<SUBMISSION>
      <TYPE>  10-Q
      <FILER>  
            <CIK>  0001091491
            <CCC>  xxxxxxx
      </FILER>
      <NOTIFY-INTERNET>  atacust@merrillcorp.com
      <PERIOD>  06/30/2011
      <SMALL-REPORTING-CO>  Yes
      <SROS>  NONE
      <SUBMISSION-CONTACT>  
            <NAME>  EDGAR  Advantage  Service  Team
            <PHONE>  (800)  688  -  1933
      </SUBMISSION-CONTACT>

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2011

 

OR

 

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

 

For the Transition Period from                   to                  

 

Commission File Number 000-26995

 

HCSB FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

South Carolina

 

57-1079444

(State or other jurisdiction
of incorporation)

 

(I.R.S. Employer
Identification No.)

 

5201 Broad Street

Loris, South Carolina 29569

(Address of principal executive
offices, including zip code)

 

(843) 756-6333

(Issuer’s telephone number, including area code)

 


 

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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated o

 

Smaller reporting company x

(do not check if smaller reporting company)

 

 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  3,738,337 shares of common stock, par value $.01 per share, were issued and outstanding as of August 15, 2011.

 

 

 



Table of Contents

 

HCSB FINANCIAL CORPORATION

 

Index

 

 

Page No.

 

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

Condensed Consolidated Balance Sheets - June 30, 2011 and December 31, 2010

3

 

 

Condensed Consolidated Statements of Operations — Six months ended June 30, 2011 and 2010 And Three months ended June 30, 2011 and 2010

4

 

 

Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Loss - Six months ended June 30, 2011 and 2010

5

 

 

Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2011 and 2010

6

 

 

Notes to Condensed Consolidated Financial Statements

7-35

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

36-57

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

58

 

 

Item 4. Controls and Procedures

58

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

59

 

 

Item 1A. Risk Factors

59

 

 

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

59

 

 

Item 3. Defaults Upon Senior Securities

59

 

 

Item 4. (Removed and Reserved)

59

 

 

Item 5. Other Information

59

 

 

Item 6. Exhibits

59

 

2



Table of Contents

 

HCSB FINANCIAL CORPORATION

 

Condensed Consolidated Balance Sheets

 

(Dollars in thousands)

 

June 30,
2011

 

December 31,
2010

 

 

 

(Unaudited)

 

(Audited)

 

Assets:

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Cash and due from banks

 

37,623

 

12,191

 

Federal funds sold

 

2,205

 

7,371

 

Total cash and cash equivalents

 

39,828

 

19,562

 

Securities available-for-sale

 

82,477

 

265,190

 

Nonmarketable equity securities

 

5,823

 

6,076

 

Total investment securities

 

88,300

 

271,266

 

Loans held for sale

 

15,452

 

15,137

 

 

 

 

 

 

 

Loans receivable

 

395,143

 

430,537

 

Less allowance for loan losses

 

(21,116

)

(14,489

)

Loans, net

 

374,027

 

416,048

 

 

 

 

 

 

 

Premises and equipment, net

 

23,001

 

23,389

 

Accrued interest receivable

 

3,053

 

4,476

 

Cash value of life insurance

 

10,091

 

9,896

 

Other real estate owned

 

16,187

 

16,891

 

Other assets

 

4,251

 

10,776

 

Total assets

 

574,190

 

787,441

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest-bearing transaction accounts

 

40,971

 

38,255

 

Interest-bearing transaction accounts

 

42,540

 

42,348

 

Money market savings accounts

 

155,128

 

197,067

 

Other savings accounts

 

7,701

 

6,707

 

Time deposits $100 and over

 

110,867

 

151,667

 

Other time deposits

 

158,313

 

192,917

 

Total deposits

 

515,520

 

628,961

 

Repurchase Agreements

 

11,744

 

6,646

 

Advances from the Federal Home Loan Bank

 

22,000

 

104,200

 

Subordinated debentures

 

12,062

 

12,062

 

Junior subordinated debentures

 

6,186

 

6,186

 

Accrued interest payable

 

1,000

 

1,252

 

Other liabilities

 

1,585

 

1,635

 

Total liabilities

 

570,097

 

760,942

 

Shareholders’ Equity

 

 

 

 

 

Preferred stock, $1,000 par value. Authorized 5,000,000 shares; issued and and outstanding 12,895 at June 30, 2011 and December 31, 2010

 

12,252

 

12,152

 

Common stock, $.01 par value; 10,000,000 shares authorized, 3,738,337 and 3,780,845 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively

 

37

 

38

 

Capital surplus

 

30,224

 

30,787

 

Common stock warrants

 

1,012

 

1,012

 

Nonvested restricted stock

 

 

(564

)

Retained deficit

 

(38,556

)

(16,813

)

Accumulated other comprehensive loss

 

(876

)

(113

)

Total shareholders’ equity

 

4,093

 

26,499

 

Total liabilities and shareholders’ equity

 

574,190

 

787,441

 

 

3



Table of Contents

 

HCSB FINANCIAL CORPORATION

 

Condensed Consolidated Statements of Operations

(Unaudited)

 

 

 

Six Months Ended June 30,

 

Three Months Ended June 30,

 

(Dollars in thousands)

 

2011

 

2010

 

2011

 

2010

 

Interest income

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

11,065

 

$

13,488

 

$

5,395

 

$

6,629

 

Investment securities:

 

 

 

 

 

 

 

 

 

Taxable

 

2,731

 

2,886

 

1,049

 

1,369

 

Tax-exempt

 

411

 

96

 

195

 

48

 

Nonmarketable equity securities

 

24

 

8

 

16

 

1

 

Other interest income

 

29

 

28

 

15

 

15

 

Total

 

14,260

 

16,506

 

6,670

 

8,062

 

Interest expense

 

 

 

 

 

 

 

 

 

