		—		4,677		279
Multifamily		—		—		—		—		—		708		826		—		829		44
Construction & Development
1 - 4 Family		—		—		—		—		—		387		387		—		393		20
Other		3,581		4,273		—		3,092		118		3,288		3,702		—		3,883		203
Farmland		362		362		—		362		12		—		—		—		—		—
Residential
Equity Lines		140		143		—		237		5		38		39		—		41		2
1 - 4 Family		7,481		8,983		—		9,043		310		7,920		9,491		—		9,577		563
Junior Liens		239		257		—		260		12		58		73		—		75		6
Consumer - Non Real Estate		74		86		—		87		4		58		58		—		59		4
Total loans with no allowance	$	19,635	$	22,567	$	—	$	21,701	$	749	$	22,568	$	30,136	$	—	$	31,454	$	1,561
With an allowance recorded:
Commercial - Non Real Estate	$	2,348	$	2,348	$	52	$	2,416	$	75	$	2,409	$	2,408	$	74	$	2,482	$	105
Commercial Real Estate
Owner occupied		4,207		4,207		173		4,255		164		1,836		1,886		64		1,902		119
Income producing		6,939		6,994		146		7,047		258		6,424		6,479		224		6,586		278
Multifamily		1,319		1,352		50		1,364		38		1,282		1,316		68		1,345		31
Construction & Development
1 - 4 Family		390		397		8		400		15		380		380		9		396		21
Other		3,380		3,382		140		3,446		101		2,920		2,920		91		2,955		130
Farmland		—		—		—		—		—		980		980		—		982		50
Residential
Equity Lines		—		—		—		—		—		—		—		—		—		—
1 - 4 Family		6,329		6,343		203		6,400		193		7,201		7,212		237		7,265		277
Junior Liens		322		324		2		326		13		398		398		3		469		24
Consumer - Non Real Estate		13		13		—		15		1		—		—		—		—		—
Total loans with an allowance	$	25,247	$	25,360	$	774	$	25,669	$	858	$	23,830	$	23,979	$	770	$	24,382	$	1,035
Total:
Commercial - Non Real Estate	$	3,538	$	3,817	$	52	$	3,997	$	136	$	3,942	$	4,821	$	74	$	5,000	$	226
Commercial Real Estate	$	19,033	$	19,547	$	369	$	19,705	$	687	$	18,828	$	23,654	$	356	$	24,741	$	1,070
Construction & Development	$	7,713	$	8,414	$	148	$	7,300	$	246	$	7,955	$	8,369	$	100	$	8,609	$	424
Residential	$	14,511	$	16,050	$	205	$	16,266	$	533	$	15,615	$	17,213	$	240	$	17,427	$	872
Consumer - Non Real Estate	$	87	$	99	$	—	$	102	$	5	$	58	$	58	$	—	$	59	$	4
Totals	$	44,882	$	47,927	$	774	$	47,370	$	1,607	$	46,398	$	54,115	$	770	$	55,836	$	2,596

Troubled debt restructuring

	For the three months ended September 30, 2012						For the nine months ended September 30, 2012
Troubled Debt Restructuring	Number of Contracts		Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Contracts		Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Commercial - Non Real Estate		3	$	82	$	82		13	$	603	$	603
Commercial - Real Estate		4		2,326		2,326		9		5,461		5,461
Construction & Development		2		445		445		8		1,576		1,576
Residential		3		1,293		1,293		22		3,325		3,325
Consumer - Non Real Estate		1		14		14		2		32		32
Totals		13	$	4,160	$	4,160		54	$	10,997	$	10,997
	For the three months ended September 30, 2011						For the nine months ended September 30, 2011
Troubled Debt Restructuring	Number of Contracts		Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Contracts		Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Commercial - Non Real Estate		5	$	315	$	315		18	$	2,195	$	2,195
Commercial - Real Estate		4		693		693		12		3,656		3,656
Construction & Development		1		902		902		6		2,311		2,311
Residential		8		3,891		3,891		25		6,270		6,270
Consumer - Non Real Estate		—		—		—		—		—		—
Totals		18	$	5,801	$	5,801		61	$	14,432	$	14,432

Troubled debt restructurings (TDRs) information

	Three months ended September 30, 2012				Nine months ended September 30, 2012
Troubled Debt Restructuring That Subsequently Defaulted	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Commercial - Non Real Estate		—	$	—		—	$	—
Commercial - Real Estate		—		—		—		—
Construction & Development		—		—		—		—
Residential		—		—		1		69
Consumer - Non Real Estate		—		—		—		—
Totals		—	$	—		1	$	69
	Three months ended September 30, 2011				Nine months ended September 30, 2011
Troubled Debt Restructuring That Subsequently Defaulted	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Commercial - Non Real Estate		—	$	—		—	$	—
Commercial - Real Estate		—		—		—		—
Construction & Development		—		—		—		—
Residential		—		—		—		—
Consumer - Non Real Estate		—		—		—		—
Totals		—	$	—		—	$	—

Non-accrual loans and an age analysis of past due loans, segregated by class of loans

	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing		Non-accrual Loans
September 30, 2012:
Commercial - Non Real Estate	$	136	$	30	$	106	$	272	$	24,187	$	24,459	$	—	$	446
Commercial Real Estate
Owner occupied		217		2,466		—		2,683		57,915		60,598		—		358
Income producing		385		—		—		385		46,223		46,608		—		1,443
Multifamily		—		—		—		—		7,296		7,296		—		—
Construction & Development
1 - 4 Family		46		—		—		46		1,816		1,862		—		—
Other		—		433		—		433		28,083		28,516		—		2,004
Farmland		—		—		—		—		362		362		—		—
Residential
Equity Lines		—		35		—		35		29,382		29,417		—		140
1 - 4 Family		1,235		293		1,225		2,753		69,882		72,635		—		3,690
Junior Liens		—		—		—		—		1,398		1,398		—		35
Consumer - Non Real Estate		4		—		9		13		3,360		3,373		—		9
Other		—		—		—		—		4,147		4,147		—		—
Total	$	2,023	$	3,257	$	1,340	$	6,620	$	274,051	$	280,671	$	—	$	8,125
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing		Non-accrual Loans
December 31, 2011:
Commercial - Non Real Estate	$	785	$	559	$	429	$	1,773	$	32,498	$	34,271	$	—	$	1,246
Commercial Real Estate
Owner occupied		319		270		957		1,546		74,706		76,252		—		4,438
Income producing		2,250		—		2,848		5,098		38,896		43,994		—		4,021
Multifamily		59		708		—		767		5,836		6,603		—		708
Construction & Development
1 - 4 Family		—		—		24		24		3,056		3,080		—		24
Other		—		—		976		976		27,683		28,659		—		1,740
Farmland		—		—		—		—		1,342		1,342		—		—
Residential
Equity Lines		137		99		—		236		29,491		29,727		—		38
1 - 4 Family		1,442		1,458		2,938		5,838		71,182		77,020		—		6,779
Junior Liens		14		—		19		33		1,578		1,611		—		58
Consumer - Non Real Estate		31		5		—		36		3,454		3,490		—		10
Other		—		—		—		—		1,858		1,858		—		—
Total	$	5,037	$	3,099	$	8,191	$	16,327	$	291,580	$	307,907	$	—	$	19,062

Schedule of loans and leases were categorized

	September 30, 2012
Internal Risk Rating Grades	Pass		Special Mention		Substandard		Doubtful		Loss
Commercial - Non Real Estate	$	17,872	$	3,691	$	2,896	$	—	$	—
Commercial Real Estate
Owner occupied		36,390		15,505		8,703		—		—
Income producing		24,873		11,441		10,294		—		—
Multifamily		5,267		710		1,319		—		—
Construction & Development
1 - 4 Family		1,238		255		369		—		—
Other		12,835		12,306		3,375		—		—
Farmland		—		—		362		—		—
Totals	$	98,475	$	43,908	$	27,318	$	—	$	—
Total:
Commercial - Non Real Estate	$	17,872	$	3,691	$	2,896	$	—	$	—
Commercial Real Estate	$	66,530	$	27,656	$	20,316	$	—	$	—
Construction & Development	$	14,073	$	12,561	$	4,106	$	—	$	—
Totals	$	98,475	$	43,908	$	27,318	$	—	$	—
	December 31, 2011
Internal Risk Rating Grades	Pass		Special Mention		Substandard		Doubtful		Loss
Commercial - Non Real Estate	$	26,552	$	3,606	$	3,727	$	386	$	—
Commercial Real Estate
Owner occupied		54,739		8,547		12,854		112		—
Income producing		29,583		3,604		10,807		—		—
Multifamily		3,820		793		1,990		—		—
Construction & Development
1 - 4 Family		1,081		1,255		744		—		—
Other		18,191		8,199		1,988		281		—
Farmland		—		362		980		—		—
Totals	$	133,966	$	26,366	$	33,090	$	779	$	—
Total:
Commercial - Non Real Estate	$	26,552	$	3,606	$	3,727	$	386	$	—
Commercial Real Estate	$	88,142	$	12,944	$	25,651	$	112	$	—
Construction & Development	$	19,272	$	9,816	$	3,712	$	281	$	—
Totals	$	133,966	$	26,366	$	33,090	$	779	$	—

Schedule of consumer-related loans, segregated by class of loans

	September 30, 2012				December 31, 2011
Risk Based on Payment Activity	Performing		Non- Performing		Performing		Non- Performing
Residential
Equity Lines	$	29,277	$	140	$	29,689	$	38
1 - 4 Family		70,758		1,877		73,427		3,593
Junior Liens		1,398		—		1,592		19
Consumer - Non Real Estate
Credit Cards		—		—		—		—
Other		3,373		—		3,480		10
Totals	$	104,806	$	2,017	$	108,188	$	3,660
Total:
Residential	$	101,433	$	2,017	$	104,708	$	3,650
Consumer - Non Real Estate	$	3,373	$	—	$	3,480	$	10
Totals	$	104,806	$	2,017	$	108,188	$	3,660

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Borrowed Funds (Details Textual) (USD $)													3 Months Ended	9 Months Ended			9 Months Ended
	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011		Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Sep. 30, 2012 Securities sold under term repurchase agreements [Member]	Dec. 31, 2011 Securities sold under term repurchase agreements [Member]	Sep. 30, 2012 Federal Home Loan Bank advances [Member]	Sep. 30, 2012 Junior Subordinated Debt [Member]	Sep. 30, 2012 Trust preferred securities [Member]	Sep. 30, 2012 Trust preferred securities [Member] Rate	Dec. 31, 2011 Trust preferred securities [Member]	Sep. 30, 2012 Trust preferred securities [Member] Bank of Carolinas Trust I [Member]	Sep. 30, 2012 Subordinated debt [Member]	Dec. 31, 2011 Subordinated debt [Member]
Borrowed Funds (Textual) [Abstract]
Borrowings in the form of securities sold	$ 53,234,000			$ 53,236,000					$ 45,000,000	$ 45,000,000	$ 0	$ 5,200,000	$ 5,155,000	$ 5,155,000	$ 5,155,000		$ 2,700,000	$ 2,700,000
Outstanding plus accrued interest									1.095
Immediately available credit											8,400,000
Issued trust preferred securities	121,387,000	105,609,000	103,682,000	112,404,000	[1]	113,768,000	118,534,000	116,879,000								5,000,000
Investment Maturity Date1														Jun. 15, 2013
Trust preferred Security													10.00%	10.00%
Trust preferred Security Frequency of payment													quarterly	annual rate of 90-day LIBOR plus 300 basis points
Trust preferred Security Basis Variable Spread														3
Subordinated debt																	2,700,000
Subordinated debt Floating Rate Spread																	75.00%
Subordinated debt Maturity Date																	Aug. 13, 2018
Subordinated debt Penalty on early repayment																	0
Borrowed Funds (Additional Textual) [Abstract]
Issued common securities	$ 155,000

[1] Derived from audited consolidated financial statements.

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Loans (Details 6) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Consumer-related loans, segregated by class of loans
Totals	$ 280,671	$ 307,907
Consumer - Non Real Estate [Member]
Consumer-related loans, segregated by class of loans
Totals	3,373	3,490
Performing [Member]
Consumer-related loans, segregated by class of loans
Totals	104,806	108,188
Performing [Member] | Consumer - Non Real Estate [Member]
Consumer-related loans, segregated by class of loans
Totals	3,373	3,480
Performing [Member] | Credit Cards [Member] | Consumer - Non Real Estate [Member]
Consumer-related loans, segregated by class of loans
Totals
Performing [Member] | Other [Member] | Consumer - Non Real Estate [Member]
Consumer-related loans, segregated by class of loans
Totals	3,373	3,480
Nonperforming [Member]
Consumer-related loans, segregated by class of loans
Totals	2,017	3,660
Nonperforming [Member] | Consumer - Non Real Estate [Member]
Consumer-related loans, segregated by class of loans
Totals		10
Nonperforming [Member] | Credit Cards [Member] | Consumer - Non Real Estate [Member]
Consumer-related loans, segregated by class of loans
Totals
Nonperforming [Member] | Other [Member] | Consumer - Non Real Estate [Member]
Consumer-related loans, segregated by class of loans
Totals		10
Residential Mortgage [Member] | Equity Lines [Member]
Consumer-related loans, segregated by class of loans
Totals	29,417	29,727
Residential Mortgage [Member] | Junior Liens [Member]
Consumer-related loans, segregated by class of loans
Totals	1,398	1,611
Residential Mortgage [Member] | Performing [Member]
Consumer-related loans, segregated by class of loans
Totals	101,433	104,708
Residential Mortgage [Member] | Performing [Member] | Equity Lines [Member]
Consumer-related loans, segregated by class of loans
Totals	29,277	29,689
Residential Mortgage [Member] | Performing [Member] | 1-4 Family [Member]
Consumer-related loans, segregated by class of loans
Totals	70,758	73,427
Residential Mortgage [Member] | Performing [Member] | Junior Liens [Member]
Consumer-related loans, segregated by class of loans
Totals	1,398	1,592
Residential Mortgage [Member] | Nonperforming [Member]
Consumer-related loans, segregated by class of loans
Totals	2,017	3,650
Residential Mortgage [Member] | Nonperforming [Member] | Equity Lines [Member]
Consumer-related loans, segregated by class of loans
Totals	140	38
Residential Mortgage [Member] | Nonperforming [Member] | 1-4 Family [Member]
Consumer-related loans, segregated by class of loans
Totals	1,877	3,593
Residential Mortgage [Member] | Nonperforming [Member] | Junior Liens [Member]
Consumer-related loans, segregated by class of loans
Totals		$ 19

