LOANS HELD FOR INVESTMENT

3 Months Ended

Mar. 31, 2012

Receivables [Abstract]

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

NOTE F - LOANS HELD FOR INVESTMENT

Following is a summary of loans at March 31, 2012 and December 31, 2011:

	March 31, 2012			December 31, 2011
Real estate - commercial	$	289,512,795		$	310,314,968
Real estate - residential		63,298,391			67,004,033
Construction loans		70,662,909			83,929,770
Commercial and industrial loans		43,185,152			39,433,800
Home equity loans and lines of credit		45,370,932			48,940,064
Loans to individuals		3,772,859			3,299,958
Total loans		515,803,038			552,922,593
Less:
Deferred loan fees		(41,576	)		(45,532	)
Allowance for loan losses		(737,000	)		(227,000	)
Net loans held for investment	$	515,024,462		$	552,650,060

Loans are primarily made in the Company’s market area of North Carolina, principally Wake, Johnston, Lee, Moore, and New Hanover counties. Real estate loans can be affected by the condition of the local real estate market. Commercial and consumer and other loans can be affected by the local economic conditions.

Purchased Credit-Impaired Loans

Accretable yield, or income expected to be collected, related to purchased credit-impaired (“PCI”) loans in the successor period is as follows:

Balance, January 1, 2012	$	29,645,444
New loans purchased		-
Accretion of income for the period		(3,112,996	)
Reclassifications from nonaccretable difference		-
Disposals		(442,114	)
Balance, March 31, 2012	$	26,090,334

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 a summary of changes in the allowance for loan losses and the ending recorded investment in loans by portfolio segment and based on impairment method as of and for the periods ended March 31, 2012 and 2011 (in thousands):

	March 31, 2012
	Commercial			Real Estate			Real Estate
	& Industrial			Commercial			Residential			Construction		Consumer			Total
Allowance for loan losses:
Beginning balance	$	30		$	126		$	47		$	21	$	3		$	227
Charge-offs		(15	)		-			(271	)		-		(8	)		(294	)
Recoveries		-			-			-			-		-			-
Provision for loan losses		163			(47	)		588			79		21			804
Ending balance	$	178		$	79		$	364		$	100	$	16		$	737
Ending balance:
Individually evaluated for impairment	$	-		$	-		$	-		$	-	$	-		$	-
Collectively evaluated for impairment	$	178		$	79		$	364		$	100	$	16		$	737
Purchased credit-impaired	$	-		$	-		$	-		$	-	$	-		$	-
Loans:
Ending balance	$	43,185		$	289,513		$	108,669		$	70,663	$	3,773		$	515,803
Ending balance:
Individually evaluated for impairment	$	-		$	-		$	-		$	-	$	-		$	-
Collectively evaluated for impairment	$	20,725		$	140,487		$	77,921		$	21,374	$	3,768		$	264,275
Purchased credit-impaired	$	22,460		$	149,026		$	30,748		$	49,289	$	5		$	251,528

	March 31, 2011
	Commercial			Real Estate			Real Estate
	& Industrial			Commercial			Residential			Construction			Consumer			Total
Allowance for loan losses:
Beginning balance	$	2,689		$	5,345		$	2,814		$	9,774		$	80		$	20,702
Charge-offs		(269	)		(216	)		(339	)		(3,761	)		(14	)		(4,599	)
Recoveries		36			-			10			312			-			358
Provision for loan losses		253			2,134			1,880			2,752			5			7,024
Ending balance	$	2,709		$	7,263		$	4,365		$	9,077		$	71		$	23,485
Ending balance:
Individually evaluated for impairment	$	1,298		$	3,575		$	2,475		$	6,636		$	35		$	14,019
Collectively evaluated for impairment	$	1,411		$	3,688		$	1,890		$	2,441		$	36		$	9,466

The following is a summary of the ending allowance for loans losses and the recorded investment in loans by portfolio segment and based on impairment method at December 31, 2011 (in thousands):

	December 31, 2011
	Commercial		Real Estate		Real Estate
	& Industrial		Commercial		Residential		Construction		Consumer		Total
Allowance for loan losses:
Ending balance	$	30	$	126	$	47	$	21	$	3	$	227
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment	$	30	$	126	$	47	$	21	$	3	$	227
Purchased credit-impaired	$	-	$	-	$	-	$	-	$	-	$	-
Loans:
Ending balance	$	39,434	$	310,315	$	115,944	$	83,930	$	3,300	$	552,923
Ending balance:
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment	$	12,426	$	149,654	$	79,588	$	19,315	$	2,850	$	263,833
Purchased credit-impaired	$	27,008	$	149,026	$	36,356	$	64,615	$	450	$	289,090

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 at March 31, 2012 and December 31, 2011.

