Document And Entity Information
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Document And Entity Information
9 Months Ended
Sep. 30, 2011
Nov. 09, 2011
Document And Entity Information [Abstract]    
Entity Registrant Name HCSB FINANCIAL CORP  
Entity Central Index Key 0001091491  
Document Type 10-Q  
Document Period End Date Sep. 30, 2011
Amendment Flag false  
Document Fiscal Year Focus 2011  
Document Fiscal Period Focus Q3  
Current Fiscal Year End Date --12-31  
Entity Filer Category Smaller Reporting Company  
Entity Common Stock, Shares Outstanding   3,738,337

Condensed Consolidated Balance Sheets
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Condensed Consolidated Balance Sheets (USD $)
In Thousands
Sep. 30, 2011
Dec. 31, 2010
Assets:    
Cash and due from banks $ 35,508 $ 12,191
Federal funds sold   7,371
Total cash and cash equivalents 35,508 19,562
Securities available-for-sale 80,855 265,190
Nonmarketable equity securities 4,936 6,076
Total investment securities 85,791 271,266
Loans held for sale 18,091 15,137
Loans receivable 373,356 430,537
Less allowance for loan losses (19,675) (14,489)
Loans, net 353,681 416,048
Premises and equipment, net 22,757 23,389
Accrued interest receivable 2,571 4,476
Cash value of life insurance 10,186 9,896
Other real estate owned 13,811 16,891
Other assets 2,034 10,776
Total assets 544,430 787,441
Liabilities and Shareholders' Equity    
Noninterest-bearing transaction accounts 42,685 38,255
Interest-bearing transaction accounts 49,329 42,348
Money market savings accounts 135,367 197,067
Other savings accounts 7,394 6,707
Time deposits $100 and over 107,579 151,667
Other time deposits 151,241 192,917
Total deposits 493,595 628,961
Repurchase Agreements 7,030 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 1,295 1,252
Other liabilities 1,790 1,635
Total liabilities 543,958 760,942
Shareholders' Equity    
Preferred stock, $1,000 par value. Authorized 5,000,000 shares; issued and outstanding 12,895 at September 30, 2011 and December 31, 2010 12,304 12,152
Common stock, $.01 par value; 10,000,000 shares authorized, 3,738,337 and 3,780,845 shares issued and outstanding at September 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 (41,883) (16,813)
Accumulated other comprehensive loss (1,222) (113)
Total shareholders' equity 472 26,499
Total liabilities and shareholders' equity $ 544,430 $ 787,441

Condensed Consolidated Balance Sheets (Parenthetical)
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Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Sep. 30, 2011
Dec. 31, 2010
Condensed Consolidated Balance Sheets [Abstract]    
Preferred stock, par value $ 1,000 $ 1,000
Preferred stock, shares authorized 5,000,000 5,000,000
Preferred stock, shares issued 12,895 12,895
Preferred stock, shares outstanding 12,895 12,895
Common stock, par value $ 0.01 $ 0.01
Common stock, shares authorized 10,000,000 10,000,000
Common stock, shares issued 3,738,337 3,780,845
Common stock, shares outstanding 3,738,337 3,780,845

Condensed Consolidated Statements Of Operations
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Condensed Consolidated Statements Of Operations (USD $)
In Thousands, except Per Share data
3 Months Ended 9 Months Ended
Sep. 30, 2011
Sep. 30, 2010
Sep. 30, 2011
Sep. 30, 2010
Interest income        
Loans, including fees $ 5,129 $ 6,501 $ 16,194 $ 19,989
Investment securities:        
Taxable 584 1,337 3,315 4,223
Tax-exempt 153 62 564 158
Nonmarketable equity securities 15 8 39 16
Other interest income 16 33 45 61
Total 5,897 7,941 20,157 24,447
Interest expense        
Certificates of deposit $100,000 & over 494 686 1,687 2,116
Other deposits 892 1,920 3,189 5,503
Advances from the Federal Home Loan Bank 192 830 1,242 2,616
Other interest expense 375 377 1,110 765
Total 1,953 3,813 7,228 11,000
Net interest income 3,944 4,128 12,929 13,447
Provision for loan losses 2,560 4,099 20,175 15,511
Net interest income (loss) after provision for loan losses 1,384 29 (7,246) (2,064)
Noninterest income        
Service charges on deposit accounts 334 372 1,014 1,096
Credit life insurance commission 2 7 13 56
Gain on sale of mortgage loans 131 251 455 679
Other fees and commissions 99 85 312 276
Brokerage commission 105 73 307 194
Gain on sale of securities 60 70 2,621 192
Income from cash value life insurance 117 122 355 364
Other operating income 35 29 87 189
Total 883 1,009 5,164 3,046
Noninterest expense        
Salaries and employee benefits 1,811 2,301 5,697 7,069
Occupancy expense 325 322 946 948
Advertising and marketing expense 32 88 126 285
Furniture and equipment expense 329 350 1,006 1,017
Prepayment penalties on FHLB borrowings 0 0 2,554 0
Gain/(loss) on sale of assets 0 7 (3) 21
Loss on sale/writedowns on OREO 1,484 1,253 2,517 1,382
FDIC insurance premiums 484 267 1,732 793
Other operating expenses 1,077 1,091 3,263 2,820
Total 5,542 5,679 17,838 14,335
Loss before income taxes (3,275) (4,641) (19,920) (13,353)
Income tax expense (benefit) 0 (1,624) 4,998 (4,654)
Net loss (3,275) (3,017) (24,918) (8,699)
Preferred dividends accrued 163 83 487 163
Net loss available to common shareholders (3,489) (3,148) (25,557) (9,004)
Basic net loss per share $ (0.93) $ (0.83) $ (6.83) $ (2.38)
Diluted net loss per share $ (0.93) $ (0.83) $ (6.83) $ (2.38)
Preferred Stock [Member]
       