Certificates of deposit $100,000 & over

 

1,193

 

1,430

 

528

 

725

 

Other deposits

 

2,297

 

3,583

 

1,026

 

1,863

 

Advances from the Federal Home Loan Bank

 

1,050

 

1,786

 

357

 

858

 

Other interest expense

 

735

 

388

 

383

 

291

 

Total

 

5,275

 

7,187

 

2,294

 

3,737

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

8,985

 

9,319

 

4,376

 

4,325

 

Provision for loan losses

 

17,615

 

11,412

 

9,065

 

9,600

 

 

 

 

 

 

 

 

 

 

 

Net interest income (loss) after provision for loan losses

 

(8,630

)

(2,093

)

(4,689

)

(5,275

)

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

680

 

724

 

343

 

365

 

Credit life insurance commission

 

11

 

49

 

4

 

10

 

Gain on sale of mortgage loans

 

324

 

428

 

169

 

181

 

Other fees and commissions

 

213

 

191

 

120

 

106

 

Brokerage commission

 

202

 

121

 

135

 

39

 

Gain on sale of securities

 

2,561

 

122

 

746

 

43

 

Income from cash value life insurance

 

238

 

242

 

122

 

118

 

Other operating income

 

52

 

160

 

27

 

58

 

Total

 

4,281

 

2,037

 

1,666

 

920

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

3,886

 

4,768

 

1,912

 

2,318

 

Occupancy expense

 

621

 

626

 

313

 

314

 

Advertising and marketing expense

 

94

 

197

 

34

 

114

 

Furniture and equipment expense

 

677

 

667

 

349

 

325

 

Prepayment penalties on FHLB borrowings

 

2,554

 

0

 

1,242

 

0

 

Gain/(loss) on sale of assets

 

(3

)

14

 

(3

)

(6

)

Loss on sale/writedowns on OREO

 

1,033

 

129

 

277

 

27

 

FDIC insurance premiums

 

1,248

 

526

 

725

 

264

 

Other operating expenses

 

2,186

 

1,729

 

1,097

 

959

 

Total

 

12,296

 

8,656

 

5,946

 

4,315

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(16,645

)

(8,712

)

(8,969

)

(8,670

)

Income tax expense (benefit)

 

4,998

 

(3,030

)

4,998

 

(3,014

)

Net loss

 

$

(21,643

)

$

(5,682

)

$

(13,967

)

$

(5,656

)

 

 

 

 

 

 

 

 

 

 

Accretion of preferred stock to redemption value

 

100

 

94

 

51

 

47

 

Preferred dividends accrued

 

323

 

161

 

161

 

82

 

Net loss available to common shareholders

 

(22,066

)

(5,937

)

(14,179

)

(5,785

)

 

 

 

 

 

 

 

 

 

 

Basic net loss per share

 

$

(5.89

)

$

(1.57

)

$

(3.78

)

$

(1.53

)

Diluted net loss per share

 

$

(5.89

)

$

(1.57

)

$

(3.78

)

$

(1.53

)

 

4



Table of Contents

 

HCSB FINANCIAL CORPORATION

 

Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Loss

For the Six Months ended June 30, 2011 and 2010

(Unaudited)

 

(Dollars in thousands except

 

Common Stock

 

Common
Stock

 

Preferred Stock

 

Nonvested
Restricted

 

Capital

 

Retained
Earnings

 

Accumulated
other
comprehensive

 

 

 

share data)

 

Shares

 

Amount

 

Warrants

 

Shares

 

Amount

 

Stock

 

Surplus

 

(deficit)

 

income

 

Total

 

Balance, December 31, 2009

 

3,787,170

 

$

38

 

$

1,012

 

12,895

 

$

11,962

 

$

(645

)

$

30,856

 

$

1,291

 

$

558

 

$

45,072

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,682

)

 

 

(5,682

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12

)

(12

)

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,694

)

Accretion of preferred stock to redemption value

 

 

 

 

 

 

 

 

 

94

 

 

 

 

 

(94

)

 

 

 

Payment of dividend on preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(322

)

 

 

(322

)

Stock compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

 

 

 

 

12

 

Balance, June 30, 2010

 

3,787,170

 

$

38

 

$

1,012

 

12,895

 

$

12,056

 

$

(645

)

$

30,868

 

$

(4,807

)

$

546

 

$

39,068

 

Balance, December 31, 2010

 

3,780,845

 

$

38

 

$

1,012

 

12,895

 

$

12,152

 

$

(564

)

$

30,787

 

$

(16,813

)

$

(113

)

$

26,499

 

Net loss for the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21,643

)

 

 

(21,643

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(763

)

(763

)

Comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22,406

)

Accretion of preferred stock to redemption value

 

 

 

 

 

 

 

 

 

100

 

 

 

 

 

(100

)

 

 

 

Termination of employee

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock option plans

 

(42,508

)

(1

)

 

 

 

564

 

(563

)

 

 

 

Balance, June 30, 2011

 

3,738,337

 

$

37

 

$

1,012

 

12,895

 

$

12,252

 

$

 

$

30,224

 

$

(38,556

)

$

(876

)

$

4,093

 

 

See notes to condensed financial statements.

