U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
x
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March
31, 2012
¨
Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period ended
Commission File Number 000-33227
Southern Community Financial Corporation
(Exact name of registrant as specified
in its charter)
North Carolina
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56-2270620
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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4605 Country Club Road
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Winston-Salem, North Carolina
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27104
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(Address of principal executive offices)
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(Zip Code)
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Registrant's telephone number, including
area code (336) 768-8500
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes
x
No
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
As of April 30, 2012 (the most recent
practicable date), the registrant had outstanding 16,858,325 shares of Common Stock, no par value.
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Page
No.
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Part I.
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FINANCIAL INFORMATION
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Item 1 -
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Financial Statements (Unaudited)
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Consolidated Statements of Financial Condition
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March 31, 2012 and December 31, 2011
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20
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Consolidated Statements of Operations
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Three Months March 31, 2012 and 2011
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21
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Consolidated Statements of Comprehensive Income (Loss)
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Three Months March 31, 2012 and 2011
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22
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Consolidated Statement of Changes in Stockholders’ Equity
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Three Months Ended March 31, 2012
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23
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Consolidated Statements of Cash Flows
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Three Months Ended March 31, 2012 and 2011
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24
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Notes to Consolidated Financial Statements
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25
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Selected Financial Data
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3
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Item 2 -
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Management’s Discussion and Analysis of Financial Condition and Results
of Operations
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4
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Item 3 -
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Quantitative and Qualitative Disclosures about Market Risk
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57
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Item 4 -
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Controls and Procedures
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57
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Part II.
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Other Information
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Item 1A -
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Risk Factors
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58
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Item 6 -
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Exhibits
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58
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Signatures
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59
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Part I.
Financial
Information
SElected financial
data
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At or for
the Quarter Ended
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% Change March
31, 2012 from
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March 31,
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December 31,
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March 31,
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December 31,
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March 31,
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2012
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2011
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2011
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2011
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2011
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(Amounts in thousands, except per share data)
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Operating Data:
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Interest income
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$
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15,845
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$
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16,602
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$
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18,699
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(5
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)%
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(15
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)
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Interest expense
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4,927
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5,111
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5,868
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(4
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)
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(16
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)
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Net interest income
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10,918
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11,491
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12,831
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(5
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)
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(15
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Provision for loan losses
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2,900
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3,400
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4,100
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(15
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(29
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Net interest income after provision
for loan losses
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8,018
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8,091
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8,731
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(1
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)
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(8
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Non-interest income
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3,432
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4,403
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2,903
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(22
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)
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18
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Non-interest expense
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10,635
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11,497
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11,483
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(7
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)
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(7
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Income (loss) before income taxes
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815
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997
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151
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(18
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)
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440
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Income tax expense (benefit)
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-
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-
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-
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-
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-
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Net income (loss)
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$
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815
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$
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997
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$
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151
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(18
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440
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Effective dividend on preferred stock
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645
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638
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639
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Net income (loss) available
to common shareholders
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$
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170
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$
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359
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$
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(488
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Net Income (Loss) Per Common Share:
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Basic
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$
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0.01
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$
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0.02
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$
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(0.03
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Diluted
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0.01
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0.02
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(0.03
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Selected Performance Ratios:
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Return on average assets
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0.22
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%
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0.26
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%
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0.04
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%
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Return on average equity
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3.35
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%
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4.02
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%
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0.67
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%
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Net interest margin (1)
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3.17
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%
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3.22
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%
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3.42
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%
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Efficiency ratio (2)
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74.11
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%
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72.34
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%
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72.98
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%
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Asset Quality Ratios:
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Nonperforming loans to period-end loans
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6.19
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%
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7.13
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%
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6.80
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%
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Nonperforming assets to total assets (3)
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5.46
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%
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5.85
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%
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6.04
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%
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Net loan charge-offs to average loans
outstanding
(annualized)
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1.22
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%
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2.29
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%
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2.19
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%
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Allowance for loan losses to period-end loans
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2.58
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%
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2.53
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%
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2.55
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%
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Allowance for loan losses to nonperforming loans
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0.42
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X
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0.36
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X
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0.38
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X
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Capital Ratios:
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Total risk-based capital
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14.49
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%
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14.26
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%
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12.62
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%
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Tier 1 risk-based capital
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11.99
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%
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11.75
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%
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10.15
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%
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Leverage ratio
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8.71
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%
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8.47
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%
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7.63
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%
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Equity to assets ratio
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6.59
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%
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6.50
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%
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5.73
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%
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Balance Sheet Data (End of Period):
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Total assets
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1,501,395
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1,502,578
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1,603,880
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-
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(6
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Loans
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931,345
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950,022
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1,083,468
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(2
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(14
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Deposits
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1,181,758
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1,183,172
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1,279,210
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-
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(8
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Short-term borrowings
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62,145
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33,629
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21,965
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85
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183
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Long-term borrowings
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147,470
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177,514
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202,643
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(17
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(27
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Stockholders’ equity
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98,879
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97,635
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91,854
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1
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8
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Other Data:
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Weighted average shares
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Basic
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16,841,111
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16,827,684
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16,824,008
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Diluted
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16,907,425
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16,891,910
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16,824,008
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Period end outstanding shares
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16,859,825
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16,827,075
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16,838,125
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Number of banking offices
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22
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22
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22
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Number of full-time equivalent employees
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300
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290
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297
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(1) Net interest margin is net interest income divided by average
interest-earning assets.
(2) Efficiency ratio is non-interest expense divided by the
sum of net interest income and non-interest income.
(3) Nonperforming assets consist of nonaccrual loans, restructured
loans and foreclosed assets, where applicable.
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
This Quarterly Report on Form 10-Q may
contain certain forward-looking statements consisting of estimates with respect to our financial condition, results of operations
and business that are subject to various factors which could cause actual results to differ materially from these estimates. These
factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real
estate values and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation;
and other economic, competitive, governmental, regulatory, technological factors affecting our operations, pricing, products and
services, and other factors discussed in our filings with the Securities and Exchange Commission.
Capital Bank Financial Corp. Acquisition
On March 26, 2012, Southern Community
Financial Corporation, Winston-Salem, N.C. (“Southern Community”) entered into an Agreement and Plan of Merger (the
“Agreement”) with Capital Bank Financial Corp. (“CBF”) and Winston 23 Corporation (“Winston”),
a wholly-owned subsidiary of CBF, pursuant to which Southern Community will merge with Winston and become a wholly-owned subsidiary
of CBF (the “Merger”). The Agreement and the transactions contemplated by it has been approved by the Board of Directors
of both CBF and Southern Community.
Capital Bank Financial Corp. is a national
bank holding company that was incorporated in the State of Delaware in 2009. CBF has raised approximately $900 million of equity
capital with the goal of creating a regional banking franchise in the southeastern region of the United States. CBF has previously
invested in First National of the South, Metro Bank of Dade Country, Turnberry Bank, TIB Financial Corporation, Capital Bank Corporation
and Green Bankshares, Inc. CBF is the parent of Capital Bank, N.A., a national banking association with approximately $6.5 billion
in total assets and 143 full-service banking offices throughout southern Florida and the Florida Keys, North Carolina, South Carolina,
Tennessee and Virginia. CBF is also the parent company of Naples Capital Advisors, Inc., a registered investment advisor.
Subject to the terms and conditions set
forth in the Agreement, each share of Southern Community Common Stock issued and outstanding at the effective time of the Merger
(other than shares owned by Southern Community, CBF and certain of their subsidiaries) will be converted into the right to receive
either $2.875 in cash or shares of CBF stock valued at $2.875, at a fixed exchange ratio (subject to certain adjustments). Southern
Community shareholders may elect to receive their payment in cash or stock, subject to the requirement that the total consideration
will consist of 40% cash and 60% stock. No fractional shares of CBF common stock will be issued in the Merger, with holders receiving
cash (without interest) in lieu of fractional shares.
Each outstanding option to purchase shares
of Southern Community common stock will be vested prior to the Merger and be paid in cash equal to the difference between the
exercise price of the option and $2.875 and each share of Southern Community restricted stock will vest immediately prior to the
Merger and all restrictions will immediately lapse. If holders of Southern Community Common Stock would be entitled to any fractional
shares of CBF Common Stock, each holder who would otherwise have been entitled to a fraction of a share of CBF Common Stock shall
be entitled to receive cash (without interest) in lieu of such fractional shares.
Southern Community shareholders will also
be granted one non-transferable contingent value right (“CVR”) per share, with each CVR eligible to receive a cash
payment equal to 75% of the excess, if any, of (i) $87 million over (ii) the amount of credit losses from Southern Community’s
cumulative legacy loan portfolio and foreclosed assets for a period of five years from the closing date of the Merger, with a
maximum payment of $1.30 per CVR. Payout of the CVR will be overseen by a special committee of the CBF Board. Southern Community
shareholders may also receive an additional cash payment based on the terms of a potential repurchase by CBF of the securities
issued by Southern Community to the United States Department of the Treasury.
Upon the closing of the Merger, Dr. William
G. Ward, Sr., the Chairman of Southern Community’s Board of Directors, will join the Board of Directors of both CBF and
its subsidiary bank (“Capital Bank”), and James G. Chrysson, the Vice Chairman of the Board of Southern Community,
will join the Board of Capital Bank.
The obligations of Southern Community
and CBF to consummate the merger are subject to certain conditions, including: (i) approval of the Merger by the shareholders
of Southern Community; (ii) the effectiveness of CBF’s registration statement on Form S-1 filed in connection with the planned
initial public offering of shares by CBF, and of a registration statement for the CBF common stock to be issued in the Merger;
(iii) receipt of required regulatory approvals (and in CBF’s case, without the imposition of an unduly burdensome regulatory
condition); (iv) the absence of any injunction or similar restraint enjoining or making illegal consummation of the Merger or
any of the other transactions contemplated by the Agreement; (v) the continuing material truth and accuracy of representations
and warranties made by the parties in the Agreement; and (vi) the performance in all material respects by each of the parties
of its covenants under the Agreement. Some of these conditions may be waived by the party for whose benefit they were included
in the Agreement. CBF’s obligation to close is subject to certain additional conditions, including the absence of a material
adverse effect on Southern Community, the amendment or waiver of certain of Southern Community’s compensation-related agreements,
and approval of the listing of the CBF common stock to be issued in the Merger.
The Agreement may be terminated, before
or after receipt of shareholder approval, in certain circumstances, including: (i) upon the mutual consent of the parties; (ii)
failure to obtain any required regulatory approval; (iii) by either party if the Merger is not consummated on or before September
26, 2012 if such failure is not caused by material breach of the Agreement; (iv) by either party if there is a material breach
of the other party’s representations, warranties, or covenants, and the breach or change that is not cured within 30 days
following notice by the complaining party to the complaining party’s reasonable satisfaction; (v) by CBF if Southern Community’s
Board fails to recommend that shareholders approve the Agreement and the Merger, changes such recommendation or breaches certain
non-solicitation covenants with respect to third party proposals; or (vi) by either party if the shareholders of Southern Community
fail to approve the Agreement.
Under certain circumstances, Southern
Community will be obligated to pay CBF a termination fee of $4 million and reimburse CBF up to $1 million for all expenses incurred
by it in connection with the Agreement and the transactions contemplated thereby.
Regulatory Actions and Management’s
Compliance Efforts
On February 25, 2011, the Bank entered
into a Consent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina Commission of
Banks (“NCCOB”). Under the terms of the Consent Order among other things, the Bank has agreed to:
|
·
|
Strengthen
Board oversight
of the management
and operations
of the Bank;
|
|
·
|
Comply
with minimum capital
requirements of
8% Tier 1 leverage
capital and 11%
total risk-based
capital;
|
|
·
|
Formulate
and implement a
plan to reduce
the Bank’s
risk exposure in
assets classified
“Substandard
or Doubtful”
in the FDIC’s
most recent report
of examination
by 15% in 180 days,
35% in 360 days,
60% in 540 days
and 75% in 720
days;
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|
·
|
Within
90 days, implement
effective lending
and collection
policies;
|
|
·
|
Not
pay cash dividends
without the prior
written approval
of the FDIC and
the Commissioner;
and
|
|
·
|
Neither
renew, rollover
or accept any brokered
deposits without
obtaining a waiver
from the FDIC.
|
On June 23, 2011, the Company entered
into a Written Agreement with the Federal Reserve Bank of Richmond under which the Company agreed to, among other things:
|
·
|
Not,
directly or indirectly,
do the following
without the prior
approval of the
Federal Reserve:
|
|
¾
|
Declare
or pay dividends
on its, common
or preferred stock;
|
|
¾
|
Make
any distributions
of interest or
principal on trust
preferred securities;
|
|
¾
|
Incur,
increase or guarantee
any debt; and
|
|
¾
|
Purchase
or redeem any shares
of its stock.
|
|
·
|
Formulate
and implement a
written plan to
maintain sufficient
capital at the
Company on a consolidated
basis.
|
As previously reported, the Company suspended
the payment of quarterly cash dividends on the preferred stock issued to the US Treasury and the Company elected to defer the
payment of quarterly scheduled interest payments on both issues of junior subordinated debentures, relating to its outstanding
trust preferred securities. The Company continues to account for the obligation for the preferred dividend to the US Treasury
and the interest due on the subordinated debentures. Although the Company has suspended the declaration and payment of preferred
stock dividends at the present time, net income (loss) available to common shareholders reflects the dividends as if declared
because of their cumulative nature. As of March 31, 2012, the cumulative amount of dividends owed to the US Treasury and the cumulative
amount of interest due on the subordinated debentures were $3.2 million and $3.7 million, respectively.
The Bank has already undertaken the following
actions, among others, to comply with the Consent Order:
|
·
|
The
Bank has exceeded
all minimum capital
requirements of
the Consent Order.
|
|
·
|
As
of March 31, 2012,
the Bank reduced
its risk exposure
to adversely classified
assets identified
in the Bank’s
June 30, 2010 Report
of Examination
by an amount (52%)
exceeding its scheduled
reduction of 35%
at its second measurement
point (by the one
year anniversary
of the Consent
Order, February
25, 2012).
|
The process of responding to the provisions
of the Consent Order is well underway. To date, management believes that the Company’s compliance efforts have been satisfactory
and within the scheduled time frames. Compliance efforts remain ongoing.
Summary of First Quarter
Total assets decreased $961 thousand,
or 0.1%, during the first quarter as loans continued to decline but at a much slower rate. Loans outstanding decreased $18.7 million,
or 2.0%, as loan paydowns continued to exceed weak loan demand resulting from the prolonged economic downturn. The liquidity from
the loan paydowns were held in overnight funds. The allowance for loan losses was virtually unchanged increasing $16 thousand,
or 0.1%, to $24.2 million during the quarter as the specific allowance requirements increased $1.0 million to $2.6 million while
the volume of impaired loans individually evaluated for impairment decreased $10.2 million. Foreclosed assets increased $4.2 million
as the new foreclosed asset additions during the quarter of $5.3 million exceeded the $460 thousand in writedowns and $598 thousand
in foreclosed assets sold. The investment securities portfolio decreased $3.9 million, or 1.0%, while overnight funds increased
by $22.9 million during the quarter. Total deposits were $1.18 billion at March 31, 2012, a decrease of $1.4 million, or 0.1%,
from December 31, 2011. The decrease in deposits was concentrated in time accounts which decreased $34.2 million sequentially;
this decrease was offset by an increase of interest bearing transaction accounts of $23.4 million and $9.4 million in demand deposits.
This decrease in time deposits consisted of $35.8 million in outflows of brokered deposits while customer certificates of deposit
remained stable, increasing $1.6 million. Growth in our deposit relationships through our business development efforts, including
the small business banking initiative was the predominant factor in growing our core (non-brokered) deposit levels. The increase
in demand deposits and interest bearing transaction accounts combined with the decrease in higher cost brokered deposits minimized
the five basis point decrease in the net interest margin for the quarter. We expect wholesale funding to continue to decrease
as the Company seeks to grow its core deposits and not renew maturing brokered deposits. Borrowings decreased $1.5 million, or
0.7%, from the prior quarter due primarily to decreased customer repurchase agreement activity.
Net interest income decreased $573 thousand,
or 5.0%, for the first quarter compared to the fourth quarter 2011. The interest rate environment remained stable in the first
quarter as the Federal Reserve maintained the federal funds target rate consistent with the prior quarter and changes in LIBOR
rates were relatively minor. Total interest income decreased $757 thousand, or 4.6%, while the cost of funds decreased $184 thousand,
or 3.6%, compared to the previous quarter. The sequential decrease in interest income was attributable to a $28.4 million decrease
in average loan balances and a 24 basis point decline in the earning asset yields due to the shift in the earning asset mix from
loans into lower yielding investments and overnight funds. Interest expense declined primarily due to reduced cost of deposits
as interest bearing deposit balances dropped significantly and the continued downward repricing of deposits. The net interest
margin decreased five basis points to 3.17% compared to 3.22% for the linked quarter and decreased 25 basis points when compared
to 3.42% for the first quarter of 2011. Management expects that interest margin compression will continue in the near future due
to, among other factors, (i) more competitive pricing for loans, (ii) a continuation of current balance sheet trends in loan portfolio
reduction and earning asset mix shift, and (iii) less impactful opportunities to reduce the cost of funds due to the low current
interest rate structure of deposits.
The Company’s provision for loan
losses of $2.9 million decreased from $3.4 million for the fourth quarter 2011 and decreased from $4.1 million for the first quarter
of 2011. Net charge-offs of $2.9 million decreased $2.7 million compared to $5.6 million in the fourth quarter. Annualized net
charge-offs decreased to 1.22% of average loans in first quarter 2012 from 2.29% of average loans for fourth quarter 2011 and
year-over-year from 2.19% of average loans for the first quarter 2011. Nonperforming loans decreased to $57.9 million, or 6.19%
of loans, at March 31, 2012 from $68.0 million, or 7.13% of loans, at December 31, 2011. Nonperforming assets decreased to $81.9
million, or 5.46% of total assets, at March 31, 2012 from $87.9 million, or 5.85% of total assets, at December 31, 2011. The allowance
for loan losses of $24.2 million at March 31, 2012 represented 2.58% of total loans and 42% coverage of nonperforming loans at
current quarter-end compared with 2.53% of total loans and 36% coverage of nonperforming loans at December 31, 2011. We believe
the allowance is adequate for losses inherent in the loan portfolio at March 31, 2012.
Non-interest income of $3.4 million decreased
$1.0 million, or 22.1%, compared to $4.4 million for the prior quarter and increased $529 thousand, or 18.2%, compared to $2.9
million for the first quarter of 2011. The major sequential changes in non-interest income were decreases of $1.5 million from
gains on sale of investment securities and an increase of $675 thousand from Small Business Investment Corporation (SBIC) income.
Furthermore, there were decreases in mortgage banking income of $72 thousand, service charges on deposit of $55 thousand and wealth
management income of $46 thousand partially offset by an increase in other non-interest income of $47 thousand. The year-over-year
increase of $529 thousand in non-interest income was primarily due to increased income from derivative activity of $690 thousand
and an increase in SBIC income of $548 thousand; partially offsetting these year-over-year increases, there were significant year-over-year
decreases of $681 thousand in gains on sale of investment securities and $126 thousand in service charges on deposit accounts.
Non-interest expense of $10.6 million
in the first quarter of 2012 decreased $862 thousand, or 7.5%, from the prior quarter and decreased by $848 thousand, or 7.4%,
compared with the year ago period. Linked quarter expense reductions were achieved in several categories with the largest reduction
attributable to a $988 thousand decrease in foreclosed asset related expense. Non-interest expense decreased $848 thousand year-over-year
primarily from decreases in professional services and FDIC assessments of $392 thousand and $382 thousand, respectively.