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Loans (Details 1) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2012	Dec. 31, 2011
Impaired Financing Receivable with no Related Allowance
With No Related Allowance, Recorded Investment	$ 19,635	$ 22,568
With No Related Allowance, Unpaid Principal Balance	22,567	30,136
With No Related Allowance, Related Allowance
With No Related Allowance, Average Recorded Investment	21,701	31,454
With No Related Allowance, Interest Income, Accrual Method	749	1,561
Impaired Financing Receivable with Allowance Recorded
With Related Allowance, Recorded Investment	25,247	23,830
With Related Allowance, Unpaid Principal Balance	25,360	23,979
With Related Allowance, Related Allowance	774	770
With Related Allowance, Average Recorded Investment	25,669	24,382
With Related Allowance, Interest Income, Accrual Method	858	1,035
Impaired Financing Receivable
Recorded Investment, Total	44,882	46,398
Unpaid Principal Balance, Total	47,927	54,115
Related Allowance, Total	774	770
Average Recorded Investment, Total	47,370	55,836
Interest Income, Accrual Method, Total	1,607	2,596
Commercial - Non Real Estate [Member]
Impaired Financing Receivable with no Related Allowance
With No Related Allowance, Recorded Investment	1,190	1,533
With No Related Allowance, Unpaid Principal Balance	1,469	2,413
With No Related Allowance, Related Allowance
With No Related Allowance, Average Recorded Investment	1,581	2,518
With No Related Allowance, Interest Income, Accrual Method	61	121
Impaired Financing Receivable with Allowance Recorded
With Related Allowance, Recorded Investment	2,348	2,409
With Related Allowance, Unpaid Principal Balance	2,348	2,408
With Related Allowance, Related Allowance	52	74
With Related Allowance, Average Recorded Investment	2,416	2,482
With Related Allowance, Interest Income, Accrual Method	75	105
Impaired Financing Receivable
Recorded Investment, Total	3,538	3,942
Unpaid Principal Balance, Total	3,817	4,821
Related Allowance, Total	52	74
Average Recorded Investment, Total	3,997	5,000
Interest Income, Accrual Method, Total	136	226
Commercial real estate [Member]
Impaired Financing Receivable
Recorded Investment, Total	19,033	18,828
Unpaid Principal Balance, Total	19,547	23,654
Related Allowance, Total	369	356
Average Recorded Investment, Total	19,705	24,741
Interest Income, Accrual Method, Total	687	1,070
Construction and development [Member]
Impaired Financing Receivable
Recorded Investment, Total	7,713	7,955
Unpaid Principal Balance, Total	8,414	8,369
Related Allowance, Total	148	100
Average Recorded Investment, Total	7,300	8,609
Interest Income, Accrual Method, Total	246	424
Owner occupied [Member] | Commercial real estate [Member]
Impaired Financing Receivable with no Related Allowance
With No Related Allowance, Recorded Investment	3,258	4,352
With No Related Allowance, Unpaid Principal Balance	3,582	8,513
With No Related Allowance, Related Allowance
With No Related Allowance, Average Recorded Investment	3,608	9,402
With No Related Allowance, Interest Income, Accrual Method	131	319
Impaired Financing Receivable with Allowance Recorded
With Related Allowance, Recorded Investment	4,207	1,836
With Related Allowance, Unpaid Principal Balance	4,207	1,886
With Related Allowance, Related Allowance	173	64
With Related Allowance, Average Recorded Investment	4,255	1,902
With Related Allowance, Interest Income, Accrual Method	164	119
Income Producing [Member] | Commercial real estate [Member]
Impaired Financing Receivable with no Related Allowance
With No Related Allowance, Recorded Investment	3,310	4,226
With No Related Allowance, Unpaid Principal Balance	3,412	4,634
With No Related Allowance, Related Allowance
With No Related Allowance, Average Recorded Investment	3,431	4,677
With No Related Allowance, Interest Income, Accrual Method	96	279
Impaired Financing Receivable with Allowance Recorded
With Related Allowance, Recorded Investment	6,939	6,424
With Related Allowance, Unpaid Principal Balance	6,994	6,479
With Related Allowance, Related Allowance	146	224
With Related Allowance, Average Recorded Investment	7,047	6,586
With Related Allowance, Interest Income, Accrual Method	258	278
Multifamily [Member] | Commercial real estate [Member]
Impaired Financing Receivable with no Related Allowance
With No Related Allowance, Recorded Investment		708
With No Related Allowance, Unpaid Principal Balance		826
With No Related Allowance, Related Allowance
With No Related Allowance, Average Recorded Investment		829
With No Related Allowance, Interest Income, Accrual Method		44
Impaired Financing Receivable with Allowance Recorded
With Related Allowance, Recorded Investment	1,319	1,282
With Related Allowance, Unpaid Principal Balance	1,352	1,316
With Related Allowance, Related Allowance	50	68
With Related Allowance, Average Recorded Investment	1,364	1,345
With Related Allowance, Interest Income, Accrual Method	38	31
1-4 family residential [Member] | Construction and development [Member]
Impaired Financing Receivable with no Related Allowance
With No Related Allowance, Recorded Investment		387
With No Related Allowance, Unpaid Principal Balance		387
With No Related Allowance, Related Allowance
With No Related Allowance, Average Recorded Investment		393
With No Related Allowance, Interest Income, Accrual Method		20
Impaired Financing Receivable with Allowance Recorded
With Related Allowance, Recorded Investment	390	380
With Related Allowance, Unpaid Principal Balance	397	380
With Related Allowance, Related Allowance	8	9
With Related Allowance, Average Recorded Investment	400	396
With Related Allowance, Interest Income, Accrual Method	15	21
Construction & Development, Other [Member] | Construction and development [Member]
Impaired Financing Receivable with no Related Allowance
With No Related Allowance, Recorded Investment	3,581	3,288
With No Related Allowance, Unpaid Principal Balance	4,273	3,702
With No Related Allowance, Related Allowance
With No Related Allowance, Average Recorded Investment	3,092	3,883
With No Related Allowance, Interest Income, Accrual Method	118	203
Impaired Financing Receivable with Allowance Recorded
With Related Allowance, Recorded Investment	3,380	2,920
With Related Allowance, Unpaid Principal Balance	3,382	2,920
With Related Allowance, Related Allowance	140	91
With Related Allowance, Average Recorded Investment	3,446	2,955
With Related Allowance, Interest Income, Accrual Method	101	130
Farmland [Member] | Construction and development [Member]
Impaired Financing Receivable with no Related Allowance
With No Related Allowance, Recorded Investment	362
With No Related Allowance, Unpaid Principal Balance	362
With No Related Allowance, Related Allowance
With No Related Allowance, Average Recorded Investment	362
With No Related Allowance, Interest Income, Accrual Method	12
Impaired Financing Receivable with Allowance Recorded
With Related Allowance, Recorded Investment		980
With Related Allowance, Unpaid Principal Balance		980
With Related Allowance, Related Allowance
With Related Allowance, Average Recorded Investment		982
With Related Allowance, Interest Income, Accrual Method		50
Residential Mortgage [Member]
Impaired Financing Receivable
Recorded Investment, Total	14,511	15,615
Unpaid Principal Balance, Total	16,050	17,213
Related Allowance, Total	205	240
Average Recorded Investment, Total	16,266	17,427
Interest Income, Accrual Method, Total	533	872
Residential Mortgage [Member] | Equity Lines [Member]
Impaired Financing Receivable with no Related Allowance
With No Related Allowance, Recorded Investment	140	38
With No Related Allowance, Unpaid Principal Balance	143	39
With No Related Allowance, Related Allowance
With No Related Allowance, Average Recorded Investment	237	41
With No Related Allowance, Interest Income, Accrual Method	5	2
Impaired Financing Receivable with Allowance Recorded
With Related Allowance, Recorded Investment
With Related Allowance, Unpaid Principal Balance
With Related Allowance, Related Allowance
With Related Allowance, Average Recorded Investment
With Related Allowance, Interest Income, Accrual Method
Residential Mortgage [Member] | 1-4 family residential [Member]
Impaired Financing Receivable with no Related Allowance
With No Related Allowance, Recorded Investment	7,481	7,920
With No Related Allowance, Unpaid Principal Balance	8,983	9,491
With No Related Allowance, Related Allowance
With No Related Allowance, Average Recorded Investment	9,043	9,577
With No Related Allowance, Interest Income, Accrual Method	310	563
Impaired Financing Receivable with Allowance Recorded
With Related Allowance, Recorded Investment	6,329	7,201
With Related Allowance, Unpaid Principal Balance	6,343	7,212
With Related Allowance, Related Allowance	203	237
With Related Allowance, Average Recorded Investment	6,400	7,265
With Related Allowance, Interest Income, Accrual Method	193	277
Residential Mortgage [Member] | Junior Liens [Member]
Impaired Financing Receivable with no Related Allowance
With No Related Allowance, Recorded Investment	239	58
With No Related Allowance, Unpaid Principal Balance	257	73
With No Related Allowance, Related Allowance
With No Related Allowance, Average Recorded Investment	260	75
With No Related Allowance, Interest Income, Accrual Method	12	6
Impaired Financing Receivable with Allowance Recorded
With Related Allowance, Recorded Investment	322	398
With Related Allowance, Unpaid Principal Balance	324	398
With Related Allowance, Related Allowance	2	3
With Related Allowance, Average Recorded Investment	326	469
With Related Allowance, Interest Income, Accrual Method	13	24
Consumer - Non Real Estate [Member]
Impaired Financing Receivable with no Related Allowance
With No Related Allowance, Recorded Investment	74	58
With No Related Allowance, Unpaid Principal Balance	86	58
With No Related Allowance, Related Allowance
With No Related Allowance, Average Recorded Investment	87	59
With No Related Allowance, Interest Income, Accrual Method	4	4
Impaired Financing Receivable with Allowance Recorded
With Related Allowance, Recorded Investment	13
With Related Allowance, Unpaid Principal Balance	13
With Related Allowance, Related Allowance
With Related Allowance, Average Recorded Investment	15
With Related Allowance, Interest Income, Accrual Method	1
Impaired Financing Receivable
Recorded Investment, Total	87	58
Unpaid Principal Balance, Total	99	58
Related Allowance, Total
Average Recorded Investment, Total	102	59
Interest Income, Accrual Method, Total	$ 5	$ 4

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Income Taxes (Details) (USD $) In Millions, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Income Taxes (Textual) [Abstract]
Valuation allowance established against deferred tax asset	$ 15.0	$ 12.7

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Commitments and Contingencies (Details) (Commitments [Member], USD $) In Thousands, unless otherwise specified	Sep. 30, 2012
Outstanding financial instruments whose contract amounts represent credit risk
Commitments	$ 28,272
Unfunded loan commitments [Member]
Outstanding financial instruments whose contract amounts represent credit risk
Commitments	28,060
Financial standby letters of credit [Member]
Outstanding financial instruments whose contract amounts represent credit risk
Commitments	$ 212

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Earnings Per Share

9 Months Ended

Sep. 30, 2012

Earnings Per Share [Abstract]

EARNINGS PER SHARE

NOTE 2. EARNINGS PER SHARE

Basic earnings (loss) per share represents income (loss) available to common stockholders divided by the weighted average number of common shares outstanding during the period. When applicable, the weighted average shares outstanding for the diluted earnings per share computations are adjusted to reflect the assumed conversion of shares available under stock options using the treasury stock method.

Earnings (loss) per share have been computed based on the following (dollars in thousands):

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Net loss applicable to common stockholders	($	3,203	)	$	(7,080	)	($	6,086	)	$	(20,382	)
Weighted average number of common shares outstanding		3,895,840			3,897,174			3,895,840			3,897,174
Weighted average number of diluted common shares outstanding		3,895,840			3,897,174			3,895,840			3,897,174
Common stock options and common stock warrants - anti-dilutive		497,605			502,205			497,605			502,205

The common stock warrants referred to above were issued to the United States Treasury in connection with the Company’s April 17, 2009 participation in the Capital Purchase Program, which was authorized as a part of the TARP legislation passed by Congress during 2008.

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Loans (Details Textual) (USD $)	9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2011
Loans (Textual) [Abstract]
Financing Receivable Modifications Recorded Investment	$ 41,200,000	$ 35,600,000
Impairment reserve for troubled debt restructurings	$ 774,000		$ 443,000
No Loans Restructured	90 days

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Borrowed Funds (Tables)

9 Months Ended

Sep. 30, 2012

Borrowed Funds [Abstract]

Company's outstanding borrowings and the annual rate of interest

	September 30, 2012					December 31, 2011
	Outstanding Balance		Annual Interest Rate			Outstanding Balance		Annual Interest Rate
Securities sold under overnight repurchase agreements	$	379		0.10	%	$	381		0.10	%
Securities sold under term repurchase agreements		45,000		4.38			45,000		4.38
Trust preferred securities		5,155		3.29			5,155		3.49
Subordinated debt		2,700		4.00			2,700		4.00
Total borrowed funds	$	53,234		4.22	%	$	53,236		4.24	%

Securities sold under term repurchase agreements

	Outstanding Principal Balance		Annual Effective Interest Rate			Final Maturity Date		Beginning Quarterly Call Dates		Collateral Requirement
Agreement dated 7/8/2008	$	25,000		4.85	%		7/8/2018		7/8/2013	$	8,796
Agreement dated 8/20/2008		20,000		3.78			8/20/2015		8/20/2011		4,356
Total	$	45,000		4.38	%					$	13,152

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Fair Value (Tables)

9 Months Ended

Sep. 30, 2012

Fair Value [Abstract]

Company's assets measured at fair value

	At September 30, 2012
	Total		Level 1		Level 2		Level 3
Assets valued on a recurring basis
Investment securities:
U.S. government and agency	$	56,237	$	—	$	56,237	$	—
State and municipals		8,391		—		8,391		—
Mortgage-backed		54,772		—		54,772		—
Assets valued on a non-recurring basis
Impaired loans		44,108		—		44,108		—
Other real estate owned		5,424		—		5,424		—
Total	$	168,932	$	—	$	168,932	$	—
	At December 31, 2011
	Total		Level 1		Level 2		Level 3
Assets valued on a recurring basis
Investment securities:
U.S. government and agency	$	44,259	$	—	$	44,259	$	—
State and municipals		3,590		—		3,590		—
Corporate		1,017		—		1,017		—
Mortgage-backed		61,571		—		61,571		—
Assets valued on a non-recurring basis
Impaired loans		45,628		—		45,628		—
Other real estate owned		8,524		—		8,524		—
Total	$	164,589	$	—	$	164,589	$	—

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Allowance for Loan Losses (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012		Sep. 30, 2011	Jun. 30, 2012	Mar. 31, 2012	Jun. 30, 2011	Mar. 31, 2011
Changes in allowance for loan losses by segment
Loans: Allowance, Beginning Balance	$ 8,101	[1]	$ 6,863	$ 7,541	$ 8,048	$ 6,685	$ 8,314
Charge offs	(4,380)		(13,350)
Recoveries	733		611
Provision	2,996		14,567
Loans Allowance, Ending Balance	7,450		8,691	7,541	8,048	6,685	8,314
Consumer - Non Real Estate [Member]
Changes in allowance for loan losses by segment
Loans: Allowance, Beginning Balance	143		161
Charge offs	(62)		(115)
Recoveries	25		15
Provision	26		93
Loans Allowance, Ending Balance	132		154
Commercial - Non Real Estate [Member]
Changes in allowance for loan losses by segment
Loans: Allowance, Beginning Balance	2,247		2,252
Charge offs	(382)		(4,085)
Recoveries	306		427
Provision	(773)		4,280
Loans Allowance, Ending Balance	1,398		2,874
Commercial real estate [Member] | Owner occupied [Member]
Changes in allowance for loan losses by segment
Loans: Allowance, Beginning Balance	1,794		1,055
Charge offs	(550)		(5,731)
Recoveries	67		21
Provision	237		6,290
Loans Allowance, Ending Balance	1,548		1,635
Commercial real estate [Member] | Income Producing [Member]
Changes in allowance for loan losses by segment
Loans: Allowance, Beginning Balance	547		99
Charge offs	(1,170)		(101)
Recoveries	47
Provision	1,359		190
Loans Allowance, Ending Balance	783		188
Commercial real estate [Member] | Multifamily [Member]
Changes in allowance for loan losses by segment
Loans: Allowance, Beginning Balance	80
Charge offs
Recoveries
Provision	5
Loans Allowance, Ending Balance	85
Construction and development [Member] | 1-4 family residential [Member]
Changes in allowance for loan losses by segment
Loans: Allowance, Beginning Balance	58		181
Charge offs	(99)		(212)
Recoveries	1		4
Provision	121		168
Loans Allowance, Ending Balance	81		141
Construction and development [Member] | Construction & Development, Other [Member]
Changes in allowance for loan losses by segment
Loans: Allowance, Beginning Balance	661		486
Charge offs	(1,019)		(492)
Recoveries	166		99
Provision	939		785
Loans Allowance, Ending Balance	747		878
Construction and development [Member] | Farmland [Member]
Changes in allowance for loan losses by segment
Loans: Allowance, Beginning Balance
Charge offs
Recoveries
Provision
Loans Allowance, Ending Balance
Residential Mortgage [Member] | Equity Lines [Member]
Changes in allowance for loan losses by segment
Loans: Allowance, Beginning Balance	279		459
Charge offs	(25)		(692)
Recoveries	7		2
Provision	20		483
Loans Allowance, Ending Balance	281		252
Residential Mortgage [Member] | 1-4 family residential [Member]
Changes in allowance for loan losses by segment
Loans: Allowance, Beginning Balance	1,168		1,078
Charge offs	(1,073)		(1,922)
Recoveries	114		43
Provision	1,073		1,902
Loans Allowance, Ending Balance	1,282		1,101
Unallocated [Member] | Residential Mortgage [Member]
Changes in allowance for loan losses by segment
Loans: Allowance, Beginning Balance	1,124		1,092
Charge offs
Recoveries
Provision	(11)		376
Loans Allowance, Ending Balance	$ 1,113		$ 1,468

[1] Derived from audited consolidated financial statements.