 

5



Table of Contents

 

HCSB FINANCIAL CORPORATION

 

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Six Months Ended

 

(Dollars in thousands)

 

June 30, 2011

 

June 30,2010

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(21,643

)

$

(5,682

)

Adjustments to reconcile net loss to net cash provided (used) by operating activities:

 

 

 

 

 

Depreciation and amortization

 

517

 

522

 

Deferred income tax benefit

 

4,862

 

(112

)

Provision for loan losses

 

17,615

 

11,412

 

Amortization less accretion on investments

 

94

 

474

 

Amortization of deferred loan costs

 

11

 

11

 

Originations from sales of loans held for sale

 

(13,119

)

(31,774

)

Sale or paydowns of loans

 

12,804

 

21,754

 

Stock compensation expense

 

 

12

 

Net gain on sale of securities available-for-sale

 

(2,561

)

(122

)

Net writedowns or sale of other real estate owned

 

1,033

 

129

 

Decrease in interest payable

 

(252

)

(85

)

Decrease in interest receivable

 

1,423

 

324

 

(Increase) decrease in other assets

 

2,111

 

(3,133

)

Income (net of mortality cost) on cash value of life insurance

 

(195

)

(202

)

Decrease (increase) in other liabilities

 

(50

)

668

 

Net cash provided (used) by operating activities

 

2,650

 

(5,804

)

Cash flows from investing activities:

 

 

 

 

 

Decrease in loans to customers

 

16,922

 

564

 

Purchases of securities available-for-sale

 

(514

)

(97,514

)

Maturities of securities available-for-sale

 

20,052

 

36,481

 

Proceeds from sale of other real estate owned

 

7,144

 

992

 

Proceeds from sales of securities available-for-sale

 

164,431

 

16,187

 

Proceeds from sales of premises and equipment

 

 

25

 

Redemptions (purchases) of nonmarketable equity securities

 

253

 

(1

)

Purchases of premises and equipment

 

(129

)

(206

)

Net cash provided (used) by investing activities

 

208,159

 

(43,472

)

Cash flows from financing activities:

 

 

 

 

 

Net increase (decrease) in demand deposits and savings

 

(38,037

)

56,728

 

Net decrease in time deposits

 

(75,404

)

(17,735

)

Decrease in FHLB borrowings

 

(82,200

)

(9,600

)

Net increase in repurchase agreements

 

5,098

 

584

 

Dividend paid on preferred stock

 

 

(322

)

Net increase in subordinated debentures

 

 

11,501

 

Net cash provided (used) by financing activities

 

(190,543

)

41,156

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

20,266

 

(8,120

)

Cash and cash equivalents, beginning of period

 

19,562

 

46,309

 

Cash and cash equivalents, end of period

 

39,828

 

$

38,189

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Income taxes

 

$

 

$

 

Interest

 

$

5,527

 

$

7,272

 

 

See notes to condensed financial statements.

 

6



Table of Contents

 

HCSB FINANCIAL CORPORATION

 

NOTE 1 — BASIS OF PRESENTATION

 

HCSB Financial Corporation (the “Company,” which may be referred to as “we,” “us,” or “our”) was incorporated on June 10, 1999 to become a holding company for Horry County State Bank (the “Bank”).  The Bank is a state chartered bank which commenced operations on January 4, 1988.  From our 14 branch locations, we offer a full range of deposit services, including checking accounts, savings accounts, certificates of deposit, money market accounts, and IRAs, as well as a broad range of non-deposit investment services.  HCSB Financial Trust I (the “Trust”) is a special purpose subsidiary organized for the sole purpose of issuing trust preferred securities.  The operations of the Trust have not been consolidated in these financial statements.

 

The accompanying consolidated financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are condensed and omit disclosures, which would substantially duplicate those contained in the most recent annual report to shareholders.  The financial statements as of June 30, 2011 and for the interim periods ended June 30, 2011 and 2010 are unaudited and, in our opinion, include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation.  Operating results for the three month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.  The financial information as of December 31, 2010 has been derived from the audited financial statements as of that date.  For further information, refer to the financial statements and the notes included in HCSB Financial Corporation’s 2010 Annual Report.

 

On March 6, 2009, as part of the Troubled Asset Relief Program (the “TARP”) Capital Purchase Program (the “CPP”) established by the U.S. Treasury under the Emergency Economic Stabilization Act of 2009 (“EESA”), the Company issued and sold to the U.S. Treasury (i) 12,895 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series T, having a liquidation preference of $1,000 per share (the “Series T Preferred Stock”), and (ii) a ten-year warrant to purchase up to 91,714 shares of its common stock at an initial exercise price of $21.09 per share (the “CPP Warrant”), for an aggregate purchase price of $12,895,000 in cash.  Refer to the accompanying Management’s Discussion and Analysis of Financial Condition and results of Operations for additional information.

 

As of February, 2011, the Federal Reserve Bank of Richmond, the Company’s primary federal regulatory, has required the Company to defer dividend payments on the 12,895 shares of the Series T Preferred Stock issued to the U.S. Treasury in March 2009 pursuant to the CPP and interest payments on the $6,000,000 of trust preferred securities issued in December 2004.  Therefore, in February  and May 2011, the Company notified the U.S. Treasury of our deferral of quarterly dividend payments on the 12,895 shares of Series T Preferred Stock and also informed the Trustee of the $6,000,000 of trust preferred securities of our deferral of a quarterly interest payments.  The amount of each of our February and May 2011 interest payments was $161,000, and as of June 30, 2011, the Company had $322,375 accrued on our dividend payments due on our Series T Preferred Stock issued to the U.S. Treasury.  Because we have deferred these two payments, we are prohibited from paying any dividends on our common stock until all deferred payments have been made in full.  Prior to March 6, 2012, so long as the Treasury owns the 12,895 shares of Series T Preferred Stock, we are not permitted to increase cash dividends on our common stock without the Treasury’s consent.  As a result of these restrictions on the Company, including the restrictions on our Bank’s ability to pay dividends to the Company, there was no stock dividend declared in January 2010 and January 2011.

 

NOTE 2 — GOING CONCERN

 

The going concern assumption is a fundamental principle in the preparation of financial statements. It is the responsibility of management to assess the Company’s ability to continue as a going concern. In assessing this assumption, 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 June 30, 2011. The Company has a history of profitable operations and sufficient sources of liquidity to meet its short-term and long-term funding needs. However, the Bank’s financial condition has suffered during 2010 and the first six months of 2011 from the extraordinary effects of what may ultimately be the worst economic downturn since the Great Depression.