Financial Condition at March 31, 2012
and December 31, 2011
During the three month period ending March
31, 2012, total assets declined $961 thousand, or 0.1%, to $1.50 billion. The Company continued to emphasize improving the funding
mix during this time of asset shrinkage from slow loan demand. A decrease of $18.7 million in loans was offset by an increase
of $22.9 million in overnight funds and a decrease of $3.9 million in investment securities. Demand deposits increased $9.4 million
during the three month period, reaching an all-time high of $144.9 million or 12.2% of total deposits. Money market, NOW and savings
accounts increased $23.4 million. Time deposits decreased $34.2 million a result of $35.8 million in brokered deposits not being
renewed, while customer time deposits increased $1.6 million. The investment portfolio decreased $3.9 million, or 1.0%, from the
December 31, 2011 level. The mix of investments changed with increases of $8.6 million in trust preferred securities and $3.5
million in residential mortgage-backed securities offset by decreases of $10.9 million in US Government Agencies, $2.9 million
in other asset-backed securities, $2.1 million in municipals and $144 thousand in other securities.
Total loans decreased $18.7 million, or
2.0%, during the three month period with decreases in the following major categories: $7.3 million, or 4.2%, in consumer loans,
$4.5 million, or 1.2%, in commercial real estate loans, $3.0 million, or 3.5%, in commercial and industrial loans, $2.2 million
or 5.0%, in residential lots and $3.6 million in other loans. Commercial lines of credit increased $1.9 million or 4.3% during
the quarter. Although loans outstanding decreased during the period largely as a result of problem loan remediation, the amount
of the decrease was much less than in prior quarters due to some improvement in new loan volume for the quarter. For the first
quarter 2012, the allowance remained virtually unchanged increasing $16 thousand with a provision of $2.9 million and net charge-offs
of $2.9 million. Net charge-offs decreased from the fourth quarter total of $5.6 million while the provision decreased due to
factors discussed in the Asset Quality section below. The reduced amount of provision and charge-offs during the first quarter
reflected moderating economic conditions and continued improving trends in the Company’s asset quality.
At March 31, 2012, the Company’s
consolidated leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio were 8.71%, 11.99% and 14.49%,
respectively. As of March 31, 2012, the Bank’s leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital
ratio were 9.36%, 12.90% and 14.16%, respectively. Our capital position remains in excess of our required regulatory capital ratios,
including the capital requirements pursuant to the Consent Order. See Note 8 to the financial statements for an update on compliance
with the Consent Order. Given the current regulatory environment and recent legislation such as the Dodd-Frank Act, our regulatory
burden could increase. Many aspects of Dodd-Frank are subject to rulemaking and will take effect over several years. Such matters
could result in a material impact on the Company and could include requirements for higher regulatory capital levels and various
other restrictions. While regulatory capital requirements are considered, the Company also evaluates its capital needs based on
other appropriate business considerations on an ongoing basis. Although raising additional capital has been considered and discussed
in recent filings, the pending merger with Capital Bank discussed above has minimized the need to seek other sources of capital
in the near future. At March 31, 2012, our stockholders’ equity totaled $98.9 million, an increase of $1.2 million compared
to December 31, 2011. The increase is primarily the result of $815 thousand in net income and $443 thousand in unrealized gains
on securities available for sale.
Results of Operations for the Three
Months Ended March 31, 2012 and 2011
Net
Income (Loss).
Our net income from operations of $815
thousand and our net available to common shareholders of $170 thousand for the three months ended March 31, 2012 improved $664
thousand and $658 thousand, respectively, from the same three month period in 2011. Net income per share available to common shareholders
was $0.01 per share, both basic and diluted, for the three months ended March 31, 2012 as compared with a $0.03 loss per share,
both basic and diluted, for the same period in 2011. Net interest income for the first quarter of 2012 was $10.9 million, down
from $12.8 million, or a decrease of 14.9% compared with the first quarter 2011, primarily due to a $134.5 million decrease in
the average balance of interest earning assets. The net interest margin of 3.17% declined 25 basis points from the year ago period.
The shift in the mix of earning assets from loans to lower yielding investments and overnight funds and the decreased loan yields
due to pricing competition were the main influences on net interest income. The yield on interest earning assets decreased 39
basis points year-over-year while the cost of funds decreased only ten basis points. Due to the current unusually low interest
rate environment, management’s ability to continue to reprice downward our deposits to achieve a meaningful reduction in
our cost of funds is limited. The primary factor for improving our profitability in the first quarter 2012 was the reduced level
of asset quality costs, including a provision for loan losses of $2.9 million compared to $4.1 million for the first quarter of
2011. Non-interest income was $3.4 million during the first quarter of 2012, which represents an increase of 18.2% from non-interest
income of $2.9 million reported in the comparable period in 2011. Non-interest expense declined $848 thousand year-over-year with
reductions in professional fees and FDIC assessments as significant factors.
Net
Interest Income.
During the three months ended March 31,
2012, our net interest income was $10.9 million, a decrease of $1.9 million, or 14.9%, over the first quarter 2011. Interest income
decreased $2.9 million from the reduced level of interest earning assets. This reduction in our interest income exceeded the $941
thousand decrease in interest expense from reduced interest bearing deposit volume and repricing of deposits.
The average yield on interest-earning
assets in the first quarter of 2012 decreased 39 basis points to 4.60% compared to the first quarter 2011 due to the decline in
yields for investment securities and the shift in mix from loans to lower yielding securities. The lower interest rate environment
has also impacted our funding costs. Deposits, such as money market and NOW accounts, are repriced at the discretion of management
while time deposits can only be repriced as they mature. Over the past year, management repriced all of our deposits downward
to continue to lower our funding cost while remaining competitive, although reducing rates in the most recent quarter has been
difficult as rates have reached extremely low levels. Our cost of average interest bearing liabilities for the first quarter of
2012 decreased ten basis points to 1.59% compared to the first quarter of 2011. For the first quarter 2012, our net interest margin
of 3.17% decreased 25 basis points from 3.42% for the first quarter of 2011.
Average Yield/Cost Analysis
The following table contains information
relating to the Company’s average balance sheet and reflects the average yield on assets and cost of liabilities for the
periods indicated. Such annualized yields and costs are derived by dividing annualized income or expense by the average balances
of assets or liabilities, respectively, for the periods presented. The average loan portfolio balances include nonaccrual loans.
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended March 31, 2012
|
|
|
Ended March 31, 2011
|
|
|
|
(Amounts in thousands)
|
|
|
|
Average
balance
|
|
|
Interest
earned/paid
|
|
|
Average
yield/cost
|
|
|
Average
balance
|
|
|
Interest
earned/paid
|
|
|
Average
yield/cost
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
947,319
|
|
|
$
|
13,216
|
|
|
|
5.61
|
%
|
|
$
|
1,111,697
|
|
|
$
|
15,513
|
|
|
|
5.66
|
%
|
Investment securities available for sale
|
|
|
364,469
|
|
|
|
2,037
|
|
|
|
2.25
|
%
|
|
|
312,507
|
|
|
|
2,563
|
|
|
|
3.33
|
%
|
Investment securities held to maturity
|
|
|
47,017
|
|
|
|
577
|
|
|
|
4.94
|
%
|
|
|
45,697
|
|
|
|
549
|
|
|
|
4.87
|
%
|
Federal funds sold and overnight deposits
|
|
|
27,369
|
|
|
|
15
|
|
|
|
0.22
|
%
|
|
|
50,763
|
|
|
|
74
|
|
|
|
0.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning
assets
|
|
|
1,386,174
|
|
|
|
15,845
|
|
|
|
4.60
|
%
|
|
|
1,520,664
|
|
|
|
18,699
|
|
|
|
4.99
|
%
|
Other assets
|
|
|
104,992
|
|
|
|
|
|
|
|
|
|
|
|
110,311
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,491,166
|
|
|
|
|
|
|
|
|
|
|
$
|
1,630,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market, NOW and savings
|
|
$
|
481,843
|
|
|
$
|
515
|
|
|
|
0.43
|
%
|
|
$
|
541,358
|
|
|
$
|
880
|
|
|
|
0.66
|
%
|
Time deposits greater than $100K
|
|
|
217,893
|
|
|
|
606
|
|
|
|
1.12
|
%
|
|
|
208,809
|
|
|
|
573
|
|
|
|
1.11
|
%
|
Other time deposits
|
|
|
336,122
|
|
|
|
1,561
|
|
|
|
1.87
|
%
|
|
|
434,297
|
|
|
|
2,170
|
|
|
|
2.03
|
%
|
Short-term borrowings
|
|
|
60,776
|
|
|
|
412
|
|
|
|
2.73
|
%
|
|
|
23,078
|
|
|
|
78
|
|
|
|
1.37
|
%
|
Long-term borrowings
|
|
|
149,902
|
|
|
|
1,834
|
|
|
|
4.92
|
%
|
|
|
200,436
|
|
|
|
2,167
|
|
|
|
4.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing
liabilities
|
|
|
1,246,536
|
|
|
|
4,928
|
|
|
|
1.59
|
%
|
|
|
1,407,978
|
|
|
|
5,868
|
|
|
|
1.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
|
135,529
|
|
|
|
|
|
|
|
|
|
|
|
121,691
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
11,199
|
|
|
|
|
|
|
|
|
|
|
|
9,348
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
97,902
|
|
|
|
|
|
|
|
|
|
|
|
91,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders' equity
|
|
$
|
1,491,166
|
|
|
|
|
|
|
|
|
|
|
$
|
1,630,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and net interest spread
|
|
|
|
|
|
$
|
10,917
|
|
|
|
3.01
|
%
|
|
|
|
|
|
$
|
12,831
|
|
|
|
3.30
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.17
|
%
|
|
|
|
|
|
|
|
|
|
|
3.42.
|
%
|
Ratio of average interest-earning assets
to average interest-bearing liabilities
|
|
|
111.20
|
%
|
|
|
|
|
|
|
|
|
|
|
108.00
|
%
|
|
|
|
|
|
|
|
|
Provision
for Loan Losses.
The Company recorded a $2.9 million provision
for loan losses for the quarter ended March 31, 2012, representing a decrease of $1.2 million from the $4.1 million provision
for the first quarter of 2011. The level of provision for the quarter is reflective of the trends in the loan portfolio, including
levels of nonperforming loans and other loan portfolio quality measures, and analyses of impaired loans as well as the level of
net charge-offs during the period. The year-over-year decrease in the provision was based on management’s analysis and evaluation
of the adequacy of the level of the allowance for loan losses. Provisions for loan losses are charged to income to bring our allowance
for loan losses to a level deemed appropriate by management based on the factors discussed under “Asset Quality” below.
On an annualized basis, our percentage of net loan charge-offs to average loans outstanding was 1.22% for the quarter ended March
31, 2012, compared with 2.19% for the quarter ended March 31, 2011.
Non-Interest Income.
For
the three months ended March 31, 2012, non-interest income increased $529 thousand, or 18.2%, to $3.4 million from $2.9 million
for the same period in 2011 primarily as a result of increased SBIC income of $548 thousand and derivative market valuation adjustments
of $690 thousand. Insufficient fund, or NSF, charges continued their trend decreasing $168 thousand based on a reduction in transaction
volumes as other service charges, primarily debit card charges, increased $42 thousand based on the increase in debit card transaction
volume. Gains from sales of investment securities decreased $681 thousand as part of normal balance sheet management. Both mortgage
banking income and wealth management fees increased by $42 thousand from increased customer activity and sales volumes.
Non-Interest
Expense.
For the three months ended March 31, 2012, non-interest
expenses decreased $848 thousand or 7.4%, over the same period in 2011 primarily due to decreases in legal and professional fees
and FDIC deposit insurance premiums and occupancy and equipment expense. These expenses reductions were partially offset by reduced
gains on sales of foreclosed properties. The reduction in legal and professional expense included savings of $194 thousand in
legal fees and $198 thousand in fees on other professional services. The reduced legal fees related to a decreased volume of problem
asset remediation litigation and other work. FDIC deposit insurance premiums decreased $382 thousand primarily due to decreased
levels of deposits and a change in the basis of the quarterly assessment calculation. Although the premiums decreased year-over
year, the premiums remained high as a result of the previously announced Consent Order and will remain at the higher assessment
rates until the Consent Order is no longer in effect. Gains on sales of foreclosed assets decreased $207 thousand due to a number
of factors including the higher mix of residential lots being sold this year. Salaries and employees benefits decreased $60 thousand
from reduced commissions on mortgage and wealth management production and from reduced employee insurance costs. Occupancy and
equipment expense decreased $144 thousand which included decreases of $68 thousand in equipment depreciation, software maintenance
of $35 thousand and building repairs of $34 thousand. Expenses related to foreclosed property began to moderate but continued
to be significant with foreclosed asset write-downs decreasing to $460 thousand during the first quarter of 2012 compared to $609
thousand in the first quarter of 2011. This decrease was offset by increased ongoing foreclosed asset related operating expenses
which increased $68 thousand year-over-year.
Provision
for Income Taxes.
The Company recorded no income tax expense
or benefit for the quarter ending March 31, 2012 or for the first quarter 2011. The Company has now used all available net operating
loss (NOL) carry backs and now has a NOL carry forward. No income tax expense is expected until income taxes on future earnings
exceed the NOL carry forward of approximately $4.7 million.
Liquidity and Capital Resources
Market and public confidence in our financial
strength and in the strength of financial institutions in general will largely determine our access to appropriate levels of liquidity.
This confidence is significantly dependent on our ability to maintain sound asset quality and sufficient levels of capital resources
to generate appropriate earnings and to maintain a consistent dividend policy.
Liquidity is defined as our ability to
meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely
basis. Management measures our liquidity position by giving consideration to both on- and off-balance sheet sources of funds and
demands for funds on a daily and weekly basis.
Sources of liquidity include cash and
cash equivalents, net of federal requirements to maintain reserves against deposit liabilities, unpledged investments available
for sale, loan repayments, loan sales, deposits, and borrowings from the Federal Home Loan Bank, the Federal Reserve and from
correspondent banks through overnight federal funds credit lines. In addition to deposit and borrowing withdrawals and maturities,
the Company’s primary demand for liquidity is anticipated funding under credit commitments to customers.
We believe our liquidity is adequate to
fund expected loan demand and current deposit and borrowing maturities particularly in light of the expected continued balance
sheet shrinkage through loan remediation activities and continued slowdown in loan demand. During the three months ended March
31, 2012, $35.8 million of brokered deposits matured and were repaid. We expect an additional $27.4 million in brokered deposits
to mature or be called by December 31, 2012. Under the provisions of the Consent Order, the Bank may not renew, rollover or replace
these brokered deposits at their call or maturity. Investment securities totaled $402.8 million at March 31, 2012, a decrease
of $3.9 million from $406.7 million at December 31, 2011. As of March 31, 2012, there were $152.2 million in unpledged securities
collateral. In addition, management has increased our overnight balances at the Federal Reserve Bank to $45.5 million at March
31, 2012 versus our reserve requirement of $5.9 million for the applicable period. Supplementing liquid assets and customer deposits
as a source of funding, we have available a line of credit from a correspondent bank to purchase federal funds on a short-term
basis of approximately $40.0 million. We also have the credit capacity from the Federal Home Loan Bank of Atlanta (FHLB) to borrow
up to $374.7 million as of March 31, 2012 with lendable collateral value of $119.8 million and current outstanding borrowings
of $76.6 million. At March 31, 2012, we had funding of $60.0 million in the form of term repurchase agreements with maturities
from two to seven years under repurchase lines of credit from various institutions. The repurchases must be and are adequately
collateralized. We also had short-term repurchase agreements with total outstanding balances of $27.1 million and $28.6 million
at March 31, 2012 and December 31, 2011, respectively, $7.1 million of which were done as accommodations for our deposit customers.
At March 31, 2012, our outstanding commitments to extend credit consisted of loan commitments of $122.1 million and amounts available
under home equity credit lines, other credit lines and letters of credit of $90.0 million, $9.2 million and $5.9 million, respectively.
We believe that our combined aggregate liquidity position from all sources is sufficient to meet the funding requirements of loan
demand and deposit maturities and withdrawals in the near term.
Historically, we relied heavily on certificates
of deposits as a source of funds. While the majority of these funds are from our local market area, the Bank utilized brokered
and out-of-market certificates of deposits to diversify and supplement our deposit base. Under the Consent Order, as discussed
above, the Bank is not permitted to accept, renew or rollover any brokered deposits. During the three months of 2012, brokered
deposits decreased $35.8 million as maturing brokered deposits were not renewed. Year-over-year demand deposits increased $18.5
million, or 14.6%. In addition, customer certificates of deposits increased $2.5 million, or 0.6%, on a year-over-year basis;
while money market, savings and NOW accounts decreased $22.3 million, or 4.3%. Interest bearing transaction accounts decreased
significantly as customers focused on yield improvement which was available with certificates of deposit. Savings accounts increased
$2.0 million during the first quarter while decreasing $2.2 million year-over-year. Certificates of deposits represented 36.0%
of our total deposits at March 31, 2012, an increase from 33.1% at March 31, 2011.
Under the
United States Treasury’s Capital Purchase Program (CPP), the Company issued $42.75 million in Cumulative Perpetual Preferred
Stock, Series A, on December 5, 2008. In addition, the Company provided warrants to the Treasury to purchase 1,623,418 shares
of the Company’s common stock at an exercise price of $3.95 per share. These warrants are immediately exercisable and expire
ten years from the date of issuance. The preferred stock is non-voting, other than having class voting rights on certain matters,
and pays cumulative dividends quarterly at a rate of 5% per annum for the first five years and 9% per annum thereafter. The preferred
shares are redeemable at the option of the Company subject to regulatory approval. In February 2011, the Company suspended the
payment of quarterly cash dividends to the US Treasury on this cumulative preferred stock. Although the Company has suspended
the declaration and payment of preferred stock dividends at the present time, net income (loss) available to common shareholders
reflects the dividends as if declared because of their cumulative nature.
Interest on the
past due payments is now also being accrued. As of March 31, 2012, the total amount of cumulative dividends and interest owed
to the US Treasury was $3.2 million. As part of the merger with Capital Bank, it is expected that the Treasury’s investment
in the Company’s preferred stock will be redeemed.
As a condition of the CPP, the Company
must obtain consent from the United States Department of the Treasury to repurchase its common stock or to increase its cash dividend
on its common stock from the September 30, 2008 quarterly level of $0.04 per common share. The Company has agreed to certain restrictions
on executive compensation, including limitations on amounts payable to certain executives under severance arrangements and change
in control provisions of employment contracts and clawback provisions in compensation plans, as part of the CPP. Under the American
Recovery and Reinvestment Act of 2009, the Company is limited to using restricted stock as the form of payment to the top five
highest compensated executives under any incentive or bonus compensation programs.
Through July 2006, the Company authorized
the repurchase of up to 1.9 million shares of its common stock. Through December 5, 2008 (the date of our participation in the
CPP), the Company had repurchased 1,858,073 shares at an average price of $6.99 per share under the three plans. During the first
quarter of 2012, there were no repurchases. Under the provisions of the CPP, the Company may not repurchase any of its common
stock without the consent of the United States Treasury as long as the Treasury holds an investment in our preferred stock.