Noninterest expense        
Accretion of preferred stock to redemption value $ 51 $ 48 $ 152 $ 142

Condensed Consolidated Statement Of Shareholders' Equity And Comprehensive Loss
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Condensed Consolidated Statement Of Shareholders' Equity And Comprehensive Loss (USD $)
In Thousands, except Share data
Common Stock [Member]
Common Stock Warrants [Member]
Preferred Stock [Member]
Nonvested Restricted Stock [Member]
Capital Surplus [Member]
Retained Earnings (Deficit) [Member]
Accumulated Other Comprehensive Income [Member]
Total
Beginning Balance at Dec. 31, 2009 $ 38 $ 1,012 $ 11,962 $ (645) $ 30,856 $ 1,291 $ 558 $ 45,072
Beginning Balance, shares at Dec. 31, 2009 3,787,170   12,895          
Net loss for the period           (8,699)   (8,699)
Other comprehensive income, net of tax             1,201 1,201
Comprehensive loss               (7,498)
Accretion of preferred stock to redemption value     142     (142)    
Payment of dividend on preferred stock           (483)   (483)
Stock compensation expense         12     12
Ending Balance at Sep. 30, 2010 38 1,012 12,104 (645) 30,868 (8,033) 1,759 37,103
Ending Balance, shares at Sep. 30, 2010 3,787,170   12,895          
Beginning Balance at Jun. 30, 2010                
Net loss for the period               (3,017)
Accretion of preferred stock to redemption value     48          
Ending Balance at Sep. 30, 2010 38 1,012 12,104 (645)       37,103
Ending Balance, shares at Sep. 30, 2010 3,787,170   12,895          
Beginning Balance at Dec. 31, 2010 38 1,012 12,152 (564) 30,787 (16,813) (113) 26,499
Beginning Balance, shares at Dec. 31, 2010 3,780,845   12,895          
Net loss for the period           (24,918)   (24,918)
Other comprehensive income, net of tax             (1,109) (1,109)
Comprehensive loss               (26,027)
Accretion of preferred stock to redemption value     152     (152)    
Termination of employee                
Stock option plans (1)     564 (563)      
Stock option plans, shares (42,508)              
Ending Balance at Sep. 30, 2011 37 1,012 12,304   30,224 (41,883) (1,222) 472
Ending Balance, shares at Sep. 30, 2011 3,738,337   12,895          
Beginning Balance at Jun. 30, 2011                
Net loss for the period               (3,275)
Accretion of preferred stock to redemption value     51          
Ending Balance at Sep. 30, 2011     $ 12,304         $ 472
Ending Balance, shares at Sep. 30, 2011     12,895          

Condensed Consolidated Statements Of Cash Flows
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Condensed Consolidated Statements Of Cash Flows (USD $)
In Thousands
9 Months Ended
Sep. 30, 2011
Sep. 30, 2010
Cash flows from operating activities:    
Net loss $ (24,918) $ (8,699)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:    
Depreciation 771 795
Deferred income tax expense (benefit) 4,862 (232)
Provision for loan losses 20,175 15,511
Amortization less accretion on investments (120) 763
Amortization of deferred loan costs 19 21
Originations from sales of loans held for sale (21,801) (34,628)
Sale or paydowns of loans 18,847 21,420
Stock compensation expense   12
Net gain on sale of securities available-for-sale (2,621) (192)
Net writedowns or sale of other real estate owned 2,517 1,382
Gain on sale of fixed assets   (4)
Increase in interest payable 43 174
Decrease in interest receivable 1,905 337
(Increase) decrease in other assets 4,531 (4,355)
Income (net of mortality cost) on cash value of life insurance (290) (303)
Increase in other liabilities 155 663
Net cash provided (used) by operating activities 4,075 (7,335)
Cash flows from investing activities:    
Decrease in loans to customers 34,031 9,989
Purchases of securities available-for-sale (16,581) (164,368)
Maturities of securities available-for-sale 28,995 70,639
Proceeds from sale of other real estate owned 8,705 2,764
Proceeds from sales of securities available-for-sale 172,902 18,677
Proceeds from sales of premises and equipment   16
Redemptions (purchases) of nonmarketable equity securities 1,140 432
Purchases of premises and equipment (139) (227)
Net cash provided (used) by investing activities 229,053 (62,078)
Cash flows from financing activities:    
Net increase (decrease) in demand deposits and savings (49,602) 63,269
Net decrease in time deposits (85,764) (13,270)
Decrease in FHLB borrowings (82,200) (9,600)
Increase (decrease) in repurchase agreements 384 (1,220)
Dividend paid on preferred stock   (483)
Net increase in subordinated debentures   12,062
Net cash provided (used) by financing activities (217,182) 50,758
Net increase (decrease) in cash and cash equivalents 15,946 (18,655)
Cash and cash equivalents, beginning of period 19,562 46,309
Cash and cash equivalents, end of period 35,508 27,654
Cash paid during the period for:    
Income taxes    
Interest $ 7,186 $ 8,662