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Selected Quarterly Financial Information (Unaudited) (Tables)

9 Months Ended

Sep. 30, 2012

Selected Quarterly Financial Information [Abstract]

Summary of selected quarterly financial information

	September 30, 2012			June 30, 2012 (As  Restated)			March 31, 2012 (As  Restated)			December 31, 2011 (As Restated)			September 30, 2011 (As Restated)			June 30, 2011 (As  Restated)			March 31, 2011 (As  Restated)
	(in thousands)
Assets:
Cash and due from banks, noninterest-bearing	$	3,987		$	3,884		$	4,674		$	5,044		$	4,922		$	10,172		$	4,174
Interest-bearing deposits in banks		3,843			3,226			2,562			2,557			4,431			4,256			4,208
Cash and cash equivalents		7,830			7,110			7,236			7,601			9,353			14,428			8,382
Federal funds sold		13,710			48,465			44,245			28,165			22,630			8,175			14,985
Investment securities		121,387			105,609			103,682			112,404			113,768			118,534			116,879
Loans receivable		280,671			285,186			296,092			307,907			324,757			345,617			359,561
Less: Allowance for loan losses		(7,450	)		(7,541	)		(8,048	)		(8,101	)		(8,691	)		(6,685	)		(8,314	)
Total loans, net		273,221			277,645			288,044			299,806			316,066			338,932			351,247
Premises and equipment		11,911			12,091			12,256			12,229			12,448			12,681			12,859
Other real estate owned		5,424			7,403			7,502			8,524			9,825			6,066			9,375
Bank owned life insurance		10,447			10,359			10,823			10,732			10,640			10,549			10,460
Deferred tax assets		—			—			—			—			3,509			3,941			4,409
Prepaid FDIC insurance assessment		998			1,396			1,790			2,200			2,759			3,095			3,418
Accrued interest receivable		1,393			1,263			1,389			1,503			1,700			1,720			1,862
Other assets		1,952			2,265			2,791			2,803			3,179			2,922			3,182
Total Assets	$	448,273		$	473,606		$	479,758		$	485,967		$	505,877		$	521,043		$	537,058
Liabilities:
Deposits:
Noninterest-bearing demand deposits	$	34,756		$	38,486		$	36,087		$	34,034		$	34,446		$	38,176		$	36,411
Interest-checking deposits		39,138			38,363			38,349			37,306			38,527			37,139			35,221
Savings and money market deposits		106,541			103,613			104,733			106,308			103,163			107,717			110,401
Time deposits		204,095			226,986			233,816			238,565			241,422			243,066			241,706
Total deposits		384,530			407,448			412,985			416,213			417,558			426,098			423,739
Securities sold under agreements to repurchase		45,379			45,249			45,418			45,381			45,412			45,710			45,458
Federal Home Loan Bank advances		—			—			—			—			10,000			10,000			20,000
Subordinated debt		7,855			7,855			7,855			7,855			7,855			7,855			7,855
Other liabilities		1,919			2,111			1,947			1,903			1,809			1,981			1,731
Total Liabilities		439,683			462,663			468,205			471,352			482,634			491,644			498,783
Commitments and contingencies (Note 6)		—			—			—			—			—			—			—
Stockholders’ Equity:
Preferred stock, no par value		13,179			13,179			13,179			13,179			13,179			13,179			13,179
Discount on preferred stock		(496	)		(570	)		(644	)		(716	)		(787	)		(856	)		(923	)
Common stock, $5 per share par value		19,479			19,479			19,479			19,479			19,486			19,486			19,486
Additional paid-in capital		12,991			12,992			12,992			12,991			12,984			12,983			12,984
Retained deficit		(37,463	)		(34,424	)		(34,419	)		(31,871	)		(23,233	)		(16,317	)		(6,627	)
Accumulated other comprehensive income		900			287			966			1,553			1,614			924			176
Total Stockholders’ Equity		8,590			10,943			11,553			14,615			23,243			29,399			38,275
Total Liabilities and Stockholders’ Equity	$	448,273		$	473,606		$	479,758		$	485,967		$	505,877		$	521,043		$	537,058

	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011			September 30, 2011			June 30, 2011			March 31, 2011
	(in thousands)
Other liabilities as previously stated	$	1,919		$	3,023		$	2,694		$	2,485		$	2,226		$	2,235		$	1,819
Prior period adjustment (See Note 1)		—			(912	)		(747	)		(582	)		(417	)		(254	)		(88	)
Other liabilities as restated	$	1,919		$	2,111		$	1,947		$	1,903		$	1,809		$	1,981		$	1,731
Retained deficit as previously stated	$	(37,463	)	$	(35,336	)	$	(35,166	)	$	(32,453	)	$	(23,650	)	$	(16,571	)	$	(6,715	)
Prior period adjustment (See Note 1)		—			912			747			582			417			254			88
Retained deficit as restated	$	(37,463	)	$	(34,424	)	$	(34,419	)	$	(31,871	)	$	(23,233	)	$	(16,317	)	$	(6,627	)

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Basis of Presentation (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011		Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011
Summary of restatement effects
Other liabilities	$ 1,919	$ 2,111	$ 1,947	$ 1,903	[1]	$ 1,809	$ 1,981	$ 1,731
Total Liabilities	439,683	462,663	468,205	471,352		482,634	491,644	498,783
Retained deficit	(37,463)	(34,424)	(34,419)	(31,871)	[1]	(23,233)	(16,317)	(6,627)
Total Stockholders' Equity	448,273	473,606	479,758	485,967	[1]	505,877	521,043	537,058
As Previously Reported [Member]
Summary of restatement effects
Other liabilities				2,485
Total Liabilities				471,934
Retained deficit				(32,453)
Total Stockholders' Equity				14,033
Preferred Dividend Adjustment [Member]
Summary of restatement effects
Other liabilities				(582)
Total Liabilities				(582)
Retained deficit				582
Total Stockholders' Equity				582
Restated [Member]
Summary of restatement effects
Other liabilities				1,903
Total Liabilities				471,352
Retained deficit				(31,871)
Total Stockholders' Equity				$ 14,615

[1] Derived from audited consolidated financial statements.

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Basis of Presentation

9 Months Ended

Sep. 30, 2012

Basis of Presentation [Abstract]

BASIS OF PRESENTATION

NOTE 1. BASIS OF PRESENTATION

In the opinion of management, the financial information included in these unaudited financial statements reflects all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial information as of September 30, 2012 and December 31, 2011 and for the three- and nine-month periods ended September 30, 2012 and 2011, in conformity with accounting principles generally accepted in the United States of America.

The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities at the date of the financial statements, as well as the amounts of income and expense during the reporting period. Actual results could differ from those estimates. Operating results for the three- and nine-month periods ended September 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012.

The results presented here are for Bank of the Carolinas Corporation (“the Company”), the parent company of Bank of the Carolinas (“the Bank”). The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the financial statements filed as part of the Company’s annual report on Form 10-K for the year ended December 31, 2011. This quarterly report should be read in conjunction with the annual report. Because the Company has no separate operations and conducts no business on its own other than owning the Bank, this discussion concerns primarily the business of the Bank. However, because the financial statements are presented on a consolidated basis, the Company and the Bank are collectively referred to as “the Company” unless otherwise noted.

Reclassifications

Certain 2012 and 2011 accounts have been reclassified to conform to the September 30, 2012 presentations. There was no impact on earnings or stockholders’ equity as a result of the reclassifications.

Restatement of Previously Issued Financial Statements

The Corporation has restated its previously issued financial statements to correct the accounting for dividends on preferred stock. The preferred stock issued to the U.S. Treasury pursuant to the Capital Purchase Program has a cumulative dividend rate of 5% per year. Although the Corporation had deferred payment of all dividends, a liability was recorded for each of the quarters in the period March 31, 2011 – June 30, 2012. The accounting guidance for recording dividends prohibits a dividend from being accrued until it has been declared. The Corporation and the Bank are prohibited from declaring dividends as a result of a written agreement between the Corporation and the FDIC and the North Carolina Commissioner of Banks. (See the Corporation’s Management Discussion and Analysis for further discussion.) As a result, since the dividend was never declared, a liability should not have been established and other liabilities was overstated and retained earnings was understated as outlined below. Because of the nature of the misclassification, there was no impact on the net loss available to common shareholders. The following is a summary of the effects of the restatement for December 31, 2011 (dollars in thousands):

	As of December 31, 2011
Consolidated Balance Sheets	As Previously Reported			Preferred Dividend Adjustment			Restated
Other liabilities	$	2,485		$	(582	)	$	1,903
Total Liabilities		471,934			(582	)		471,352
Retained deficit		(32,453	)		582			(31,871	)
Total Stockholders’ Equity		14,033			582			14,615

See Note 13 for the further effects of the restatement on the quarterly financial information.

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Basis of Presentation (Details Textual) (Preferred Stock [Member])	9 Months Ended
	Sep. 30, 2012
Preferred Stock [Member]
Basis of Presentation (Textual) [Abstract]
Cumulative dividend rate	5.00%

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Loans (Details 4) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Financing Receivable, Recorded Investment, Past Due
30 to 59 Days Past Due	$ 2,023	$ 5,037
60 to 89 Days Past Due	3,257	3,099
Equal to Greater than 90 Days Past Due	1,340	8,191
Past Due	6,620	16,327
Current	274,051	291,580
Gross loans receivable	280,671	307,907
90 Days Past Due and Still Accruing
Nonaccrual Status	8,125	19,062
Consumer - Non Real Estate [Member]
Financing Receivable, Recorded Investment, Past Due
30 to 59 Days Past Due	4	31
60 to 89 Days Past Due		5
Equal to Greater than 90 Days Past Due	9
Past Due	13	36
Current	3,360	3,454
Gross loans receivable	3,373	3,490
90 Days Past Due and Still Accruing
Nonaccrual Status	9	10
Commercial - Non Real Estate [Member]
Financing Receivable, Recorded Investment, Past Due
30 to 59 Days Past Due	136	785
60 to 89 Days Past Due	30	559
Equal to Greater than 90 Days Past Due	106	429
Past Due	272	1,773
Current	24,187	32,498
Gross loans receivable	24,459	34,271
90 Days Past Due and Still Accruing
Nonaccrual Status	446	1,246
Others [Member]
Financing Receivable, Recorded Investment, Past Due
30 to 59 Days Past Due
60 to 89 Days Past Due
Equal to Greater than 90 Days Past Due
Past Due
Current	4,147	1,858
Gross loans receivable	4,147	1,858
90 Days Past Due and Still Accruing
Nonaccrual Status
Owner occupied [Member] | Commercial real estate [Member]
Financing Receivable, Recorded Investment, Past Due
30 to 59 Days Past Due	217	319
60 to 89 Days Past Due	2,466	270
Equal to Greater than 90 Days Past Due		957
Past Due	2,683	1,546
Current	57,915	74,706
Gross loans receivable	60,598	76,252
90 Days Past Due and Still Accruing
Nonaccrual Status	358	4,438
Income Producing [Member] | Commercial real estate [Member]
Financing Receivable, Recorded Investment, Past Due
30 to 59 Days Past Due	385	2,250
60 to 89 Days Past Due
Equal to Greater than 90 Days Past Due		2,848
Past Due	385	5,098
Current	46,223	38,896
Gross loans receivable	46,608	43,994
90 Days Past Due and Still Accruing
Nonaccrual Status	1,443	4,021
Multifamily [Member] | Commercial real estate [Member]
Financing Receivable, Recorded Investment, Past Due
30 to 59 Days Past Due		59
60 to 89 Days Past Due		708
Equal to Greater than 90 Days Past Due
Past Due		767
Current	7,296	5,836
Gross loans receivable	7,296	6,603
90 Days Past Due and Still Accruing
Nonaccrual Status		708
1-4 family residential [Member] | Construction and development [Member]
Financing Receivable, Recorded Investment, Past Due
30 to 59 Days Past Due	46
60 to 89 Days Past Due
Equal to Greater than 90 Days Past Due		24
Past Due	46	24
Current	1,816	3,056
Gross loans receivable	1,862	3,080
90 Days Past Due and Still Accruing
Nonaccrual Status		24
Construction & Development, Other [Member] | Construction and development [Member]
Financing Receivable, Recorded Investment, Past Due
30 to 59 Days Past Due
60 to 89 Days Past Due	433
Equal to Greater than 90 Days Past Due		976
Past Due	433	976
Current	28,083	27,683
Gross loans receivable	28,516	28,659
90 Days Past Due and Still Accruing
Nonaccrual Status	2,004	1,740
Farmland [Member] | Construction and development [Member]
Financing Receivable, Recorded Investment, Past Due
30 to 59 Days Past Due
60 to 89 Days Past Due
Equal to Greater than 90 Days Past Due
Past Due
Current	362	1,342
Gross loans receivable	362	1,342
90 Days Past Due and Still Accruing
Nonaccrual Status
Residential Mortgage [Member] | 1-4 family residential [Member]
Financing Receivable, Recorded Investment, Past Due
30 to 59 Days Past Due	1,235	1,442
60 to 89 Days Past Due	293	1,458
Equal to Greater than 90 Days Past Due	1,225	2,938
Past Due	2,753	5,838
Current	69,882	71,182
Gross loans receivable	72,635	77,020
90 Days Past Due and Still Accruing
Nonaccrual Status	3,690	6,779
Residential Mortgage [Member] | Equity Lines [Member]
Financing Receivable, Recorded Investment, Past Due
30 to 59 Days Past Due		137
60 to 89 Days Past Due	35	99
Equal to Greater than 90 Days Past Due
Past Due	35	236
Current	29,382	29,491
Gross loans receivable	29,417	29,727
90 Days Past Due and Still Accruing
Nonaccrual Status	140	38
Residential Mortgage [Member] | Junior Liens [Member]
Financing Receivable, Recorded Investment, Past Due
30 to 59 Days Past Due		14
60 to 89 Days Past Due
Equal to Greater than 90 Days Past Due		19
Past Due		33
Current	1,398	1,578
Gross loans receivable	1,398	1,611
90 Days Past Due and Still Accruing
Nonaccrual Status	$ 35	$ 58

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Going Concern (Details) (USD $)	1 Months Ended		6 Months Ended	9 Months Ended
	Nov. 30, 2011	Jun. 30, 2011	Jun. 30, 2012	Sep. 30, 2012	Mar. 31, 2012	Dec. 31, 2011		Sep. 30, 2011	Mar. 31, 2011	Dec. 31, 2010
Going Concern (Additional Textual) [Abstract]
Cash and cash equivalents		$ 14,428,000	$ 7,110,000	$ 7,830,000	$ 7,236,000	$ 7,601,000	[1]	$ 9,353,000	$ 8,382,000	$ 10,565,000
Long term debt maturity in 2012				0
Long term debt maturity in 2013				0
Reduction of risk-weighted assets			103,400,000
Reductions in other borrowings				22,000,000
Decrease in non core deposits				9,600,000
Retired advances in FHLB	10,000,000	10,000,000
Early redemption penalty paid	$ 7,000	$ 273,000
Remaining average life of advances			1 year 0 months
Average interest rate of Advances			1.21%
Average interest rates, institutional certificates of deposit				0.50%
Maximum [Member]
Going Concern (Textual) [Abstract]
Brokered certificates of deposit, maturities range				27 months
Brokered certificates of deposit, Interest rate range				2.40%
Minimum [Member]
Going Concern (Textual) [Abstract]
Brokered certificates of deposit, maturities range				2 months
Brokered certificates of deposit, Interest rate range				0.75%

[1] Derived from audited consolidated financial statements.

