LOANS HELD FOR INVESTMENT

12 Months Ended

Dec. 31, 2011

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

NOTE E - LOANS HELD FOR INVESTMENT

The following is a summary of loans at December 31, 2011 and 2010:

	Successor			Predecessor
	Company			Company
	2011			2010
Real estate – commercial	$	310,314,968		$	345,902,319
Real estate – residential		67,004,033			81,644,508
Construction loans		83,929,770			140,848,750
Commercial and industrial loans		39,433,800			48,144,401
Home equity loans and lines of credit		48,940,064			57,125,274
Loans to individuals		3,299,958			3,838,154
Total loans		552,922,593			677,503,406
Less:
Deferred loan fees		(45,532	)		(700,337	)
Allowance for loan losses		(227,000	)		(20,702,000	)
Total	$	552,650,060		$	656,101,069

The Company has granted loans to certain directors and executive officers of the Company and their related interests. Such loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers and, in management’s opinion, do not involve more than the normal risk of collectability. All loans to directors and executive officers or their related interests are submitted to the Board of Directors for approval. A summary of contractual obligations due from directors, executive officers and their interests (“D&O”) follows:

Loans to directors and officers as a group at December 31, 2010	$	37,689,321
Reduction in balances due to D&O stepping down in 2011		(20,628,446	)
New advances to D&O		1,416,116
Payoffs and principal reductions		(1,735,997	)
Loans to directors and officers as a group at December 31, 2011	$	16,740,994

Purchased Credit-Impaired Loans (Successor Company)

PCI loans for which it was probable at acquisition that all contractually required payments would not be collected are as follows:

Contractually required payments	$	398,339,374
Nonaccretable difference		(57,730,794	)
Cash flows expected to be collected at acquisition		340,608,580
Accretable yield		(32,068,080	)
Fair value of acquired loans at acquisition	$	308,540,500

Accretable yield, or income expected to be collected, related to PCI loans in the successor period is as follows:

Balance, beginning of period	$	32,068,080
New loans purchased		-
Accretion of income		(2,422,636	)
Reclassifications from nonaccretable difference		-
Disposals		-
Balance, end of period	$	29,645,444

The contractually required payments represent the total undiscounted amount of all uncollected contractual principal and contractual interest payments both past due and scheduled for the future, adjusted for the timing of estimated prepayments and any full or partial charge-offs prior to the Piedmont Investment. Nonaccretable difference represents contractually required payments in excess of the amount of estimated cash flows expected to be collected. The accretable yield represents the excess of estimated cash flows expected to be collected over the initial fair value of the PCI loans, which is their fair value at the time of the Piedmont Investment. The accretable yield is accreted into interest income over the estimated life of the PCI loans using the level yield method. The accretable yield will change due to changes in:

· the estimate of the remaining life of PCI loans which may change the amount of future interest income, and possibly principal, expected to be collected;

· the estimate of the amount of contractually required principal and interest payments over the estimated life that will not be collected (the nonaccretable difference); and

· indices for PCI loans with variable rates of interest.

For PCI loans, the impact of loan modifications is included in the evaluation of expected cash flows for subsequent decreases or increases of cash flows. For variable rate PCI loans, expected future cash flows will be recalculated as the rates adjust over the lives of the loans. At acquisition, the expected future cash flows were based on the variable rates that were in effect at that time.

Allowance for Loan Losses

The following is an analysis of the allowance for loan losses for the periods presented:

	Predecessor Company
	Total
At December 31, 2008	$	12,585
Charge-offs		(6,941	)
Recoveries		397
Provision		11,526
At December 31, 2009	$	17,567

	Predecessor Company
	Commercial			Real Estate			Real Estate
	& Industrial			Commercial			Residential			Construction			Consumer			Total
At December 31, 2009	$	2,856		$	5,810		$	2,208		$	6,439		$	254		$	17,567
Charge-offs		(1,999	)		(4,071	)		(6,406	)		(5,518	)		(68	)		(18,062	)
Recoveries		242			39			158			408			3			850
Provision		1,590			3,567			6,853			8,446			(109	)		20,347
At December 31, 2010	$	2,689		$	5,345		$	2,813		$	9,775		$	80		$	20,702
Charge-offs		(1,502	)		(2,570	)		(1,689	)		(9,751	)		(25	)		(15,537	)
Recoveries		105			28			92			484			2			711
Provision		1,484			5,460			3,798			5,904			72			16,718
At November 18, 2011	$	2,776		$	8,263		$	5,014		$	6,412		$	129		$	22,594