 

The effects of the current economic environment are being felt across many industries, with financial services and residential real estate being particularly hard hit. The effects of the economic downturn have been particularly severe during the last 24 months. The Bank, with a loan portfolio consisting of a concentration in commercial real estate 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 to the Bank. As a result, the Bank’s level of nonperforming assets has increased substantially during 2010 and the six months of 2011. As of June 30, 2011, our

 

7



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nonperforming assets equaled $88,377,000, or 15.39% of assets, as compared to $86,059,000, or 10.93% of assets, as of December 31, 2010. In addition, our level of impaired loans increased to $72,190,000 at June 30, 2011 compared to $69,168,000 at December 31, 2010. For the six months ended June 30, 2011, the Bank recorded a $17,615,000 provision increase the allowance for loan losses to a level which, in management’s best judgment, adequately reflected the increased risk inherent in the loan portfolio as of June 30, 2011. Nevertheless, given the current economic climate, management recognizes the possibility of further deterioration in the loan portfolio in the second half of 2011.  For the six months ended June 30, 2011, we recorded net loan charge-offs of $10,988,000, or 2.55% of average loans, as compared to net loan charge-offs of $6,169,000, for the six months ended June 30, 2010.

 

The Company and the Bank operate in a highly regulated industry and must plan for the liquidity needs of each entity separately. A variety of sources of liquidity are available to the Bank to meet its short-term and long-term funding needs. Although a number of these sources have been limited following execution of the Consent Order with the FDIC and the State Board, management has prepared forecasts of these sources of funds and the Bank’s projected uses of funds during 2011 in an effort to ensure that the sources available are sufficient to meet the Bank’s projected liquidity needs for this period.

 

The Company relies on dividends from the Bank as its primary source of liquidity. The Company is a legal entity separate and distinct from the Bank. Various legal limitations restrict the Bank from lending or otherwise supplying funds to the Company to meet its obligations, including paying dividends. In addition, the terms of the Consent Order described above will further limit the Bank’s ability to pay dividends to the Company to satisfy its funding needs.

 

Management believes the Bank’s liquidity sources are adequate to meet its needs for at least the next 12 months, but if the Bank is unable to meet its liquidity needs, then the Bank may be placed into a federal conservatorship or receivership by the FDIC, with the FDIC appointed conservator or receiver.

 

The Company will also need to raise substantial additional capital to increase capital levels to meet the standards set forth by the FDIC. As a result of the recent downturn in the financial markets, the availability of many sources of capital (principally to financial services companies) has become significantly restricted or has become increasingly costly as compared to the prevailing market rates prior to the volatility. Management cannot predict when or if the capital markets will return to more favorable conditions. Management is actively evaluating a number of capital sources asset reductions and other balance sheet management strategies to ensure that the Bank’s projected level of regulatory capital can support its balance sheet.

 

There can be no assurances that the Company will be successful in its efforts to raise additional capital during 2011 or at all. An equity financing transaction would result in substantial dilution to the Company’s current shareholders and could adversely affect the market price of the Company’s common stock. It is difficult to predict if these efforts will be successful, either on a short-term or long-term basis. Should these efforts be unsuccessful, due to the regulatory restrictions which exist that restrict cash payments between the Bank and the Company, the Company may be unable to realize its assets and discharge its liabilities in the normal course of business.

 

As a result of management’s assessment of the Company’s ability to continue as a going concern, 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.

 

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Management’s Estimates - In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and income and expenses for the period.  Actual results could differ significantly from those estimates.

 

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, including valuation allowances for impaired loans, and the carrying amount of real estate acquired in connection with foreclosures or in satisfaction of loans.  Management must also make estimates in determining the estimated useful lives and methods for depreciating premises and equipment.

 

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While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowance may be necessary based on changes in local economic conditions.  In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowances for losses on loans and foreclosed real estate.  Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examination.  Because of these factors, it is reasonably possible that the allowances for losses on loans and foreclosed real estate may change materially in the near term.

 

Investment Securities - Investment securities available-for-sale by the Company are carried at amortized cost and adjusted to their estimated fair value for reporting purposes.  The unrealized gain or loss is recorded in shareholders’ equity net of the deferred tax effects.  Management does not actively trade securities classified as available-for-sale, but intends to hold these securities for an indefinite period of time and may sell them prior to maturity to achieve certain objectives.  Reductions in fair value considered by management to be other than temporary are reported as a realized loss and a reduction in the cost basis in the security.  The adjusted cost basis of securities available-for-sale is determined by specific identification and is used in computing the realized gain or loss from a sales transaction.

 

Nonmarketable Equity Securities - Nonmarketable equity securities include the Company’s investments in the stock of the Federal Home Loan Bank (the “FHLB”).  The FHLB stock is carried at cost because the stock has no quoted market value and no ready market exists.  Investment in FHLB stock is a condition of borrowing from the FHLB, and the stock is pledged to collateralize the borrowings.  Dividends received on FHLB stock is included as a separate component in interest income.

 

Loans held for Sale - Loans held for sale consist of residential mortgage loans the Company originates for sale to secondary market investors.  They are carried at the lower of aggregate cost or market value.  Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.  Fees collected in conjunction with origination activities are deferred as part of the cost basis of the loan and recognized when the loan is sold.  Gains or losses on sales are recognized when the loans are sold and are determined as the difference between the sales price and the carrying value of the loans.

 

The Company issues rate lock commitments to borrowers based on prices quoted by secondary market investors.  When rates are locked with borrowers, a sales commitment is immediately entered (on a best efforts basis) at a specified price with a secondary market investor.  Accordingly, any potential liabilities associated with rate lock commitments are offset by sales commitments to investors.

 

Loans Receivable - Loans receivable are stated at their unpaid principal balance.  Interest income on loans is computed based upon the unpaid principal balance.  Interest income is recorded in the period earned.