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Consolidated Balance Sheets (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Assets:
Cash and due from banks, noninterest-bearing	$ 3,987	$ 5,044	[1]
Interest-bearing deposits in banks	3,843	2,557	[1]
Cash and cash equivalents	7,830	7,601	[1]
Federal funds sold	13,710	28,165	[1]
Investment securities	121,387	112,404	[1]
Loans receivable	280,671	307,907	[1]
Less: Allowance for loan losses	(7,450)	(8,101)	[1]
Total loans, net	273,221	299,806	[1]
Premises and equipment	11,911	12,229	[1]
Other real estate owned	5,424	8,524	[1]
Bank owned life insurance	10,447	10,732	[1]
Deferred tax assets			[1]
Prepaid FDIC insurance assessment	998	2,200	[1]
Accrued interest receivable	1,393	1,503	[1]
Other assets	1,952	2,803	[1]
Total Assets	448,273	485,967	[1]
Deposits:
Noninterest-bearing demand deposits	34,756	34,034	[1]
Interest-checking deposits	39,138	37,306	[1]
Savings and money market deposits	106,541	106,308	[1]
Time deposits	204,095	238,565	[1]
Total deposits	384,530	416,213	[1]
Securities sold under agreements to repurchase	45,379	45,381	[1]
Subordinated debt	7,855	7,855	[1]
Other liabilities	1,919	1,903	[1]
Total Liabilities	439,683	471,352
Commitments and contingencies (Note 6)			[1]
Stockholders' Equity:
Preferred stock, no par value	13,179	13,179	[1]
Discount on preferred stock	(496)	(716)	[1]
Common stock, $5 per share par value	19,479	19,479	[1]
Additional paid-in capital	12,991	12,991	[1]
Retained deficit	(37,463)	(31,871)	[1]
Accumulated other comprehensive income	900	1,553	[1]
Total Stockholders' Equity	8,590	14,615	[1]
Total Liabilities and Stockholders' Equity	$ 448,273	$ 485,967	[1]
Preferred shares authorized	3,000,000	3,000,000	[1]
Preferred shares issued and outstanding	13,179	13,179	[1]
Common shares authorized	15,000,000	15,000,000	[1]
Common shares issued and outstanding	3,895,840	3,895,840	[1]

[1] Derived from audited consolidated financial statements.

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Allowance for Loan Losses (Details 1) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Individually Evaluated for Impairment
Allowance	$ 774	$ 770
Total Loans	44,882	46,398
Unallocated [Member]
Individually Evaluated for Impairment
Allowance
Total Loans
Consumer - Non Real Estate [Member]
Individually Evaluated for Impairment
Allowance
Total Loans	87	58
Commercial - Non Real Estate [Member]
Individually Evaluated for Impairment
Allowance	52	74
Total Loans	3,538	5,451
Commercial real estate [Member] | Owner occupied [Member]
Individually Evaluated for Impairment
Allowance	173	64
Total Loans	7,465	6,188
Commercial real estate [Member] | Income Producing [Member]
Individually Evaluated for Impairment
Allowance	146	224
Total Loans	10,249	10,650
Commercial real estate [Member] | Multifamily [Member]
Individually Evaluated for Impairment
Allowance	50	68
Total Loans	1,319	1,990
Construction and development [Member] | 1-4 Family [Member]
Individually Evaluated for Impairment
Allowance	8	9
Total Loans	390	1,668
Construction and development [Member] | Construction & Development, Other [Member]
Individually Evaluated for Impairment
Allowance	140	91
Total Loans	6,961	5,307
Construction and development [Member] | Farmland [Member]
Individually Evaluated for Impairment
Allowance
Total Loans	362
Residential Mortgage [Member] | Equity Lines [Member]
Individually Evaluated for Impairment
Allowance
Total Loans	140	38
Residential Mortgage [Member] | 1-4 family residential [Member]
Individually Evaluated for Impairment
Allowance	205	240
Total Loans	$ 14,371	$ 15,048

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Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2012		Sep. 30, 2011
Cash flows from operating activities:
Net loss	$ (5,372)		$ (19,684)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses	2,996		14,567
Stock based compensation benefit			(4)
Loss on disposal of premises and equipment			3
Depreciation and amortization	627		751
Change in valuation allowance on other real estate owned	1,965		3,191
(Gain) loss on sale of other real estate owned	(33)		125
Gains on sales of investment securities	(2,147)		(6)
Decrease (increase) in bank owned life insurance	(685)		(269)
Net amortization/accretion of premiums and discounts on investments	464		572
Net change in other assets	1,730		1,361
Net change in other liabilities	16		93
Net cash provided by operating activities	531		700
Cash flows from investing activities:
Net change in federal funds sold	14,455		(13,300)
Purchases of premises and equipment	(309)		(96)
Purchases of securities	(118,959)		(31,533)
Proceeds from sales, calls, maturities and principal repayments of securities available for sale	110,597		29,691
Redemption of FHLB stock	842		298
Proceeds from sales of other real estate owned	4,711		2,855
Net decrease in loans	20,046		20,975
Net cash provided by investing activities	31,383		8,890
Cash flows from financing activities:
Net increase (decrease) in deposits	(31,683)		1,389
Net repayments of other borrowings			(12,000)
Net decrease in repurchase agreements	(2)		(191)
Cash dividends paid on preferred stock
Net cash used by financing activities	(31,685)		(10,802)
Net increase (decrease) in cash and cash equivalents	229		(1,212)
Cash and cash equivalents at beginning of period	7,601	[1]	10,565
Cash and cash equivalents at end of period	7,830		9,353
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	4,338		4,900
Noncash investing and financing activities:
Change in fair value of securities available for sale, net of tax	653		1,304
Transfer from loans to other real estate owned	$ 3,543		$ 7,682

[1] Derived from audited consolidated financial statements.

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Investment Securities (Details 1) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Temporarily impaired securities fair values with unrealized losses
Less than 12 Months, Estimated Fair Value	$ 10,770	$ 3,071
12 Months or More, Estimated Fair Value	1,000	1,000
Total, Estimated Fair Value	11,770	4,071
Less than 12 Months, Unrealized Losses	122	32
12 Months or More, Unrealized Losses	235	235
Total, Unrealized Losses	357	267
U.S. Government agency securities [Member]
Temporarily impaired securities fair values with unrealized losses
Less than 12 Months, Estimated Fair Value	1,971
12 Months or More, Estimated Fair Value
Total, Estimated Fair Value	1,971
Less than 12 Months, Unrealized Losses	19
12 Months or More, Unrealized Losses
Total, Unrealized Losses	19
State and municipal securities [Member]
Temporarily impaired securities fair values with unrealized losses
Less than 12 Months, Estimated Fair Value	7,468
12 Months or More, Estimated Fair Value
Total, Estimated Fair Value	7,468
Less than 12 Months, Unrealized Losses	99
12 Months or More, Unrealized Losses
Total, Unrealized Losses	99
Mortgage-backed securities [Member]
Temporarily impaired securities fair values with unrealized losses
Less than 12 Months, Estimated Fair Value	1,331	3,071
12 Months or More, Estimated Fair Value
Total, Estimated Fair Value	1,331	3,071
Less than 12 Months, Unrealized Losses	4	32
12 Months or More, Unrealized Losses
Total, Unrealized Losses	4	32
Corporate securities [Member]
Temporarily impaired securities fair values with unrealized losses
Less than 12 Months, Estimated Fair Value
12 Months or More, Estimated Fair Value	1,000	1,000
Total, Estimated Fair Value	1,000	1,000
Less than 12 Months, Unrealized Losses
12 Months or More, Unrealized Losses	235	235
Total, Unrealized Losses	$ 235	$ 235

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Basis of Presentation (Tables)

9 Months Ended

Sep. 30, 2012

Basis of Presentation [Abstract]

Summary of restatement effects

	As of December 31, 2011
Consolidated Balance Sheets	As Previously Reported			Preferred Dividend Adjustment			Restated
Other liabilities	$	2,485		$	(582	)	$	1,903
Total Liabilities		471,934			(582	)		471,352
Retained deficit		(32,453	)		582			(31,871	)
Total Stockholders’ Equity		14,033			582			14,615

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Loans (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011		Sep. 30, 2011	Jun. 30, 2011	Mar. 31, 2011	Dec. 31, 2010
Loan portfolio
Total real estate loans	$ 248,692			$ 268,288
Commercial business and other loans	24,459			34,271
Consumer loans:
Total consumer loans	7,520			5,348
Gross loans receivable	280,671			307,907
Less: Allowance for loan losses	(7,450)	(7,541)	(8,048)	(8,101)	[1]	(8,691)	(6,685)	(8,314)	(6,863)
Total loans, net	273,221	277,645	288,044	299,806	[1]	316,066	338,932	351,247
1-4 family residential [Member]
Loan portfolio
Total real estate loans	74,033			78,631
Commercial real estate [Member]
Loan portfolio
Total real estate loans	114,502			126,849
Construction and development [Member]
Loan portfolio
Total real estate loans	30,740			33,081
Home equity [Member]
Loan portfolio
Total real estate loans	29,417			29,727
Consumer loans installment [Member]
Consumer loans:
Installment	3,373			3,490
Consumer loans Other [Member]
Consumer loans:
Other	$ 4,147			$ 1,858

[1] Derived from audited consolidated financial statements.

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Investment Securities (Tables)

9 Months Ended

Sep. 30, 2012

Investment Securities [Abstract]

Amortized cost, estimated fair values and carrying values of the investment securities portfolios

	September 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Carrying Value
Investment securities available for sale:
U.S. Government agencies securities	$	55,793	$	463	$	19	$	56,237	$	56,237
State and municipal bonds		8,487		3		99		8,391		8,391
Corporate securities		—		—		—		—		—
Mortgage-backed securities		53,686		1,090		4		54,772		54,772
Total investment securities available for sale		117,966		1,556		122		119,400		119,400
Investment securities held to maturity:
Corporate securities		1,987		29		235		1,781		1,987
Total investment securities	$	119,953	$	1,585	$	357	$	121,181	$	121,387
	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Carrying Value
Investment securities available for sale:
U.S. Government agencies securities	$	43,131	$	1,128	$	—	$	44,259	$	44,259
State and municipal bonds		3,433		157		—		3,590		3,590
Corporate securities		963		54		—		1,017		1,017
Mortgage-backed securities		60,415		1,188		32		61,571		61,571
Total investment securities available for sale		107,942		2,527		32		110,437		110,437
Investment securities held to maturity:
Corporate securities		1,967		67		235		1,799		1,967
Total investment securities	$	109,909	$	2,594	$	267	$	112,236	$	112,404

Temporarily impaired securities fair values with unrealized losses

	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Temporarily impaired securities:
U.S. Government agency securities	$	1,971	$	19	$	—	$	—	$	1,971	$	19
State and municipal securities		7,468		99		—		—		7,468		99
Mortgage-backed securities		1,331		4		—		—		1,331		4
Corporate securities		—		—		1,000		235		1,000		235
Total	$	10,770	$	122	$	1,000	$	235	$	11,770	$	357

December 31, 2011:

	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Temporarily impaired securities:
U.S. Government agency securities	$	—	$	—	$	—	$	—	$	—	$	—
State and municipal securities		—		—		—		—		—		—
Mortgage-backed securities		3,071		32		—		—		3,071		32
Corporate securities		—		—		1,000		235		1,000		235
Total	$	3,071	$	32	$	1,000	$	235	$	4,071	$	267

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Consolidated Statements of Changes In Stockholders' Equity (Unaudited) (USD $) In Thousands	Total		Preferred Stock	Discount on Preferred Stock	Common Stock	Additional Paid-In Capital	Retained Deficit	Accumulated Other Comprehensive Income
Balance at Dec. 31, 2010	$ 41,704		$ 13,179	$ (991)	$ 19,486	$ 12,988	$ (3,268)	$ 310
Balance, shares at Dec. 31, 2010			13,179		3,897,174
Net loss	(19,684)						(19,684)
Other comprehensive loss	1,304							1,304
Total comprehensive loss	(18,380)
Stock based compensation benefit	(4)					(4)
Discount accretion on preferred stock				204			(204)
Dividends accrued on preferred stock	(77)						(77)
Balance at Sep. 30, 2011	23,243		13,179	(787)	19,486	12,984	(23,233)	1,614
Balance, shares at Sep. 30, 2011			13,179		3,897,174
Balance at Dec. 31, 2011	14,615	[1]	13,179	(716)	19,479	12,991	(31,871)	1,553
Balance, shares at Dec. 31, 2011			13,179		3,895,840
Net loss	(5,372)						(5,372)
Other comprehensive loss	(653)							(653)
Total comprehensive loss	(6,025)
Discount accretion on preferred stock				220			(220)
Dividends accrued on preferred stock
Balance at Sep. 30, 2012	$ 8,590		$ 13,179	$ (496)	$ 19,479	$ 12,991	$ (37,463)	$ 900
Balance, shares at Sep. 30, 2012			13,179		3,895,840

[1] Derived from audited consolidated financial statements.

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Consolidated Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Consolidated Balance Sheets [Abstract]
Preferred stock par value
Common stock par value	$ 5	$ 5

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Stockholders' Equity

9 Months Ended

Sep. 30, 2012

Stockholders' Equity [Abstract]

STOCKHOLDERS' EQUITY

NOTE 10. STOCKHOLDERS’ EQUITY

Preferred Stock:

The Company has 3.0 million shares of preferred stock authorized. There were 13,179 shares of preferred stock issued and outstanding with a $1,000 per share liquidation preference on September 30, 2012 and December 31, 2011. All of the shares were issued on April 17, 2009 in connection with the Company’s participation in the U.S. Treasury’s TARP Capital Purchase Program.

In February 2011, the Company notified the Treasury of its intent to defer the payment of its regular quarterly cash dividend on its Series A Preferred Stock sold to the Treasury. In addition, the Company has entered into a written agreement with the Federal Reserve Bank of Richmond, which prohibits the Company’s payment of any dividends without the prior approval of the Federal Reserve Bank of Richmond and the Director of the Division of Banking Supervision and Regulation of the Federal Reserve Board of Governors.

At September 30, 2012 and December 31, 2011, the cumulative amount of dividends in arrears not declared was $1.1 million and $582,000, respectively.

Common Stock:

The Company has 15.0 million shares of $5 par value common stock authorized. There were 3,895,840 shares of common stock issued and outstanding at September 30, 2012 and December 31, 2011, respectively.

Warrants:

In connection with the issuance of the preferred shares under the U.S. Treasury’s TARP Capital Purchase Program, the Company issued the U.S. Treasury a warrant to purchase 475,204 shares of its common stock for $4.16 per share. The warrant expires April 17, 2019.

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Document and Entity Information	9 Months Ended
	Sep. 30, 2012	Nov. 14, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	Bank of the Carolinas CORP
Entity Central Index Key	0001365997
Document Type	10-Q
Document Period End Date	Sep. 30, 2012
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		3,895,840

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Income Taxes

9 Months Ended

Sep. 30, 2012

Income Taxes [Abstract]

INCOME TAXES

NOTE 11. INCOME TAXES

The Company utilizes the liability method of computing income taxes. Under the liability method, deferred tax liabilities and assets are established for future tax return effects of the temporary differences between the stated value of assets and liabilities for financial reporting purposes and their tax bases. The focus is on accruing the appropriate balance sheet deferred tax amount, with the statement of income effect being the result of the changes in the balance sheet amounts from period to period. The current portion of income tax expense is provided based upon the actual tax liability incurred for tax return purposes.

An evaluation of the probability of being able to realize the future benefits of deferred tax assets is made. A valuation allowance is provided for the deferred tax asset when it is more likely than not that some portion or all of the deferred tax asset will not be realized. Management has established a deferred tax asset valuation allowance as of September 30, 2012 of $15.0 million. There was a $12.7 million valuation allowance as of December 31, 2011. The valuation allowance has been established because management believes current overall credit trends, as well as actual and forecasted performance, raise significant concern over the ability of the Company to realize the components of its deferred tax assets relating to net operating losses and the allowances for losses on loans and OREO.