At March 31, 2012, the Company’s
consolidated leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio were 8.71%, 11.99% and 14.49%,
respectively, which exceeded the minimum requirements for a “well-capitalized” bank holding company. As of March 31,
2012, the Bank’s leverage ratio, Tier 1 risk-based capital ratio and total risk-based capital ratio were 9.36%, 12.90% and
14.16%, respectively. The Consent Order, as set forth above, requires the Bank to achieve and maintain minimum capital requirements
of 8% Tier 1 (leverage) capital and 11% total risk-based capital. Our capital position remains in excess of our regulatory capital
requirements pursuant to the Consent Order. In addition to utilizing balance sheet shrinkage through net loan run-off and the
reduction in brokered deposits and ways to improve Bank profitability, the Company has considered various strategies, including:
asset sales, plans for capital injections, taking action to restructure the risk weighting of assets, capital raising and strategic
partnerships in order to achieve and maintain compliance with the terms of the Consent Order. Due to the pending merger with Capital
Bank, management does not expect to seek additional sources of capital. As of March 31, 2012, the parent holding company had $5.5
million in cash available to be invested into the Bank to bolster capital levels.
Given the current regulatory environment
and recent legislation such as the Dodd-Frank Act, our regulatory burden could increase. Such actions could result in a material
impact on the Company and could include requirements for higher regulatory capital levels and various other restrictions.
On March 24, 2009, the Company announced
that its Board of Directors voted to suspend payment of a quarterly cash dividend to common shareholders.
Asset Quality
We consider asset quality to be of primary
importance. We employ a formal internal loan review process to ensure adherence to the Board-approved Lending Policy. It is the
responsibility of each lending officer to assign an appropriate risk grade to every loan originated. Credit Administration, through
the loan review process, validates the accuracy of the initial and any revised risk grade assessment. In addition, as a given
loan’s credit quality improves or deteriorates, it is the loan officer’s responsibility to change the borrower’s
risk grade accordingly. Our policy in regard to past due loans normally requires a charge-off to the allowance for loan losses
within a reasonable period after collection efforts and a thorough review have been completed. Further collection efforts are
then pursued through various means including legal remedies. Loans carried in a nonaccrual status and probable losses are considered
in the determination of the allowance for loan losses.
Our financial statements are prepared
on the accrual basis of accounting, which means we recognize interest income on loans, unless we place a loan on nonaccrual basis.
We account for loans on a nonaccrual basis when we have serious doubts about the collectability of principal or interest. Generally,
our policy is to place a loan on nonaccrual status when the loan becomes past due 90 days. We also place loans on nonaccrual status
in cases where we are uncertain whether the borrower can satisfy the contractual terms of the loan agreement. Amounts received
on nonaccrual loans generally are applied first to principal and then to interest only after all principal has been collected.
If a borrower brings their loan current, our general policy is to keep this loan in a nonaccrual status until this loan has remained
current for six months. Restructured loans are those for which concessions, including the reduction of interest rates below a
rate otherwise available to that borrower or the deferral of interest or principal have been granted due to the borrower’s
weakened financial condition. We record interest on restructured loans at the restructured rates, as collected, when we anticipate
that no loss of original principal will occur. Management also considers potential problem loans in the evaluation of the adequacy
of the Bank’s allowance for loan losses. Potential problem loans are loans which are currently performing and are not included
in nonaccrual or restructured loans as shown above, but about which we have doubts as to the borrower’s ability to comply
with present repayment terms. Because these loans are at a heightened risk of becoming past due, reaching nonaccrual status or
being restructured, they are being monitored closely.
Nonperforming Assets
In the tables and discussion below, the
credit metrics for the current quarter and their sequential changes are illustrated reflecting: 1) a $10.1 million decrease in
nonperforming loans; 2) $5.9 million decrease in nonperforming assets despite a $4.2 million increase in foreclosed assets; 3)
a slight sequential decrease in 30-89 delinquencies, however, a significant improvement over the prior year level; 4) a sequential
decrease in adversely classified loans, and 5) the continued reduction in the higher risk loan segments of aged speculative construction
and land acquisition and development loans.
The following is a summary of nonperforming
assets at the periods presented:
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
31,499
|
|
|
$
|
38,715
|
|
|
$
|
39,587
|
|
|
$
|
45,381
|
|
|
$
|
53,304
|
|
Restructured loans - nonaccruing
|
|
|
26,404
|
|
|
|
29,333
|
|
|
|
32,870
|
|
|
|
21,422
|
|
|
|
20,437
|
|
Total nonperforming loans
|
|
|
57,903
|
|
|
|
68,048
|
|
|
|
72,457
|
|
|
|
66,803
|
|
|
|
73,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed assets
|
|
|
24,032
|
|
|
|
19,812
|
|
|
|
19,114
|
|
|
|
23,022
|
|
|
|
23,060
|
|
Total nonperforming assets
|
|
$
|
81,935
|
|
|
$
|
87,860
|
|
|
$
|
91,571
|
|
|
$
|
89,825
|
|
|
$
|
96,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured loans in accruing status
not included above
|
|
$
|
24,486
|
|
|
$
|
24,202
|
|
|
$
|
22,214
|
|
|
$
|
15,471
|
|
|
$
|
13,488
|
|
Nonperforming loans decreased to $57.9
million, or 6.19% of total loans, at March 31, 2012 compared to $68.0 million, or 7.13% of loans, at December 31, 2011. This $10.1
million decrease in nonperforming loans is due to the impact of: $2.9 million in net charge-offs, $5.3 million in loans foreclosed
upon and approximately $8.3 million in loan payoffs and paydowns which more than offset the $6.3 million in new additions to nonperforming
loans during the first quarter. Foreclosed assets increased $4.2 million, or 21%, sequentially as $5.3 million in new foreclosed
asset additions exceeded slower sales of foreclosed properties of $599 thousand and writedowns of $460 thousand.
The following table sets forth a breakdown
of nonperforming loans at the periods presented, by loan segment.
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
Nonperforming loans
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
$
|
12,887
|
|
|
$
|
12,975
|
|
|
$
|
16,412
|
|
|
$
|
13,424
|
|
|
$
|
16,987
|
|
Commercial real estate
|
|
|
19,234
|
|
|
|
26,484
|
|
|
|
31,035
|
|
|
|
28,730
|
|
|
|
20,079
|
|
Commercial and industrial
|
|
|
3,292
|
|
|
|
4,977
|
|
|
|
5,524
|
|
|
|
3,917
|
|
|
|
6,846
|
|
Residential lots
|
|
|
12,305
|
|
|
|
12,096
|
|
|
|
8,717
|
|
|
|
8,806
|
|
|
|
18,281
|
|
Consumer
|
|
|
10,185
|
|
|
|
11,516
|
|
|
|
10,769
|
|
|
|
11,926
|
|
|
|
11,548
|
|
Total nonperforming loans
|
|
$
|
57,903
|
|
|
$
|
68,048
|
|
|
$
|
72,457
|
|
|
$
|
66,803
|
|
|
$
|
73,741
|
|
The following table sets forth a breakdown,
by loan class, of impaired loans that were individually evaluated for loss impairment at March 31, 2012. This table further shows,
within each loan class, the evaluation results for those loans requiring a specific valuation allowance and those which did not.
|
|
With Specific Allowance
|
|
|
No Specific Allowance
|
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
Total
|
|
|
Net
|
|
|
|
Principal
|
|
|
Recorded
|
|
|
Specific
|
|
|
Principal
|
|
|
Recorded
|
|
|
Recorded
|
|
|
of Specific
|
|
|
|
Balance
|
|
|
Investment
|
|
|
Allowance
|
|
|
Balance
|
|
|
Investment
|
|
|
Investment
|
|
|
Allowance
|
|
|
|
(Amounts in thousands)
|
|
Commercial real estate
|
|
$
|
12,472
|
|
|
$
|
12,194
|
|
|
$
|
1,051
|
|
|
$
|
31,461
|
|
|
$
|
22,965
|
|
|
$
|
35,159
|
|
|
$
|
34,108
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
36
|
|
|
|
31
|
|
|
|
6
|
|
|
|
2,986
|
|
|
|
1,953
|
|
|
|
1,984
|
|
|
|
1,978
|
|
Commercial line of credit
|
|
|
805
|
|
|
|
753
|
|
|
|
204
|
|
|
|
216
|
|
|
|
216
|
|
|
|
969
|
|
|
|
765
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction
|
|
|
6,906
|
|
|
|
6,226
|
|
|
|
289
|
|
|
|
10,926
|
|
|
|
9,524
|
|
|
|
15,750
|
|
|
|
15,461
|
|
Residential lot loans
|
|
|
5,874
|
|
|
|
5,669
|
|
|
|
541
|
|
|
|
10,209
|
|
|
|
6,576
|
|
|
|
12,245
|
|
|
|
11,704
|
|
Raw land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,720
|
|
|
|
118
|
|
|
|
118
|
|
|
|
118
|
|
Home equity lines
|
|
|
1,051
|
|
|
|
1,050
|
|
|
|
376
|
|
|
|
517
|
|
|
|
485
|
|
|
|
1,535
|
|
|
|
1,159
|
|
Consumer loans
|
|
|
2,455
|
|
|
|
2,406
|
|
|
|
160
|
|
|
|
7,239
|
|
|
|
6,654
|
|
|
|
9,060
|
|
|
|
8,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,599
|
|
|
$
|
28,329
|
|
|
$
|
2,627
|
|
|
$
|
66,274
|
|
|
$
|
48,491
|
|
|
$
|
76,820
|
|
|
$
|
74,193
|
|
The recorded investment in loans that
were considered individually impaired was $76.8 million and $87.1 million at March 31, 2012 and December 31, 2011, respectively.
At March 31, 2012, the largest non-accrual balance of any one borrower was $6.0 million, with the average balance for the two
hundred nineteen non-accrual loans being $264 thousand. At March 31, 2012, the recorded investment in impaired loans requiring
a valuation allowance based on individual analysis was $28.3 million, with a corresponding valuation allowance of $2.6 million.
Compared with December 31, 2011, the recorded investment in impaired loans requiring a specific valuation allowance at March 31,
2012 increased $500 thousand while the corresponding specific valuation allowance decreased by $2.5 million. In the above table
for these impaired loans individually evaluated for loss impairment, the unpaid principal balance represents the amount borrowers
owe the Bank; while the recorded investment represents the amount of loans shown on the Bank’s books which are net of amounts
charged off to date. For these impaired loans as of March 31, 2012, amounts charged off to date were $19.1 million, or 19.9% of
the unpaid principal balances. Included in the table above, $22.8 million out of the total of $24.5 million of accruing troubled
debt restructured loans were also individually evaluated as they exceeded the evaluation scope of $200,000 per loan. The results
of the individual evaluation of the $22.8 million in accruing troubled debt restructured loans indicated that $9.5 million of
these loans required a specific allowance of $403 thousand.
For loan modifications and in particular,
troubled debt restructurings (TDRs), the Company generally utilizes its own loan modification programs whereby the borrower is
provided one or more of the following concessions: interest rate reduction, extension of payment terms, forgiveness of principal
or other modifications. The Company has a small residential mortgage portfolio without the need to utilize government sponsored
loan modification programs. The primary factor in the pre-modification evaluation of a troubled debt restructuring is whether
such an action will increase the likelihood of achieving a better result in terms of collecting the amount owed to the Bank.
As illustrated in one of the tables in
Note 4 to the financial statements, during the three months ended March 31, 2012, the following concessions were made on 5 loans
for $1.7 million (measured as a percentage of loan balances on TDRs):
|
·
|
Reduced
interest rate for
2% (1 loans for
$42 thousand);
|
|
·
|
Extension
of payment terms
for 96% (3 loans
for $1.6 million);
and
|
|
·
|
Forgiveness
of principal for
2% (1 loan for
$27 thousand).
|
In cases where there was more than one
concession granted, the modification was classified by the more dominant concession.
Of the total of 103 loans for $40.9 million
which were modified as TDRs during the twelve months ended March 31, 2012, there were payment defaults (where the modified loan
was past due thirty days or more) of $1.9 million, or 4.6%, during the three months ended March 31, 2012.
On these TDRs (103 loans for $40.9 million)
during the twelve months ended March 31, 2012, the following represents the success or failure of these concessions during the
past year:
|
·
|
88.7%
are paying as restructured;
|
|
·
|
0.3%
have been reclassified
to nonaccrual;
|
|
·
|
9.7%
have defaulted
and/or been foreclosed
upon; and
|
|
·
|
1.3%
have paid in full.
|
For a further breakdown of the successes
and failures of each type of concession/modification, see the table in Note 4 to the financial statements.
In addition to nonperforming loans and
accruing TDRs, there were $97.0 million of loans at March 31, 2012 for which management has concerns regarding the ability of
the borrowers to meet existing repayment terms, compared with $98.5 million at December 31, 2011. See “Credit Quality Indicators”
below for a more detailed disclosure and discussion on the Bank’s distribution of credit risk grade classifications. Potential
problem loans are primarily classified as substandard for regulatory purposes and reflect the distinct possibility, but not the
probability, that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement.
Although these loans have been identified as potential problem loans, they may never become delinquent, nonperforming or impaired.
Additionally, these loans are generally secured by real estate or other assets, thus reducing the total exposure should they become
nonperforming. Potential problem loans are considered in the determination of the adequacy of the allowance for loan losses.
The following table sets forth a breakdown
of foreclosed assets at the periods presented, by nature of the property.
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
Foreclosed assets
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
|
(Amounts in thousands)
|
|
Residential construction, land development and other land
|
|
$
|
10,452
|
|
|
$
|
9,854
|
|
|
$
|
11,617
|
|
|
$
|
14,360
|
|
|
$
|
14,837
|
|
Commercial construction
|
|
|
1,196
|
|
|
|
1,196
|
|
|
|
1,196
|
|
|
|
1,196
|
|
|
|
1,196
|
|
1 - 4 family residential properties
|
|
|
2,126
|
|
|
|
1,990
|
|
|
|
2,453
|
|
|
|
1,245
|
|
|
|
756
|
|
Nonfarm nonresidential properties
|
|
|
10,258
|
|
|
|
6,772
|
|
|
|
3,808
|
|
|
|
6,221
|
|
|
|
6,221
|
|
Multi-family properties
|
|
|
-
|
|
|
|
-
|
|
|
|
40
|
|
|
|
-
|
|
|
|
50
|
|
Total foreclosed assets
|
|
$
|
24,032
|
|
|
$
|
19,812
|
|
|
$
|
19,114
|
|
|
$
|
23,022
|
|
|
$
|
23,060
|
|
Foreclosed assets increased $4.2 million,
or 21%, sequentially as $5.3 million in new foreclosed asset additions exceeded slower sales of foreclosed properties of $599
thousand and writedowns of $460 thousand. During the quarter ended March 31, 2012, the three largest additions for $4.1 million
were unimproved land parcels to be developed into commercial and residential properties.
Credit Quality Indicators
We monitor credit risk migration and delinquency
trends in the ongoing evaluation and assessment of credit risk exposure in the overall loan portfolio. The following table presents
quarterly trends in loan delinquencies, in loans classified substandard or doubtful and in nonperforming loans.
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
|
(Amounts in millions)
|
|
|
|
$
|
|
|
% of
Total
Loans
|
|
|
$
|
|
|
% of
Total
Loans
|
|
|
$
|
|
|
% of
Total
Loans
|
|
|
$
|
|
|
% of
Total
Loans
|
|
|
$
|
|
|
% of
Total
Loans
|
|
Loans delinquencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 - 89 days past due
|
|
$
|
4.5
|
|
|
|
0.48
|
%
|
|
$
|
5.2
|
|
|
|
0.55
|
%
|
|
$
|
4.5
|
|
|
|
0.46
|
%
|
|
$
|
4.3
|
|
|
|
0.41
|
%
|
|
$
|
3.4
|
|
|
|
0.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans classified substandard or doubtful
|
|
$
|
176.8
|
|
|
|
18.90
|
%
|
|
$
|
185.7
|
|
|
|
19.46
|
%
|
|
$
|
205.6
|
|
|
|
20.72
|
%
|
|
$
|
210.0
|
|
|
|
20.19
|
%
|
|
$
|
214.3
|
|
|
|
19.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans
|
|
$
|
57.9
|
|
|
|
6.19
|
%
|
|
$
|
68.0
|
|
|
|
7.13
|
%
|
|
$
|
72.5
|
|
|
|
7.30
|
%
|
|
$
|
66.8
|
|
|
|
6.42
|
%
|
|
$
|
73.7
|
|
|
|
6.80
|
%
|
Delinquency is viewed as one of the leading
indicators for credit quality. The Company’s 30-89 day past due statistic decreased sequentially by $723 thousand to $4.5
million, or 0.48% of total loans, at March 31, 2012. Prior to the most current quarterly change, this metric has increased sequentially
for three of the last four quarter end statistics since March 31, 2011. The improvement in loan delinquencies is attributable
to a continued strong involvement of commercial loan officers and their management in monthly collection efforts.
Another key indicator of credit quality
is the distribution of credit risk grade classifications in the loan portfolio and the trends in the movement or migration of
these risk grades or classifications. See Note 5 in the financial statements for a description of the Bank’s credit risk
grade classifications. The Substandard (Grade 7) and Doubtful (Grade 8) classifications denote adversely classified loans, while
the Special Mention (Grade 6) classification may provide an early warning indicator of deterioration in the credit quality of
a loan portfolio. The following table is a summary of certain classified loans in our loan portfolio at the dates indicated.
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
|
$
|
|
|
% of
Total
Loans
|
|
|
$
|
|
|
% of
Total
Loans
|
|
|
$
|
|
|
% of
Total
Loans
|
|
|
$
|
|
|
% of
Total
Loans
|
|
|
$
|
|
|
% of
Total
Loans
|
|
|
|
(Amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Mention
|
|
$
|
86.8
|
|
|
|
9.3
|
%
|
|
$
|
96.1
|
|
|
|
10.1
|
%
|
|
$
|
100.0
|
|
|
|
10.1
|
%
|
|
$
|
104.1
|
|
|
|
10.0
|
%
|
|
$
|
135.6
|
|
|
|
12.5
|
%
|
Substandard and Doubtful
|
|
|
176.8
|
|
|
|
19.0
|
%
|
|
|
185.7
|
|
|
|
19.6
|
%
|
|
|
205.6
|
|
|
|
20.8
|
%
|
|
|
210.0
|
|
|
|
20.2
|
%
|
|
|
214.3
|
|
|
|
19.8
|
%
|
|
|
$
|
263.6
|
|
|
|
28.3
|
%
|
|
$
|
281.8
|
|
|
|
29.7
|
%
|
|
$
|
305.6
|
|
|
|
30.9
|
%
|
|
$
|
314.1
|
|
|
|
30.2
|
%
|
|
$
|
349.9
|
|
|
|
32.3
|
%
|
The $8.9 million, or 5%, decrease in adversely
classified loans during the quarter ended March 31, 2012, as well as the decrease in special mention loans, was due to ongoing
loan remediation efforts partially mitigated by portfolio downgrades during the quarter.
The following table contains an indicator
of the overall credit quality of each loan class, denoted by the weighted average risk grade, along with a further breakdown of
the certain classified loans by loan class at March 31, 2012.
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Special
|
|
|
Substandard and
|
|
|
|
Risk Grade
|
|
|
Mention
|
|
|
Doubtful
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Commercial real estate
|
|
4.96
|
|
|
$
|
35,996
|
|
|
$
|
77,093
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
4.74
|
|
|
|
11,202
|
|
|
|
13,549
|
|
Commercial line of credit
|
|
4.52
|
|
|
|
3,910
|
|
|
|
3,324
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction
|
|
5.03
|
|
|
|
9,500
|
|
|
|
27,244
|
|
Residential lots
|
|
6.21
|
|
|
|
4,641
|
|
|
|
28,541
|
|
Raw land
|
|
5.18
|
|
|
|
782
|
|
|
|
3,188
|
|
Home equity lines
|
|
3.67
|
|
|
|
2,955
|
|
|
|
4,968
|
|
Consumer
|
|
4.47
|
|
|
|
17,780
|
|
|
|
18,926
|
|
|
|
|
|
|
|
$
|
86,764
|
|
|
$
|
176,833
|
|
Compared with December 31, 2011, the above
mentioned weighted average risk grades, within these loan classes and in the aggregate, have not changed significantly.