 

The accrual of interest income is generally discontinued when a loan becomes contractually 90 days past due as to principal or interest.  Management may elect to continue the accrual of interest when the estimated net realizable value of collateral exceeds the principal balance and accrued interest.

 

Loan origination, commitment fees, and certain direct loan origination costs (principally salaries and employee benefits) are deferred and amortized to income over the contractual life of the related loans or commitments, adjusted for prepayments, using the straight-line method.

 

Loans are defined as impaired when it is probable that a creditor will be unable to collect all amounts due according

 

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to the contractual terms of the loan agreement.  All loans are subject to this criteria except for smaller balance homogeneous loans that are collectively evaluated for impairment and loans measured at fair value or at the lower of cost or fair value.  The Company considers its consumer installment portfolio, credit card loans, and home equity lines as such exceptions.  Therefore, loans within the real estate and commercial loan portfolios are reviewed individually.

 

Impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.  When management determines that a loan is impaired, the difference between the Company’s investment in the related loan and the present value of the expected future cash flows, or the fair value of the collateral, is charged off with a corresponding entry to the allowance for loan losses.  The accrual of interest is discontinued on an impaired loan when management determines the borrower may be unable to meet payments as they become due.

 

Concentrations of Credit Risk - Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans receivable, investment securities, federal funds sold and amounts due from banks.

 

The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily throughout Horry County in South Carolina and Columbus and Brunswick counties in North Carolina.  The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers. However, the loan portfolio does include a concentration in loans secured by residential and commercial real estate and commercial and industrial non-real estate loans.  These loans are especially susceptible to being adversely effected by the current economic downturn.  The current downturn in the real estate market has resulted in an increase in loan delinquencies, defaults and foreclosures, and we believe these trends are likely to continue, especially in the Myrtle Beach area.  In some cases, this downturn has resulted in a significant impairment to the value of our collateral and our ability to sell the collateral upon foreclosure, and there is a risk that this trend will continue.  The commercial real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended.  If real estate values in our market areas continue to decline, it is also more likely that we would be required to increase our allowance for loan losses.

 

In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc.), and loans with high loan-to-value ratios. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life.  For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans).  These loans are underwritten and monitored to manage the associated risks.  Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.

 

The Company’s investment portfolio consists principally of obligations of the United States, its agencies or its corporations and general obligation municipal securities.  In the opinion of management, there is no concentration of credit risk in its investment portfolio.  The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions.  Management believes credit risk associated with correspondent accounts is not significant.

 

Allowance for Loan Losses - The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.  Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.  The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experiences, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.  Management’s judgments about the adequacy of the allowance are based on numerous assumptions about current events, which

 

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management believes to be reasonable, but which may or may not prove to be accurate.  Thus, there can be no assurance that loan losses in future periods will not exceed the current allowance amount or that future increases in the allowance will not be required.  No assurance can be given that management’s ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting the operating results of the Company.

 

The allowance is subject to examination by regulatory agencies, which may consider such factors as the methodology used to determine adequacy and the size of the allowance relative to that of peer institutions, and other adequacy tests.  In addition, such regulatory agencies could require the Company to adjust its allowance based on information available to them at their examination.

 

The methodology used to determine the reserve for unfunded lending commitments, which is included in other liabilities, is inherently similar to that used to determine the allowance for loan losses adjusted for factors specific to binding commitments, including the probability of funding and historical loss ratio.

 

Premises, Furniture and Equipment - Premises, furniture and equipment are stated at cost less accumulated depreciation.  The provision for depreciation is computed by the straight-line method.  Rates of depreciation are generally based on the following estimated useful lives:  buildings - 40 years; furniture and equipment - three to 25 years.  The cost of assets sold or otherwise disposed of and the related accumulated depreciation is eliminated from the accounts, and the resulting gains or losses are reflected in the income statement.

 

Maintenance and repairs are charged to current expense as incurred, and the costs of major renewals and improvements are capitalized.

 

Other Real Estate Owned - Other real estate owned includes real estate acquired through foreclosure.  Other real estate owned is initially recorded at the lower of cost (principal balance of the former loan plus costs of improvements) or fair value, less estimated costs to sell.

 

Any write-downs at the dates of acquisition are charged to the allowance for loan losses.  Expenses to maintain such assets, subsequent write-downs, and gains and losses on disposal are included in other expenses.

 

Income and Expense Recognition - The accrual method of accounting is used for all significant categories of income and expense.  Immaterial amounts of insurance commissions and other miscellaneous fees are reported when received.

 

Income Taxes - Amounts provided for income taxes are based on income reported for financial statement purposes. Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  As of June 30, 2011, our gross deferred tax asset was $13,916,000.  However, as of June 30, 2011, due to the Company’s recent financial results, the uncertainty involved in projecting near-term profitability, and evaluation of appropriate tax planning strategies, management has provided a 100% valuation allowance for our deferred tax asset in the amount of $13,916,000.  This valuation allowance reflects management’s estimate that the deferred tax asset is not more-likely-than-not to be realized.

 

The Company believes that its income tax filing positions taken or expected to be taken in its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company’s financial condition, results of operations, or cash flow.  Therefore, no reserves for uncertain income tax positions have been recorded.

 

Net Income (Loss) Per Common Share - Basic income (loss) per common share is calculated by dividing net income (loss) by the weighted-average number of shares outstanding during the year.  Diluted net income per share is computed based on net income divided by the weighted average number of common and potential common shares.  Retroactive recognition has been given for the effects of all stock dividends and splits in computing the weighted-average number of shares.  The only potential common share equivalents are those related to stock options

 

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and restricted stock awards.  Stock options that are anti-dilutive are excluded from the calculation of diluted net income per share.

 

Comprehensive Income - Accounting principles generally require recognized income, expenses, gains, and losses to be included in net income.  Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

 

Statements of Cash Flows - For purposes of reporting cash flows, the Company considers certain highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.  Cash equivalents include amounts due from banks, federal funds sold, and time deposits with other banks with maturities of three months or less.