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Consolidated Statements of Operations (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Interest income
Interest and fees on loans	$ 3,571	$ 4,276	$ 10,905	$ 13,415
Interest on securities	723	823	2,043	2,422
Other interest income	13	16	59	42
Total interest income	4,307	5,115	13,007	15,879
Interest expense
Interest on deposits	779	1,075	2,530	3,405
Interest on borrowed funds	570	571	1,698	2,075
Total interest expense	1,349	1,646	4,228	5,480
Net interest income	2,958	3,469	8,779	10,399
Provision for loan losses	1,471	5,650	2,996	14,567
Net interest income (loss) after provision for loan losses	1,487	(2,181)	5,783	(4,168)
Noninterest income
Customer service fees	297	318	867	951
Increase in value of bank owned life insurance	89	91	685	269
Gains on sales of investment securities			2,147	6
Other income	5	6	20	16
Total noninterest income	391	415	3,719	1,242
Noninterest expense
Salaries and benefits	1,723	1,757	5,266	4,947
Occupancy and equipment	468	502	1,451	1,571
FDIC insurance assessments	405	345	1,225	949
Data processing services	257	218	737	654
Valuation provisions and net operating costs associated with foreclosed real estate	1,324	1,053	2,415	4,050
Other	1,048	1,205	3,371	3,591
Total noninterest expense	5,225	5,080	14,465	15,762
Loss before income taxes	(3,347)	(6,846)	(4,963)	(18,688)
Provision for income taxes	(383)		409	996
Net loss	(2,964)	(6,846)	(5,372)	(19,684)
Dividends and accretion on preferred stock	(239)	(234)	(714)	(698)
Net loss available to common stockholders	$ (3,203)	$ (7,080)	$ (6,086)	$ (20,382)
Loss per common share:
Basic	$ (0.82)	$ (1.82)	$ (1.56)	$ (5.23)
Diluted	$ (0.82)	$ (1.82)	$ (1.56)	$ (5.23)

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Allowance for Loan Losses

9 Months Ended

Sep. 30, 2012

Allowance for Loan Losses [Abstract]

ALLOWANCE FOR LOAN LOSSES

NOTE 5. ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance is necessary to reserve for, in the judgment of management, estimated loan losses and risks inherent in the loan portfolio. The Company’s allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans.

The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The Company’s allowance for loan losses consists of three elements: (i) specific valuation allowances determined in accordance with accounting principles regarding receivables based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with accounting principles regarding contingencies based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with accounting principles regarding contingencies based on general economic conditions and other qualitative risk factors both internal and external to the Company.

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans at the time they were charged-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. The Company’s pools of similar loans include commercial and industrial loans, commercial real estate loans, construction and development loans, residential real estate loans, and consumer and other loans. General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such valuation allowances are determined by evaluating, among other things: (i) levels and trends in delinquencies and impaired loans; (ii) levels of and trends in charge-offs and recoveries; (iii) levels of non-impaired substandard loans; (iv) trends in volume and terms of loans; (v) effects of changes in risk selection and underwriting practices; (vi) experience, ability, and depth of lending management and staff; (vii) national and local economic trends and conditions; (viii) industry conditions; and (ix) effect of changes in credit concentrations. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Loans identified as losses by management, internal loan review and/or regulatory examiners are charged-off.

Changes in the allowance for loan losses by segment, since their respective year-end, are as follows (dollars in thousands):

	September 30, 2012												September 30, 2011
	Beginning Balance		Chargeoffs			Recoveries		Provision			Ending Balance		Beginning Balance		Chargeoffs			Recoveries		Provision		Ending Balance
Commercial - Non Real Estate	$	2,247	$	(382	)	$	306	$	(773	)	$	1,398	$	2,252	$	(4,085	)	$	427	$	4,280	$	2,874
Commercial Real Estate
Owner occupied		1,794		(550	)		67		237			1,548		1,055		(5,731	)		21		6,290		1,635
Income producing		547		(1,170	)		47		1,359			783		99		(101	)		—		190		188
Multifamily		80		—			—		5			85		—		—			—		—		—
Construction & Development
1 - 4 Family		58		(99	)		1		121			81		181		(212	)		4		168		141
Other		661		(1,019	)		166		939			747		486		(492	)		99		785		878
Farmland		—		—			—		—			—		—		—			—		—		—
Residential
Equity Lines		279		(25	)		7		20			281		459		(692	)		2		483		252
1 - 4 Family		1,168		(1,073	)		114		1,073			1,282		1,078		(1,922	)		43		1,902		1,101
Consumer - Non Real Estate		143		(62	)		25		26			132		161		(115	)		15		93		154
Unallocated		1,124		—			—		(11	)		1,113		1,092		—			—		376		1,468
Total	$	8,101	$	(4,380	)	$	733	$	2,996		$	7,450	$	6,863	$	(13,350	)	$	611	$	14,567	$	8,691

As of September 30, 2012 and December 31, 2011, loans were evaluated for impairment as follows (dollars in thousands):

	Individually Evaluated for Impairment
	September 30, 2012				December 31, 2011
	Allowance		Total Loans		Allowance		Total Loans
Commercial - Non Real Estate	$	52	$	3,538	$	74	$	5,451
Commercial Real Estate
Owner occupied		173		7,465		64		6,188
Income producing		146		10,249		224		10,650
Multifamily		50		1,319		68		1,990
Construction & Development
1 - 4 Family		8		390		9		1,668
Other		140		6,961		91		5,307
Farmland		—		362		—		—
Residential
Equity Lines		—		140		—		38
1 - 4 Family		205		14,371		240		15,048
Consumer - Non Real Estate		—		87		—		58
Unallocated		—		—		—		—
Total	$	774	$	44,882	$	770	$	46,398
	Collectively Evaluated for Impairment
	September 30, 2012				December 31, 2011
	Allowance		Total Loans		Allowance		Total Loans
Commercial - Non Real Estate	$	1,346	$	20,921	$	2,173	$	28,820
Commercial Real Estate
Owner occupied		1,375		53,133		1,730		70,064
Income producing		637		36,359		323		33,344
Multifamily		35		5,977		12		4,613
Construction & Development
1 - 4 Family		73		1,472		49		1,412
Other		607		21,555		570		23,352
Farmland		—		—		—		1,342
Residential
Equity Lines		281		29,277		279		29,689
1 - 4 Family		1,077		59,662		928		63,583
Consumer - Non Real Estate		132		3,286		143		3,432
Unallocated		1,113		4,147		1,124		1,858
Total	$	6,676	$	235,789	$	7,331	$	261,509

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Loans

9 Months Ended

Sep. 30, 2012

Loans [Abstract]

LOANS

NOTE 4. LOANS

The loan portfolio as of the dates indicated is summarized below (dollars in thousands):

	September 30, 2012			December 31, 2011
Real estate loans:
1-4 family residential	$	74,033		$	78,631
Commercial real estate		114,502			126,849
Construction and development		30,740			33,081
Home equity		29,417			29,727
Total real estate loans		248,692			268,288
Commercial business and other loans		24,459			34,271
Consumer loans:
Installment		3,373			3,490
Other		4,147			1,858
Total consumer loans		7,520			5,348
Gross loans receivable		280,671			307,907
Allowance for loan losses		(7,450	)		(8,101	)
Loans, net	$	273,221		$	299,806

Impaired loans, segregated by class of loans, are summarized as follows as of the dates indicated (dollars in thousands):

	September 30, 2012										December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial - Non Real Estate	$	1,190	$	1,469	$	—	$	1,581	$	61	$	1,533	$	2,413	$	—	$	2,518	$	121
Commercial Real Estate
Owner occupied		3,258		3,582		—		3,608		131		4,352		8,513		—		9,402		319
Income producing		3,310		3,412		—		3,431		96		4,226		4,634		—		4,677		279
Multifamily		—		—		—		—		—		708		826		—		829		44
Construction & Development
1 - 4 Family		—		—		—		—		—		387		387		—		393		20
Other		3,581		4,273		—		3,092		118		3,288		3,702		—		3,883		203
Farmland		362		362		—		362		12		—		—		—		—		—
Residential
Equity Lines		140		143		—		237		5		38		39		—		41		2
1 - 4 Family		7,481		8,983		—		9,043		310		7,920		9,491		—		9,577		563
Junior Liens		239		257		—		260		12		58		73		—		75		6
Consumer - Non Real Estate		74		86		—		87		4		58		58		—		59		4
Total loans with no allowance	$	19,635	$	22,567	$	—	$	21,701	$	749	$	22,568	$	30,136	$	—	$	31,454	$	1,561
With an allowance recorded:
Commercial - Non Real Estate	$	2,348	$	2,348	$	52	$	2,416	$	75	$	2,409	$	2,408	$	74	$	2,482	$	105
Commercial Real Estate
Owner occupied		4,207		4,207		173		4,255		164		1,836		1,886		64		1,902		119
Income producing		6,939		6,994		146		7,047		258		6,424		6,479		224		6,586		278
Multifamily		1,319		1,352		50		1,364		38		1,282		1,316		68		1,345		31
Construction & Development
1 - 4 Family		390		397		8		400		15		380		380		9		396		21
Other		3,380		3,382		140		3,446		101		2,920		2,920		91		2,955		130
Farmland		—		—		—		—		—		980		980		—		982		50
Residential
Equity Lines		—		—		—		—		—		—		—		—		—		—
1 - 4 Family		6,329		6,343		203		6,400		193		7,201		7,212		237		7,265		277
Junior Liens		322		324		2		326		13		398		398		3		469		24
Consumer - Non Real Estate		13		13		—		15		1		—		—		—		—		—
Total loans with an allowance	$	25,247	$	25,360	$	774	$	25,669	$	858	$	23,830	$	23,979	$	770	$	24,382	$	1,035
Total:
Commercial - Non Real Estate	$	3,538	$	3,817	$	52	$	3,997	$	136	$	3,942	$	4,821	$	74	$	5,000	$	226
Commercial Real Estate	$	19,033	$	19,547	$	369	$	19,705	$	687	$	18,828	$	23,654	$	356	$	24,741	$	1,070
Construction & Development	$	7,713	$	8,414	$	148	$	7,300	$	246	$	7,955	$	8,369	$	100	$	8,609	$	424
Residential	$	14,511	$	16,050	$	205	$	16,266	$	533	$	15,615	$	17,213	$	240	$	17,427	$	872
Consumer - Non Real Estate	$	87	$	99	$	—	$	102	$	5	$	58	$	58	$	—	$	59	$	4
Totals	$	44,882	$	47,927	$	774	$	47,370	$	1,607	$	46,398	$	54,115	$	770	$	55,836	$	2,596

Impaired loans include loans whose contractual terms have been restructured in a manner that grants a concession to a borrower experiencing financial difficulties. Troubled debt restructurings (TDRs) are a subset of impaired loans and totaled $41.2 million at September 30, 2012 and $35.6 million at December 31, 2011.

The following tables illustrate TDR information for the three and nine months ended September 30, 2012 and 2011 (dollars in thousands):

	For the three months ended September 30, 2012						For the nine months ended September 30, 2012
Troubled Debt Restructuring	Number of Contracts		Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Contracts		Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Commercial - Non Real Estate		3	$	82	$	82		13	$	603	$	603
Commercial - Real Estate		4		2,326		2,326		9		5,461		5,461
Construction & Development		2		445		445		8		1,576		1,576
Residential		3		1,293		1,293		22		3,325		3,325
Consumer - Non Real Estate		1		14		14		2		32		32
Totals		13	$	4,160	$	4,160		54	$	10,997	$	10,997
	For the three months ended September 30, 2011						For the nine months ended September 30, 2011
Troubled Debt Restructuring	Number of Contracts		Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Number of Contracts		Pre-Modification Recorded Investment		Post-Modification Recorded Investment
Commercial - Non Real Estate		5	$	315	$	315		18	$	2,195	$	2,195
Commercial - Real Estate		4		693		693		12		3,656		3,656
Construction & Development		1		902		902		6		2,311		2,311
Residential		8		3,891		3,891		25		6,270		6,270
Consumer - Non Real Estate		—		—		—		—		—		—
Totals		18	$	5,801	$	5,801		61	$	14,432	$	14,432

For the purposes of this report, default is defined as being 90-days past due or on non-accrual status without performance. The following tables illustrate loans restructured in the twelve months prior to September 30, 2012 that went into default during the three- and nine-month periods ended September 30, 2012 and 2011 (dollars in thousands).

	Three months ended September 30, 2012				Nine months ended September 30, 2012
Troubled Debt Restructuring That Subsequently Defaulted	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Commercial - Non Real Estate		—	$	—		—	$	—
Commercial - Real Estate		—		—		—		—
Construction & Development		—		—		—		—
Residential		—		—		1		69
Consumer - Non Real Estate		—		—		—		—
Totals		—	$	—		1	$	69
	Three months ended September 30, 2011				Nine months ended September 30, 2011
Troubled Debt Restructuring That Subsequently Defaulted	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Commercial - Non Real Estate		—	$	—		—	$	—
Commercial - Real Estate		—		—		—		—
Construction & Development		—		—		—		—
Residential		—		—		—		—
Consumer - Non Real Estate		—		—		—		—
Totals		—	$	—		—	$	—

Some loan modifications classified as TDRs may not ultimately result in the full collection of principal and interest, as modified, and may result in potential incremental losses. These potential incremental losses have been factored into our overall allowance for loan losses estimate. The level of any re-defaults will likely be affected by future economic conditions. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is ultimately repaid in full, reclassified to loans held for sale, or foreclosed and sold. Included in the allowance for loan losses at September 30, 2012 and 2011 was an impairment reserve for TDRs in the amount of $774,000 and $443,000, respectively.

Non-accrual loans and an age analysis of past due loans, segregated by class of loans, were as follows (dollars in thousands):

	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing		Non-accrual Loans
September 30, 2012:
Commercial - Non Real Estate	$	136	$	30	$	106	$	272	$	24,187	$	24,459	$	—	$	446
Commercial Real Estate
Owner occupied		217		2,466		—		2,683		57,915		60,598		—		358
Income producing		385		—		—		385		46,223		46,608		—		1,443
Multifamily		—		—		—		—		7,296		7,296		—		—
Construction & Development
1 - 4 Family		46		—		—		46		1,816		1,862		—		—
Other		—		433		—		433		28,083		28,516		—		2,004
Farmland		—		—		—		—		362		362		—		—
Residential
Equity Lines		—		35		—		35		29,382		29,417		—		140
1 - 4 Family		1,235		293		1,225		2,753		69,882		72,635		—		3,690
Junior Liens		—		—		—		—		1,398		1,398		—		35
Consumer - Non Real Estate		4		—		9		13		3,360		3,373		—		9
Other		—		—		—		—		4,147		4,147		—		—
Total	$	2,023	$	3,257	$	1,340	$	6,620	$	274,051	$	280,671	$	—	$	8,125
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days Past Due and Still Accruing		Non-accrual Loans
December 31, 2011:
Commercial - Non Real Estate	$	785	$	559	$	429	$	1,773	$	32,498	$	34,271	$	—	$	1,246
Commercial Real Estate
Owner occupied		319		270		957		1,546		74,706		76,252		—		4,438
Income producing		2,250		—		2,848		5,098		38,896		43,994		—		4,021
Multifamily		59		708		—		767		5,836		6,603		—		708
Construction & Development
1 - 4 Family		—		—		24		24		3,056		3,080		—		24
Other		—		—		976		976		27,683		28,659		—		1,740
Farmland		—		—		—		—		1,342		1,342		—		—
Residential
Equity Lines		137		99		—		236		29,491		29,727		—		38
1 - 4 Family		1,442		1,458		2,938		5,838		71,182		77,020		—		6,779
Junior Liens		14		—		19		33		1,578		1,611		—		58
Consumer - Non Real Estate		31		5		—		36		3,454		3,490		—		10
Other		—		—		—		—		1,858		1,858		—		—
Total	$	5,037	$	3,099	$	8,191	$	16,327	$	291,580	$	307,907	$	—	$	19,062

The Bank categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. This categorization is made on all commercial, commercial real estate, and construction and development loans. The Bank uses the following definitions for risk ratings:

Special Mention - Loans and leases classified as special mention, while still adequately protected by the borrower’s capital adequacy and payment capability, exhibit distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment. These exposures require management’s close attention so as to avoid becoming undue or unwarranted credit exposures.

Substandard - Loans and leases classified as substandard are inadequately protected by the borrower’s current financial condition and payment capability or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

Doubtful - Loans and leases classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined. The Company’s practice is to charge-off the portion of the loan amount determined to be doubtful in the quarter that the determination is made if the repayment of the loan is collateral dependent.