In addition to the financial strength
of each borrower and cash flow characteristics of each project, the repayment of construction and development loans are particularly
dependent on the value of the real estate collateral. Repayment of such loans is generally considered subject to greater credit
risk than residential mortgage loans. Regardless of the underwriting criteria the Company utilizes, losses may be experienced
as a result of various factors beyond our control, including, among other things, changes in market conditions affecting the value
of the real estate collateral and problems affecting the credit of our borrowers. Approximately $1.4 million, or 38.4%, of the
$3.6 million in gross charge-offs during this quarter were attributable to further deterioration in real estate values of underlying
collateral on existing nonperforming loans upon reappraisal.
Furthermore, we monitor certain performance
and credit metrics related to these higher risk loan categories, including the aging of the underlying loans in these categories.
As of March 31, 2012, speculative construction loans on our books more than twelve months amounted to $12.0 million, or 33.8%,
of the total speculative residential construction loan portfolio of $35.5 million. This speculative residential construction portfolio
has increased from $33.3 million at December 31, 2011 and decreased from $37.7 million at March 31, 2011. Land acquisition and
development loans on our books for more than twenty-four months at March 31, 2012 amounted to $38.1 million, or 78.9%, of that
$48.3 million portfolio. The land acquisition and development portfolio has increased from $46.0 million as of December 31, 2011
and decreased from $55.8 million as of March 31, 2011.
Analysis of Allowance for Loan Losses
Our allowance for loan losses (“ALLL”)
is established through charges to earnings in the form of a provision for loan losses. We increase our allowance for loan losses
by provisions charged to operations and by recoveries of amounts previously charged off and we reduce our allowance by loans charged
off. In evaluating the adequacy of the allowance, we consider the growth, composition and industry diversification of the portfolio,
historical loan loss experience, current delinquency levels, trends in past dues and classified assets, adverse situations that
may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and
other relevant factors derived from our history of operations. Management is continuing to closely monitor the value of real estate
serving as collateral for our loans, especially lots and land under development, due to continued concern that the low level of
real estate sales activity will continue to have a negative impact on the value of real estate collateral. In addition, depressed
market conditions have adversely impacted, and may continue to adversely impact, the financial condition and liquidity position
of certain of our borrowers. Additionally, the value of commercial real estate collateral may come under further pressure from
weak economic conditions and prevailing unemployment levels. The methodology and assumptions used to determine the allowance are
continually reviewed as to their appropriateness given the most recent losses realized and other factors that influence the estimation
process. The model assumptions and resulting allowance level are adjusted accordingly as these factors change.
The ALLL consists of two major components:
specific valuation allowances and a general valuation allowance. The Bank’s format for the calculation of ALLL begins with
the evaluation of individual loans considered impaired. For the purpose of evaluating loans for impairment, loans are considered
impaired when it is considered probable that all amounts due under the contractual terms of the loan will not be collected when
due (minor shortfalls in amount or timing excepted). The Bank has established policies and procedures for identifying loans that
should be evaluated for impairment. Loans are reviewed through multiple means such as delinquency management, credit risk reviews,
watch and criticized loan monitoring meetings and general account management. Loans that are outside of the Bank’s established
criteria for evaluation may be considered for impairment testing when management deems the risk sufficient to warrant this approach.
For loans determined to be impaired, the specific allowance is based on the most appropriate of the three measurement methods:
present value of expected future cash flows, fair value of collateral, or the observable market price of a loan method. While
management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions
differ substantially from the assumptions used in making the evaluations. Once a loan is considered individually impaired, it
is not included in other troubled loan analysis, even if no specific allowance is considered necessary.
In addition to the evaluation of loans
for impairment, we calculate the loan loss exposure on the remaining loans (not evaluated for impairment) by applying the applicable
historical loan loss experience of the loan portfolio to provide for probable losses in the loan portfolio through the general
valuation allowance. These loss factors are based on an appropriate loss history for each major loan segment more heavily weighted
for the most recent twelve months historical loss experience to reflect current market conditions. In addition, we assign additional
general allowance requirements utilizing qualitative risk factors related to economic trends (such as the unemployment rate and
changes in real estate values) and portfolio trends (such as delinquencies and concentration levels among others) that are pertinent
to the underlying risks in each major loan segment in estimating the general valuation allowance. This methodology allows us to
focus on the relative risk and the pertinent factors for the major loan segments of the Company. The Company incorporates certain
refinements and improvements to its allowance for loan losses methodology from time to time. During 2011, these refinements had
a minimal effect on the total allowance for loan losses.
As discussed herein, management has undertaken
various initiatives since mid-year 2010 in response to the challenging economic environment, increased nonperforming loans, weakened
collateral positions, and increased foreclosed asset levels, including but not limited to:
|
·
|
Restructuring
interest only loan
payment terms to
require principal
repayments;
|
|
·
|
Refining
the allowance for
loan losses methodology
to weight current
period loss experience
more heavily;
|
|
·
|
Downgrading
renewed and other
higher risk loans
to a substandard
classification;
|
|
·
|
Enhancing
the internal controls
surrounding troubled
debt restructured
(TDR) loan identification
and monitoring;
|
|
·
|
Charging
off weakened credits;
|
|
·
|
Increasing
the staffing resources
of our Credit Administration
function, including
problem asset management
and loan review;
|
|
·
|
Enhancing
our internal and
external loan review
protocol; and
|
|
·
|
Increasing
the general valuation
allowance component
of our allowance
for loan losses.
|
The following table shows, an analysis
of the allowance for loan losses by loan segment, for the quarter ended March 31, 2012.
|
|
Commercial
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
|
|
|
|
|
|
Real
|
|
|
|
|
|
|
|
|
|
|
|
|
Estate
|
|
|
Commercial
|
|
|
Estate
|
|
|
HELOC
|
|
|
Consumer
|
|
|
Total
|
|
Allowance for credit losses:
|
|
(Amounts in thousands)
|
|
Beginning balance
|
|
$
|
9,076
|
|
|
$
|
3,036
|
|
|
$
|
7,258
|
|
|
$
|
1,412
|
|
|
$
|
3,383
|
|
|
$
|
24,165
|
|
Provision
|
|
|
1,368
|
|
|
|
816
|
|
|
|
1,126
|
|
|
|
(137
|
)
|
|
|
(273
|
)
|
|
|
2,900
|
|
Charge-offs
|
|
|
(1,727
|
)
|
|
|
(900
|
)
|
|
|
(572
|
)
|
|
|
(12
|
)
|
|
|
(357
|
)
|
|
|
(3,568
|
)
|
Recoveries
|
|
|
208
|
|
|
|
140
|
|
|
|
49
|
|
|
|
3
|
|
|
|
284
|
|
|
|
684
|
|
Ending balance
|
|
$
|
8,925
|
|
|
$
|
3,092
|
|
|
$
|
7,861
|
|
|
$
|
1,266
|
|
|
$
|
3,037
|
|
|
$
|
24,181
|
|
The following table shows, by loan segment,
an analysis of the allowance for loan losses for the quarter ended March 31, 2011.
|
|
Commercial
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
|
|
|
|
|
|
Real
|
|
|
|
|
|
|
|
|
|
|
|
|
Estate
|
|
|
Commercial
|
|
|
Estate
|
|
|
HELOC
|
|
|
Consumer
|
|
|
Total
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
6,703
|
|
|
$
|
4,154
|
|
|
$
|
13,534
|
|
|
$
|
1,493
|
|
|
$
|
3,696
|
|
|
$
|
29,580
|
|
Provision
|
|
|
921
|
|
|
|
128
|
|
|
|
1,441
|
|
|
|
804
|
|
|
|
806
|
|
|
|
4,100
|
|
Charge-offs
|
|
|
(1,897
|
)
|
|
|
(765
|
)
|
|
|
(2,203
|
)
|
|
|
(541
|
)
|
|
|
(1,680
|
)
|
|
|
(7,086
|
)
|
Recoveries
|
|
|
535
|
|
|
|
76
|
|
|
|
325
|
|
|
|
3
|
|
|
|
131
|
|
|
|
1,070
|
|
Ending balance
|
|
$
|
6,262
|
|
|
$
|
3,593
|
|
|
$
|
13,097
|
|
|
$
|
1,759
|
|
|
$
|
2,953
|
|
|
$
|
27,664
|
|
The following table describes the allocation
of the allowance for loan losses among various categories of loans and certain other information for the dates indicated. The
allocation is made for analytical purposes only and is not necessarily indicative of the categories in which future losses may
occur.
|
|
At March 31, 2012
|
|
|
At December 31, 2011
|
|
|
At September 30, 2011
|
|
|
At June 30, 2011
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
By Loan Class
|
|
Amount
|
|
|
Total ALLL
|
|
|
Amount
|
|
|
Total ALLL
|
|
|
Amount
|
|
|
Total ALLL
|
|
|
Amount
|
|
|
Total ALLL
|
|
|
|
(Amounts in thousands)
|
|
Commercial real estate
|
|
$
|
8,925
|
|
|
|
36.9
|
%
|
|
$
|
9,076
|
|
|
|
37.6
|
%
|
|
$
|
8,072
|
|
|
|
30.6
|
%
|
|
$
|
6,883
|
|
|
|
25.0
|
%
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
1,741
|
|
|
|
7.2
|
%
|
|
|
1,865
|
|
|
|
7.7
|
%
|
|
|
2,504
|
|
|
|
9.5
|
%
|
|
|
2,461
|
|
|
|
8.9
|
%
|
Commercial line of credit
|
|
|
1,351
|
|
|
|
5.6
|
%
|
|
|
1,171
|
|
|
|
4.8
|
%
|
|
|
1,047
|
|
|
|
4.0
|
%
|
|
|
1,207
|
|
|
|
4.4
|
%
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Construction
|
|
|
4,827
|
|
|
|
20.0
|
%
|
|
|
4,564
|
|
|
|
18.9
|
%
|
|
|
5,559
|
|
|
|
21.0
|
%
|
|
|
7,114
|
|
|
|
25.9
|
%
|
Residential lots
|
|
|
2,821
|
|
|
|
11.7
|
%
|
|
|
2,595
|
|
|
|
10.7
|
%
|
|
|
4,295
|
|
|
|
16.3
|
%
|
|
|
4,975
|
|
|
|
18.1
|
%
|
Raw land
|
|
|
213
|
|
|
|
0.9
|
%
|
|
|
99
|
|
|
|
0.5
|
%
|
|
|
218
|
|
|
|
0.8
|
%
|
|
|
228
|
|
|
|
0.8
|
%
|
Home equity lines
|
|
|
1,266
|
|
|
|
5.2
|
%
|
|
|
1,412
|
|
|
|
5.8
|
%
|
|
|
1,665
|
|
|
|
6.3
|
%
|
|
|
1,471
|
|
|
|
5.3
|
%
|
Consumer
|
|
|
3,037
|
|
|
|
12.5
|
%
|
|
|
3,383
|
|
|
|
14.0
|
%
|
|
|
3,049
|
|
|
|
11.5
|
%
|
|
|
3,172
|
|
|
|
11.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,181
|
|
|
|
100.0
|
%
|
|
$
|
24,165
|
|
|
|
100.0
|
%
|
|
$
|
26,409
|
|
|
|
100.0
|
%
|
|
$
|
27,511
|
|
|
|
100.0
|
%
|
Item 1 - Financial Statements
SOUTHERN COMMUNITY FINANCIAL
CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011*
|
|
|
|
(Amounts in thousands, except share data)
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
22,206
|
|
|
$
|
23,356
|
|
Federal funds sold and overnight deposits
|
|
|
46,050
|
|
|
|
23,198
|
|
Investment securities
|
|
|
|
|
|
|
|
|
Available for sale, at fair value
|
|
|
350,577
|
|
|
|
362,298
|
|
Held to maturity, at amortized cost
|
|
|
52,260
|
|
|
|
44,403
|
|
Federal Home Loan Bank stock
|
|
|
6,842
|
|
|
|
6,842
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
4,383
|
|
|
|
4,459
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
931,345
|
|
|
|
950,022
|
|
Allowance for loan losses
|
|
|
(24,181
|
)
|
|
|
(24,165
|
)
|
Net Loans
|
|
|
907,164
|
|
|
|
925,857
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
37,952
|
|
|
|
38,315
|
|
Foreclosed assets
|
|
|
24,032
|
|
|
|
19,812
|
|
Other assets
|
|
|
49,929
|
|
|
|
54,038
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,501,395
|
|
|
$
|
1,502,578
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
144,852
|
|
|
$
|
135,434
|
|
Money market, NOW and savings
|
|
|
499,308
|
|
|
|
475,900
|
|
Time
|
|
|
537,598
|
|
|
|
571,838
|
|
Total Deposits
|
|
|
1,181,758
|
|
|
|
1,183,172
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
62,145
|
|
|
|
33,629
|
|
Long-term borrowings
|
|
|
147,470
|
|
|
|
177,514
|
|
Other liabilities
|
|
|
11,143
|
|
|
|
10,628
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
1,402,516
|
|
|
|
1,404,943
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Senior cumulative preferred stock (Series A), no par
value, 1,000,000 shares authorized; 42,750 shares issued and outstanding at March 31, 2012 and December 31, 2011
|
|
|
41,981
|
|
|
|
41,870
|
|
Common stock, no par value, 30,000,000 shares authorized; issued and
outstanding 16,859,825 shares at March 31, 2012 and 16,827,075 shares at December 31, 2011
|
|
|
119,523
|
|
|
|
119,505
|
|
Retained earnings (accumulated deficit)
|
|
|
(63,721
|
)
|
|
|
(64,425
|
)
|
Accumulated other comprehensive income
|
|
|
1,096
|
|
|
|
685
|
|
Total Stockholders’ Equity
|
|
|
98,879
|
|
|
|
97,635
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
|
$
|
1,501,395
|
|
|
$
|
1,502,578
|
|
* Derived
from audited consolidated financial statements
See accompanying notes.
SOUTHERN COMMUNITY FINANCIAL
CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Amounts in thousands, except per
share and share data)
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
13,216
|
|
|
$
|
15,513
|
|
Investment securities available for sale
|
|
|
2,037
|
|
|
|
2,563
|
|
Investment securities held to maturity
|
|
|
577
|
|
|
|
549
|
|
Federal funds sold and overnight deposits
|
|
|
15
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
Total Interest Income
|
|
|
15,845
|
|
|
|
18,699
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
Money market, NOW and savings deposits
|
|
|
515
|
|
|
|
880
|
|
Time deposits
|
|
|
2,166
|
|
|
|
2,743
|
|
Borrowings
|
|
|
2,246
|
|
|
|
2,245
|
|
|
|
|
|
|
|
|
|
|
Total Interest Expense
|
|
|
4,927
|
|
|
|
5,868
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income
|
|
|
10,918
|
|
|
|
12,831
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses
|
|
|
2,900
|
|
|
|
4,100
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income After Provision for Loan Losses
|
|
|
8,018
|
|
|
|
8,731
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Income
|
|
|
|
|
|
|
|
|
Service charges and fees on deposit accounts
|
|
|
1,362
|
|
|
|
1,488
|
|
Income from mortgage banking activities
|
|
|
305
|
|
|
|
263
|
|
Investment brokerage and trust fees
|
|
|
230
|
|
|
|
188
|
|
Gain on sale of investment securities
|
|
|
263
|
|
|
|
944
|
|
SBIC income and management fees
|
|
|
670
|
|
|
|
122
|
|
Other
|
|
|
602
|
|
|
|
(102
|
)
|
Total Non-Interest Income
|
|
|
3,432
|
|
|
|
2,903
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Expense
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
4,686
|
|
|
|
4,746
|
|
Occupancy and equipment
|
|
|
1,640
|
|
|
|
1,784
|
|
FDIC deposit insurance
|
|
|
751
|
|
|
|
1,133
|
|
Foreclosed asset related
|
|
|
798
|
|
|
|
879
|
|
Other
|
|
|
2,760
|
|
|
|
2,941
|
|
|
|
|
|
|
|
|
|
|
Total Non-Interest Expense
|
|
|
10,635
|
|
|
|
11,483
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
815
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
Income Tax (Benefit) Expense
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
815
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
Effective Dividend on Preferred Stock
|
|
|
645
|
|
|
|
639
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Available to Common Shareholders
|
|
$
|
170
|
|
|
$
|
(488
|
)
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) Per Common Share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
(0.03
|
)
|
Diluted
|
|
|
0.01
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,841,111
|
|
|
|
16,824,008
|
|
Diluted
|
|
|
16,907,425
|
|
|
|
16,824,008
|
|
See accompanying notes.
SOUTHERN COMMUNITY FINANCIAL
CORPORATION
Consolidated
STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
815
|
|
|
$
|
151
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
Unrealized holding gains on available for sale securities
|
|
|
984
|
|
|
|
(589
|
)
|
Tax effect
|
|
|
(379
|
)
|
|
|
227
|
|
Reclassification of gains recognized in net income
|
|
|
(263
|
)
|
|
|
(944
|
)
|
Tax effect
|
|
|
101
|
|
|
|
364
|
|
Net of tax amount
|
|
|
443
|
|
|
|
(942
|
)
|
Cash flow hedging activities:
|
|
|
|
|
|
|
|
|
Unrealized holding (gains) losses on cash flow hedging activities
|
|
|
(122
|
)
|
|
|
(13
|
)
|
Tax effect
|
|
|
47
|
|
|
|
5
|
|
Reclassification of (gains) losses recognized in net
income, net:
|
|
|
|
|
|
|
|
|
Reclassified into income
|
|
|
70
|
|
|
|
459
|
|
Tax effect
|
|
|
(27
|
)
|
|
|
(178
|
)
|
Net of tax amount
|
|
|
(32
|
)
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
411
|
|
|
|
(669
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
1,226
|
|
|
$
|
(518
|
)
|
See accompanying notes.
SOUTHERN COMMUNITY FINANCIAL
CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
(Accumulated
Deficit)
|
|
|
Comprehensive
Income
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
42,750
|
|
|
$
|
41,870
|
|
|
|
16,827,075
|
|
|
$
|
119,505
|
|
|
$
|
(64,425
|
)
|
|
$
|
685
|
|
|
$
|
97,635
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
815
|
|
|
|
-
|
|
|
|
815
|
|
Other comprehensive
income, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
411
|
|
|
|
411
|
|
Restricted stock issued
|
|
|
-
|
|
|
|
-
|
|
|
|
32,750
|
|
|
|
17
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Preferred stock accretion
of discount
|
|
|
-
|
|
|
|
111
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(111
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2012
|
|
|
42,750
|
|
|
$
|
41,981
|
|
|
|
16,859,825
|
|
|
$
|
119,523
|
|
|
$
|
(63,721
|
)
|
|
$
|
1,096
|
|
|
$
|
98,879
|
|
See accompanying notes.