Basis Of Presentation
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Basis Of Presentation
9 Months Ended
Sep. 30, 2011
Basis Of Presentation [Abstract]  
Basis Of Presentation

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 13 branch locations During the third quarter of 2011, the Bank closed its Covenant Towers branch located at Myrtle Beach. All deposits were transferred to the Bank's Myrtle Beach branch and the Bank does not expect any disruption of service in that market for its customers. 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 September 30, 2011 and for the interim periods ended September 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 September 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, May and August 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 quarterly interest payments was $161,000, and as of September 30, 2011, the Company had $487,000 accrued on our dividend payments due on our Series T Preferred Stock issued to the U.S. Treasury.  Because we have deferred these three 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 our financial condition and 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.

Going Concern
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Going Concern
9 Months Ended
Sep. 30, 2011
Going Concern [Abstract]  
Going Concern

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 September 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 nine 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 nine months of 2011. As of September 30, 2011, our nonperforming assets equaled $90,632,000, or 16.65% of assets, as compared to $86,386,000, or 10.93% of assets, as of December 31, 2010. In addition, our level of impaired loans increased to $76,821,000 at September 30, 2011 compared to $69,495,000 at December 31, 2010. For the nine months ended September 30, 2011, the Bank recorded a $20,175,000 provision to 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 September 30, 2011. Nevertheless, given the current economic climate, management recognizes the possibility of further deterioration in the loan portfolio for the remainder of 2011. For the nine months ended September 30, 2011, we recorded net loan charge-offs of $14,989.000, or 3.57% of average loans, as compared to net loan charge-offs of $9,570,000, or 2.28% of average loans, for the nine months ended September 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 Federal Deposit Insurance Corporation (the "FDIC") and the South Carolina Board of Financial Institutions (the "State Board") on February 11, 2011 (the "Consent Order"), 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. See Note 13 – "Regulatory Matters," for a more detailed description of the Consent Order.

 

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 below further limits 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 the remainder of 2011, in 2012, 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.


Summary Of Significant Accounting Policies
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Summary Of Significant Accounting Policies
9 Months Ended
Sep. 30, 2011
Summary Of Significant Accounting Policies [Abstract]  
Summary Of Significant Accounting Policies

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.

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

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 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 September 30, 2011, our gross deferred tax asset was $12,342,000. However, as of September 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 $12,342,000.  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 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 – "Loan Portfolio".

 

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 are required beginning with this quarter ended September 30, 2011.  See Note 7 – "Loan Portfolio" for applicable disclosures. 

 

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.

 

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 – "Regulatory Matters" 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.


Earnings (Losses) Per Share
v4.2.117.0
Earnings (Losses) Per Share
9 Months Ended
Sep. 30, 2011
Earnings (Losses) Per Share [Abstract]  
Earnings (Losses) Per Share

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:

                                                                                               

                                                                                                                       Nine Months Ended September 30, 2011           

(Dollars in thousands, except share amounts)                               Income                 Average Shares         Per Share   

                                                                                                            (Numerator)            (Denominator)             Amount    

Basic loss per share

        Loss available to common shareholders                            $        (25,557)                3,743,787            $           (6.83)

Effect of dilutive securities

        Stock options                                                                                            -                             -_____

Diluted loss per share

        Loss available to common shareholders

            plus assumed conversions                                                 $        (25,557)               $3,743,787             $           (6.83)

 

     

Nine Months Ended September 30, 2010           

(Dollars in thousands, except share amounts)                               Income                 Average Shares         Per Share   

                                                                                                            (Numerator)            (Denominator)             Amount    

Basic loss per share

        Loss available to common shareholders                            $          (9,004)                3,787,170            $           (2.38)

Effect of dilutive securities

        Stock options                                                                                                  -                                   -

Diluted loss per share

        Loss available to common shareholders

            plus assumed conversions                                                 $          (9,004)                  3,787,170             $           (2.38)

 

 

                                                                                                                    Three Months Ended September 30, 2011           

(Dollars in thousands, except share amounts)                               Income                 Average Shares         Per Share   

                                                                                                            (Numerator)            (Denominator)             Amount    

Basic loss per share

        Loss available to common shareholders                            $          (3,489)                3,738,337            $           (0.93)

Effect of dilutive securities

        Stock options                                                                           ____   -____ _           ______-____

Diluted loss per share

        Loss available to common shareholders

            plus assumed conversions                                                 $          (3,489)                  3,738,337             $           (0.93)