Loss - Loans and leases classified as loss are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Losses are taken in the period in which they surface as uncollectible.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. As of September 30, 2012 and December 31, 2011, and based on the most recent analysis performed, the loans and leases were categorized as follows (dollars in thousands):

	September 30, 2012
Internal Risk Rating Grades	Pass		Special Mention		Substandard		Doubtful		Loss
Commercial - Non Real Estate	$	17,872	$	3,691	$	2,896	$	—	$	—
Commercial Real Estate
Owner occupied		36,390		15,505		8,703		—		—
Income producing		24,873		11,441		10,294		—		—
Multifamily		5,267		710		1,319		—		—
Construction & Development
1 - 4 Family		1,238		255		369		—		—
Other		12,835		12,306		3,375		—		—
Farmland		—		—		362		—		—
Totals	$	98,475	$	43,908	$	27,318	$	—	$	—
Total:
Commercial - Non Real Estate	$	17,872	$	3,691	$	2,896	$	—	$	—
Commercial Real Estate	$	66,530	$	27,656	$	20,316	$	—	$	—
Construction & Development	$	14,073	$	12,561	$	4,106	$	—	$	—
Totals	$	98,475	$	43,908	$	27,318	$	—	$	—
	December 31, 2011
Internal Risk Rating Grades	Pass		Special Mention		Substandard		Doubtful		Loss
Commercial - Non Real Estate	$	26,552	$	3,606	$	3,727	$	386	$	—
Commercial Real Estate
Owner occupied		54,739		8,547		12,854		112		—
Income producing		29,583		3,604		10,807		—		—
Multifamily		3,820		793		1,990		—		—
Construction & Development
1 - 4 Family		1,081		1,255		744		—		—
Other		18,191		8,199		1,988		281		—
Farmland		—		362		980		—		—
Totals	$	133,966	$	26,366	$	33,090	$	779	$	—
Total:
Commercial - Non Real Estate	$	26,552	$	3,606	$	3,727	$	386	$	—
Commercial Real Estate	$	88,142	$	12,944	$	25,651	$	112	$	—
Construction & Development	$	19,272	$	9,816	$	3,712	$	281	$	—
Totals	$	133,966	$	26,366	$	33,090	$	779	$	—

All consumer-related loans, including residential real estate and non-real estate, are evaluated and monitored based upon payment activity. Once a consumer-related loan becomes past due on a recurring basis, the Company will pull that loan out of the homogenized pool and evaluate it individually for impairment. At this time, the consumer-related loan may be placed on the Company’s internal watch list and risk rated either special mention or substandard, depending upon the individual circumstances. Consumer-related loans at September 30, 2012 and December 31, 2011, segregated by class of loans, were as follows (dollars in thousands):

	September 30, 2012				December 31, 2011
Risk Based on Payment Activity	Performing		Non- Performing		Performing		Non- Performing
Residential
Equity Lines	$	29,277	$	140	$	29,689	$	38
1 - 4 Family		70,758		1,877		73,427		3,593
Junior Liens		1,398		—		1,592		19
Consumer - Non Real Estate
Credit Cards		—		—		—		—
Other		3,373		—		3,480		10
Totals	$	104,806	$	2,017	$	108,188	$	3,660
Total:
Residential	$	101,433	$	2,017	$	104,708	$	3,650
Consumer - Non Real Estate	$	3,373	$	—	$	3,480	$	10
Totals	$	104,806	$	2,017	$	108,188	$	3,660

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Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2012

Earnings Per Share [Abstract]

Computation of earnings (loss) per share

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Net loss applicable to common stockholders	($	3,203	)	$	(7,080	)	($	6,086	)	$	(20,382	)
Weighted average number of common shares outstanding		3,895,840			3,897,174			3,895,840			3,897,174
Weighted average number of diluted common shares outstanding		3,895,840			3,897,174			3,895,840			3,897,174
Common stock options and common stock warrants - anti-dilutive		497,605			502,205			497,605			502,205

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Going Concern

9 Months Ended

Sep. 30, 2012

Going Concern Disclosure [Abstract]

GOING CONCERN

NOTE 12. GOING CONCERN

Going Concern Considerations

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. It is the responsibility of management to assess the Company’s ability to continue as a going concern. In making this assessment, the Company has taken into account all available information about the future, which is at least, but is not limited to, twelve months from the balance sheet date of September 30, 2012. The Company had a history of profitable operations prior to 2008 and sufficient sources of liquidity to meet its short-term and long-term funding needs.

The effects of the current economic environment are being felt across many industries, with financial services and real estate being particularly hard-hit, and have been particularly severe during the last 45 months. The Bank, with a loan portfolio consisting of a concentration in commercial real estate loans, including residential construction and development loans, has seen a decline in the value of the collateral securing its portfolio as well as rapid deterioration in its borrowers’ cash flow and ability to repay their outstanding loans made by the Bank. As a result, the Bank’s level of nonperforming assets increased substantially during 2010 and 2011. The significant losses in 2010, 2011, and the first nine months of 2012, which were primarily related to credit losses and the valuation allowance on deferred tax assets, reduced the Company’s capital levels. In order to again become well capitalized under federal banking agencies’ guidelines, management believes that the Company will need to raise additional capital to recapitalize the Bank and to absorb the potential future credit losses associated with the disposition of its nonperforming assets. Accordingly, management is in the process of evaluating various alternatives to increase tangible common equity and regulatory capital through the issuance of additional equity in public or private offerings. Management is actively evaluating a number of potential capital sources, asset reductions, and other balance sheet management strategies with the goal of increasing its level of regulatory capital to support its balance sheet long-term. Management is currently attempting to reduce and otherwise restructure the Company’s balance sheet to improve capital ratios.

Current market conditions for banking institutions, the overall uncertainty in financial markets, and a depressed stock price are significant barriers to the success of any plan to issue additional equity in public or private offerings. An equity financing transaction would result in substantial dilution to the Company’s current stockholders and could adversely affect the market price of the Company’s common stock. There can be no assurance as to whether these efforts will be successful, either on a short-term or long-term basis. Should these efforts be unsuccessful, due to existing regulatory restrictions on cash payments and dividends between the Bank and the holding company, the Company may be unable to discharge its liabilities in the normal course of business. There can be no assurance that the Company will be successful in any efforts to raise additional capital.

Both the Company and the Bank actively manage liquidity and cash flow needs. The Bank is prohibited from declaring or paying dividends without prior approval of the FDIC or the North Carolina Commissioner of Banks and the Company is prohibited from declaring or paying dividends without the prior approval from the Federal Reserve. Even if these requirements were not in place, the Company does not intend to declare or pay dividends to shareholders at any time in the foreseeable future. At September 30, 2012, the Company had $7.8 million of cash and cash equivalents. The Company has no long-term debt maturing in 2012 or 2013.

Based on current capital levels and continued operating losses, management believes the Company will require additional capital to be able to remain viable. Management has implemented various strategies to provide this needed capital. In spite of management’s best efforts, there is no assurance management will be successful in raising additional capital. The accompanying consolidated financial statements for the Company have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and does not include any adjustments to reflect the possible future effects on the recoverability or classification of assets.

Management’s Plans and Intentions

The Company incurred significant net losses in 2010 and 2011, which have continued in 2012, primarily from the higher provisions for loan losses due to the significant level of nonperforming assets and increases in foreclosed real estate. The FDIC and the Commissioner issued the Consent Order in April 2011. The Company entered into a written agreement with the FRB in August 2011. The Company’s independent registered public accounting firm issued a report with respect to the Company’s audited financial statements for the fiscal year ended December 31, 2011, which contained an explanatory paragraph indicating that there is substantial doubt about the Company’s ability to continue as a going concern. The Company is attempting to implement the following strategies to improve its financial condition:

Deferring Preferred Stock and Trust Preferred Securities Payments – The Company began deferring the payment of cash dividends on its outstanding Fixed Rate Cumulative Perpetual Preferred Stock, Series A, in February 2011, as well as the payment of interest on the junior subordinated notes related to its outstanding trust preferred securities to enhance the Company’s liquidity. The expense associated with trust preferred securities continues to accrue and is reflected in the Company’s Consolidated Statements of Operations. Accrued but unpaid dividends on preferred stock are shown as an increase to net loss to derive net loss to common shareholders in the Consolidated Statements of Operations.

Balance Sheet Reduction – Management currently is implementing strategies to improve capital ratios through the reduction of assets and off-balance sheet commitments. At September 30, 2012, risk-weighted assets had been reduced by $103.4 million since December 31, 2010. Reductions occurred primarily in the commercial loan portfolio. Management expects future reductions in risk-weighted assets to be moderate and occur primarily in the loan portfolio. To offset the majority of asset reductions, liabilities declined primarily through reductions in other borrowings by $22.0 million and non-core deposits by $9.6 million.

Earnings – In June 2011, the Bank retired $10.0 million in FHLB advances and paid an early redemption penalty of $273,000 to the FHLB for the retirement of these advances. In November 2011, the Bank retired an additional advance of $10.0 million due to the FHLB and paid an early redemption penalty of $7,000. The advances had a remaining average life of 1.0 year and an average interest rate of 1.21%. The Bank is prohibited from accepting or rolling over any brokered certificates of deposit. Since April 2011, the brokered certificates of deposit had maturities ranging from 2 months to 27 months with interest rates ranging from 0.75% to 2.40%. As these matured and continue to mature, the Bank replaced and will continue to replace these funds with institutional certificates of deposit with average interest rates of 0.50%. As a result of these changes, the interest expense savings during 2012 should have a positive impact on net interest margin.

Additional Capital – The Company has engaged investment banking firms and is working to secure investors in a capital raise plan that may include issuing common stock, preferred stock or a combination of both, debt, or other financing alternatives that may be treated as capital for capital adequacy ratio purposes. Currently, the Company is working diligently to raise additional capital; however, there are no assurances that an offering will be completed or that the Company will succeed in this endeavor. In addition, a transaction would more likely than not involve equity financing, resulting in substantial dilution to current shareholders and an adverse effect on the price of the Company’s common stock. The Company’s ability to raise capital depends to a large degree on the current capital markets and on its financial performance. Available capital markets are not currently favorable, and the Company can offer no assurance that it will be able to raise capital on terms that are acceptable, if at all.

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Fair Value

9 Months Ended

Sep. 30, 2012

Fair Value [Abstract]

FAIR VALUE

NOTE 8. FAIR VALUE

Accounting principles generally accepted in the United States of America require that companies measure and record certain assets and liabilities at fair value and record any adjustments to the fair value of those assets. Securities are recorded at fair value on a recurring basis while other assets, such as impaired loans, are recorded at fair value on a non-recurring basis.

The Company uses three levels of measurement to group those assets measured at fair value. These groupings are made based on the markets the assets are traded in and the reliability of the assumptions used to determine fair value. The groupings include:

• Level 1 pricing for an asset or liability is derived from the most likely actively traded markets and considered very reliable. Quoted prices on actively traded equities, for example, fall into this category.

• Level 2 pricing is derived from observable data including market spreads, current and projected rates, prepayment data and credit quality. Our bond price adjustments fall into this category as well as impaired loans and other real estate owned that use appraisals or brokered price opinions to determine fair value.

• Level 3 pricing is derived without observable data. In such cases, mark-to-market strategies are typically employed. These types of instruments often have no active market, possess unique characteristics and are thinly traded.

The Company’s investment securities are measured on a recurring basis through a model used by our bond agent. All of our bond price adjustments meet Level 2 criteria. Prices are derived from a model which uses actively quoted rates, prepayment models and other underlying credit and collateral data.

The following table summarizes the Company’s assets measured at fair value at the dates indicated (dollars in thousands):

	At September 30, 2012
	Total		Level 1		Level 2		Level 3
Assets valued on a recurring basis
Investment securities:
U.S. government and agency	$	56,237	$	—	$	56,237	$	—
State and municipals		8,391		—		8,391		—
Mortgage-backed		54,772		—		54,772		—
Assets valued on a non-recurring basis
Impaired loans		44,108		—		44,108		—
Other real estate owned		5,424		—		5,424		—
Total	$	168,932	$	—	$	168,932	$	—
	At December 31, 2011
	Total		Level 1		Level 2		Level 3
Assets valued on a recurring basis
Investment securities:
U.S. government and agency	$	44,259	$	—	$	44,259	$	—
State and municipals		3,590		—		3,590		—
Corporate		1,017		—		1,017		—
Mortgage-backed		61,571		—		61,571		—
Assets valued on a non-recurring basis
Impaired loans		45,628		—		45,628		—
Other real estate owned		8,524		—		8,524		—
Total	$	164,589	$	—	$	164,589	$	—

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Commitments and Contingencies

9 Months Ended

Sep. 30, 2012

Commitments and Contingencies [Abstract]

COMMITMENTS AND CONTINGENCIES

NOTE 6. COMMITMENTS AND CONTINGENCIES

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, lines of credit and standby letters of credit. These instruments involve elements of credit risk in excess of amounts recognized in the accompanying financial statements.

The Company’s risk of loss related to unfunded loan commitments and lines of credit or standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments under such instruments as it does for on-balance sheet instruments. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The following table presents a summary of outstanding financial instruments whose contract amounts represent credit risk as of September 30, 2012 (dollars in thousands):

Unfunded loan commitments	$	28,060
Financial standby letters of credit		212
Total unused commitments	$	28,272

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Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2012

Recent Accounting Pronouncements [Abstract]

RECENT ACCOUNTING PRONOUNCEMENTS

NOTE 7. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2011, the FASB (also referred to in this note as the “Board”) issued Accounting Standards Update 2011-01, Receivables: Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. Under the existing effective date in Update 2010-20, public-entity creditors would have provided disclosures about troubled debt restructurings for periods beginning on or after December 15, 2010. The amendments in this Update temporarily deferred the effective date for interim and annual periods ending after June 15, 2011, enabling public-entity creditors to provide those disclosures after the Board clarifies the guidance for determining what constitutes a troubled debt restructuring. The deferral in this Update will result in more consistent disclosures about troubled debt restructurings. This amendment does not defer the effective date of the other disclosure requirements in Update 2010-20. The deferral in this amendment was effective upon issuance and did have a significant impact on the Company.

In April 2011, the FASB issued Accounting Standards Update 2011-02, Receivables: A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This update provides additional guidance and amendments to Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: the restructuring constitutes a concession, and the debtor is experiencing financial difficulties. The amendments clarify the guidance on a creditor’s evaluation of whether it has granted a concession, and on a creditor’s evaluation of whether a debtor is experiencing financial difficulties.

The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. An entity should disclose the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired under Section 310-10-35 for which impairment was previously measured under Subtopic 450-20, Contingencies—Loss Contingencies. An entity should disclose the information required by paragraphs 310-10-50-33 through 50-34, which was deferred by Accounting Standards Update No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this update are for interim and annual periods beginning on or after June 15, 2011. The amendments did not have a significant impact on the Company.

In April 2011, the FASB issued Accounting Standards Update 2011-03, Transfers and Servicing: Reconsideration of Effective Control for Repurchase Agreements. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that

criterion. Other criteria applicable to the assessment of effective control are not changed by the amendments in this Update.

Those criteria indicate that the transferor is deemed to have maintained effective control over the financial assets transferred (and thus must account for the transaction as a secured borrowing) for agreements that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity when all of the listed conditions have been met. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments did not have a significant impact on the Company.

In May 2011, the FASB issued Accounting Standards Update 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the Board does not intend for the amendments in this Update to result in a change in the application of the requirements in Topic 820.

Some of the amendments clarify the Board’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments did not have a significant impact on the Company.

In June 2011, the FASB issued Accounting Standards Update 2011-05, Comprehensive Income: Presentation of Comprehensive Income. Under the amendments to Topic 220, Comprehensive Income, in this Update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income.

Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.

The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments do not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items. In both cases, the tax effect for each component must be disclosed in the notes to the financial statements or presented in the statement in which other comprehensive income is presented. The amendments do not affect how earnings per share is calculated or presented. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments did not have a significant impact on the Company.

In December 2011, the FASB issued Accounting Standards Update 2011-12, Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. Under the amendments in Update 2011-05, entities are required to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive income. In addition, the amendments in Update 2011-05 require that reclassification adjustments be presented in interim financial periods.

The amendments in this Update supersede changes to those paragraphs in Update 2011-05 that pertain to how, when, and where reclassification adjustments are presented.