SOUTHERN COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF
CASH FLOWS (Unaudited)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Amounts in thousands)
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
815
|
|
|
$
|
151
|
|
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,353
|
|
|
|
1,096
|
|
Provision for loan losses
|
|
|
2,900
|
|
|
|
4,100
|
|
Net proceeds from sales of loans held for sale
|
|
|
14,317
|
|
|
|
17,770
|
|
Originations of loans held for sale
|
|
|
(13,936
|
)
|
|
|
(12,113
|
)
|
Gain from mortgage banking
|
|
|
(305
|
)
|
|
|
(263
|
)
|
Stock-based compensation
|
|
|
18
|
|
|
|
31
|
|
Net increase in cash surrender value of life insurance
|
|
|
(254
|
)
|
|
|
(266
|
)
|
Realized gain on sale of available for sale securities, net
|
|
|
(263
|
)
|
|
|
(944
|
)
|
Realized (gain) loss on sale of premises and equipment
|
|
|
4
|
|
|
|
(4
|
)
|
(Gain) loss on economic hedges
|
|
|
(85
|
)
|
|
|
605
|
|
Deferred income taxes
|
|
|
(278
|
)
|
|
|
591
|
|
Realized gain on sales of foreclosed assets
|
|
|
(73
|
)
|
|
|
(280
|
)
|
Writedowns in carrying values of foreclosed assets
|
|
|
460
|
|
|
|
609
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in other assets
|
|
|
4,054
|
|
|
|
(379
|
)
|
Increase (decrease) in other liabilities
|
|
|
823
|
|
|
|
(252
|
)
|
Total Adjustments
|
|
|
8,735
|
|
|
|
10,301
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in) Operating Activities
|
|
|
9,550
|
|
|
|
10,452
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Increase (decrease) in federal funds sold
|
|
|
(22,852
|
)
|
|
|
14,972
|
|
Purchase of:
|
|
|
|
|
|
|
|
|
Available-for-sale investment securities
|
|
|
(60,769
|
)
|
|
|
(51,075
|
)
|
Held-to-maturity investment securities
|
|
|
(8,552
|
)
|
|
|
(7,829
|
)
|
Proceeds from maturities and calls of:
|
|
|
|
|
|
|
|
|
Available-for-sale investment securities
|
|
|
10,833
|
|
|
|
7,670
|
|
Held-to-maturity investment securities
|
|
|
708
|
|
|
|
577
|
|
Proceeds from sale of:
|
|
|
|
|
|
|
|
|
Available-for-sale investment securities
|
|
|
61,986
|
|
|
|
51,672
|
|
Net decrease in loans
|
|
|
10,515
|
|
|
|
31,591
|
|
Capitalized cost in foreclosed assets
|
|
|
-
|
|
|
|
(156
|
)
|
Purchases of premises and equipment
|
|
|
(298
|
)
|
|
|
(63
|
)
|
Proceeds from disposal of premises and equipment
|
|
|
-
|
|
|
|
4
|
|
Proceeds from sales of foreclosed assets
|
|
|
671
|
|
|
|
3,082
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in) Investing Activities
|
|
|
(7,758
|
)
|
|
|
50,445
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Net increase (decrease) in transaction accounts and savings accounts
|
|
|
32,826
|
|
|
|
(45,022
|
)
|
Net decrease in time deposits
|
|
|
(34,240
|
)
|
|
|
(24,187
|
)
|
Net decrease in short-term borrowings
|
|
|
(1,484
|
)
|
|
|
(133
|
)
|
Proceeds from long-term borrowings
|
|
|
-
|
|
|
|
20,000
|
|
Repayment of long-term borrowings
|
|
|
(44
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in) Financing Activities
|
|
|
(2,942
|
)
|
|
|
(49,385
|
)
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Due From Banks
|
|
|
(1,150
|
)
|
|
|
11,512
|
|
Cash and Due From Banks, Beginning of Period
|
|
|
23,356
|
|
|
|
16,584
|
|
|
|
|
|
|
|
|
|
|
Cash and Due From Banks, End of Period
|
|
$
|
22,206
|
|
|
$
|
28,096
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
|
|
|
Transfer of loans to foreclosed assets
|
|
$
|
5,278
|
|
|
$
|
9,001
|
|
See accompanying notes.
Southern Community Financial
Corporation
Notes to Consolidated Financial
Statements (Unaudited)
Note 1 – Basis of Presentation
The consolidated financial statements
include the accounts of Southern Community Financial Corporation (the “Company”), and its wholly-owned subsidiary,
Southern Community Bank and Trust (the “Bank”). All intercompany transactions and balances have been eliminated in
consolidation. In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting
solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three-month
periods ended March 31, 2012 and 2011, in conformity with accounting principles generally accepted in the United States of America.
The preparation of the consolidated financial
statements and accompanying notes requires management of the Company to make estimates and assumptions relating to reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the period. Actual results could differ significantly from those estimates
and assumptions. Material estimates that are particularly susceptible to significant change relate to the determination of the
allowance for loan losses. To a lesser extent, significant estimates are also associated with the valuation of securities, intangibles
and derivative instruments and determination of stock-based compensation and income tax assets or liabilities. Operating results
for the three-month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal
year ending December 31, 2012.
The organization and business of the Company,
accounting policies followed by the Company and other relevant information are contained in the notes to the consolidated financial
statements filed as part of the Company’s 2011 annual report on Form 10-K. This quarterly report should be read in conjunction
with the annual report.
Per Share Data
Basic and diluted net income (loss) per
common share is computed based on the weighted average number of shares outstanding during each period. Diluted net income (loss)
per share reflects the potential dilution that could occur if stock options or warrants were exercised, resulting in the issuance
of common stock that then shared in the net income (loss) of the Company.
Basic and diluted net income (loss) per
share have been computed based upon the weighted average number of common shares outstanding or assumed to be outstanding as summarized
below.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
used in computing basic net income per share
|
|
|
16,841,111
|
|
|
|
16,824,008
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive stock options
|
|
|
66,314
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares and dilutive potential common shares used in computing diluted net income per share
|
|
|
16,907,425
|
|
|
|
16,824,008
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
(in thousands)
|
|
$
|
170
|
|
|
$
|
(488
|
)
|
Basic
|
|
|
0.01
|
|
|
|
(0.03
|
)
|
Diluted
|
|
|
0.01
|
|
|
|
(0.03
|
)
|
Note 1 – Basis of Presentation
(continued)
For the three months ended March 31, 2012
and 2011, net income (loss) for determining net income (loss) per common share was reported as net income (loss) less the dividend
on preferred stock. Options and warrants to purchase shares that have been excluded from the determination of diluted earnings
per share because they are antidilutive (the exercise price is higher than the current market price) amount to 538,500 and 617,952
shares for the three months ended March 31, 2012 and 2011, respectively. These options, warrants, unvested shares of restricted
stock and all other common stock equivalents were excluded from the determination of diluted earnings per share for the three
months ended March 31, 2012 since the exercise price exceeded the average market price for the period. At March 31, 2011 all common
stock equivalents were excluded due to the Company’s loss position.
Recently issued accounting pronouncements
In May 2011, the FASB has issued Accounting
Standards Update No. 2011-04,
Fair Value Measurement
.
The purpose of the standard is to clarify and combine
fair value measurements and disclosure requirements for accounting principles generally accepted in the U.S. (GAAP) and international
financial reporting standards (IFRS). The new
standard provides amendments and wording changes used to describe certain
requirements for measuring fair value and for disclosing information about fair value measurements. This guidance is effective
for interim and annual reporting periods beginning after December 15, 2011, and should be applied prospectively to the beginning
of the annual period of adoption. The Company adopted this statement during the quarter ended March 31, 2012, which resulted in
additional disclosures related to fair value in Notes 11 and 12.
In June 2011, the FASB has issued Accounting
Standards Update No. 2011-05,
Comprehensive Income
.
The new
standard provides guidance and new formats
for reporting components and total net income and comprehensive income. The guidance allows the presentation of net income and
comprehensive income to be in a single continuous statement or two separate but consecutive statements. This guidance is effective
for interim and annual reporting periods beginning after December 15, 2011, and should be applied retrospectively to the beginning
of the annual period of adoption. The Company adopted this statement during the quarter ended September 30, 2011 and continued
to use the two consecutive statement formats which is allowed by the pronouncement.
From time to time the FASB issues exposure
drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public,
to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers
the effect of the proposed statements and SEC Staff Accounting Bulletins on the consolidated financial statements of the Company
and monitors the status of changes to and proposed effective dates of exposure drafts.
Note 2 – Acquisition Agreement
with Capital Bank Financial Corp.
On March 26, 2012, the Company entered
into an Agreement and Plan of Merger (the “Agreement”) with Capital Bank Financial Corp. (“CBF”) and Winston
23 Corporation (“Winston”), a wholly-owned subsidiary of CBF, pursuant to which Southern Community Financial Corporation
(“Southern Community”) will merge with Winston and become a wholly-owned subsidiary of CBF (the “Merger”).
The Agreement and the transactions contemplated by it has been approved by the Board of Directors of both CBF and Southern Community.
Capital Bank Financial Corp. is a national
bank holding company that was incorporated in the State of Delaware in 2009. CBF has raised approximately $900 million of equity
capital with the goal of creating a regional banking franchise in the southeastern region of the United States. CBF has previously
invested in First National of the South, Metro Bank of Dade Country, Turnberry Bank, TIB Financial Corporation, Capital Bank Corporation
and Green Bankshares, Inc. CBF is the parent of Capital Bank, N.A., a national banking association with approximately $6.5 billion
in total assets and 143 full-service banking offices throughout southern Florida and the Florida Keys, North Carolina, South Carolina,
Tennessee and Virginia. CBF is also the parent company of Naples Capital Advisors, Inc., a registered investment advisor.
Note 2 – Acquisition Agreement
with Capital Bank Financial Corp. (continued)
Subject to the terms and conditions set
forth in the Agreement, each share of Southern Community Common Stock issued and outstanding at the effective time of the Merger
(other than shares owned by Southern Community, CBF and certain of their subsidiaries) will be converted into the right to receive
either $2.875 in cash or shares of CBF stock valued at $2.875, at a fixed exchange ratio (subject to certain adjustments). Southern
Community shareholders may elect to receive their payment in cash or stock, subject to the requirement that the total consideration
will consist of 40% cash and 60% stock. No fractional shares of CBF common stock will be issued in the Merger, with holders receiving
cash (without interest) in lieu of fractional shares.
Each outstanding option to purchase shares
of Southern Community common stock will be vested prior to the Merger and be paid in cash equal to the difference between the
exercise price of the option and $2.875 and each share of Southern Community restricted stock will vest immediately prior to the
Merger and all restrictions will immediately lapse. If holders of Southern Community Common Stock would be entitled to any fractional
shares of CBF Common Stock, each holder who would otherwise have been entitled to a fraction of a share of CBF Common Stock shall
be entitled to receive cash (without interest) in lieu of such fractional shares.
Southern Community shareholders will also
be granted one non-transferable contingent value right (“CVR”) per share, with each CVR eligible to receive a cash
payment equal to 75% of the excess, if any, of (i) $87 million over (ii) the amount of credit losses from Southern Community’s
cumulative legacy loan portfolio and foreclosed assets for a period of five years from the closing date of the Merger, with a
maximum payment of $1.30 per CVR. Payout of the CVR will be overseen by a special committee of the CBF Board. Southern Community
shareholders may also receive an additional cash payment based on the terms of a potential repurchase by CBF of the preferred
stock issued by Southern Community to the United States Department of the Treasury.
Upon the closing of the Merger, Dr. William
G. Ward, Sr., the Chairman of Southern Community’s Board of Directors, will join the Board of Directors of both CBF and
its subsidiary bank (“Capital Bank”), and James G. Chrysson, the Vice Chairman of the Board of Southern Community,
will join the Board of Capital Bank.
The obligations of Southern Community
and CBF to consummate the merger are subject to certain conditions, including: (i) approval of the Merger by the shareholders
of Southern Community; (ii) the effectiveness of CBF’s registration statement on Form S-1 filed in connection with the planned
initial public offering of shares by CBF, and of a registration statement for the CBF common stock to be issued in the Merger;
(iii) receipt of required regulatory approvals (and in CBF’s case, without the imposition of an unduly burdensome regulatory
condition); (iv) the absence of any injunction or similar restraint enjoining or making illegal consummation of the Merger or
any of the other transactions contemplated by the Agreement; (v) the continuing material truth and accuracy of representations
and warranties made by the parties in the Agreement; and (vi) the performance in all material respects by each of the parties
of its covenants under the Agreement. Some of these conditions may be waived by the party for whose benefit they were included
in the Agreement. CBF’s obligation to close is subject to certain additional conditions, including the absence of a material
adverse effect on Southern Community, the amendment or waiver of certain of Southern Community’s compensation-related agreements,
and approval of the listing of the CBF common stock to be issued in the Merger.
The Agreement may be terminated, before
or after receipt of shareholder approval, in certain circumstances, including: (i) upon the mutual consent of the parties; (ii)
failure to obtain any required regulatory approval; (iii) by either party if the Merger is not consummated on or before September
26, 2012 if such failure is not caused by material breach of the Agreement; (iv) by either party if there is a material breach
of the other party’s representations, warranties, or covenants, and the breach or change that is not cured within 30 days
following notice by the complaining party to the complaining party’s reasonable satisfaction; (v) by CBF if Southern Community’s
Board fails to recommend that shareholders approve the Agreement and the Merger, changes such recommendation or breaches certain
non-solicitation covenants with respect to third party proposals; or (vi) by either party if the shareholders of Southern Community
fail to approve the Agreement.
Under certain circumstances, Southern
Community will be obligated to pay CBF a termination fee of $4 million and reimburse CBF up to $1 million for all expenses incurred
by it in connection with the Agreement and the transactions contemplated thereby.
Note 3 – Investment Securities
The following is a summary of the securities
portfolio by major classification at the dates presented.
|
|
March 31, 2012
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
Gross Unrealized
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(Amounts in thousands)
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agencies
|
|
$
|
23,958
|
|
|
$
|
2
|
|
|
$
|
160
|
|
|
$
|
23,800
|
|
Asset-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
|
188,690
|
|
|
|
2,314
|
|
|
|
108
|
|
|
|
190,896
|
|
Collateralized mortgage obligations
|
|
|
27,672
|
|
|
|
233
|
|
|
|
810
|
|
|
|
27,095
|
|
Small Business Administration loan pools
|
|
|
65,076
|
|
|
|
739
|
|
|
|
78
|
|
|
|
65,737
|
|
Student loan pools
|
|
|
8,730
|
|
|
|
-
|
|
|
|
89
|
|
|
|
8,641
|
|
Municipals
|
|
|
25,410
|
|
|
|
2,150
|
|
|
|
-
|
|
|
|
27,560
|
|
Trust preferred securities
|
|
|
3,250
|
|
|
|
-
|
|
|
|
918
|
|
|
|
2,332
|
|
Corporate bonds
|
|
|
4,213
|
|
|
|
-
|
|
|
|
688
|
|
|
|
3,525
|
|
Other
|
|
|
1,000
|
|
|
|
-
|
|
|
|
9
|
|
|
|
991
|
|
|
|
$
|
347,999
|
|
|
$
|
5,438
|
|
|
$
|
2,860
|
|
|
$
|
350,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
$
|
428
|
|
|
$
|
30
|
|
|
$
|
-
|
|
|
$
|
458
|
|
Small Business Administration loan pools
|
|
|
4,660
|
|
|
|
241
|
|
|
|
-
|
|
|
|
4,901
|
|
Municipals
|
|
|
32,788
|
|
|
|
2,309
|
|
|
|
-
|
|
|
|
35,097
|
|
Trust preferred securities
|
|
|
8,597
|
|
|
|
59
|
|
|
|
123
|
|
|
|
8,533
|
|
Corporate bonds
|
|
|
5,787
|
|
|
|
-
|
|
|
|
567
|
|
|
|
5,220
|
|
|
|
$
|
52,260
|
|
|
$
|
2,639
|
|
|
$
|
690
|
|
|
$
|
54,209
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
Gross Unrealized
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(Amounts in thousands)
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agencies
|
|
$
|
34,660
|
|
|
$
|
69
|
|
|
$
|
-
|
|
|
$
|
34,729
|
|
Asset-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
|
185,838
|
|
|
|
1,713
|
|
|
|
245
|
|
|
|
187,306
|
|
Collateralized mortgage obligations
|
|
|
28,089
|
|
|
|
450
|
|
|
|
1,447
|
|
|
|
27,092
|
|
Small Business Administration loan pools
|
|
|
67,507
|
|
|
|
637
|
|
|
|
76
|
|
|
|
68,068
|
|
Student loan pools
|
|
|
8,903
|
|
|
|
-
|
|
|
|
1
|
|
|
|
8,902
|
|
Municipals
|
|
|
26,981
|
|
|
|
2,239
|
|
|
|
-
|
|
|
|
29,220
|
|
Trust preferred securities
|
|
|
3,250
|
|
|
|
-
|
|
|
|
929
|
|
|
|
2,321
|
|
Corporate Bonds
|
|
|
4,213
|
|
|
|
-
|
|
|
|
554
|
|
|
|
3,659
|
|
Other
|
|
|
1,000
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1,001
|
|
|
|
$
|
360,441
|
|
|
$
|
5,109
|
|
|
$
|
3,252
|
|
|
$
|
362,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
$
|
474
|
|
|
$
|
34
|
|
|
$
|
-
|
|
|
$
|
508
|
|
Small Business Administration loan pools
|
|
|
4,928
|
|
|
|
230
|
|
|
|
-
|
|
|
|
5,158
|
|
Municipals
|
|
|
33,214
|
|
|
|
1,904
|
|
|
|
1
|
|
|
|
35,117
|
|
Corporate bonds
|
|
|
5,787
|
|
|
|
-
|
|
|
|
1,056
|
|
|
|
4,731
|
|
|
|
$
|
44,403
|
|
|
$
|
2,168
|
|
|
$
|
1,057
|
|
|
$
|
45,514
|
|
Residential mortgage-backed securities
and collateralized mortgage obligations are primarily government sponsored (GSE) agency issued whose underlying collateral are
prime residential mortgage loans. The Company’s municipal securities are composed of geographic concentrations of 94.4%
North Carolina, 3.2% of Texas independent school districts and less than 2.4% in other states. As the Company’s investment
policy limits the purchase of municipal securities to “A” rated or better, the municipal investment portfolio segment
has 98.4% of this portfolio rated “A” or better.
Note 3 – Investment Securities
(continued)
For the
three months ended March 31, 2012 and 2011, sales of securities available for sale resulted in gross realized gains of $301 thousand
and
$
944 thousand, respectively, and realized losses of $38 thousand and none, respectively,
for each
period. These investment sales generated $62.0 million and $51.7 million in proceeds
during these respective periods.