	Successor Company
	Commercial		Real Estate		Real Estate
	& Industrial		Commercial		Residential		Construction		Consumer		Total
At November 19, 2011	$	-	$	-	$	-	$	-	$	-	$	-
Charge-offs		-		-		-		-		-		-
Recoveries		-		-		-		-		-		-
Provision		30		126		47		21		3		227
At December 31, 2011	$	30	$	126	$	47	$	21	$	3	$	227

The following is a summary of the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2011 and 2010:

	At December 31, 2011
	Allowance for loan losses						Loans
	Individually		Collectively		Purchased		Individually		Collectively		Purchased
	Evaluated for		Evaluated for		Credit -		Evaluated for		Evaluated for		Credit –
	Impairment		Impairment		Impaired		Impairment		Impairment		Impaired
Successor Company					(Dollars in thousands)
Real estate – commercial	$	-	$	126	$	-	$	-	$	149,654	$	160,661
Real estate – residential		-		47		-		-		79,588		36,356
Construction		-		21		-		-		19,315		64,615
Commercial and industrial		-		30		-		-		12,426		27,008
Loans to individuals		-		3		-		-		2,850		450
Total Loans	$	-	$	227	$	-	$	-	$	263,833	$	289,090

	At December 31, 2010
	Allowance for loan losses						Loans
	Individually		Collectively		Purchased		Individually		Collectively		Purchased
	Evaluated for		Evaluated for		Credit -		Evaluated for		Evaluated for		Credit –
	Impairment		Impairment		Impaired		Impairment		Impairment		Impaired
Predecessor Company					(Dollars in thousands)
Real estate – commercial	$	1,754	$	3,591	$	-	$	10,024	$	283,708	$	-
Real estate – residential		909		1,904		-		9,637		161,736		-
Construction		7,271		2,504		-		32,297		128,119		-
Commercial and industrial		1,094		1,595		-		2,471		45,673		-
Loans to individuals		10		70		-		13		3,825		-
Total Loans	$	11,038	$	9,664	$	-	$	54,442	$	623,061	$	-

At the Piedmont Investment, the acquired loan portfolio was adjusted to fair value and the allowance for loan losses was eliminated. For PCI loans, impairment and the associated allowance for loan losses is evaluated based on decreases in expected cash flows. Since no decreases in expected cash flows were detected on PCI loans since acquisition, no impairment, or corresponding allowance for loan losses, was recorded in the successor period. Non-impaired purchased loans and loans originated subsequent to the acquisition date are evaluated individually or collectively for impairment, depending on whether loans are identified as individually impaired. There were no purchased non-impaired loans or loans originated subsequent to acquisition that were individually evaluated for impairment at December 31, 2011.

Analysis of Credit Quality

We use an internal grading system to assign the degree of inherent risk on each individual loan. The grade is initially assigned by the lending officer and reviewed by the loan administration function throughout the life of the loan. As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, we track certain credit quality indicators including trends related to (i) the weighted-average grade of commercial loans, (ii) the level of classified commercial loans, (iii) charge-offs, (iv) non-performing loans (see details above) and (v) the general economic conditions in the state of North Carolina. Our credit grades apply to each class of the loan portfolio and have been defined as follows:

· Risk Grade 1 - Minimal credit risk - A loan to a borrower of unquestionable financial strength. Financial information exhibits superior earnings, leverage and liquidity positions, which firmly establish a repayment source that is substantial in relation to debt. These borrowers would generally have access to national credit and equity markets. Also includes a loan fully protected by cash equivalents or high grade, readily marketable securities.

· Risk Grade 2 – Modest credit risk - Loans to borrowers of better than average financial strength.  Earnings performance is consistent and primary and secondary sources of repayment are well established.  Borrower exhibits very good asset quality and liquidity with strong debt servicing capacity.  Company management has depth, is experienced and well regarded in the industry. This risk grade is reserved for loans secured by readily marketable collateral or is a loan made within guidelines to borrowers with liquid financial statements.

· Risk Grade 3 – Average credit risk - Loans to borrowers involving satisfactory financial strength.  Earnings performance is consistent with primary and secondary sources of repayment well defined and adequate to retire the debt in a timely and orderly fashion.   These businesses would generally exhibit satisfactory asset quality and liquidity with moderate leverage, average performance to their peer group and experienced management in key positions. This risk grade is reserved for the Bank’s top quality loans.