 

 

                                                                                                                    Three Months Ended September 30, 2010           

(Dollars in thousands, except share amounts)                               Income                 Average Shares         Per Share   

                                                                                                            (Numerator)            (Denominator)             Amount    

Basic loss per share

        Loss available to common shareholders                            $          (3,148)                3,787,170            $           (0.83)

Effect of dilutive securities

        Stock options                                                                                                  -                                   -

Diluted loss per share

        Loss available to common shareholders

            plus assumed conversions                                                 $          (3,148)                  3,787,170             $           (0.83)


Comprehensive Income (Loss)
v4.2.117.0
Comprehensive Income (Loss)
9 Months Ended
Sep. 30, 2011
Comprehensive Income (Loss) [Abstract]  
Comprehensive Income (Loss)

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:

 

                                                                                                                          Nine Months Ended September 30, 2011       

(Dollars in thousands)                                                                                Pre-tax                (Expense)              Net-of-tax  

                                                                                                                         Amount                 Benefit                   Amount   

Unrealized gains (losses) on securities:

    Unrealized holding gains (losses) arising

        during the period                                                                              $          (4,381)       $           1,621        $          (2,760)

    Plus: reclassification adjustment for gains (losses)

        realized in net income                                                                                   2,621                        (970)                     1,651

    Net unrealized gains (losses) on securities                                                   (1,760)                        651                    (1,109)

Other comprehensive (loss)/income                                                     $          (1,760)        $               651         $          (1,109)

 

 

            Nine Months Ended September 30, 2010       

(Dollars in thousands)                                                                                Pre-tax                (Expense)              Net-of-tax  

                                                                                                                         Amount                 Benefit                   Amount   

Unrealized gains (losses) on securities:

    Unrealized holding gains (losses) arising

        during the period                                                                              $           1,716        $             (636)       $           1,080

    Plus: reclassification adjustment for gains (losses)

        realized in net income                                                                                      192                          (71)                        121

    Net unrealized gains (losses) on securities                                                     1,908                        (707)                     1,201

Other comprehensive gain                                                                     $           1,908         $             (707)        $           1,201

 

 

                                                                                                                        Three Months Ended September 30, 2011       

(Dollars in thousands)                                                                                Pre-tax                (Expense)              Net-of-tax  

                                                                                                                         Amount                 Benefit                   Amount   

Unrealized gains (losses) on securities:

    Unrealized holding gains (losses) arising

        during the period                                                                              $             (609)       $               225        $             (384)

    Plus: reclassification adjustment for gains (losses)

        realized in net income                                                                                        60                          (22)                          38

    Net unrealized gains (losses) on securities                                                       (549)                        203                        (346)

Other comprehensive (loss) income                                                     $             (549)        $               203         $             (346)

 

 

                                                                                                                        Three Months Ended September 30, 2010       

(Dollars in thousands)                                                                                Pre-tax                (Expense)              Net-of-tax  

                                                                                                                         Amount                 Benefit                   Amount   

Unrealized gains (losses) on securities:

    Unrealized holding gains (losses) arising

        during the period                                                                              $           1,857        $             (687)       $           1,170

    Plus: reclassification adjustment for gains (losses)

        realized in net income                                                                                        70                          (26)                          44

    Net unrealized gains (losses) on securities                                                     1,927                        (713)                     1,214

Other comprehensive gain                                                                     $           1,927         $             (713)        $           1,214

 

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

Investment Portfolio
v4.2.117.0
Investment Portfolio
9 Months Ended
Sep. 30, 2011
Investment Portfolio [Abstract]  
Investment Portfolio

NOTE 6 - INVESTMENT PORTFOLIO

 

Investment securities available-for-sale decreased from $265,190,000 at December 31, 2010 to $80,855,000 at September 30, 2011 as a result of management's concerted effort to decrease the assets of the Bank to help improve its capital position. This represents a decrease of $184,335,000, or 69.51%, from December 31, 2010 to September 30, 2011.

 

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 September 30, 2011, all securities were classified as available-for-sale.

 

Securities available-for-sale consisted of the following:

                                                                                                Amortized                  Gross Unrealized                 Estimated

(Dollars in thousands)                                                               Cost                  Gains                 Losses           Fair Value

September 30, 2011

   Government-sponsored enterprises                               $     22,511        $           211        $       -                 $       22,722

   Mortgage-backed securities                                                   47,508                     202                  2,921                 44,789

   Obligations of state and local governments                       12,776                     603                       35                 13,344

          Total                                                                             $     82,795         $       1,016         $       2,956         $       80,855

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 September 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                                                                                                            $               0

Due after one year but within five years                                                                                               325

Due after five years but within ten years                                                                                        16,143

Due after ten years                                                                                                                              64,387

                Total                                                                                                                               $        80,855

 

 

The following is a summary of maturities of securities available-for-sale as of September 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.