The objective of Update 2011-05 was to help financial statement users better understand the causes of an entity’s change in financial position and results of operations. However, it is important that the benefits of improving the usefulness of financial statement information to users of financial statements be justified by the related costs. The Board received more information about the systems challenges for preparers to comply with the presentation requirements for reclassifications out of accumulated other comprehensive income by the effective date since the issuance of Update 2011-05. The information received caused the Board to reassess the costs and benefits of those provisions in Update 2011-05 related to reclassifications out of accumulated other comprehensive income. Due to the time required to properly make such a reassessment and to evaluate alternative presentation formats, the Board decided that it is necessary to reinstate the requirements for the presentation of reclassifications out of accumulated other comprehensive income that were in place before the issuance of Update 2011-05. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments did not have a significant impact on the Company.

In July 2012, the FASB issued Accounting Standards Update 2012-02, Intangibles – Goodwill and Other (Topic 350). The amendments in this Update are intended to reduce cost and complexity by providing an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The amendments also enhance the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing an indefinite-lived intangible asset for impairment, which is equivalent to the impairment testing requirements for other long-lived assets. The amendments are not expected to have a significant impact on the Company.

From time to time the FASB issues Proposed Accounting Standards Updates. Such proposed updates are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as Accounting Standards Updates. Management considers the effect of the proposed updates on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of proposed updates.

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Borrowed Funds

9 Months Ended

Sep. 30, 2012

Borrowed Funds [Abstract]

BORROWED FUNDS

NOTE 9. BORROWED FUNDS

A summary of the Company’s outstanding borrowings and the annual rate of interest currently payable on each category is presented in the following table at the dates indicated (dollars in thousands):

	September 30, 2012					December 31, 2011
	Outstanding Balance		Annual Interest Rate			Outstanding Balance		Annual Interest Rate
Securities sold under overnight repurchase agreements	$	379		0.10	%	$	381		0.10	%
Securities sold under term repurchase agreements		45,000		4.38			45,000		4.38
Trust preferred securities		5,155		3.29			5,155		3.49
Subordinated debt		2,700		4.00			2,700		4.00
Total borrowed funds	$	53,234		4.22	%	$	53,236		4.24	%

The Bank engages from time-to-time in federal funds purchases from upstream correspondent institutions to meet temporary funding needs. There were none of these transactions outstanding at the close of either period presented in the above table.

The Bank had a total of $45.0 million of borrowings in the form of securities sold under term repurchase agreements that were entered into during 2008. These borrowings are secured by marketable investment securities equal to approximately 109.5% of the principal balances outstanding plus accrued interest and the value of an imbedded interest rate cap. The following table contains certain pertinent information with respect to these agreements at September 30, 2012 (dollars in thousands):

	Outstanding Principal Balance		Annual Effective Interest Rate			Final Maturity Date		Beginning Quarterly Call Dates		Collateral Requirement
Agreement dated 7/8/2008	$	25,000		4.85	%		7/8/2018		7/8/2013	$	8,796
Agreement dated 8/20/2008		20,000		3.78			8/20/2015		8/20/2011		4,356
Total	$	45,000		4.38	%					$	13,152

The Bank utilizes borrowings from the Federal Home Loan Bank (“FHLB”) as a source of liquidity. At September 30, 2012, the Bank had immediately available credit of $8.4 million. There were no advances from the FHLB at quarter-end.

During 2008, the Company issued $5.2 million of junior subordinated debentures to its wholly owned capital trust, Bank of the Carolinas Trust I (the “Trust”), which, in turn, issued $5.0 million in trust preferred securities having a like liquidation amount and $155,000 in common securities (all common securities are owned by the Company). The Company has fully and unconditionally guaranteed the Trust’s obligations related to the trust preferred securities. The Trust has the right to redeem the trust preferred securities in whole or in part, on or after June 15, 2013 at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest.

In addition, the Trust may redeem the trust preferred securities in whole (but not in part) at any time within 90 days following the occurrence of a tax event, an investment company event, or a capital treatment event at a special redemption price (as defined in the debenture). Interest is payable quarterly on the trust preferred securities at the annual rate of 90-day LIBOR plus 300 basis points. In February 2011, the Company announced its election to defer its regularly scheduled interest payments on the junior subordinated debentures related to the trust preferred securities. Furthermore, the Company is now party to a written agreement with the Federal Reserve, which restricts the Company’s ability to make interest payments on subordinated debt, as described below.

The Company also has issued $2.7 million of subordinated debt in a private transaction with another financial institution. This subordinated note has a floating interest rate equal to 75 basis points over the Prime Rate published by Wall Street Journal and a maturity date of August 13, 2018. This debt can be repaid in full at any time with no penalty.

Under the terms of a written agreement between the Company and the Federal Reserve Bank of Richmond, the Company and the Trust may not make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without the prior written approval of the Federal Reserve Bank of Richmond and the Director of the Division of Banking Supervision and Regulation of the Federal Reserve Board of Governors.

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Investment Securities (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Investment securities available for sale:
Amortized Cost	$ 117,966	$ 107,942
Gross Unrealized Gains	1,556	2,527
Gross Unrealized Losses	122	32
Estimated Fair Value	119,400	110,437
Carrying Value	119,400	110,437
Investment securities held to maturity:
Amortized Cost	119,953	109,909
Gross Unrealized Gains	1,585	2,594
Gross Unrealized Losses	357	267
Estimated Fair Value	121,181	112,236
Carrying Value	121,387	112,404
U.S. Government agency securities [Member]
Investment securities available for sale:
Amortized Cost	55,793	43,131
Gross Unrealized Gains	463	1,128
Gross Unrealized Losses	19
Estimated Fair Value	56,237	44,259
Carrying Value	56,237	44,259
State and municipal bonds [Member]
Investment securities available for sale:
Amortized Cost	8,487	3,433
Gross Unrealized Gains	3	157
Gross Unrealized Losses	99
Estimated Fair Value	8,391	3,590
Carrying Value	8,391	3,590
Corporate securities [Member]
Investment securities available for sale:
Amortized Cost		963
Gross Unrealized Gains		54
Gross Unrealized Losses
Estimated Fair Value		1,017
Carrying Value		1,017
Investment securities held to maturity:
Amortized Cost	1,987	1,967
Gross Unrealized Gains	29	67
Gross Unrealized Losses	235	235
Estimated Fair Value	1,781	1,799
Carrying Value	1,987	1,967
Mortgage-backed securities [Member]
Investment securities available for sale:
Amortized Cost	53,686	60,415
Gross Unrealized Gains	1,090	1,188
Gross Unrealized Losses	4	32
Estimated Fair Value	54,772	61,571
Carrying Value	$ 54,772	$ 61,571

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Stockholders' Equity (Details) (USD $)				9 Months Ended
	Sep. 30, 2012	Dec. 31, 2011		Sep. 30, 2012 U.S. Treasury Securities [Member]	Sep. 30, 2012 Preferred Stock [Member]	Dec. 31, 2011 Preferred Stock [Member]	Sep. 30, 2012 Common Stock [Member]	Dec. 31, 2011 Common Stock [Member]
Stockholders' Equity (Textual) [Abstract]
Preferred shares issued and outstanding	13,179	13,179	[1]
Cumulative Amount Of Dividends In Arrears Not Declared	$ 1,100,000	$ 582,000
Common stock authorized	15,000,000	15,000,000	[1]				15,000,000
Common stock par value	$ 5	$ 5		$ 4.16	$ 1,000	$ 1,000	$ 5
Common shares issued and outstanding	3,895,840	3,895,840	[1]				3,895,840	3,895,840
Company issued the U.S. Treasury a warrant to purchase common shares				475,204
Warrant, expiration Date				Apr. 17, 2019

[1] Derived from audited consolidated financial statements.

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Recent Accounting Pronouncements (Policies)

9 Months Ended

Sep. 30, 2012

Recent Accounting Pronouncements [Abstract]

Receivables

In January 2011, the FASB (also referred to in this note as the “Board”) issued Accounting Standards Update 2011-01, Receivables: Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. Under the existing effective date in Update 2010-20, public-entity creditors would have provided disclosures about troubled debt restructurings for periods beginning on or after December 15, 2010. The amendments in this Update temporarily deferred the effective date for interim and annual periods ending after June 15, 2011, enabling public-entity creditors to provide those disclosures after the Board clarifies the guidance for determining what constitutes a troubled debt restructuring. The deferral in this Update will result in more consistent disclosures about troubled debt restructurings. This amendment does not defer the effective date of the other disclosure requirements in Update 2010-20. The deferral in this amendment was effective upon issuance and did have a significant impact on the Company.

In April 2011, the FASB issued Accounting Standards Update 2011-02, Receivables: A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This update provides additional guidance and amendments to Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: the restructuring constitutes a concession, and the debtor is experiencing financial difficulties. The amendments clarify the guidance on a creditor’s evaluation of whether it has granted a concession, and on a creditor’s evaluation of whether a debtor is experiencing financial difficulties.

The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. An entity should disclose the total amount of receivables and the allowance for credit losses as of the end of the period of adoption related to those receivables that are newly considered impaired under Section 310-10-35 for which impairment was previously measured under Subtopic 450-20, Contingencies—Loss Contingencies. An entity should disclose the information required by paragraphs 310-10-50-33 through 50-34, which was deferred by Accounting Standards Update No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this update are for interim and annual periods beginning on or after June 15, 2011. The amendments did not have a significant impact on the Company.

Transfers and Servicing

In April 2011, the FASB issued Accounting Standards Update 2011-03, Transfers and Servicing: Reconsideration of Effective Control for Repurchase Agreements. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that

criterion. Other criteria applicable to the assessment of effective control are not changed by the amendments in this Update.

Those criteria indicate that the transferor is deemed to have maintained effective control over the financial assets transferred (and thus must account for the transaction as a secured borrowing) for agreements that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity when all of the listed conditions have been met. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments did not have a significant impact on the Company.

Fair Value Measurement

In May 2011, the FASB issued Accounting Standards Update 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the Board does not intend for the amendments in this Update to result in a change in the application of the requirements in Topic 820.

Some of the amendments clarify the Board’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments did not have a significant impact on the Company.

Comprehensive Income

In June 2011, the FASB issued Accounting Standards Update 2011-05, Comprehensive Income: Presentation of Comprehensive Income. Under the amendments to Topic 220, Comprehensive Income, in this Update, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income.

Regardless of whether an entity chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.

The amendments in this Update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments do not change the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, with one amount shown for the aggregate income tax expense or benefit related to the total of other comprehensive income items. In both cases, the tax effect for each component must be disclosed in the notes to the financial statements or presented in the statement in which other comprehensive income is presented. The amendments do not affect how earnings per share is calculated or presented. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments did not have a significant impact on the Company.

In December 2011, the FASB issued Accounting Standards Update 2011-12, Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. Under the amendments in Update 2011-05, entities are required to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by component of other comprehensive income. In addition, the amendments in Update 2011-05 require that reclassification adjustments be presented in interim financial periods.

The amendments in this Update supersede changes to those paragraphs in Update 2011-05 that pertain to how, when, and where reclassification adjustments are presented.

The objective of Update 2011-05 was to help financial statement users better understand the causes of an entity’s change in financial position and results of operations. However, it is important that the benefits of improving the usefulness of financial statement information to users of financial statements be justified by the related costs. The Board received more information about the systems challenges for preparers to comply with the presentation requirements for reclassifications out of accumulated other comprehensive income by the effective date since the issuance of Update 2011-05. The information received caused the Board to reassess the costs and benefits of those provisions in Update 2011-05 related to reclassifications out of accumulated other comprehensive income. Due to the time required to properly make such a reassessment and to evaluate alternative presentation formats, the Board decided that it is necessary to reinstate the requirements for the presentation of reclassifications out of accumulated other comprehensive income that were in place before the issuance of Update 2011-05. The amendments in this Update are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments did not have a significant impact on the Company.

Intangibles - Goodwill and Other

In July 2012, the FASB issued Accounting Standards Update 2012-02, Intangibles – Goodwill and Other (Topic 350). The amendments in this Update are intended to reduce cost and complexity by providing an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The amendments also enhance the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing an indefinite-lived intangible asset for impairment, which is equivalent to the impairment testing requirements for other long-lived assets. The amendments are not expected to have a significant impact on the Company.

From time to time the FASB issues Proposed Accounting Standards Updates. Such proposed updates are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as Accounting Standards Updates. Management considers the effect of the proposed updates on the consolidated financial statements of the Company and monitors the status of changes to and proposed effective dates of proposed updates.

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Allowance for Loan Losses (Tables)

9 Months Ended

Sep. 30, 2012

Allowance for Loan Losses [Abstract]

Schedule of changes in allowance for loan losses by segment

	September 30, 2012												September 30, 2011
	Beginning Balance		Chargeoffs			Recoveries		Provision			Ending Balance		Beginning Balance		Chargeoffs			Recoveries		Provision		Ending Balance
Commercial - Non Real Estate	$	2,247	$	(382	)	$	306	$	(773	)	$	1,398	$	2,252	$	(4,085	)	$	427	$	4,280	$	2,874
Commercial Real Estate
Owner occupied		1,794		(550	)		67		237			1,548		1,055		(5,731	)		21		6,290		1,635
Income producing		547		(1,170	)		47		1,359			783		99		(101	)		—		190		188
Multifamily		80		—			—		5			85		—		—			—		—		—
Construction & Development
1 - 4 Family		58		(99	)		1		121			81		181		(212	)		4		168		141
Other		661		(1,019	)		166		939			747		486		(492	)		99		785		878
Farmland		—		—			—		—			—		—		—			—		—		—
Residential
Equity Lines		279		(25	)		7		20			281		459		(692	)		2		483		252
1 - 4 Family		1,168		(1,073	)		114		1,073			1,282		1,078		(1,922	)		43		1,902		1,101
Consumer - Non Real Estate		143		(62	)		25		26			132		161		(115	)		15		93		154
Unallocated		1,124		—			—		(11	)		1,113		1,092		—			—		376		1,468
Total	$	8,101	$	(4,380	)	$	733	$	2,996		$	7,450	$	6,863	$	(13,350	)	$	611	$	14,567	$	8,691

Schedule of loans individually evaluated for impairment

	Individually Evaluated for Impairment
	September 30, 2012				December 31, 2011
	Allowance		Total Loans		Allowance		Total Loans
Commercial - Non Real Estate	$	52	$	3,538	$	74	$	5,451
Commercial Real Estate
Owner occupied		173		7,465		64		6,188
Income producing		146		10,249		224		10,650
Multifamily		50		1,319		68		1,990
Construction & Development
1 - 4 Family		8		390		9		1,668
Other		140		6,961		91		5,307
Farmland		—		362		—		—
Residential
Equity Lines		—		140		—		38
1 - 4 Family		205		14,371		240		15,048
Consumer - Non Real Estate		—		87		—		58
Unallocated		—		—		—		—
Total	$	774	$	44,882	$	770	$	46,398
	Collectively Evaluated for Impairment
	September 30, 2012				December 31, 2011
	Allowance		Total Loans		Allowance		Total Loans
Commercial - Non Real Estate	$	1,346	$	20,921	$	2,173	$	28,820
Commercial Real Estate
Owner occupied		1,375		53,133		1,730		70,064
Income producing		637		36,359		323		33,344
Multifamily		35		5,977		12		4,613
Construction & Development
1 - 4 Family		73		1,472		49		1,412
Other		607		21,555		570		23,352
Farmland		—		—		—		1,342
Residential
Equity Lines		281		29,277		279		29,689
1 - 4 Family		1,077		59,662		928		63,583
Consumer - Non Real Estate		132		3,286		143		3,432
Unallocated		1,113		4,147		1,124		1,858
Total	$	6,676	$	235,789	$	7,331	$	261,509