The following table shows the gross unrealized
losses and fair values for our investments and length of time that the individual securities have been in a continuous unrealized
loss position.
|
|
March 31, 2012
|
|
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
losses
|
|
|
Fair Value
|
|
|
losses
|
|
|
Fair Value
|
|
|
losses
|
|
|
|
(Amounts in thousands)
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agencies
|
|
$
|
22,021
|
|
|
$
|
160
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22,021
|
|
|
$
|
160
|
|
Asset-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
|
30,158
|
|
|
|
108
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,158
|
|
|
|
108
|
|
Collateralized mortgage obligations
|
|
|
12,798
|
|
|
|
810
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,798
|
|
|
|
810
|
|
Small Business Administration loan pools
|
|
|
14,481
|
|
|
|
77
|
|
|
|
534
|
|
|
|
1
|
|
|
|
15,015
|
|
|
|
78
|
|
Student loan pools
|
|
|
8,641
|
|
|
|
89
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,641
|
|
|
|
89
|
|
Trust preferred securities
|
|
|
-
|
|
|
|
-
|
|
|
|
2,332
|
|
|
|
918
|
|
|
|
2,332
|
|
|
|
918
|
|
Corporate bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
3,525
|
|
|
|
688
|
|
|
|
3,525
|
|
|
|
688
|
|
Other
|
|
|
1,000
|
|
|
|
9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
89,099
|
|
|
$
|
1,253
|
|
|
$
|
6,391
|
|
|
$
|
1,607
|
|
|
$
|
95,490
|
|
|
$
|
2,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities
|
|
$
|
4,830
|
|
|
$
|
123
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,830
|
|
|
$
|
123
|
|
Corporate bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
5,220
|
|
|
|
567
|
|
|
|
5,220
|
|
|
|
567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
4,830
|
|
|
$
|
123
|
|
|
$
|
5,220
|
|
|
$
|
567
|
|
|
$
|
10,050
|
|
|
$
|
690
|
|
|
|
December 31, 2011
|
|
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
losses
|
|
|
Fair Value
|
|
|
losses
|
|
|
Fair Value
|
|
|
losses
|
|
|
|
(Amount in thousands)
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
$
|
54,446
|
|
|
$
|
245
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
54,446
|
|
|
$
|
245
|
|
Collateralized mortgage obligations
|
|
|
12,248
|
|
|
|
1,447
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,248
|
|
|
|
1,447
|
|
Small Business Administration loan pools
|
|
|
12,309
|
|
|
|
74
|
|
|
|
686
|
|
|
|
2
|
|
|
|
12,995
|
|
|
|
76
|
|
Student loan pools
|
|
|
8,902
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,902
|
|
|
|
1
|
|
Municipals
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
Trust preferred securities
|
|
|
-
|
|
|
|
-
|
|
|
|
2,321
|
|
|
|
929
|
|
|
|
2,321
|
|
|
|
929
|
|
Corporate bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
3,659
|
|
|
|
554
|
|
|
|
3,659
|
|
|
|
554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
87,911
|
|
|
$
|
1,767
|
|
|
$
|
6,666
|
|
|
$
|
1,485
|
|
|
$
|
94,577
|
|
|
$
|
3,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipals
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
967
|
|
|
$
|
1
|
|
|
$
|
967
|
|
|
$
|
1
|
|
Corporate bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
4,731
|
|
|
|
1,056
|
|
|
|
4,731
|
|
|
|
1,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,698
|
|
|
$
|
1,057
|
|
|
$
|
5,698
|
|
|
$
|
1,057
|
|
Note 3 – Investment Securities
(continued)
In evaluating investment securities for
“other-than-temporary impairment” losses, management considers, among other things, (i) the length of time and the
extent to which the investment is in an unrealized loss position, (ii) the financial condition and near term prospects of the
issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a sufficient period of time
to allow for any anticipated recovery of unrealized loss. At March 31, 2012, there were five investment securities with aggregate
fair values of $11.6 million in an unrealized loss position for at least twelve months including one trust preferred security
valued at $2.2 million with a $840 thousand unrealized loss due to changes in the level of market interest rates. The security
has a variable rate based on LIBOR which had declined steadily throughout 2009 and has stabilized during 2010, 2011 and the first
three months of 2012. The fair value of this security increased from the prior quarter and the unrealized loss remained significant.
Based on the nature of these securities and the continued timely receipt of scheduled payments, we believe the decline in value
to be solely due to changes in interest rates and the general economic conditions and not deterioration in their credit quality.
We have the intention and ability to hold these securities for a period of time sufficient to allow for their recovery in value
or until maturity. The unrealized losses on the securities available for sale are reflected in other comprehensive income.
The amortized cost and fair values of
securities available for sale and held to maturity at March 31, 2012 by contractual maturity are shown below. Actual expected
maturities may differ from contractual maturities because issuers may have the right to call or prepay the obligation.
|
|
March 31, 2012
|
|
|
|
Securities Available for Sale
|
|
|
Securities Held to Maturity
|
|
|
|
Amortized
|
|
|
|
|
|
Amortized
|
|
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
(Amount in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government Agencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one but through five years
|
|
$
|
1,000
|
|
|
$
|
1,001
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Due after five but through ten years
|
|
|
777
|
|
|
|
778
|
|
|
|
-
|
|
|
|
-
|
|
Due after ten years
|
|
|
22,181
|
|
|
|
22,020
|
|
|
|
-
|
|
|
|
-
|
|
Municipals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
364
|
|
|
|
364
|
|
|
|
-
|
|
|
|
-
|
|
Due after one but through five years
|
|
|
446
|
|
|
|
449
|
|
|
|
1,722
|
|
|
|
1,804
|
|
Due after five but through ten years
|
|
|
355
|
|
|
|
370
|
|
|
|
4,448
|
|
|
|
4,732
|
|
Due after ten years
|
|
|
24,245
|
|
|
|
26,377
|
|
|
|
26,618
|
|
|
|
28,561
|
|
Trust preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after ten years
|
|
|
3,250
|
|
|
|
2,333
|
|
|
|
8,597
|
|
|
|
8,533
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after five but through ten years
|
|
|
4,213
|
|
|
|
3,525
|
|
|
|
5,787
|
|
|
|
5,220
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after five but through ten years
|
|
|
1,000
|
|
|
|
991
|
|
|
|
-
|
|
|
|
-
|
|
Asset-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
|
188,690
|
|
|
|
190,896
|
|
|
|
428
|
|
|
|
458
|
|
Collateralized mortgage obligations
|
|
|
27,672
|
|
|
|
27,095
|
|
|
|
-
|
|
|
|
-
|
|
Small Business Administration loan pools
|
|
|
65,076
|
|
|
|
65,737
|
|
|
|
4,660
|
|
|
|
4,901
|
|
Student loan pools
|
|
|
8,730
|
|
|
|
8,641
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
347,999
|
|
|
$
|
350,577
|
|
|
$
|
52,260
|
|
|
$
|
54,209
|
|
Federal Home Loan Bank Stock
As disclosed separately on our statements
of financial condition, the Company has an investment in Federal Home Loan Bank of Atlanta (“FHLB”) stock of $6.8
million at March 31, 2012 and December 31, 2011. The Company carries its investment in FHLB at its cost which is the par value
of the stock. Based on current borrowings, the FHLB periodically repurchases excess stock from the Company at par value as the
stock is not actively traded and does not have a quoted market price. The FHLB paid a quarterly cash dividend to its members for
the second quarter of 2009. Management believes that the investment in FHLB stock was not impaired as of March 31, 2012.
Note 4 – Loans
Following is a summary of loans by loan
class:
|
|
At March 31, 2012
|
|
|
At December 31, 2011
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
Amount
|
|
|
of Total
|
|
|
Amount
|
|
|
of Total
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
Commercial real estate
|
|
$
|
382,776
|
|
|
|
41.1
|
%
|
|
$
|
387,275
|
|
|
|
40.8
|
%
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
82,335
|
|
|
|
8.8
|
%
|
|
|
85,321
|
|
|
|
9.0
|
%
|
Commercial line of credit
|
|
|
46,508
|
|
|
|
5.0
|
%
|
|
|
44,574
|
|
|
|
4.7
|
%
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction
|
|
|
101,551
|
|
|
|
10.9
|
%
|
|
|
101,945
|
|
|
|
10.7
|
%
|
Residential lots
|
|
|
42,924
|
|
|
|
4.6
|
%
|
|
|
45,164
|
|
|
|
4.8
|
%
|
Raw land
|
|
|
16,144
|
|
|
|
1.7
|
%
|
|
|
17,488
|
|
|
|
1.8
|
%
|
Home equity lines
|
|
|
93,247
|
|
|
|
10.0
|
%
|
|
|
95,136
|
|
|
|
10.0
|
%
|
Consumer
|
|
|
165,860
|
|
|
|
17.9
|
%
|
|
|
173,119
|
|
|
|
18.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
$
|
931,345
|
|
|
|
100
|
%
|
|
$
|
950,022
|
|
|
|
100
|
%
|
Less: Allowance for loan losses
|
|
|
(24,181
|
)
|
|
|
|
|
|
|
(24,165
|
)
|
|
|
|
|
Net Loans
|
|
$
|
907,164
|
|
|
|
|
|
|
$
|
925,857
|
|
|
|
|
|
Construction loans are non-revolving extensions
of credit secured by real property, the proceeds of which will be used to a) finance the preparation of land for construction
of industrial, commercial, residential, or farm buildings; or b) finance the on-site construction of such buildings. Construction
loans are approved based on a set of projections regarding cost, time to completion, time to stabilization or sale, and availability
of permanent financing. Any one of these projections may vary from actual results. Therefore, construction loans are considered
based not only on the expected merits of the project itself, but also on secondary and tertiary repayment sources of the project
sponsor, project sponsor expertise and experience and independent evaluation of project viability. Personal guarantees are typically
required. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders,
sales of developed property, or an interim loan commitment from the Company until permanent financing is obtained. These loans
are closely monitored by on-site inspections to ensure that loan commitments remain in-balance with work completed to date and
that adequate funds remain available to ensure completion.
Commercial real estate loans are underwritten
by evaluating and understanding the borrower’s ability to generate adequate cash flow to repay the subject debt within reasonable
terms. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate
lending typically involves higher loan amounts relative to equity sources of capitalization and higher debt service requirements
relative to available cash flow. This heightened degree of financial and operating leverage can expose commercial real estate
loans to increased sensitivity to changes in market and economic conditions. Repayment of these loans is generally largely dependent
on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Management
monitors and evaluates commercial real estate loans based on collateral, geography, and secondary/tertiary sources of repayment
of the property sponsors. Management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied
loans. Loans secured by owner-occupied properties are generally considered to be less sensitive to real estate market conditions,
since the profitability and cash flow of the occupying business are aligned via common ownership.
Commercial and industrial loans are underwritten
after evaluating and understanding the borrower’s ability to generate positive cash flow, operate profitably and prudently
expand its business. Underwriting standards are designed to promote relationships to include a full range of loan, deposit, and
cash management services. Underwriting processes include thorough examination of the borrower’s market, operating environment,
and business model, to assess whether current and projected cash flows can reasonably be expected to present an acceptable source
of repayment. Such repayments are generally sensitized with variances of growth/decline, profitability, and operating cycle changes.
Secondary repayment sources, including collateral, are assessed. The level of control and monitoring over such secondary repayment
sources may be impacted by the strength of the primary repayment source and the financial position of the borrower.
Note 4 – Loans (continued)
Residential lot loans are extensions of
credit secured by developed tracts of land with appropriate entitlements to support construction of single family or multifamily
residential buildings. Such loans were historically structured as time or term loans to finance the holding of the lot for future
construction. Because the property is neither generating current income nor providing shelter, these loans have proven to be subject
to a higher-than-average risk of abandonment. Extensions of credit for acquisition of finished lots are generally assessed based
on the outside repayment sources readily available to the borrower in the current underwriting for such loans.
Consumer loans are originated utilizing
a centralized approval process staffed by experienced consumer loan administration personnel. Policies and procedures are developed
and maintained to ensure compliance with the Company’s risk management objectives and regulatory compliance requirements.
This activity, coupled with relatively small loan amounts spread across many individual borrowers, minimizes risk. Additionally,
trend and outlook reports are reviewed by management on a periodic basis, along with periodic review activity of particular regions
and individual lenders. Loans are concentrated in home equity lines of credit and term loans secured by first or second liens
on owner-occupied residential real estate.
Home Equity loans are consumer-purpose
revolving or term loans secured by 1
st
or 2
nd
liens on owner-occupied residential real estate. Such loans
are underwritten and approved on the same centralized basis as other consumer loans. Appropriate risk management and compliance
practices are exercised to ensure that loan-to-value, lien perfection, and compliance risks are addressed and managed within the
Bank’s established tolerances. The degree of utilization of revolving commitments within this asset class is reviewed monthly
to identify changes in the behavior of this borrowing group.
Commercial lines of credit are underwritten
according to the same standards applied to other commercial and industrial loans; with particular focus on the cash flow impact
of the borrower’s operating cycle. Based on the risk profile of each borrower, an appropriate level of monitoring and servicing
can be applied, such that higher risk categories involve more frequent monitoring and more involved control over the cash proceeds
of asset conversion. Lower risk profiles may involve less restrictive controls and lighter servicing intensity.
Raw land loans are those secured by tracts
of undeveloped raw land held for personal use or investment. Such properties are expected to be held for a period of not less
than twenty-four months with no active development plan. Given the raw nature of the land, these loans are underwritten based
on the ability of the borrower to service the indebtedness with sources of income unrelated to the property. Higher cash down
payment and lower loan-to-value expectations are applied to such loans.
Loan origination fees and certain direct
origination are capitalized and recognized as an adjustment to yield over the life of the related loan. Net unamortized deferred
fees less related cost included in the above were $41 thousand at March 31, 2012 and $136 thousand at December 31, 2011.
Loans are placed in a nonaccrual status
for all classes of loans when, in management’s opinion, the borrower may be unable to meet payments as they become due or
payments are 90 days past due. Loans are returned to an accrual status when the borrower makes timely principal and interest payments
for a period of at least six months and has demonstrated the ability to continue making scheduled payments until the loan is repaid
in full.
The following is a summary of nonperforming
assets at the periods presented:
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
31,499
|
|
|
$
|
38,715
|
|
|
$
|
53,304
|
|
Restructured loans - nonaccruing
|
|
|
26,404
|
|
|
|
29,333
|
|
|
|
20,437
|
|
Total nonperforming loans
|
|
|
57,903
|
|
|
|
68,048
|
|
|
|
73,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed assets
|
|
|
24,032
|
|
|
|
19,812
|
|
|
|
23,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
81,935
|
|
|
$
|
87,860
|
|
|
$
|
96,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured loans in accrual status not included above
|
|
$
|
24,486
|
|
|
$
|
24,202
|
|
|
$
|
13,488
|
|
Note 4 – Loans (continued)
For loan modifications and in particular,
troubled debt restructurings (TDRs), the Company generally utilizes its own loan modification programs whereby the borrower is
provided one or more of the following concessions: interest rate reduction, extension of payment terms, forgiveness of principal
or other modifications. The Company has a small residential mortgage portfolio without the need to utilize government sponsored
loan modification programs. The primary factor in the pre-modification evaluation of a troubled debt restructuring is whether
such an action will increase the likelihood of achieving a better result in terms of collecting the amount owed to the Bank.
As illustrated in the table below, during
the three months ended March 31, 2012, the following concessions were made on 5 loans for $1.7 million (measured as a percentage
of loan balances on TDRs):
|
·
|
Reduced
interest rate for
2% (1 loans for
$42 thousand);
|
|
·
|
Extension
of payment terms
for 96% (3 loans
for $1.6 million);
and
|
|
·
|
Forgiveness
of principal for
2% (1 loan for
$27 thousand).
|
In cases where there was more than one
concession granted, the modification was classified by the more dominant concession.
The following table presents a breakdown
of the types of concessions made by loan class for the three months ended March 31, 2012.
|
|
Three months ended March 31, 2012
|
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
Number of
|
|
|
Recorded
|
|
|
Recorded
|
|
|
|
Loans
|
|
|
Investment
|
|
|
Investment
|
|
Below market interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial line of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Home equity lines
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential lots
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Raw land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
1
|
|
|
|
42
|
|
|
|
42
|
|
Total
|
|
|
1
|
|
|
|
42
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extended payment terms
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
2
|
|
|
|
707
|
|
|
|
707
|
|
Commercial line of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential construction
|
|
|
1
|
|
|
|
902
|
|
|
|
902
|
|
Home equity lines
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential lots
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Raw land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
3
|
|
|
|
1,609
|
|
|
|
1,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forgiveness of principal
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial line of credit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Home equity lines
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential lots
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Raw land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
1
|
|
|
|
96
|
|
|
|
27
|
|
Total
|
|
|
1
|
|
|
|
96
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5
|
|
|
$
|
1,747
|
|
|
$
|
1,678
|
|
Note 4 – Loans (continued)
During the previous twelve months ended
March 31, 2012, the Company modified 103 loans in the amount of $40.9 million. Of this total, there were payment defaults (where
the modified loan was past due thirty days or more) of $1.9 million, or 4.6%, during the three ended March 31, 2012.
The following table presents loans that
were modified as troubled debt restructurings within the previous 12 months and for which there was a payment default (past due
30 days or more) during the three months ended March 31, 2012.
|
|
Three Months
|
|
|
|
Ended March 31, 2012
|
|
|
|
Number of
|
|
|
Recorded
|
|
|
|
Loans
|
|
|
Investment
|
|
Below market interest rate
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
-
|
|
|
$
|
-
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
Commercial line of credit
|
|
|
-
|
|
|
|
-
|
|
Residential construction
|
|
|
-
|
|
|
|
-
|
|
Home equity lines
|
|
|
-
|
|
|
|
-
|
|
Residential lots
|
|
|
1
|
|
|
|
9
|
|
Raw land
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
1
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Extended payment terms
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
3
|
|
|
|
1,092
|
|
Commercial and industrial
|
|
|
1
|
|
|
|
4
|
|
Commercial line of credit
|
|
|
1
|
|
|
|
250
|
|
Residential construction
|
|
|
-
|
|
|
|
-
|
|
Home equity lines
|
|
|
-
|
|
|
|
-
|
|
Residential lots
|
|
|
1
|
|
|
|
43
|
|
Raw land
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
9
|
|
|
|
487
|
|
Total
|
|
|
15
|
|
|
|
1,876
|
|
|
|
|
|
|
|
|
|
|
Forgiveness of principal
|
|
|
|
|
|
|
|
|
Total
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
16
|
|
|
$
|
1,885
|
|
Note 4 – Loans (continued)
Of the total of 103 loans for $40.9 million
which were modified during the twelve months ended March 31, 2012, the following represents their success or failure during the
year ended March 31, 2012:
|
·
|
88.7%
are paying as restructured;
|
|
·
|
0.3%
have been reclassified
to nonaccrual;
|
|
·
|
9.7%
have defaulted
and/or foreclosed
upon; and
|
|
·
|
1.3%
have paid in full.
|
The following table presents the successes
and failures of the types of modifications within the previous 12 months as of March 31, 2012.
|
|
Paid in full
|
|
|
Paying as restructured
|
|
|
Converted to
non-accrual
|
|
|
Foreclosure/Default
|
|
|
|
Number
|
|
|
Recorded
|
|
|
Number
|
|
|
Recorded
|
|
|
Number
|
|
|
Recorded
|
|
|
Number
|
|
|
Recorded
|
|
Amounts in $ thousands
|
|
of Loans
|
|
|
Investment
|
|
|
of Loans
|
|
|
Investment
|
|
|
of Loans
|
|
|
Investment
|
|
|
of Loans
|
|
|
Investment
|
|
Below market interest rate
|
|
|
-
|
|
|
$
|
-
|
|
|
|
24
|
|
|
$
|
17,637
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Extended payment terms
|
|
|
2
|
|
|
|
527
|
|
|
|
45
|
|
|
|
16,106
|
|
|
|
2
|
|
|
|
104
|
|
|
|
11
|
|
|
|
3,960
|
|
Forgiveness of principal
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
1,417
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
1,142
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
2
|
|
|
$
|
527
|
|
|
|
73
|
|
|
$
|
36,302
|
|
|
|
2
|
|
|
$
|
104
|
|
|
|
11
|
|
|
$
|
3,960
|
|
The following is a summary of the recorded
investment in nonaccrual loans and impaired loans segregated by class of loans at the periods presented:
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
|
Nonaccrual
|
|
|
Impaired
|
|
|
Nonaccrual
|
|
|
Impaired
|
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
Loans
|
|
|
|
(Amounts in thousands)
|
|
Commercial real estate
|
|
$
|
19,234
|
|
|
$
|
35,159
|
|
|
$
|
26,484
|
|
|
$
|
39,297
|
|
Commercial and industrial
|
|
|
2,213
|
|
|
|
1,984
|
|
|
|
3,548
|
|
|
|
3,899
|
|
Commercial line of credit
|
|
|
1,079
|
|
|
|
969
|
|
|
|
1,429
|
|
|
|
1,004
|
|
Residential construction
|
|
|
12,653
|
|
|
|
15,750
|
|
|
|
11,491
|
|
|
|
16,619
|
|
Home equity lines
|
|
|
2,230
|
|
|
|
1,535
|
|
|
|
2,637
|
|
|
|
1,955
|
|
Residential lots
|
|
|
12,305
|
|
|
|
12,245
|
|
|
|
12,096
|
|
|
|
12,095
|
|
Raw land
|
|
|
234
|
|
|
|
118
|
|
|
|
1,484
|
|
|
|
1,484
|
|
Consumer
|
|
|
7,955
|
|
|
|
9,060
|
|
|
|
8,879
|
|
|
|
10,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
57,903
|
|
|
$
|
76,820
|
|
|
$
|
68,048
|
|
|
$
|
87,106
|
|
The Company evaluates “impaired”
loans, which includes nonperforming loans and accruing troubled debt restructured loans, having risk characteristics that are
unique to an individual borrower on a loan-by-loan basis with balances above a specified level. For smaller loans, the allowance
is calculated based on the credit grade utilizing historical loss experience and other qualitative factors. Included in the table
below, $54.1 million out of the total of $57.9 million of nonperforming loans and $22.8 million out of the total of $24.5 million
of accruing troubled debt restructured loans were individually evaluated which required a reserve of $2.2 million and $403 thousand,
respectively, for a total specific ALLL of $2.6 million. The impaired loans with smaller balances ($3.8 million in nonperforming
loans and $1.7 million in accruing troubled debt restructured loans) were collectively evaluated for impairment.