 

 

Securities Available for Sale

                                                                                                                   September 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  $         -           $         -           $         -           $         -           $         -           $         -      

Mortgage-backed securities                      20,608              1,032           19,333              1,889           39,941              2,921

Obligations of state and

   local governments                                      1,760                   35             -                 -                   1,760              35

        Total                                              $     22,368     $       1,067     $     19,333     $       1,889     $     41,701     $       2,956

 

 

                                                                                                                   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 September 30, 2011, the Bank had 21 individual securities, or 23.91% 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 September 30, 2011 and 2010, investment securities with a book value of $34,748,000 and $149,706,000, respectively, and a market value of $34,535,000 and $152,213,000, respectively, were pledged to secure deposits.

 

Gross realized gains on sales of available-for-sale securities as of September 30, 2011 were $2,885,000 and gross realized losses were $264,000.


Loan Portfolio
v4.2.117.0
Loan Portfolio
9 Months Ended
Sep. 30, 2011
Loan Portfolio [Abstract]  
Loan Portfolio

NOTE 7 - LOAN PORTFOLIO

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

 

 

(Dollars in thousands)

 September 30,
2011

 

 December 31,
2010

 Real estate - construction and land development

$          71,189

 

$         90,064

 Real estate - other

235,982

 

262,131

 Agricultural

13,996

 

10,679

 Commercial and industrial

42,275

 

54,693

 Consumer

9,611

 

12,446

 Other, net

                     303

 

               524

 

$           373,356

 

$      430,537

 

The primary component of our loan portfolio is loans collateralized by real estate, which made up approximately 82.27% of our loan portfolio at September 30, 2011. These loans are secured generally by first or second mortgages on residential, agricultural or commercial property. Commercial real estate loans declined $3,284,000, or 2.17%, 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 throughout the remainder of 2011 in accordance with our strategic plan. There are no foreign loans, and agricultural loans, as of September 30, 2011, were $13,996,000, or 3.75%, of our loan portfolio. There are no significant concentrations of loans in any particular individuals or industry or group of related individuals or industries.

 

For the three months ended September 30, 2011, we recorded a provision for loan losses of $2,560,000 and net loan charge-offs of $4,001,000, as compared to provisions for loan losses of $9,065,000 and $8,550,000 and net loan charge-offs of $4,019,000 and $6,969,00 for the three months ended June 30 and March 31, 2011, respectively. We believe that we have now located the majority of our problem assets, but we will continue to monitor our loan portfolio very carefully and work aggressively to reduce our problem assets.

 

To the extent our loan portfolio continues to stabilize and improve, we may reduce our allowance for loan losses in future periods based on our assessment of the inherent risk in the loan portfolio at those future reporting dates. A reduction in the allowance for loan losses would result in a lower provision for loans losses being recorded in future periods. Conversely, there can be no assurance that loan losses in future periods will not exceed the current allowance for loan losses amount or that future increases in the allowance for loan losses will not be required. Additionally, no assurance can be given that our ongoing evaluation of the loan portfolio, in light of changing economic conditions and other relevant factors, will not require significant future additions to the allowance for loan losses, thus adversely impacting our business, financial condition, results of operations, and cash flows.

 

Loan Performance and Asset Quality

 

Generally, a loan will be placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of the loan is doubtful. When a loan is placed in nonaccrual status, interest accruals are discontinued and income earned but not collected is reversed. Cash receipts on nonaccrual loans are not recorded as interest income, but are used to reduce principal.

 

The following chart summarizes delinquencies and nonaccruals, by portfolio class, as of September 30, 2011 and December 31, 2010.

 

September 30, 2011                                                                                                                                                               Recorded  

                                                                                                                                                                                             Investments

(Dollars in                            30-59 Days     60-89 Days      Nonaccrual        Total Past                             Total Loans    90 Days and

Thousands)                             Past Due          Past Due           Loans                Due              Current           Receivable       Accruing  

Commercial                         $            451    $            265    $         2,501    $         3,217    $       53,158    $       56,375    $              ―

Commercial real estate:                           

    Construction                                  309                  457             16,655             17,421             53,768             71,189                    ―

    Other                                             171               6,296               5,573             12,040           116,578           128,618                    ―

Real Estate:

    Other                                          2,017               1,252             11,424             14,693             92,671           107,364                    ―

Consumer:

    Other                                             110                    11                    25                  146               8,562               8,708                    ―

    Revolving credit                                1                    ―                      1                      2                  901                  903                    ―

Other                                                   ―                    ―                    ―                    ―                  199                  199                    ―

    Total                                $         3,059    $         8,281    $       36,179    $       47,519    $     325,837    $     373,356    $              ―

 

 

 

December 31, 2010                                                                                                                                                                Recorded  

                                                                                                                                                                                             Investments

(Dollars in                            30-59 Days     60-89 Days      Nonaccrual        Total Past                             Total Loans    90 Days and

Thousands)                             Past Due          Past Due           Loans                Due              Current           Receivable       Accruing  

Commercial                         $            710    $              51    $            966    $         1,727    $       52,966    $       54,693    $              ―

Commercial real estate:

    Construction                               3,544               1,351             15,029             19,924             70,140             90,064                    ―

    Other                                          1,951                    56               1,107               3,114             73,636             76,750                    ―