XML

Borrowed Funds (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Assets Sold under Agreements to Repurchase [Line Items]
Outstanding Balance	$ 53,234	$ 53,236
Annual Interest Rate	4.22%	4.24%
Annual Effective Interest Rate	4.38%
Collateral Requirement	13,152
Securities sold under overnight repurchase agreements [Member]
Assets Sold under Agreements to Repurchase [Line Items]
Outstanding Balance	379	381
Annual Interest Rate	0.10%	0.10%
Securities sold under term repurchase agreements [Member]
Assets Sold under Agreements to Repurchase [Line Items]
Outstanding Balance	45,000	45,000
Annual Interest Rate	4.38%	4.38%
Securities sold under term repurchase agreements [Member] | Agreement dated 7/8/2008 [Member]
Assets Sold under Agreements to Repurchase [Line Items]
Outstanding Balance	25,000
Annual Effective Interest Rate	4.85%
Final Maturity Date	Jul. 08, 2018
Beginning Quarterly Call Dates	Jul. 08, 2013
Collateral Requirement	8,796
Securities sold under term repurchase agreements [Member] | Agreement dated 8/20/2008 [Member]
Assets Sold under Agreements to Repurchase [Line Items]
Outstanding Balance	20,000
Annual Effective Interest Rate	3.78%
Final Maturity Date	Aug. 20, 2015
Beginning Quarterly Call Dates	Aug. 20, 2011
Collateral Requirement	4,356
Trust preferred securities [Member]
Assets Sold under Agreements to Repurchase [Line Items]
Outstanding Balance	5,155	5,155
Annual Interest Rate	3.29%	3.49%
Subordinated debt [Member]
Assets Sold under Agreements to Repurchase [Line Items]
Outstanding Balance	$ 2,700	$ 2,700
Annual Interest Rate	4.00%	4.00%

XML

Loans (Details 5) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Loans and leases were categorized
Totals	$ 280,671	$ 307,907
Commercial - Non Real Estate [Member]
Loans and leases were categorized
Totals	24,459	34,271
Owner occupied [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals	60,598	76,252
Income Producing [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals	46,608	43,994
Multifamily [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals	7,296	6,603
Construction & Development, Other [Member] | Construction and development [Member]
Loans and leases were categorized
Totals	28,516	28,659
Farmland [Member] | Construction and development [Member]
Loans and leases were categorized
Totals	362	1,342
Pass [Member]
Loans and leases were categorized
Totals	98,475	133,966
Pass [Member] | Commercial - Non Real Estate [Member]
Loans and leases were categorized
Totals	17,872	26,552
Pass [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals	66,530	88,142
Pass [Member] | Construction and development [Member]
Loans and leases were categorized
Totals	14,073	19,272
Pass [Member] | Owner occupied [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals	36,390	54,739
Pass [Member] | Income Producing [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals	24,873	29,583
Pass [Member] | Multifamily [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals	5,267	3,820
Pass [Member] | 1-4 Family [Member] | Construction and development [Member]
Loans and leases were categorized
Totals	1,238	1,081
Pass [Member] | Construction & Development, Other [Member] | Construction and development [Member]
Loans and leases were categorized
Totals	12,835	18,191
Pass [Member] | Farmland [Member] | Construction and development [Member]
Loans and leases were categorized
Totals
Special Mention [Member]
Loans and leases were categorized
Totals	43,908	26,366
Special Mention [Member] | Commercial - Non Real Estate [Member]
Loans and leases were categorized
Totals	3,691	3,606
Special Mention [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals	27,656	12,944
Special Mention [Member] | Construction and development [Member]
Loans and leases were categorized
Totals	12,561	9,816
Special Mention [Member] | Owner occupied [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals	15,505	8,547
Special Mention [Member] | Income Producing [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals	11,441	3,604
Special Mention [Member] | Multifamily [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals	710	793
Special Mention [Member] | 1-4 Family [Member] | Construction and development [Member]
Loans and leases were categorized
Totals	255	1,255
Special Mention [Member] | Construction & Development, Other [Member] | Construction and development [Member]
Loans and leases were categorized
Totals	12,306	8,199
Special Mention [Member] | Farmland [Member] | Construction and development [Member]
Loans and leases were categorized
Totals		362
Substandard [Member]
Loans and leases were categorized
Totals	27,318	33,090
Substandard [Member] | Commercial - Non Real Estate [Member]
Loans and leases were categorized
Totals	2,896	3,727
Substandard [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals	20,316	25,651
Substandard [Member] | Construction and development [Member]
Loans and leases were categorized
Totals	4,106	3,712
Substandard [Member] | Owner occupied [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals	8,703	12,854
Substandard [Member] | Income Producing [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals	10,294	10,807
Substandard [Member] | Multifamily [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals	1,319	1,990
Substandard [Member] | 1-4 Family [Member] | Construction and development [Member]
Loans and leases were categorized
Totals	369	744
Substandard [Member] | Construction & Development, Other [Member] | Construction and development [Member]
Loans and leases were categorized
Totals	3,375	1,988
Substandard [Member] | Farmland [Member] | Construction and development [Member]
Loans and leases were categorized
Totals	362	980
Doubtful [Member]
Loans and leases were categorized
Totals		779
Doubtful [Member] | Commercial - Non Real Estate [Member]
Loans and leases were categorized
Totals		386
Doubtful [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals		112
Doubtful [Member] | Construction and development [Member]
Loans and leases were categorized
Totals		281
Doubtful [Member] | Owner occupied [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals		112
Doubtful [Member] | Income Producing [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals
Doubtful [Member] | Multifamily [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals
Doubtful [Member] | 1-4 Family [Member] | Construction and development [Member]
Loans and leases were categorized
Totals
Doubtful [Member] | Construction & Development, Other [Member] | Construction and development [Member]
Loans and leases were categorized
Totals		281
Doubtful [Member] | Farmland [Member] | Construction and development [Member]
Loans and leases were categorized
Totals
Loss [Member]
Loans and leases were categorized
Totals
Loss [Member] | Commercial - Non Real Estate [Member]
Loans and leases were categorized
Totals
Loss [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals
Loss [Member] | Construction and development [Member]
Loans and leases were categorized
Totals
Loss [Member] | Owner occupied [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals
Loss [Member] | Income Producing [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals
Loss [Member] | Multifamily [Member] | Commercial real estate [Member]
Loans and leases were categorized
Totals
Loss [Member] | 1-4 Family [Member] | Construction and development [Member]
Loans and leases were categorized
Totals
Loss [Member] | Construction & Development, Other [Member] | Construction and development [Member]
Loans and leases were categorized
Totals
Loss [Member] | Farmland [Member] | Construction and development [Member]
Loans and leases were categorized
Totals
Loss [Member] | Doubtful [Member] | Commercial - Non Real Estate [Member]
Loans and leases were categorized
Totals

XML

Consolidated Statements of Comprehensive Loss (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Consolidated Statements of Comprehensive Loss [Abstract]
Net loss	$ (2,964)	$ (6,846)	$ (5,372)	$ (19,684)
Other comprehensive income (loss):
Unrealized holding gains on securities available-for-sale	996	1,121	1,085	2,125
Reclassification adjustment for gains realized in net loss			(2,147)	(6)
Income tax effect	(383)	(431)	409	(815)
Total other comprehensive income (loss), net of income tax effect	613	690	(653)	1,304
Total comprehensive loss	$ (2,351)	$ (6,156)	$ (6,025)	$ (18,380)

XML

Investment Securities

9 Months Ended

Sep. 30, 2012

Investment Securities [Abstract]

INVESTMENT SECURITIES

NOTE 3. INVESTMENT SECURITIES

The amortized cost, estimated fair values and carrying values of the investment securities portfolios at the indicated dates are summarized as follows (dollars in thousands):

	September 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Carrying Value
Investment securities available for sale:
U.S. Government agencies securities	$	55,793	$	463	$	19	$	56,237	$	56,237
State and municipal bonds		8,487		3		99		8,391		8,391
Corporate securities		—		—		—		—		—
Mortgage-backed securities		53,686		1,090		4		54,772		54,772
Total investment securities available for sale		117,966		1,556		122		119,400		119,400
Investment securities held to maturity:
Corporate securities		1,987		29		235		1,781		1,987
Total investment securities	$	119,953	$	1,585	$	357	$	121,181	$	121,387
	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Carrying Value
Investment securities available for sale:
U.S. Government agencies securities	$	43,131	$	1,128	$	—	$	44,259	$	44,259
State and municipal bonds		3,433		157		—		3,590		3,590
Corporate securities		963		54		—		1,017		1,017
Mortgage-backed securities		60,415		1,188		32		61,571		61,571
Total investment securities available for sale		107,942		2,527		32		110,437		110,437
Investment securities held to maturity:
Corporate securities		1,967		67		235		1,799		1,967
Total investment securities	$	109,909	$	2,594	$	267	$	112,236	$	112,404

Management of the Bank believes all unrealized losses on available-for-sale securities as of September 30, 2012 represent temporary impairments related to market fluctuations. The unrealized losses on our securities are a nominal portion of the total value of the portfolio. The Bank has no intention of selling these securities before their maturity and has the appropriate sources of liquidity to hold these securities until maturity in order to minimize the likelihood that recognized losses will occur.

The fair values of securities with unrealized losses at September 30, 2012 and December 31, 2011 are as follows (dollars in thousands):

September 30, 2012:

	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Temporarily impaired securities:
U.S. Government agency securities	$	1,971	$	19	$	—	$	—	$	1,971	$	19
State and municipal securities		7,468		99		—		—		7,468		99
Mortgage-backed securities		1,331		4		—		—		1,331		4
Corporate securities		—		—		1,000		235		1,000		235
Total	$	10,770	$	122	$	1,000	$	235	$	11,770	$	357

December 31, 2011:

	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Temporarily impaired securities:
U.S. Government agency securities	$	—	$	—	$	—	$	—	$	—	$	—
State and municipal securities		—		—		—		—		—		—
Mortgage-backed securities		3,071		32		—		—		3,071		32
Corporate securities		—		—		1,000		235		1,000		235
Total	$	3,071	$	32	$	1,000	$	235	$	4,071	$	267

XML

Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2012

Commitments and Contingencies [Abstract]

Summary of outstanding financial instruments whose contract amounts represent credit risk

Unfunded loan commitments	$	28,060
Financial standby letters of credit		212
Total unused commitments	$	28,272

XML

Loans (Details 2) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Troubled Debt Restructuring
Number of Contracts	$ 13	$ 18	$ 54	$ 61
Pre- Modification Recorded Investment	4,160,000	5,801,000	10,997,000	14,432,000
Post- Modification Recorded Investment	4,160,000	5,801,000	10,997,000	14,432,000
Consumer - Non Real Estate [Member]
Troubled Debt Restructuring
Number of Contracts	1		2
Pre- Modification Recorded Investment	14,000		32,000
Post- Modification Recorded Investment	14,000		32,000
Residential Mortgage [Member]
Troubled Debt Restructuring
Number of Contracts	3	8	22	25
Pre- Modification Recorded Investment	1,293,000	3,891,000	3,325,000	6,270,000
Post- Modification Recorded Investment	1,293,000	3,891,000	3,325,000	6,270,000
Commercial - Non Real Estate [Member]
Troubled Debt Restructuring
Number of Contracts	3	5	13	18
Pre- Modification Recorded Investment	82,000	315,000	603,000	2,195,000
Post- Modification Recorded Investment	82,000	315,000	603,000	2,195,000
Commercial real estate [Member]
Troubled Debt Restructuring
Number of Contracts	4	4	9	12
Pre- Modification Recorded Investment	2,326,000	693,000	5,461,000	3,656,000
Post- Modification Recorded Investment	2,326,000	693,000	5,461,000	3,656,000
Construction and development [Member]
Troubled Debt Restructuring
Number of Contracts	2	1	8	6
Pre- Modification Recorded Investment	445,000	902,000	1,576,000	2,311,000
Post- Modification Recorded Investment	$ 445,000	$ 902,000	$ 1,576,000	$ 2,311,000

XML

Selected Quarterly Financial Information (Unaudited)

9 Months Ended

Sep. 30, 2012

Selected Quarterly Financial Information [Abstract]

SELECTED QUARTERLY FINANCIAL INFORMATION (Unaudited)

NOTE 13. SELECTED QUARTERLY FINANCIAL INFORMATION (Unaudited)

	September 30, 2012			June 30, 2012 (As  Restated)			March 31, 2012 (As  Restated)			December 31, 2011 (As Restated)			September 30, 2011 (As Restated)			June 30, 2011 (As  Restated)			March 31, 2011 (As  Restated)
	(in thousands)
Assets:
Cash and due from banks, noninterest-bearing	$	3,987		$	3,884		$	4,674		$	5,044		$	4,922		$	10,172		$	4,174
Interest-bearing deposits in banks		3,843			3,226			2,562			2,557			4,431			4,256			4,208
Cash and cash equivalents		7,830			7,110			7,236			7,601			9,353			14,428			8,382
Federal funds sold		13,710			48,465			44,245			28,165			22,630			8,175			14,985
Investment securities		121,387			105,609			103,682			112,404			113,768			118,534			116,879
Loans receivable		280,671			285,186			296,092			307,907			324,757			345,617			359,561
Less: Allowance for loan losses		(7,450	)		(7,541	)		(8,048	)		(8,101	)		(8,691	)		(6,685	)		(8,314	)
Total loans, net		273,221			277,645			288,044			299,806			316,066			338,932			351,247
Premises and equipment		11,911			12,091			12,256			12,229			12,448			12,681			12,859
Other real estate owned		5,424			7,403			7,502			8,524			9,825			6,066			9,375
Bank owned life insurance		10,447			10,359			10,823			10,732			10,640			10,549			10,460
Deferred tax assets		—			—			—			—			3,509			3,941			4,409
Prepaid FDIC insurance assessment		998			1,396			1,790			2,200			2,759			3,095			3,418
Accrued interest receivable		1,393			1,263			1,389			1,503			1,700			1,720			1,862
Other assets		1,952			2,265			2,791			2,803			3,179			2,922			3,182
Total Assets	$	448,273		$	473,606		$	479,758		$	485,967		$	505,877		$	521,043		$	537,058
Liabilities:
Deposits:
Noninterest-bearing demand deposits	$	34,756		$	38,486		$	36,087		$	34,034		$	34,446		$	38,176		$	36,411
Interest-checking deposits		39,138			38,363			38,349			37,306			38,527			37,139			35,221
Savings and money market deposits		106,541			103,613			104,733			106,308			103,163			107,717			110,401
Time deposits		204,095			226,986			233,816			238,565			241,422			243,066			241,706
Total deposits		384,530			407,448			412,985			416,213			417,558			426,098			423,739
Securities sold under agreements to repurchase		45,379			45,249			45,418			45,381			45,412			45,710			45,458
Federal Home Loan Bank advances		—			—			—			—			10,000			10,000			20,000
Subordinated debt		7,855			7,855			7,855			7,855			7,855			7,855			7,855
Other liabilities		1,919			2,111			1,947			1,903			1,809			1,981			1,731
Total Liabilities		439,683			462,663			468,205			471,352			482,634			491,644			498,783
Commitments and contingencies (Note 6)		—			—			—			—			—			—			—
Stockholders’ Equity:
Preferred stock, no par value		13,179			13,179			13,179			13,179			13,179			13,179			13,179
Discount on preferred stock		(496	)		(570	)		(644	)		(716	)		(787	)		(856	)		(923	)
Common stock, $5 per share par value		19,479			19,479			19,479			19,479			19,486			19,486			19,486
Additional paid-in capital		12,991			12,992			12,992			12,991			12,984			12,983			12,984
Retained deficit		(37,463	)		(34,424	)		(34,419	)		(31,871	)		(23,233	)		(16,317	)		(6,627	)
Accumulated other comprehensive income		900			287			966			1,553			1,614			924			176
Total Stockholders’ Equity		8,590			10,943			11,553			14,615			23,243			29,399			38,275
Total Liabilities and Stockholders’ Equity	$	448,273		$	473,606		$	479,758		$	485,967		$	505,877		$	521,043		$	537,058

	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011			September 30, 2011			June 30, 2011			March 31, 2011
	(in thousands)
Other liabilities as previously stated	$	1,919		$	3,023		$	2,694		$	2,485		$	2,226		$	2,235		$	1,819
Prior period adjustment (See Note 1)		—			(912	)		(747	)		(582	)		(417	)		(254	)		(88	)
Other liabilities as restated	$	1,919		$	2,111		$	1,947		$	1,903		$	1,809		$	1,981		$	1,731
Retained deficit as previously stated	$	(37,463	)	$	(35,336	)	$	(35,166	)	$	(32,453	)	$	(23,650	)	$	(16,571	)	$	(6,715	)
Prior period adjustment (See Note 1)		—			912			747			582			417			254			88
Retained deficit as restated	$	(37,463	)	$	(34,424	)	$	(34,419	)	$	(31,871	)	$	(23,233	)	$	(16,317	)	$	(6,627	)