 

Off-Balance-Sheet Financial Instruments - In the ordinary course of business, the Company enters into off-balance-sheet financial instruments consisting of commitments to extend credit and letters of credit.  These financial instruments are recorded in the financial statements when they become payable by the customer.

 

Recently Issued Accounting Pronouncements — The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and / or disclosure of financial information by the Company.

 

In July 2010, the Receivables topic of the Accounting Standards Codification (“ASC”) was amended by Accounting Standards Update (“ASU”) 2010-20 to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis.  The Company is required to include these disclosures in its interim and annual financial statements.  See Note 7.

 

Disclosures about Troubled Debt Restructurings (“TDRs”) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (“FASB”) in ASU 2011-01 issued in January 2011. In April 2011 the FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR.  The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present.

 

Disclosures related to TDRs under ASU 2010-20 will be effective for reporting periods beginning after June 15, 2011.

 

In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03.  The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control.  The other criteria to assess effective control were not changed.  The amendments are effective for the Company beginning January 1, 2012 but are not expected to have a material effect on the financial statements.

 

ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements.  The amendments will be effective for the Company beginning January 1, 2012 but are not expected to have a material effect on the financial statements.

 

The Comprehensive Income topic of the ASC was amended in June 2011.  The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity.  The amendment requires consecutive presentation of the statement of net income and other comprehensive income and requires an entity to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements.  The amendments will be applicable to the Company on January 1, 2012 and will be applied retrospectively.

 

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Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

Risks and Uncertainties - In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory.  There are three main components of economic risk:  interest rate risk, credit risk and market risk.  The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different basis, than its interest-earning assets.  Credit risk is the risk of default on the Company’s loan portfolio that results from borrower’s inability or unwillingness to make contractually required payments.  Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.

 

The Company is subject to the regulations of various governmental agencies.  These regulations can and do change significantly from period to period.  The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions from the regulators’ judgments based on information available to them at the time of their examination.  See Note 13 for additional discussions of Regulatory Matters.

 

Additionally, the Company is subject to certain regulations due to our participation in the U.S. Treasury’s CPP.  Pursuant to the terms of the CPP Purchase Agreement between us and the Treasury, we adopted certain standards for executive compensation and corporate governance for the period during which the Treasury holds the equity issued pursuant to the CPP Purchase Agreement, including the common stock which may be issued pursuant to the CPP Warrant.  These standards generally apply to our named executive officers. The standards include (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibition on making golden parachute payments to senior executives; (4) prohibition on providing tax gross-up provisions; and (5) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive.  In particular, the change to the deductibility limit on executive compensation will likely increase the overall cost of our compensation programs in future periods and may make it more difficult to attract suitable candidates to serve as executive officers.

 

Legislation that has been adopted after we closed on our sale of Series T Preferred Stock and the Warrant to the U.S. Treasury for $12.9 million pursuant to the CPP on March 6, 2009, or any legislation or regulations that may be implemented in the future, may have a material impact on the terms of our CPP transaction with the Treasury.  If we determine that any such legislation or any regulations, in whole or in part, alter the terms of our CPP transaction with the Treasury in ways that we believe are adverse to our ability to effectively manage our business, then it is possible that we may seek to unwind, in whole or in part, the CPP transaction by repurchasing some or all of the preferred stock and warrants that we sold to the Treasury pursuant to the CPP.  If we were to repurchase all or a portion of such preferred stock or warrants, then our capital levels could be materially reduced.

 

NOTE 4 — EARNINGS (LOSSES) PER SHARE

 

A reconciliation of the numerators and denominators used to calculate basic and diluted earnings (losses) per share is as follows:

 

 

 

Six Months Ended June 30, 2011

 

 

 

Income

 

Average Shares

 

Per Share

 

(Dollars in thousands, except share amounts)

 

(Numerator)

 

(Denominator)

 

Amount

 

Basic loss per share

 

 

 

 

 

 

 

Loss available to common shareholders

 

$

(22,066

)

3,746,557

 

$

(5.89

)

Effect of dilutive securities

 

 

 

 

 

 

 

Stock options

 

 

 

 

 

Diluted loss per share

 

 

 

 

 

 

 

Loss available to common shareholders plus assumed conversions

 

$

(22,066

)

3,746,557

 

$

(5.89

)

 

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Six Months Ended June 30, 2010

 

 

 

Income

 

Average Shares

 

Per Share

 

(Dollars in thousands, except share amounts)

 

(Numerator)

 

(Denominator)

 

Amount

 

Basic loss per share

 

 

 

 

 

 

 

Loss available to common shareholders

 

$

(5,937

)

3,787,170

 

$

(1.57

)

Effect of dilutive securities

 

 

 

 

 

 

 

Stock options

 

 

 

 

 

Diluted loss per share

 

 

 

 

 

 

 

Loss available to common shareholders plus assumed conversions

 

$

(5,937

)

3,787,170

 

$

(1.57

)

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2011

 

 

 

Income

 

Average Shares

 

Per Share

 

(Dollars in thousands, except share amounts)

 

(Numerator)

 

(Denominator)

 

Amount

 

Basic loss per share

 

 

 

 

 

 

 

Loss available to common shareholders

 

$

(14,179

)

3,746,557

 

$

(3.78

)

Effect of dilutive securities

 

 

 

 

 

 

 

Stock options

 

 

 

 

 

Diluted loss per share

 

 

 

 

 

 

 

Loss available to common shareholders plus assumed conversions

 

$

(14,179

)

3,746,557

 

$

(3.78

)

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2010

 

 

 

Income

 

Average Shares

 

Per Share

 

(Dollars in thousands, except share amounts)

 

(Numerator)

 

(Denominator)

 

Amount

 