Real Estate:

    Other                                          3,484                  876               6,960             11,320           174,061           185,381                    ―

Consumer:

    Other                                             251                    24                      6                  281             11,206             11,487                    ―

    Revolving credit                                1                      1                    -                         2                  957                  959                    ―

Other                                                   -                         9               1,129               1,138             10,065             11,203                    ―

    Total                                $         9,941    $         2,368    $       25,197    $       37,506    $     393,031    $     430,537    $              ―

 

 

At September 30, 2011 and December 31, 2010, there were nonaccrual loans of $36,179,000 and $25,197,000, respectively. Foregone interest income related to nonaccrual loans equaled $1,877,000 and $1,285,000 for the nine months ended September 30, 2011 and 2010, respectively. No interest income was recognized on nonaccrual loans during for the nine months ended September 30, 2011 and 2010. At both September 30, 2011 and December 31, 2010, there were no accruing loans which were contractually past due 90 days or more as to principal or interest payments.

 

Credit Risk Management

 

Another method used to monitor the loan portfolio is credit grading. Credit risk entails both general risk, which is inherent in the process of lending, and risk that is specific to individual borrowers. The management of credit risk involves the processes of loan underwriting and loan administration. The Company seeks to manage credit risk through a strategy of making loans within the Company's primary marketplace and within the Company's limits of expertise. Although management seeks to avoid concentrations of credit by loan type or industry through diversification, a substantial portion of the borrowers' ability to honor the terms of their loans is dependent on the business and economic conditions in Horry County in South Carolina and Columbus and Brunswick Counties in North Carolina. A continuation of the economic downturn could result in a further deterioration of the quality of our loan portfolio and reduce our level of deposits, which in turn would have a negative impact on our business. Additionally, since real estate has historically been considered by the Company as the most desirable nonmonetary collateral, a significant portion of the Company's loans are collateralized by real estate. Generally, the value of real estate is not considered by the Company as the primary source of repayment for performing loans. The cash flow of the borrower or the business enterprise is generally considered as the primary source of repayment. The Company also seeks to limit total exposure to individual and affiliated borrowers. The Company seeks to manage risk specific to individual borrowers through the loan underwriting process and through an ongoing analysis of the borrower's ability to service the debt as well as the value of the pledged collateral.

 

The Company's loan officers and loan administration staff are charged with monitoring the Company's loan portfolio and identifying changes in the economy or in a borrower's circumstances which may affect the ability to repay the debt or the value of the pledged collateral. In order to assess and monitor the degree of risk in the Company's loan portfolio, several credit risk identification and monitoring processes are utilized. The Company assesses credit risk initially through the assignment of a risk grade to each loan based upon an assessment of the borrower's financial capacity to service the debt and the presence and value of any collateral. Commercial loans are individually graded at origination and credit grades are reviewed on a regular basis in accordance with our loan policy. Consumer loans are assigned a "pass" credit rating unless something within the loan warrants a specific classification grade.

 

Credit grading is adjusted during the life of the loan to reflect economic and individual changes having an impact on the borrowers' abilities to honor the terms of their commitments. Management uses the risk grades as a tool for identifying known and inherent losses in the loan portfolio and for determining the adequacy of the allowance for loan losses.

 

The following table summarizes management's internal credit risk grades, by portfolio class, as of September 30, 2011 and December 31, 2010.

 

September 30, 2011    

(Dollars in thousands)

 

Real Estate – Other

Commercial Real Estate

Commercial

Consumer

Total

Grade 1 – Minimal

$                    -

$                 45

$           2,316

$          1,162

$            3,523

Grade 2 – Modest

10,096

10,433

1,964

94

22,587

Grade 3 – Average

1,864

4,960

6,118

415

13,357

Grade 4 – Satisfactory

62,003

111,342

32,806

6,747

212,898

Grade 5 –Watch

4,001

1,725

1,516

602

7,844

Grade 6 – Special Mention

7,186

9,954

2,268

194

19,602

Grade 7 – Substandard

22,004

58,799

9,364

332

90,499

Grade 8 – Doubtful

210

2,548

288

-

3,046

Grade 9 – Loss

                      -

                      -

                      -

                      -

                      -

   Total loans

$        107,364

$        199,806

$          56,640

$          9,546

$        373,356

 

December 31, 2010    

(Dollars in thousands)

 

Real Estate – Other

Commercial Real Estate

Commercial

Consumer

Total

Grade 1 – Minimal

$                    -

$                   -

$            4,023

$           1,573

$            5,596

Grade 2 – Modest

9,899

17,447

3,939

125

31,410

Grade 3 – Average

2,003

4,035

5,416

516

11,970

Grade 4 – Satisfactory

68,520

123,615

37,908

8,988

239,031

Grade 5 –Watch

3,781

2,736

1,969

845

9,331

Grade 6 – Special Mention

13,293

18,822

4,152

17

36,284

Grade 7 – Substandard

23,606

63,107

7,688

369

94,770

Grade 8 – Doubtful

1,032

298

802

13

2,145

Grade 9 – Loss

                      -

                      -

                      -

                      -

                      -

   Total loans

$        122,134

$        230,060

$          65,897

$          12,446

$        430,537

 

 

 

 

Loans graded one through four are considered "pass" credits. As of September 30, 2011, approximately 67.59% of the loan portfolio had a credit grade of "minimal," "modest," "average" or "satisfactory." For loans to qualify for this grade, they must be performing relatively close to expectations, with no significant departures from the intended source and timing of repayment.