Note 4 – Loans (continued)
The following is a summary of loans individually
or collectively evaluated for impairment, by segment, at March 31, 2012:
|
|
Commercial
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
|
|
|
|
|
|
Real
|
|
|
|
|
|
|
|
|
|
|
|
|
Estate
|
|
|
Commercial
|
|
|
Estate
|
|
|
HELOC
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
Ending balance: nonperforming loans individually evaluated for impairment
|
|
$
|
17,893
|
|
|
$
|
2,455
|
|
|
$
|
26,036
|
|
|
$
|
1,535
|
|
|
$
|
6,105
|
|
|
$
|
54,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing troubled debt restructured loans individually evaluated for impairment
|
|
|
17,266
|
|
|
|
498
|
|
|
|
2,077
|
|
|
|
-
|
|
|
|
2,955
|
|
|
|
22,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: total impaired loans individually evaluated for impairment
|
|
|
35,159
|
|
|
|
2,953
|
|
|
|
28,113
|
|
|
|
1,535
|
|
|
|
9,060
|
|
|
|
76,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
|
347,617
|
|
|
|
125,891
|
|
|
|
132,506
|
|
|
|
91,711
|
|
|
|
156,800
|
|
|
|
854,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
382,776
|
|
|
$
|
128,844
|
|
|
$
|
160,619
|
|
|
$
|
93,246
|
|
|
$
|
165,860
|
|
|
$
|
931,345
|
|
The following is a summary of loans individually
or collectively evaluated for impairment, by segment, at December 31, 2011:
|
|
Commercial
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
|
|
|
|
|
|
Real
|
|
|
|
|
|
|
|
|
|
|
|
|
Estate
|
|
|
Commercial
|
|
|
Estate
|
|
|
HELOC
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
Ending balance: nonperforming loans individually evaluated for impairment
|
|
$
|
24,822
|
|
|
$
|
3,889
|
|
|
$
|
27,238
|
|
|
$
|
1,955
|
|
|
$
|
7,209
|
|
|
$
|
65,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing troubled debt restructured loans individually evaluated for impairment
|
|
|
14,475
|
|
|
|
1,014
|
|
|
|
2,960
|
|
|
|
-
|
|
|
|
3,544
|
|
|
|
21,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: total impaired loans individually evaluated for impairment
|
|
|
39,297
|
|
|
|
4,903
|
|
|
|
30,198
|
|
|
|
1,955
|
|
|
|
10,753
|
|
|
|
87,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: collectively evaluated for impairment
|
|
|
347,978
|
|
|
|
124,993
|
|
|
|
134,399
|
|
|
|
93,180
|
|
|
|
162,366
|
|
|
|
862,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
387,275
|
|
|
$
|
129,896
|
|
|
$
|
164,597
|
|
|
$
|
95,135
|
|
|
$
|
173,119
|
|
|
$
|
950,022
|
|
Note 4 – Loans (continued)
The following is a breakdown of impaired
loans individually evaluated for impairment, by class, with and without related specific allowance at March 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
Unpaid
|
|
|
Partial
|
|
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
Principal
|
|
|
Charge Offs
|
|
|
Recorded
|
|
|
Related
|
|
|
Recorded
|
|
|
Income
|
|
|
|
Balance
|
|
|
To Date
|
|
|
Investment
|
|
|
Allowance
|
|
|
Investment
|
|
|
Recognized
|
|
|
|
(Amounts in thousands)
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
31,461
|
|
|
$
|
(8,496
|
)
|
|
$
|
22,965
|
|
|
$
|
-
|
|
|
$
|
24,022
|
|
|
$
|
166
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
2,986
|
|
|
|
(1,033
|
)
|
|
|
1,953
|
|
|
|
-
|
|
|
|
2,038
|
|
|
|
23
|
|
Commercial line of credit
|
|
|
216
|
|
|
|
-
|
|
|
|
216
|
|
|
|
-
|
|
|
|
545
|
|
|
|
1
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction
|
|
|
10,926
|
|
|
|
(1,402
|
)
|
|
|
9,524
|
|
|
|
-
|
|
|
|
12,626
|
|
|
|
17
|
|
Residential lots
|
|
|
10,209
|
|
|
|
(3,633
|
)
|
|
|
6,576
|
|
|
|
-
|
|
|
|
7,983
|
|
|
|
6
|
|
Raw land
|
|
|
2,720
|
|
|
|
(2,602
|
)
|
|
|
118
|
|
|
|
-
|
|
|
|
119
|
|
|
|
2
|
|
Home equity lines
|
|
|
517
|
|
|
|
(32
|
)
|
|
|
485
|
|
|
|
-
|
|
|
|
838
|
|
|
|
-
|
|
Consumer
|
|
|
7,239
|
|
|
|
(585
|
)
|
|
|
6,654
|
|
|
|
-
|
|
|
|
7,074
|
|
|
|
40
|
|
Subtotal
|
|
|
66,274
|
|
|
|
(17,783
|
)
|
|
|
48,491
|
|
|
|
-
|
|
|
|
55,245
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
12,472
|
|
|
|
(278
|
)
|
|
|
12,194
|
|
|
|
1,051
|
|
|
|
12,411
|
|
|
|
119
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
36
|
|
|
|
(5
|
)
|
|
|
31
|
|
|
|
6
|
|
|
|
296
|
|
|
|
-
|
|
Commercial line of credit
|
|
|
805
|
|
|
|
(52
|
)
|
|
|
753
|
|
|
|
204
|
|
|
|
446
|
|
|
|
-
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction
|
|
|
6,906
|
|
|
|
(680
|
)
|
|
|
6,226
|
|
|
|
289
|
|
|
|
3,203
|
|
|
|
4
|
|
Residential lots
|
|
|
5,874
|
|
|
|
(205
|
)
|
|
|
5,669
|
|
|
|
541
|
|
|
|
4,235
|
|
|
|
-
|
|
Raw land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
454
|
|
|
|
-
|
|
Home equity lines
|
|
|
1,051
|
|
|
|
(1
|
)
|
|
|
1,050
|
|
|
|
376
|
|
|
|
896
|
|
|
|
-
|
|
Consumer
|
|
|
2,455
|
|
|
|
(49
|
)
|
|
|
2,406
|
|
|
|
160
|
|
|
|
2,827
|
|
|
|
9
|
|
Subtotal
|
|
|
29,599
|
|
|
|
(1,270
|
)
|
|
|
28,329
|
|
|
|
2,627
|
|
|
|
24,768
|
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
43,933
|
|
|
|
(8,774
|
)
|
|
|
35,159
|
|
|
|
1,051
|
|
|
|
36,433
|
|
|
|
285
|
|
Commercial
|
|
|
4,043
|
|
|
|
(1,090
|
)
|
|
|
2,953
|
|
|
|
210
|
|
|
|
3,325
|
|
|
|
24
|
|
Residential real estate
|
|
|
36,635
|
|
|
|
(8,522
|
)
|
|
|
28,113
|
|
|
|
830
|
|
|
|
28,620
|
|
|
|
29
|
|
Home equity lines
|
|
|
1,568
|
|
|
|
(33
|
)
|
|
|
1,535
|
|
|
|
376
|
|
|
|
1,734
|
|
|
|
-
|
|
Consumer
|
|
|
9,694
|
|
|
|
(634
|
)
|
|
|
9,060
|
|
|
|
160
|
|
|
|
9,901
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand Totals
|
|
$
|
95,873
|
|
|
$
|
(19,053
|
)
|
|
$
|
76,820
|
|
|
$
|
2,627
|
|
|
$
|
80,013
|
|
|
$
|
387
|
|
As shown in the above table, the Company
has previously taken partial charge-offs of $19.1 million on the $76.8 million in loans individually evaluated for impairment.
In addition, the Company has set aside $2.6 million in specific allowance for these $28.3 million in loans.
The recorded investment in loans that
were considered and collectively evaluated for impairment at March 31, 2012 and December 31, 2011 totaled $854.5 million and $862.9
million, respectively. The recorded investment in loans that were considered individually impaired at March 31, 2012 and December
31, 2011 totaled $76.8 million and $87.1 million, respectively. At March 31, 2012 and December 31, 2011, the recorded investment
in impaired loans requiring a valuation allowance based on individual analysis was $28.3 million and $23.0 million, respectively,
with a corresponding valuation allowance of $2.6 million and $1.6 million. No valuation allowance for the other impaired loans
was considered necessary as a result of previously recognized partial charge-offs or adequate collateral coverage. No loans with
deteriorated credit quality have been acquired by the Company to date.
Note 4 – Loans (continued)
The average recorded investment in impaired
loans for the quarter ended March 31, 2012 and year ended December 31, 2011 was approximately $80.0 million and $84.7 million,
respectively. For the three months ended March 31, 2012, the interest income recorded on accruing troubled debt restructured loans
that were individually evaluated for impairment was $387 thousand. The interest income foregone for loans in a non-accrual status
at March 31, 2012 and 2011 was $906 thousand and $1.2 million, respectively.
The following is a breakdown of impaired
loans individually evaluated for impairment, by class, with and without related specific allowance at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to Date
|
|
|
Year to Date
|
|
|
|
Unpaid
|
|
|
Partial
|
|
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
|
Principal
|
|
|
Charge Offs
|
|
|
Recorded
|
|
|
Related
|
|
|
Recorded
|
|
|
Income
|
|
|
|
Balance
|
|
|
To Date
|
|
|
Investment
|
|
|
Allowance
|
|
|
Investment
|
|
|
Recognized
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
36,251
|
|
|
$
|
(7,334
|
)
|
|
$
|
28,917
|
|
|
$
|
-
|
|
|
$
|
26,846
|
|
|
$
|
358
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
4,742
|
|
|
|
(1,341
|
)
|
|
|
3,401
|
|
|
|
-
|
|
|
|
2,998
|
|
|
|
76
|
|
Commercial line of credit
|
|
|
957
|
|
|
|
(52
|
)
|
|
|
905
|
|
|
|
-
|
|
|
|
1,427
|
|
|
|
-
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction
|
|
|
17,874
|
|
|
|
(2,443
|
)
|
|
|
15,431
|
|
|
|
-
|
|
|
|
15,241
|
|
|
|
190
|
|
Residential lots
|
|
|
6,853
|
|
|
|
(2,803
|
)
|
|
|
4,050
|
|
|
|
-
|
|
|
|
10,387
|
|
|
|
17
|
|
Raw land
|
|
|
3,808
|
|
|
|
(2,324
|
)
|
|
|
1,484
|
|
|
|
-
|
|
|
|
1,467
|
|
|
|
-
|
|
Home equity lines
|
|
|
954
|
|
|
|
(32
|
)
|
|
|
922
|
|
|
|
-
|
|
|
|
655
|
|
|
|
-
|
|
Consumer
|
|
|
10,501
|
|
|
|
(1,501
|
)
|
|
|
9,000
|
|
|
|
-
|
|
|
|
5,211
|
|
|
|
81
|
|
Subtotal
|
|
|
81,940
|
|
|
|
(17,830
|
)
|
|
|
64,110
|
|
|
|
-
|
|
|
|
64,232
|
|
|
|
722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
10,710
|
|
|
|
(330
|
)
|
|
|
10,380
|
|
|
|
655
|
|
|
|
8,346
|
|
|
|
420
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
|
498
|
|
|
|
-
|
|
|
|
498
|
|
|
|
114
|
|
|
|
1,067
|
|
|
|
14
|
|
Commercial line of credit
|
|
|
99
|
|
|
|
-
|
|
|
|
99
|
|
|
|
99
|
|
|
|
482
|
|
|
|
-
|
|
Residential real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction
|
|
|
1,348
|
|
|
|
(160
|
)
|
|
|
1,188
|
|
|
|
102
|
|
|
|
2,602
|
|
|
|
17
|
|
Residential lots
|
|
|
9,080
|
|
|
|
(1,035
|
)
|
|
|
8,045
|
|
|
|
161
|
|
|
|
3,843
|
|
|
|
32
|
|
Raw land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
144
|
|
|
|
-
|
|
Home equity lines
|
|
|
1,033
|
|
|
|
-
|
|
|
|
1,033
|
|
|
|
387
|
|
|
|
1,027
|
|
|
|
-
|
|
Consumer
|
|
|
1,839
|
|
|
|
(86
|
)
|
|
|
1,753
|
|
|
|
90
|
|
|
|
2,921
|
|
|
|
80
|
|
Subtotal
|
|
|
24,607
|
|
|
|
(1,611
|
)
|
|
|
22,996
|
|
|
|
1,608
|
|
|
|
20,432
|
|
|
|
563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
46,961
|
|
|
|
(7,664
|
)
|
|
|
39,297
|
|
|
|
655
|
|
|
|
35,192
|
|
|
|
778
|
|
Commercial
|
|
|
6,296
|
|
|
|
(1,393
|
)
|
|
|
4,903
|
|
|
|
213
|
|
|
|
5,974
|
|
|
|
90
|
|
Residential real estate
|
|
|
38,963
|
|
|
|
(8,765
|
)
|
|
|
30,198
|
|
|
|
263
|
|
|
|
33,684
|
|
|
|
256
|
|
Home equity lines
|
|
|
1,987
|
|
|
|
(32
|
)
|
|
|
1,955
|
|
|
|
387
|
|
|
|
1,682
|
|
|
|
-
|
|
Consumer
|
|
|
12,340
|
|
|
|
(1,587
|
)
|
|
|
10,753
|
|
|
|
90
|
|
|
|
8,132
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand Totals
|
|
$
|
106,547
|
|
|
$
|
(19,441
|
)
|
|
$
|
87,106
|
|
|
$
|
1,608
|
|
|
$
|
84,664
|
|
|
$
|
1,285
|
|
Note 4 – Loans (continued)
The following is an aging analysis of
past due financing receivables by class at March 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
30-59
|
|
|
60-89
|
|
|
Greater
|
|
|
|
|
|
|
|
|
Total
|
|
|
90 Days or
|
|
|
|
Days
|
|
|
Days
|
|
|
than 90
|
|
|
Total Past
|
|
|
|
|
|
Financing
|
|
|
more and
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Days (1)
|
|
|
Due
|
|
|
Current
|
|
|
Receivables
|
|
|
Accruing
|
|
|
|
(Amounts in thousands)
|
|
Commercial real estate
|
|
$
|
403
|
|
|
$
|
-
|
|
|
$
|
19,234
|
|
|
$
|
19,637
|
|
|
$
|
363,139
|
|
|
$
|
382,776
|
|
|
$
|
-
|
|
Commercial and industrial
|
|
|
697
|
|
|
|
-
|
|
|
|
2,213
|
|
|
|
2,910
|
|
|
|
79,425
|
|
|
|
82,335
|
|
|
|
-
|
|
Commercial line of credit
|
|
|
132
|
|
|
|
31
|
|
|
|
1,079
|
|
|
|
1,242
|
|
|
|
45,266
|
|
|
|
46,508
|
|
|
|
-
|
|
Residential construction
|
|
|
-
|
|
|
|
-
|
|
|
|
12,653
|
|
|
|
12,653
|
|
|
|
88,898
|
|
|
|
101,551
|
|
|
|
-
|
|
Home equity lines
|
|
|
1,147
|
|
|
|
15
|
|
|
|
2,230
|
|
|
|
3,392
|
|
|
|
89,855
|
|
|
|
93,247
|
|
|
|
-
|
|
Residential lots
|
|
|
-
|
|
|
|
-
|
|
|
|
12,305
|
|
|
|
12,305
|
|
|
|
30,619
|
|
|
|
42,924
|
|
|
|
-
|
|
Raw land
|
|
|
18
|
|
|
|
-
|
|
|
|
234
|
|
|
|
252
|
|
|
|
15,892
|
|
|
|
16,144
|
|
|
|
-
|
|
Consumer
|
|
|
713
|
|
|
|
1,352
|
|
|
|
7,955
|
|
|
|
10,020
|
|
|
|
155,840
|
|
|
|
165,860
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,110
|
|
|
$
|
1,398
|
|
|
$
|
57,903
|
|
|
$
|
62,411
|
|
|
$
|
868,934
|
|
|
$
|
931,345
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total loans
|
|
|
0.33
|
%
|
|
|
0.15
|
%
|
|
|
6.22
|
%
|
|
|
6.70
|
%
|
|
|
93.30
|
%
|
|
|
|
|
|
|
|
|
The following is an aging analysis of
past due financing receivables by class at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
30-59
|
|
|
60-89
|
|
|
Greater
|
|
|
|
|
|
|
|
|
Total
|
|
|
90 Days or
|
|
|
|
Days
|
|
|
Days
|
|
|
than 90
|
|
|
Total Past
|
|
|
|
|
|
Financing
|
|
|
more and
|
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Days (1)
|
|
|
Due
|
|
|
Current
|
|
|
Receivables
|
|
|
Accruing
|
|
|
|
(Amounts in thousands)
|
|
Commercial real estate
|
|
$
|
376
|
|
|
$
|
265
|
|
|
$
|
26,484
|
|
|
$
|
27,125
|
|
|
$
|
360,150
|
|
|
$
|
387,275
|
|
|
$
|
-
|
|
Commercial and industrial
|
|
|
308
|
|
|
|
7
|
|
|
|
3,548
|
|
|
|
3,863
|
|
|
|
81,458
|
|
|
|
85,321
|
|
|
|
-
|
|
Commercial line of credit
|
|
|
50
|
|
|
|
35
|
|
|
|
1,429
|
|
|
|
1,514
|
|
|
|
43,060
|
|
|
|
44,574
|
|
|
|
-
|
|
Residential construction
|
|
|
-
|
|
|
|
-
|
|
|
|
11,491
|
|
|
|
11,491
|
|
|
|
90,454
|
|
|
|
101,945
|
|
|
|
-
|
|
Home equity lines
|
|
|
248
|
|
|
|
171
|
|
|
|
2,637
|
|
|
|
3,056
|
|
|
|
92,080
|
|
|
|
95,136
|
|
|
|
-
|
|
Residential lots
|
|
|
-
|
|
|
|
-
|
|
|
|
12,096
|
|
|
|
12,096
|
|
|
|
33,068
|
|
|
|
45,164
|
|
|
|
-
|
|
Raw land
|
|
|
-
|
|
|
|
-
|
|
|
|
1,484
|
|
|
|
1,484
|
|
|
|
16,004
|
|
|
|
17,488
|
|
|
|
-
|
|
Consumer
|
|
|
2,839
|
|
|
|
932
|
|
|
|
8,879
|
|
|
|
12,650
|
|
|
|
160,469
|
|
|
|
173,119
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,821
|
|
|
$
|
1,410
|
|
|
$
|
68,048
|
|
|
$
|
73,279
|
|
|
$
|
876,743
|
|
|
$
|
950,022
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total loans
|
|
|
0.40
|
%
|
|
|
0.15
|
%
|
|
|
7.16
|
%
|
|
|
7.71
|
%
|
|
|
92.29
|
%
|
|
|
|
|
|
|
|
|
(1)
As the Company has no loans
past due 90 or more days and still accruing, this category only includes nonaccrual loans.