Basic loss per share

 

 

 

 

 

 

 

Loss available to common shareholders

 

$

(5,785

)

3,787,170

 

$

(1.53

)

Effect of dilutive securities

 

 

 

 

 

 

 

Stock options

 

 

 

 

 

Diluted loss per share

 

 

 

 

 

 

 

Loss available to common shareholders plus assumed conversions

 

$

(5,785

)

3,787,170

 

$

(1.53

)

 

NOTE 5 — COMPREHENSIVE INCOME (LOSS)

 

The following table sets forth the amounts of other comprehensive income (loss) included in equity along with the related tax effect:

 

 

 

Six Months Ended June 30, 2011

 

 

 

Pre-tax

 

(Expense)

 

Net-of-tax

 

(Dollars in thousands)

 

Amount

 

Benefit

 

Amount

 

Unrealized gains (losses) on securities:

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

$

(3,772

)

$

1,396

 

$

(2,376

)

Plus: reclassification adjustment for gains (losses) realized in net income

 

2,561

 

(948

)

1,613

 

Net unrealized gains (losses) on securities

 

(1,211

)

448

 

(763

)

Other comprehensive loss

 

$

(1,211

)

$

448

 

$

(763

)

 

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Six Months Ended June 30, 2010

 

 

 

Pre-tax

 

(Expense)

 

Net-of-tax

 

(Dollars in thousands)

 

Amount

 

Benefit

 

Amount

 

Unrealized gains (losses) on securities:

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

$

(140

)

$

52

 

$

(88

)

Plus: reclassification adjustment for gains (losses) realized in net income

 

122

 

(46

)

76

 

Net unrealized gains (losses) on securities

 

(18

)

6

 

(12

)

Other comprehensive loss

 

$

(18

)

$

6

 

$

(12

)

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2011

 

 

 

Pre-tax

 

(Expense)

 

Net-of-tax

 

(Dollars in thousands)

 

Amount

 

Benefit

 

Amount

 

Unrealized gains (losses) on securities:

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

$

194

 

$

(72

)

$

122

 

Plus: reclassification adjustment for gains (losses) realized in net income

 

746

 

(276

)

470

 

Net unrealized gains (losses) on securities

 

940

 

(348

)

592

 

Other comprehensive loss

 

$

940

 

$

(348

)

$

592

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2010

 

 

 

Pre-tax

 

(Expense)

 

Net-of-tax

 

(Dollars in thousands)

 

Amount

 

Benefit

 

Amount

 

Unrealized gains (losses) on securities:

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

$

708

 

$

(262

)

$

446

 

Plus: reclassification adjustment for gains (losses) realized in net income

 

43

 

(16

)

27

 

Net unrealized gains (losses) on securities

 

751

 

(278

)

473

 

Other comprehensive loss

 

$

751

 

$

(278

)

$

473

 

 

Accumulated other comprehensive income (loss) consists solely of the unrealized gain (loss) on securities available-for-sale, net of the deferred tax effects.

 

NOTE 6 -  INVESTMENT PORTFOLIO

 

Management classifies investment securities as either held-to-maturity or available-for-sale based on their intentions and the Company’s ability to hold them until maturity.  In determining such classifications, securities that management has the positive intent and the Company has the ability to hold until maturity are classified as held-to-maturity and carried at amortized cost.  All other securities are designated as available-for-sale and carried at estimated fair value with unrealized gains and losses included in shareholders’ equity on an after-tax basis.  As of June 30, 2011, all securities were classified as available-for-sale.

 

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Securities available-for-sale consisted of the following:

 

 

 

Amortized

 

Gross Unrealized

 

Estimated

 

(Dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

 

June 30, 2011

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises

 

$

15,992

 

$

 

$

386

 

$

15,606

 

Mortgage-backed securities

 

49,730

 

170

 

1,174

 

48,726

 

Obligations of state and local governments

 

18,146

 

231

 

232

 

18,145

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

83,868

 

$

401

 

$

1,792

 

$

82,477

 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises

 

$

55,661

 

$

372

 

$

1,072

 

$

54,961

 

Mortgage-backed securities

 

187,649

 

3,313

 

1,878

 

189,084

 

Obligations of state and local governments

 

22,060

 

173

 

1,088

 

21,145

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

265,370

 

$

3,858

 

$

4,038

 

$

265,190

 

 

The following is a summary of maturities of securities available-for-sale as of June 30, 2011.  The amortized cost and estimated fair values are based on the contractual maturity dates.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.

 

 

 

Estimated

 

(Dollars in thousands)

 

Fair Value

 

 

 

 

 

Due in less than one year

 

$

 

Due after one year but within five years

 

401

 

Due after five years but within ten years

 

14,803

 

Due after ten years

 

67,273

 

 

 

 

 

Total

 

$

82,477

 

 

The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2011 and December 31, 2010:

 

Securities Available for Sale

 

 

 

 

 

June 30, 2011

 

 

 

 

 

 

 

Less than

 

Twelve months

 

 

 

 

 

 

 

twelve months

 

or more

 

Total

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

(Dollars in thousands)

 

Fair value

 

losses

 

Fair value

 

losses

 

Fair value

 

losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises

 

$

15,606

 

$

387

 

$

 

$

 

$

15,606

 

$

387

 

Mortgage-backed securities

 

20,527

 

462

 

21,739

 

712

 

42,266

 

1,174

 

Obligations of state and local governments

 

9,483

 

231

 

 

 

9,483

 

231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

45,616

 

$

1,080

 

$

21,739

 

$

712

 

$

67,355

 

$

1,792

 

 

16



Table of Contents

 

 

 

 

 

December 31, 2010

 

 

 

 

 

Less than

 

Twelve months

 

 

 

 

 

twelve months

 

or more

 

Total

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

(Dollars in thousands)

 

Fair value

 

losses

 

Fair value

 

losses

 

Fair value

 

losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government-sponsored enterprises

 

$

43,222

 

$

1,072

 

$

 

$

 

$

43,222

 

$

1,072

 

Mortgage-backed securities

 

58,691

 

1,537

 

8,459

 

341

 

67,150

 

1,878

 

Obligations of state and local governments

 

13,164

 

1,088

 

 

 

13,164

 

1,088

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

115,077

 

$

3,697

 

$

8,459

 

$

341

 

$

123,536

 

$

4,038

 

 

At June 30, 2011, the Bank had nine individual securities, or 26.36% of the security portfolio, that have been in an unrealized loss position for more than twelve months.  The Bank does not intend to sell these securities and it is more likely than not that the Bank will not be required to sell these securities before recovery of their amortized cost.  The Bank believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and, therefore, these losses are not considered other-than-temporary.