 

Loans with a credit grade of "watch" and "special mention" are not considered classified; however, they are categorized as a watch list credit and are considered potential problem loans. This classification is utilized by us when we have an initial concern about the financial health of a borrower.  These loans are designated as such in order to be monitored more closely than other credits in our portfolio. We then gather current financial information about the borrower and evaluate our current risk in the credit.  We will then either reclassify the loan as "substandard" or back to its original risk rating after a review of the information.  There are times when we may leave the loan on the watch list if, in management's opinion, there are risks that cannot be fully evaluated without the passage of time, and we determine to review the loan on a more regular basis.  Loans on the watch list are not considered problem loans until they are determined by management to be classified as substandard. As of September 30, 2011, we had loans totaling $27,446,000 on the watch list. Watch list loans are considered potential problem loans and are monitored as they may develop into problem loans in the future. 

 

Loans graded "substandard" or greater are considered classified credits. At September 30, 2011, classified loans totaled $93,545,000, with $83,562,000 being collateralized by real estate. Classified credits are evaluated for impairment on a quarterly basis.

 

We identify impaired loans through its normal internal loan review process. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan-by-loan basis by calculating either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Any resultant shortfall is charged to provision for loan losses and is classified as a specific reserve. When an impaired loan is ultimately charged-off, the charge-off is taken against the specific reserve.

 

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Generally, we do also identify individual consumer and residential loans for impairment disclosures, however, it is our stated policy to individually evaluate for impairment all loans with a risk rating of 7 or higher that have an outstanding balance of $50,000 or greater, and all loans with a risk rating of 6 that have outstanding principal balance of $100,000 or greater.

 

At September 30, 2011, impaired loans totaled $76,821,000, all of which were valued on a nonrecurring basis at the lower of cost or market value of the underlying collateral. Market values were obtained using independent appraisals, updated in accordance with our reappraisal policy, or other market data such as recent offers to the borrower. At September 30, 2011, the recorded investment in impaired loans was $82,228,000, compared to $35,667,000 at September 30, 2010.

 

The following chart details our impaired loans, which includes TDRs totaling $51,546,000 and $40,522,000, by category as of September 30, 2011 and December 31, 2010:

 

September 30, 2011

(Dollars in thousands)

 

                                                                                               Unpaid                                                   Average                   Interest      

                                                             Recorded-                  Principal                 Related                  Recorded                   Income      

                                                            Investment                   Balance                Allowance               Investment              Recognized   

With no related allowance recorded:

    Commercial                                 $             2,420        $             2,323        $           —               $             1,845        $                  70

    Commercial real estate                              19,316                     17,725                     —                            19,349                          573

    Residential                                                  6,045                       6,009                     —                              5,953                          152

    Consumer                                                        45                            45                     —                                   45                              3

With an allowance recorded:                                  

    Commercial                                                3,473                       3,014                          983                       2,904                            64

    Commercial real estate                              34,636                     32,346                       6,221                     32,900                          368                               

    Residential                                                16,293                     15,359                       4,348                     14,397                          219

    Consumer                                                  —                            —                            —                               —                           —

Total:

    Commercial                                                5,893                       5,337                          983                       4,749                          134

    Commercial real estate                              53,952                     50,071                       6,221                     52,250                          941

    Residential                                                22,338                     21,368                       4,348                     20,350                          371

    Consumer                                                        45                            45                     —                                   45                              3

Total:                                               $           82,228        $           76,821        $           11,552        $           77,394        $             1,449

 

December 31, 2010

(Dollars in thousands)

 

                                                                                               Unpaid                                                   Average                   Interest      

                                                             Recorded-                  Principal                 Related                  Recorded                   Income      

                                                            Investment                   Balance                Allowance               Investment              Recognized   

With no related allowance recorded:

    Commercial                                 $             1,270        $                920        $           —               $                704        $           —

    Commercial real estate                              19,383                     18,865                     —                            14,955                          117

    Residential                                                  5,862                       5,016                     —                              3,727                            13

    Consumer                                                        46                            46                     —                                   24                     —      

With an allowance recorded:

    Commercial                                                2,335                       2,250                          849                       1,552                              2                               

    Commercial real estate                              31,164                     30,059                       5,640                     27,782                          102

    Residential                                                12,500                     12,439                       2,088                       8,327                            48

    Consumer                                                  —                            —                            —                                    43                     —      

Total:

    Commercial                                                3,605                       3,170                          849                       2,256                              2

    Commercial real estate                              50,547                     48,824                       5,640                     42,737                          219

    Residential                                                18,362                     17,455                       2,088                     12,054                            61

    Consumer                                                        46                            46                     —                                   67                     —      

Total:                                               $           72,560        $           69,495        $             8,577        $           57,114        $                282

 

 

TDRs are loans which have been restructured from their original contractual terms and include concessions that would not otherwise have been granted outside of the financial difficulty of the borrower. We only restructure loans for borrowers in financial difficulty that have designed a viable business plan to fully pay off all obligations, including outstanding debt, interest and fees, either by generating additional income from the business or through liquidation of assets. Generally, these loans are restructured to provide the borrower additional time to execute upon their plans.