· Risk Grade 4 – Acceptable credit risk - Loans to borrowers with more than average risk but with little risk of ultimate collection. The loan may contain certain characteristics that require some supervision and attention by the lender.  Asset quality is acceptable, but debt capacity is modest and little excess liquidity is available.  The borrower may be fully leveraged, and unable to overcome major setbacks.  Covenants are structured to ensure adequate protection.  Management may have limited experience and depth.  Includes loans, which are highly leveraged transactions due to regulatory constraints.  Also includes loans involving reasonable exceptions to policy. This grade is given to acceptable loans. These loans have adequate sources of repayment, with little identifiable risk of collection.

· Risk Grade 5 – Acceptable credit risk - A loan that is sound yet ultimate collectability may depend on guarantor support or tertiary repayment sources. Although asset quality remains acceptable, the borrower has a smaller and/or less diverse asset base, very little liquidity and limited debt capacity.  Earnings performance is inconsistent and the borrower may be highly leveraged and below average size or lower-tier competitor.  Limited management experience and depth.  May be well-conceived start-up venture, but repayment is still dependent upon a successful operation.  Includes loans with significant documentation or policy exceptions, improper loan structure or inadequate loan servicing procedures.  May also include a loan in which strong reliance for a secondary repayment source is placed on a guarantor who exhibits the ability and willingness to repay.  These credits require significant supervision by the lender and covenants structured to ensure adequate protection.  Loans which are highly leveraged transactions due to the obligor's financial status. This grade is given to acceptable loans that show signs of weakness in either sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss.

· Risk Grade 6 – Special mention - Criticized Exposure.  A loan which still has the capacity to perform but contains certain characteristics that require continual supervision and attention from the lender. These characteristics may include but are not limited to (1) adverse trends in financial condition or key operating, liquidity, trading asset turn, or leverage ratios; (2) inconsistent repayment performance; or (3) fatal documentation errors that would prevent the Bank from enforcing its note or security instruments. Material adverse trends have not yet been developed.

· Risk Grade 7 – Substandard - A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. A loan classified as Substandard must have a well-defined weakness or weaknesses that jeopardize the collection of all payments contractually due the Bank upon liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

· Risk Grade 8 – Doubtful - Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.

· Risk Grade 9 – Loss - Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that is not practical or desirable to defer writing off this worthless loan even though partial recovery may be effected in the future. Probable Loss portions of Doubtful assets are charged against the Allowance for Loan Losses. Loans may reside in this classification for administrative purposes for a period not to exceed the earlier of thirty (30) days or calendar quarter end.

· Other – Ungraded loans. Overdraft protection accounts are typically not graded at origination, but are assigned a risk grade when credit deterioration is detected.

The following tables summarize the carrying value of the loan portfolio by internal risk ratings at December 31, 2011 and 2010:

	Successor Company
	Commercial Credit Exposure
	December 31, 2011
	Commercial		Real Estate		Commercial		Commercial
	& Industrial		Commercial		Construction		LOC		Total
	(Dollars in thousands)
Non-Acquired Loans
1-Minimal Credit Risk	$	-	$	-	$	-	$	-	$	-
2-Modest Credit Risk		-		-		-		-		-
3-Average Credit Risk		108		-		-		-		108
4-Acceptable Credit Risk		316		7,416		-		-		7,732
5-Acceptable Credit Risk		470		231		138		-		839
6-Special Mention		-		-		-		-		-
7-Substandard		99		-		-		-		99
8-Doubtful		-		-		-		-		-
9-Loss		-		-		-		-		-
Other		-		-		-		-		-
Total	$	993	$	7,647	$	138	$	-	$	8,778

	Successor Company
	Consumer Credit Exposure
	December 31, 2011
	Real Estate		Consumer
	Residential		Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Non-Acquired Loans
1-Minimal Credit Risk	$	-	$	-	$	-	$	25	$	25
2-Modest Credit Risk		-		-		-		-		-
3-Average Credit Risk		721		110		426		13		1,270
4-Acceptable Credit Risk		358		86		-		17		461
5-Acceptable Credit Risk		660		-		-		71		731
6-Special Mention		-		-		-		-		-
7-Substandard		-		-		-		-		-
8-Doubtful		-		-		-		-		-
9-Loss		-		-		-		-		-
Other		-		-		-		-		-
Total	$	1,739	$	196	$	426	$	126	$	2,487

