10-Q 1 d398131d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

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.

 

 

 


Table of Contents

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   

 

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Table of Contents

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.

 

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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.

 

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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.

 

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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.

 

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Table of Contents

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.

 

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Table of Contents

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.

 

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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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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.

 

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Table of Contents

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   
  

 

 

   

 

 

 

 

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Table of Contents

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

12


Table of Contents

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).

 

13


Table of Contents

 

     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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Table of Contents

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.

 

15


Table of Contents

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.

 

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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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Table of Contents

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


Table of Contents

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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Table of Contents

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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Table of Contents

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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Table of Contents

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 PaymentsThe 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 ReductionManagement 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.

EarningsIn 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 CapitalThe 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      &nbs