 

With respect to restructured loans, we grant concessions by (1) reduction of the stated interest rate for the remaining original life of the debt, or (2) extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk. We do not generally grant concessions through forgiveness of principal or accrued interest. Restructured loans where a concession has been granted through extension of the maturity date generally include extension of payments in an interest only period, extension of payments with capitalized interest and extension of payments through a forbearance agreement. These extended payment terms are also combined with a reduction of the stated interest rate in certain cases.

 

Success in restructuring loans has been mixed but it has proven to be a useful tool in certain situations to protect collateral values and allow certain borrowers additional time to execute upon defined business plans. In situations where a TDR is unsuccessful and the borrower is unable to follow through with terms of the restricted agreement, the loan is placed on nonaccrual status and continues to be written down to the underlying collateral value.

 

Our policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms; continued accrual of interest at the restructured interest rate is likely. If a borrower was materially delinquent on payments prior to the restructuring but shows capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status.

 

We will continue to closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms. If, after previously being classified as a TDR, a loan is restructured a second time, then that loan is automatically placed on nonaccrual status. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms before that loan can be placed back on accrual status. Further, the borrower must show capacity to continue performing into the future prior to restoration of accrual status. To date, we have not restored any nonaccrual loan classified as a TDR to accrual status. We believe that all of our modified loans meet the definition of a TDR.

 

As a result of adopting the amendments in ASU 2011-02, we reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they are considered TDRs under the amended guidance. We did not identify any new TDRs during our assessment. As noted below, all outstanding TDRs as of September 30, 2011 were restructured prior to the adoption of ASU 2011-02. All loans restructured subsequent to adoption of ASU 2011-02 have resulted from financial difficulties experienced by borrowers and not from adopting the amendments of the accounting standard update.

 

The following is a summary of information pertaining to our TDRs:

 

(Dollars in thousands)

 

September 30,

2011

 

 

December 31,

2010

 

Nonperforming TDRs

 

$

24,705

 

 

$

10,962

 

Performing TDRs:

 

 

 

 

 

 

 

 

Commercial

 

$

3,013

 

 

$

1,864

 

Commercial real estate - construction

 

$

18,927

 

 

$

20,584

 

Residential

 

$

4,856

 

 

$

7,112

 

Consumer

 

$

45

 

 

$

 

Total performing TDRs

 

$

26,841

 

 

$

29,560

 

 Total TDRs

 

$

51,546

 

 

$

40,522

 

                   

 

 

The following table summarizes loans that were modified during the periods indicated (dollars in thousands).

 

For the nine months ended           September 30, 2011 For the nine months ended            September 30, 2011
TDRs that are in compliance with the terms of the agreement TDRs that are susbequently defaulted
Number of contracts Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Number of contracts Pre-modification outstanding recorded investment Post-modification outstanding recorded investment
Commercial real estate                    27  $         18,928  $        18,928                    20  $         21,145  $        18,919
Single-family residential                    17               4,856              4,856                    28               6,169              5,490
Commercial and industrial                    25               3,122              3,012                      2                  296                 296
Consumer                      1                    45                   45                    -                      -                      -  
Total loans                    70  $         26,951  $        26,841                    50  $         27,610  $        24,705
Less: Commercial loans held for sale                    -                      -                      -                      -                      -                      -  
Loans, gross                    70  $         26,951  $        26,841                    50  $         27,610  $        24,705

 

The following table summarizes how loans that were considered TDRs were modified during the periods indicated (dollars in thousands).

 

For the year ended                                        December 31, 2010 For the year ended                                  December 31, 2010
TDRs that are in compliance with the terms of the agreement TDRs that have susbequently defaulted
Number of contracts Pre-modification outstanding recorded investment Post-modification outstanding recorded investment Number of contracts Pre-modification outstanding recorded investment Post-modification outstanding recorded investment
Commercial Real Estate                    28  $         20,684  $        20,584                      7  $           7,695  $          7,695
Single-family residential                    19               7,112              7,112                      9               3,883              3,062
Commercial and industrial                    10               1,864              1,864                      3                  277                 205
Total loans                    57  $         29,660  $        29,560                    19  $         11,855  $        10,962
Less: Commercial loans held for sale                    -                      -                      -                      -                      -                      -  
Loans, gross                    57  $         29,660  $        29,560                    19  $         11,855  $        10,962

 

 

The following chart details our impaired loans, which includes TDRs totaling $51,546,000, by category as of September 30, 2011:

 

September 30, 2011  Unpaid 
(Dollars in thousands) Recorded  Principal  Related
Investment  Balance  Allowance