	Successor Company
	Commercial Credit Exposure
	December 31, 2011
	Commercial		Real Estate		Commercial		Commercial
	& Industrial		Commercial		Construction		LOC		Total
	(Dollars in thousands)
Acquired Loans
1-Minimal Credit Risk	$	938	$	-	$	-	$	11	$	949
2-Modest Credit Risk		598		-		-		-		598
3-Average Credit Risk		1,171		10,108		3,594		-		14,873
4-Acceptable Credit Risk		8,201		130,614		9,134		70		148,019
5-Acceptable Credit Risk		22,405		111,571		27,199		99		161,274
6-Special Mention		2,212		34,877		22,482		1		59,572
7-Substandard		2,258		13,907		12,402		1		28,568
8-Doubtful		-		379		519		-		898
9-Loss		-		-		-		-		-
Other		253		1,212		-		223		1,688
Total	$	38,036	$	302,668	$	75,330	$	405	$	416,439

	Successor Company
	Consumer Credit Exposure
	December 31, 2011
	Real Estate		Consumer
	Residential		Construction		Home Equity		Consumer		Total
	(Dollars in thousands)
Acquired Loans
1-Minimal Credit Risk	$	-	$	-	$	-	$	290	$	290
2-Modest Credit Risk		-		-		-		-		-
3-Average Credit Risk		9,330		1,886		8,523		412		20,151
4-Acceptable Credit Risk		23,802		4,870		27,060		815		56,547
5-Acceptable Credit Risk		18,487		507		7,183		628		26,805
6-Special Mention		5,155		176		2,064		336		7,731
7-Substandard		8,300		758		3,684		43		12,785
8-Doubtful		145		-		-		-		145
9-Loss		-		-		-		-		-
Other		46		69		-		650		765
Total	$	65,265	$	8,266	$	48,514	$	3,174	$	125,219

	Predecessor Company
	Commercial Credit Exposure
	December 31, 2010
	Commercial		Real Estate		Commercial		Commercial
	& Industrial		Commercial		Construction		LOC		Total
1-Minimal Credit Risk	$	3,704	$	-	$	-	$	-	$	3,704
2-Modest Credit Risk		276		-		-		-		276
3-Average Credit Risk		638		11,177		1,850		-		13,665
4-Acceptable Credit Risk		13,125		164,402		22,265		173		199,965
5-Acceptable Credit Risk		24,025		144,810		51,069		87		219,991
6-Special Mention		3,595		15,419		24,150		5		43,169
7-Substandard		2,044		8,456		29,911		-		40,411
8-Doubtful		132		1,568		2,225		-		3,925
9-Loss		-		-		-		-		-
Other		67		70		49		273		459
Total	$	47,606	$	345,902	$	131,519	$	538	$	525,565

	Predecessor Company
	Consumer Credit Exposure
	December 31, 2010
	Real Estate		Consumer
	Residential		Construction		Home Equity		Consumer		Total
1-Minimal Credit Risk	$	-	$	-	$	-	$	421	$	421
2-Modest Credit Risk		-		-		78		-		78
3-Average Credit Risk		9,707		2,275		6,440		597		19,019
4-Acceptable Credit Risk		34,191		5,297		35,153		1,041		44,682
5-Acceptable Credit Risk		24,648		704		10,392		736		36,480
6-Special Mention		6,808		788		1,463		377		9,436
7-Substandard		5,996		221		3,368		13		9,598
8-Doubtful		295		45		167		-		507
9-Loss		-		-		-		-		-
Other		-		-		64		653		717
Total	$	81,645	$	9,330	$	57,125	$	3,838	$	151,938

Past Due Analysis

The following table summarizes the aging of the loan portfolio by past due status, based on contractual terms, at December 31, 2011:

	Successor Company
	December 31, 2011
			Greater than
	30-89 Days		90 Days		Total				Total
	Past Due		Past Due		Past Due		Current		Loans
	(Dollars in thousands)
Acquired Loans:
Commercial and Industrial	$	925	$	797	$	1,722	$	36,314	$	38,036
Commercial – Construction		4,809		10,328		15,137		60,193		75,330
Commercial - Real Estate		3,878		6,101		9,979		292,689		302,668
Commercial - Lines of Credit		-		1		1		404		405
Consumer		3		3		6		3,168		3,174
Consumer – Construction		652		382		1,034		7,232		8,266
Home Equity		740		1,128		1,868		46,646		48,514
Residential - Real Estate		2,289		4,148		6,437		58,828		65,265
Total	$	13,296	$	22,888	$	36,184	$	505,474	$	541,658

None of the non-acquired loans were past due at December 31, 2011. None of the non-acquired or purchased non-impaired loans were in nonaccrual status or had been restructured in a TDR as of December 31, 2011.