 

At June 30, 2011 and 2010, investment securities with a book value of $63,679,000 and $139,804,000, respectively, and a market value of $62,597,000 and $141,420,000, respectively, were pledged to secure deposits.

 

Gross realized gains on sales of available-for-sale securities as of June 30, 2011 were $2,824,000 and gross realized losses were $263,000.

 

NOTE 7 - LOAN PORTFOLIO

 

The following table sets forth the composition of the loan portfolio by category at June 30, 2011 and December 31, 2010 and highlights the Company’s historic emphasis on mortgage lending.

 

(Dollars in thousands) 

 

June 30,
2011

 

December 31,
2010

 

Real estate - construction and land development

 

$

72,862

 

$

90,064

 

Real estate - other

 

252,245

 

262,131

 

Agricultural

 

14,056

 

10,679

 

Commercial and industrial

 

45,769

 

54,693

 

Consumer

 

10,131

 

12,446

 

Other, net

 

80

 

524

 

 

 

$

395,143

 

$

430,537

 

 

The primary component of our loan portfolio is loans collateralized by real estate, which made up approximately 82.28% of our loan portfolio at June 30, 2011.  These loans are secured generally by first or second mortgages on residential, agricultural or commercial property.  Commercial real estate loans declined $15.8 million (9.47%) as we continue to seek to reduce our commercial real estate loan portfolio to improve our credit quality and reduce our concentration in commercial real estate.  We anticipate decreasing our amount of commercial real estate loans

 

17



Table of Contents

 

throughout the remainder of 2011.  There are no foreign loans, and agricultural loans, as of June 30, 2011, were $14,056,000 or 3.56%, of our loan portfolio.  There are no significant concentrations of loans in any particular individuals or industry or group of related individuals or industries.

 

Activity in the Allowance for Loan Losses is as follows:

 

(Dollars in thousands) 

 

Six months ended
June 30,

 

 

 

2011

 

2010

 

Balance, January 1

 

$

14,489

 

7,525

 

Provision for loan losses for the period

 

17,615

 

11,412

 

Net loans charged-off for the period

 

(10,988

)

(6,169

)

 

 

 

 

 

 

Balance, end of period

 

$

21,116

 

$

12,768

 

 

 

 

 

 

 

Gross loans outstanding, end of period

 

$

395,143

 

$

472,895

 

Allowance for Loan Losses to loans outstanding

 

5.34

%

2.70

%

 

The following chart details the activity within our allowance for loan losses as of June 30, 2011 and December 31, 2010:

 

18



Table of Contents

 

June 30, 2011

 

 

 

Commercial

 

 

 

 

 

 

 

(Dollars in thousands)

 

Commercial

 

Real Estate

 

Consumer

 

Residential

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,822

 

$

7,237

 

$

131

 

$

5,299

 

$

14,489

 

Charge-offs

 

2,075

 

6,576

 

46

 

2,934

 

11,631

 

Recoveries

 

20

 

419

 

17

 

188

 

644

 

Provisions

 

2,663

 

10,551

 

94

 

4,307

 

17,615

 

Ending balance

 

$

2,429

 

$

11,631

 

$

196

 

$

6,860

 

$

21,116

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balances:

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

953

 

$

7,959

 

$

88

 

$

3,886

 

$

12,886

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

$

1,476

 

$

3,672

 

$

108

 

$

2,974

 

$

8,230

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,429

 

$

11,631

 

$

196

 

$

6,860

 

$

21,116

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance - total

 

$

59,929

 

$

212,176

 

$

10,131

 

$

112,907

 

$

395,143

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balances:

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

4,658

 

$

47,537

 

$

138

 

$

19,857

 

$

72,190

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

$

55,271

 

$

164,639

 

$

9,993

 

$

93,050

 

$

322,953

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

59,929

 

$

212,176

 

$

10,131

 

$

112,907

 

$

395,143

 

 

19



Table of Contents

 

December 31, 2010

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Commercial

 

Real Estate

 

Consumer

 

Residential

 

Other

 

Total

 

Allowance for loan losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

956

 

$

2,916

 

$

217

 

$

3,240

 

$

196

 

$

7,525

 

Charge-offs

 

2,396

 

8,092

 

222

 

5,988

 

28

 

16,726

 

Recoveries

 

181

 

185

 

32

 

205

 

3

 

606

 

Provisions

 

2,309

 

12,228

 

104

 

7,842

 

601

 

23,084

 

Ending balance

 

$

1,050

 

$

7,237

 

$

131

 

$

5,299

 

$

772

 

$

14,489

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

862

 

$

4,446

 

$

 

$

2,652

 

$

 

$

7,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

$

188

 

$

2,791

 

$

131

 

$

2,647

 

$

772

 

$

6,529

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,050

 

$

7,237

 

$

131

 

$

5,299

 

$

772

 

$

14,489

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance - total

 

$

54,693

 

$

166,814

 

$

12,446

 

$

185,381

 

$

11,203

 

$

430,537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

3,089

 

$

45,412

 

$

46

 

$

20,621