Analysis of Credit Quality

The Company uses 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, management tracks 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. The credit grades 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 affected 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 non-acquired loan portfolio (or loans originated subsequent to the Piedmont Investment) by internal risk ratings at March 31, 2012 and December 31, 2011:

	Commercial Credit Exposure
	March 31, 2012
	Commercial		Real Estate		Commercial		Commercial
	& Industrial		Commercial		Construction		LOC		Total
Non-Acquired Loans	(Dollars in Thousands)
1-Minimal Credit Risk	$	-	$	-	$	-	$	-	$	-
2-Modest Credit Risk		-		-		-		-		-
3-Average Credit Risk		104		-		-		-		104
4-Acceptable Credit Risk		5,827		10,046		-		24		15,897
5-Acceptable Credit Risk		128		680		1,397		-		2,205
6-Special Mention		-		-		-		-		-
7-Substandard		-		-		-		-		-
8-Doubtful		-		-		-		-		-
9-Loss		-		-		-		-		-
Other		9		-		259		-		268
Total	$	6,068	$	10,726	$	1,656	$	24	$	18,474

	Consumer Credit Exposure
	March 31, 2012
	Real Estate		Consumer		Home
	Residential		Construction		Equity		Consumer		Total
Non-Acquired Loans	(Dollars in Thousands)
1-Minimal Credit Risk	$	-	$	-	$	-	$	293	$	293
2-Modest Credit Risk		-		-		-		-		-
3-Average Credit Risk		626		242		545		50		1,463
4-Acceptable Credit Risk		87		642		250		401		1,380
5-Acceptable Credit Risk		49		-		-		72		121
6-Special Mention		-		-		-		-		-
7-Substandard		-		-		-		-		-
8-Doubtful		-		-		-		-		-
9-Loss		-		-		-		-		-
Other		975		-		1		12		988
Total	$	1,737	$	884	$	796	$	828	$	4,245

	Commercial Credit Exposure
	December 31, 2011
	Commercial		Commercial		Commercial		Commercial
	& Industrial		Real Estate		Construction		LOC		Total
Non-Acquired Loans	(Dollars in thousands)
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

	Consumer Credit Exposure
	December 31, 2011
	Real Estate		Consumer		Home
	Residential		Construction		Equity		Consumer		Total
Non-Acquired Loans	(Dollars in thousands)
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

The following tables summarize the carrying value of the acquired loan portfolio (or loans originated prior to the Piedmont Investment) by internal risk ratings at March 31, 2012 and December 31, 2011:

	Commercial Credit Exposure
	March 31, 2012
	Commercial		Real Estate		Commercial		Commercial
	& Industrial		Commercial		Construction		LOC		Total
Acquired Loans	(Dollars in thousands)
1-Minimal Credit Risk	$	702	$	-	$	-	$	11	$	713
2-Modest Credit Risk		592		-		-		-		592
3-Average Credit Risk		917		14,057		3,464		-		18,438
4-Acceptable Credit Risk		8,546		93,510		6,301		62		108,419
5-Acceptable Credit Risk		19,042		110,860		26,279		86		156,267
6-Special Mention		4,243		45,438		17,330		13		67,024
7-Substandard		2,301		14,922		7,964		-		25,187
8-Doubtful		-		-		388		-		388
9-Loss		-		-		-		-		-
Other		366		-		35		212		613
Total	$	36,709	$	278,787	$	61,761	$	384	$	377,641

	Consumer Credit Exposure
	March 31, 2012
	Real Estate		Consumer
	Residential		Construction		Home Equity		Consumer		Total
Acquired Loans	(Dollars in thousands)
1-Minimal Credit Risk	$	-	$	-	$	-	$	276	$	276
2-Modest Credit Risk		-		-		-		-		-
3-Average Credit Risk		9,586		1,550		3,457		414		15,007
4-Acceptable Credit Risk		23,494		3,456		27,437		706		55,093
5-Acceptable Credit Risk		16,192		342		9,341		591		26,466
6-Special Mention		5,389		176		1,915		331		7,811
7-Substandard		6,151		804		2,425		19		9,399
8-Doubtful		140		-		-		-		140
9-Loss		-		-		-		-		-
Other		609		34		-		608		1,251
Total	$	61,561	$	6,362	$	44,575	$	2,945	$	115,443

	Commercial Credit Exposure
	December 31, 2011
	Commercial		Real Estate		Commercial		Commercial
	& Industrial		Commercial		Construction		LOC		Total
Acquired Loans	(Dollars in thousands)
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

	Consumer Credit Exposure
	December 31, 2011
	Real Estate		Consumer
	Residential		Construction		Home Equity		Consumer		Total
Acquired Loans	(Dollars in thousands)
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

Past Due Analysis

The following tables summarize the aging of the loan portfolio by past due status, based on contractual terms, at March 31, 2012 and December 31, 2011:

	March 31, 2012
			Greater than
	30-89 Days		90 Days		Total		Total
	Past Due		Past Due		Past Due		Current		Loans
Acquired Loans:	(Dollars in thousands)
Commercial and industrial	$	312	$	811	$	1,123	$	35,219	$	36,342
Commercial construction		5,838		5,243		11,081		50,680		61,761
Commercial real estate		1,549		5,469		7,018		271,959		278,977
Commercial lines of credit		-		-		-		384		384
Consumer		1		-		1		2,944		2,945
Consumer construction		-		588		588		5,774		6,362
Home equity		132		-		132		44,443		44,575
Residential real estate		403		2,922		3,325		57,627		60,952
Total	$	8,235	$	15,033	$	23,268	$	469,030	$	492,298

	December 31, 2011
			Greater than
	30-89 Days		90 Days		Total		Total
	Past Due		Past Due		Past Due		Current		Loans
Acquired Loans:	(Dollars in thousands)
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 March 31, 2012 or December 31, 2011. None of the non-acquired or purchased non-impaired loans were restructured in a troubled debt restructuring at March 31, 2012.