	Predecessor Company
	December 31, 2010
			Greater than
	30-89 Days		90 Days		Total				Total
	Past Due(1)		Past Due(2)		Past Due		Current		Loans
Commercial and Industrial	$	469	$	167	$	636	$	46,970	$	47,606
Commercial – Construction		6,118		8,649		14,767		116,752		131,519
Commercial - Real Estate		3,943		7,301		11,244		334,658		345,902
Commercial - Lines of Credit		-		-		-		538		538
Consumer		-		5		5		3,833		3,838
Consumer – Construction		221		45		266		9,064		9,330
Home Equity		350		881		1,231		55,894		57,125
Residential Real Estate		3,601		2,093		5,694		75,951		81,645
Total	$	14,702	$	19,141	$	33,843	$	643,660	$	677,503

(1) Total loans past due 30 to 89 days includes approximately $9.4 million of loans in nonaccrual status.

(2) All loans past due 90 days or more were in nonaccrual status.

Impaired Loans

	Predecessor Company
	December 31, 2010
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Consumer	$	-	$	-	$	-	$	49	$	1
Commercial & industrial		83		92		-		1,200		3
Commercial construction		2,649		4,475		-		11,132		354
Commercial real estate		3,366		3,366		-		6,154		226
Consumer construction		45		133		-		258		15
Home equity lines/loans		1,883		2,032		-		1,780		74
Residential real estate		2,820		2,820		-		1,894		58
		10,846		12,918		-		22,467		731
With an allowance recorded:
Consumer		13		13		10		220		8
Commercial & industrial		2,093		2,093		984		2,261		96
Commercial construction		29,488		30,529		7,251		17,409		677
Commercial real estate		6,658		7,328		1,780		9,730		230
Consumer construction		221		221		20		367		9
Home equity lines/loans		1,652		1,879		547		1,099		14
Residential real estate		3,471		5,197		446		6,107		223
		43,596		47,260		11,038		37,193		1,257
Totals:
Commercial		2,471		2,185		984		3,461		99
Commercial real estate		42,427		45,698		9,032		44,425		1,487
Consumer		13		13		10		269		9
Residential real estate		9,531		12,282		1,012		11,505		393
Total	$	54,442	$	60,178	$	11,038	$	59,660	$	1,988

At December 31, 2010, the recorded investment in loans considered impaired totaled $54.4 million. Of the total investment in loans considered impaired, $43.6 million were found to show specific impairment for which $11.0 million in valuation allowance was recorded; the remaining $10.8 million in impaired loans required no specific valuation allowance because either previously established valuation allowances had been absorbed by partial charge-offs or loan evaluations had no indication of impairment. For the year ended December 31, 2010, the average recorded investment in impaired loans was approximately $32 million. The amount of interest recognized on impaired loans during the portion of the year that they were considered impaired was approximately $1.8 million.

At December 31, 2009, the recorded investment in loans considered impaired totaled $66.1 million. Of the total investment in loans considered impaired, $35.4 million were found to show specific impairment for which $9.1 million in valuation allowance was recorded; no valuation allowance for the other impaired loans was considered necessary. For the year ended December 31, 2009, the average recorded investment in impaired loans was approximately $39.6 million. The amount of interest recognized on impaired loans during the portion of the year that they were considered impaired was approximately $1.3 million.

Loans on Nonaccrual Status	Predecessor Company
	December 31, 2010
Commercial
Commercial & industrial	$	616
Commercial LOC		-
Commercial other		-
Commercial real estate
Commercial construction		16,614
Commercial real estate – other		7,633
Consumer
Consumer LOC		5
Consumer other		-
Residential real estate
Consumer construction		221
Home equity loans/lines		1,314
Residential real estate – other		4,166
Total	$	30,569