Note 5 – Allowance for Loan Losses
An analysis of the allowance for loan
losses is as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Amounts in thousands)
|
|
Balance at beginning of period
|
|
$
|
24,165
|
|
|
$
|
29,580
|
|
Provision for loan losses
|
|
|
2,900
|
|
|
|
4,100
|
|
Charge-offs
|
|
|
(3,568
|
)
|
|
|
(7,086
|
)
|
Recoveries
|
|
|
684
|
|
|
|
1,070
|
|
Net charge-offs
|
|
|
(2,884
|
)
|
|
|
(6,016
|
)
|
Balance at end of period
|
|
$
|
24,181
|
|
|
$
|
27,664
|
|
Note 5 – Allowance for Loan Losses
(continued)
The following table shows, an analysis
of the allowance for loan losses by loan segment, for the three months ended March 31, 2012.
|
|
Commercial
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
|
|
|
|
|
|
Real
|
|
|
|
|
|
|
|
|
|
|
|
|
Estate
|
|
|
Commercial
|
|
|
Estate
|
|
|
HELOC
|
|
|
Consumer
|
|
|
Total
|
|
|
|
(Amounts in thousands)
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
9,076
|
|
|
$
|
3,036
|
|
|
$
|
7,258
|
|
|
$
|
1,412
|
|
|
$
|
3,383
|
|
|
$
|
24,165
|
|
Provision
|
|
|
1,368
|
|
|
|
816
|
|
|
|
1,126
|
|
|
|
(137
|
)
|
|
|
(273
|
)
|
|
|
2,900
|
|
Charge-offs
|
|
|
(1,727
|
)
|
|
|
(900
|
)
|
|
|
(572
|
)
|
|
|
(12
|
)
|
|
|
(357
|
)
|
|
|
(3,568
|
)
|
Recoveries
|
|
|
208
|
|
|
|
140
|
|
|
|
49
|
|
|
|
3
|
|
|
|
284
|
|
|
|
684
|
|
Ending balance
|
|
$
|
8,925
|
|
|
$
|
3,092
|
|
|
$
|
7,861
|
|
|
$
|
1,266
|
|
|
$
|
3,037
|
|
|
$
|
24,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For nonperforming loans requiring specific ALLL
|
|
|
694
|
|
|
|
210
|
|
|
|
829
|
|
|
|
376
|
|
|
|
115
|
|
|
$
|
2,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For accruing troubled debt restructured loans requiring specific ALLL
|
|
|
357
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
45
|
|
|
|
403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: requiring specific ALLL
|
|
$
|
1,051
|
|
|
$
|
210
|
|
|
$
|
830
|
|
|
$
|
376
|
|
|
$
|
160
|
|
|
$
|
2,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: general ALLL
|
|
$
|
7,874
|
|
|
$
|
2,882
|
|
|
$
|
7,031
|
|
|
$
|
890
|
|
|
$
|
2,877
|
|
|
$
|
21,554
|
|
The following table shows the breakdown
of the allowance for loan losses by component loan segment at March 31, 2011.
|
|
Commercial
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
|
|
|
|
|
|
Real
|
|
|
|
|
|
|
|
|
|
|
|
|
Estate
|
|
|
Commercial
|
|
|
Estate
|
|
|
HELOC
|
|
|
Consumer
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
6,703
|
|
|
$
|
4,154
|
|
|
$
|
13,534
|
|
|
$
|
1,493
|
|
|
$
|
3,696
|
|
|
$
|
29,580
|
|
Provision
|
|
|
921
|
|
|
|
128
|
|
|
|
1,441
|
|
|
|
804
|
|
|
|
806
|
|
|
|
4,100
|
|
Charge-offs
|
|
|
(1,897
|
)
|
|
|
(765
|
)
|
|
|
(2,203
|
)
|
|
|
(541
|
)
|
|
|
(1,680
|
)
|
|
|
(7,086
|
)
|
Recoveries
|
|
|
535
|
|
|
|
76
|
|
|
|
325
|
|
|
|
3
|
|
|
|
131
|
|
|
|
1,070
|
|
Ending balance
|
|
$
|
6,262
|
|
|
$
|
3,593
|
|
|
$
|
13,097
|
|
|
$
|
1,759
|
|
|
$
|
2,953
|
|
|
$
|
27,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For nonperforming loans requiring specific ALLL
|
|
$
|
350
|
|
|
$
|
510
|
|
|
$
|
1,511
|
|
|
$
|
287
|
|
|
$
|
243
|
|
|
$
|
2,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For accruing troubled debt restructured loans requiring specific ALLL
|
|
|
121
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: requiring specific ALLL
|
|
$
|
471
|
|
|
$
|
511
|
|
|
$
|
1,511
|
|
|
$
|
287
|
|
|
$
|
284
|
|
|
$
|
3,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: general ALLL
|
|
$
|
5,791
|
|
|
$
|
3,082
|
|
|
$
|
11,586
|
|
|
$
|
1,472
|
|
|
$
|
2,669
|
|
|
$
|
24,600
|
|
Note 5 – Allowance for Loan Losses
(continued)
Credit Quality Indicators
. As part
of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality
indicators including trends related to (i) the weighted-average risk grade of commercial loans, (ii) the level of classified commercial
loans, (iii) net charge-offs, (iv) nonperforming loans (see details above) and (v) the general economic conditions in its market
areas.
The Company utilizes a risk grading matrix
to assign a risk grade to each of its commercial loans. Loans are graded on a scale of 1 to 9. A description of the general characteristics
of the 9 risk grades is as follows:
|
·
|
Grades
1, 2 and 3 –
Better Than Average
Risk
–
Borrowers assigned
any one of these
ratings would generally
be characterized
as representing
better than average
risk. Access to
alternate sources
of traditional
bank financing
is evident; secondary
repayment sources
are sufficient
to protect against
the risk of principal
or income loss.
|
|
·
|
Grade
4 – Average
Risk
–
Borrowers assigned
this rating would
generally be characterized
as representing
average risk. Access
to alternate sources
of traditional
bank financing
is evident; secondary
repayment sources
are sufficient
to protect against
the risk of principal
or income loss.
Or, the risk attributable
to a marginally
sufficient primary
repayment source
is mitigated by
liquid collateral
in amounts which,
discounted for
normal fluctuations
in market value,
are sufficient
to protect against
the risk of principal
or income loss.
|
|
·
|
Grade
5 – Acceptable
Risk/Watch
– Loans where
the borrower’s
ability to repay
from primary (intended)
repayment source
is not clearly
sufficient to ensure
performance as
contracted; however,
the loan is performing
as contracted,
secondary repayment
sources are clearly
sufficient to protect
against the risk
of principal or
income loss, and
the Bank can reasonably
expect that the
circumstances causing
the repayment concern
will be resolved.
Access to alternate
financing sources
exists, but may
be limited to institutions
specializing in
higher risk financing.
|
|
·
|
Grade
6 – Special
Mention
–
This would include
“Other Assets
Especially Mentioned”
(OAEM). OAEM are
currently protected
but potentially
weak, they are
characterized by
undue and unwarranted
credit risk but
not to the point
of justifying a
classification
of substandard.
Potential weakness
may weaken the
asset or inadequately
protect the Bank’s
credit position
at some future
date if not corrected.
Evidence that the
risk is increasing
beyond that at
which the loan
originally would
have been granted.
Loans, where adverse
economic conditions
that develop subsequent
to the loan origination
that do not jeopardize
liquidation of
the debt but do
increase the level
of risk, may also
warrant this rating.
|
|
·
|
Grade
7 – Substandard
– A substandard
loan is inadequately
protected by the
current net worth
and paying capacity
of the obligor
or by the value
of the collateral
pledged, if any.
There is a distinct
possibility that
the Bank will sustain
some loss if the
deficiencies are
not corrected.
Loans in this category
are characterized
by deterioration
in quality exhibited
by any number of
well-defined weaknesses
requiring corrective
action. Examples
include high debt
to net worth ratios,
declining or negative
earnings trends,
declining or inadequate
liquidity, improper
loan structure
and questionable
repayment sources.
Near term improvement
is questionable.
|
|
·
|
Grade
8 – Doubtful
– Loans
classified as doubtful
have all the weaknesses
inherent in loans
classified substandard,
plus the added
characteristic
that the weaknesses
make collection
or liquidation
in full on the
basis of currently
existing facts,
conditions and
values highly questionable
and improbable.
Some loss of principal
is expected, however,
the amount of such
loss cannot be
fully determined
at this time. Factors
such as equity
injection, alternative
financing, liquidation
of assets or the
pledging of additional
collateral can
impact the loan.
All loans in this
category are to
immediately be
placed on non-accrual
with all payments
applied to principal
until such time
as the potential
loss exposure is
eliminated.
|
|
·
|
Grade
9 – Loss
– Loans
classified as loss
are considered
uncollectable and
of such little
value that there
continuance as
bankable assets
is not warranted.
This classification
does not mean that
the asset has absolutely
no recovery or
salvage value,
but rather that
it is not practical
or desirable to
defer writing off
this worthless
loan even though
partial recovery
may be affected
in the future.
|
Note 5 – Allowance for Loan Losses
(continued)
Loan grades for all commercial loans are
established at the origination of the loan. Non-commercial loans are graded as a 4 at origination date as these loans are determined
to be “pass graded” loans. These non-commercial loans may subsequently require a different risk grade if the credit
department has evaluated the credit and determined it necessary to reclassify the loan. Loan grades are reviewed on a quarterly
basis, or more frequently if necessary, by the credit department. Typically, an individual loan grade will not be changed from
the prior period unless there is a specific indication of credit deterioration or improvement. Credit deterioration is evidenced
by delinquency, direct communications with the borrower, or other borrower information that becomes public. Credit improvements
are evidenced by known factors regarding the borrower or the collateral property.
The loan grades relate to the likelihood
of losses in that the higher the grade, the greater the loss potential. Loans with a grade of 1 to 5 are believed to have some
inherent losses in the portfolios, but to a lesser extent than the other loan grades. Acceptable or better risk (1 to 5) graded
loans might have a zero percent loss based on historical experience and current market trends. The special mention or OAEM loan
grade is transitory in that the Company is waiting on additional information to determine the likelihood and extent of the potential
losses. However, the likelihood of loss is greater than Watch grade because there has been measurable credit deterioration. Loans
with a substandard grade are generally loans the Company has individually analyzed for potential impairment. The Doubtful graded
loans and the Loss graded loans are to a point that the Company is almost certain of the losses, and the unpaid principal balances
are generally charged-off.
The Company’s allowance for loan
losses (“ALLL”) is established through charges to earnings in the form of a provision for loan losses. We increase
our allowance for loan losses by provisions charged to operations and by recoveries of amounts previously charged off and we reduce
our allowance by loans charged off. In evaluating the adequacy of the allowance, we consider the growth, composition and industry
diversification of the portfolio, historical loan loss experience, current delinquency levels, trends in past dues and classified
assets, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral,
prevailing economic conditions and other relevant factors derived from our history of operations. Management is continuing to
closely monitor the value of real estate serving as collateral for our loans, especially lots and land under development, due
to continued concern that the low level of real estate sales activity will continue to have a negative impact on the value of
real estate collateral. In addition, depressed market conditions have adversely impacted, and may continue to adversely impact,
the financial condition and liquidity position of certain of our borrowers. Additionally, the value of commercial real estate
collateral may come under further pressure from weak economic conditions and prevailing unemployment levels. The methodology and
assumptions used to determine the allowance are continually reviewed as to their appropriateness given the most recent losses
realized and other factors that influence the estimation process. The model assumptions and resulting allowance level are adjusted
accordingly as these factors change. The Company incorporates certain refinements and improvements to its allowance for loan losses
methodology from time to time. During 2011, the Company made the following refinements in its allowance methodology. First, the
Company individually evaluated accruing TDR loans for impairment which at March 31, 2012 amounted to $22.8 million in accruing
TDR loans requiring a specific allowance of $403 thousand. Second, the use of a loan migration factor by risk grade as an increment
to historical loss experience was discontinued in the general (FAS 5) loss allowance calculation because of the lack of statistically
meaningful supporting data. Third, we enhanced the use of qualitative and quantitative factors to further evaluate the portfolio
risk. Except for the impact of the first refinement noted above, the effects of these refinements were offsetting and minimally
affected the total allowance.
Note 5 – Allowance for Loan Losses
(continued)
The ALLL consists of two major components:
specific valuation allowances and a general valuation allowance. The Bank’s format for the calculation of ALLL begins with
the evaluation of individual loans considered impaired. For the purpose of evaluating loans for impairment, loans are considered
impaired when it is considered probable that all amounts due under the contractual terms of the loan will not be collected when
due (minor shortfalls in amount or timing excepted). The Bank has established policies and procedures for identifying loans that
should be considered for impairment. Loans are reviewed through multiple means such as delinquency management, credit risk reviews,
watch and criticized loan monitoring meetings and general account management. Loans that are outside of the Bank’s established
criteria for evaluation may be considered for impairment testing when management deems the risk sufficient to warrant this approach.
For loans determined to be impaired, the specific allowance is based on the most appropriate of the three measurement methods:
present value of expected future cash flows, fair value of collateral, or the observable market price of a loan method. While
management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions
differ substantially from the assumptions used in making the evaluations. Once a loan is considered individually impaired, it
is not included in other troubled loan analysis, even if no specific allowance is considered necessary.
In addition to the evaluation of loans
for impairment, the Company calculates loan loss exposure on the remaining loans (not evaluated for impairment) by applying the
applicable historical loan loss experience of the loan portfolio to provide for probable losses in the loan portfolio through
the general valuation allowance. These loss factors are based on an appropriate loss history for each major loan segment more
heavily weighted for the most recent twelve months historical loss experience to reflect current market conditions. In addition,
the Company assigns additional general allowance requirements utilizing qualitative risk factors related to economic and portfolio
trends that are pertinent to the underlying risks in each major loan segment in estimating the general valuation allowance. This
methodology allows the Company to focus on the relative risk and the pertinent factors for the major loan segments of the Company.
The following is a summary of credit exposure
segregated by credit risk profile by internally assigned grade by class at March 31, 2012 and December 31, 2011:
|
|
Commercial Real Estate
|
|
|
Commercial and Industrial
|
|
|
Commercial Lines of Credit
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(Amounts in thousands)
|
|
Acceptable Risk or Better
|
|
$
|
269,687
|
|
|
$
|
261,287
|
|
|
$
|
57,584
|
|
|
$
|
57,563
|
|
|
$
|
39,273
|
|
|
$
|
37,883
|
|
Special Mention
|
|
|
35,996
|
|
|
|
49,179
|
|
|
|
11,202
|
|
|
|
10,804
|
|
|
|
3,910
|
|
|
|
2,796
|
|
Substandard
|
|
|
68,843
|
|
|
|
76,701
|
|
|
|
13,232
|
|
|
|
16,526
|
|
|
|
2,908
|
|
|
|
3,765
|
|
Doubtful
|
|
|
8,250
|
|
|
|
108
|
|
|
|
317
|
|
|
|
428
|
|
|
|
417
|
|
|
|
130
|
|
Total
|
|
$
|
382,776
|
|
|
$
|
387,275
|
|
|
$
|
82,335
|
|
|
$
|
85,321
|
|
|
$
|
46,508
|
|
|
$
|
44,574
|
|
|
|
Residential Construction
|
|
|
Home Equity Lines
|
|
|
Consumer
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
(Amounts in thousands)
|
|
Acceptable Risk or Better
|
|
$
|
64,807
|
|
|
$
|
62,382
|
|
|
$
|
85,324
|
|
|
$
|
87,325
|
|
|
$
|
129,153
|
|
|
$
|
139,491
|
|
Special Mention
|
|
|
9,500
|
|
|
|
11,212
|
|
|
|
2,955
|
|
|
|
2,362
|
|
|
|
17,780
|
|
|
|
13,147
|
|
Substandard
|
|
|
27,244
|
|
|
|
28,351
|
|
|
|
4,968
|
|
|
|
5,449
|
|
|
|
18,927
|
|
|
|
20,481
|
|
Total
|
|
$
|
101,551
|
|
|
$
|
101,945
|
|
|
$
|
93,247
|
|
|
$
|
95,136
|
|
|
$
|
165,860
|
|
|
$
|
173,119
|
|
|
|
Residential Lots
|
|
|
Raw Land
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
Acceptable Risk or Better
|
|
$
|
9,742
|
|
|
$
|
10,451
|
|
|
$
|
12,174
|
|
|
$
|
11,807
|
|
Special Mention
|
|
|
4,641
|
|
|
|
5,612
|
|
|
|
782
|
|
|
|
976
|
|
Substandard
|
|
|
28,541
|
|
|
|
29,101
|
|
|
|
3,188
|
|
|
|
4,705
|
|
Total
|
|
$
|
42,924
|
|
|
$
|
45,164
|
|
|
$
|
16,144
|
|
|
$
|
17,488
|
|
Note 6 – Borrowings
The following is a summary of our borrowings
at March 31, 2012 and December 31, 2011:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Amounts in thousands)
|
|
Short-term borrowings
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
35,000
|
|
|
$
|
5,000
|
|
Repurchase agreements
|
|
|
27,145
|
|
|
|
28,629
|
|
|
|
$
|
62,145
|
|
|
$
|
33,629
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings
|
|
|
|
|
|
|
|
|
FHLB advances
|
|
$
|
41,593
|
|
|
$
|
71,637
|
|
Term repurchase agreements
|
|
|
60,000
|
|
|
|
60,000
|
|
Jr. subordinated debentures
|
|
|
45,877
|
|
|
|
45,877
|
|
|
|
$
|
147,470
|
|
|
$
|
177,514
|
|
See Note 8 for discussion on deferral
of interest payments on subordinated debentures.
Note 7 – Non-Interest Income
and Other Non-Interest Expense
The major components of other non-interest income are as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Amounts in thousands)
|
|
Increase in cash surrender value of life insurance
|
|
|
254
|
|
|
|
266
|
|
Gain (loss) and net cash settlement on economic hedges
|
|
|
85
|
|
|
|
(605
|
)
|
Other
|
|
|
263
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
602
|
|
|
$
|
(102
|
)
|
The major components of other non-interest expense are as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Amounts in thousands)
|
|
Postage, printing and office supplies
|
|
$
|
165
|
|
|
$
|
171
|
|
Telephone and communication
|
|
|
216
|
|
|
|
248
|
|
Advertising and promotion
|
|
|
228
|
|
|
|
231
|
|
Data processing and other outsourced services
|
|
|
257
|
|
|
|
171
|
|
Professional services
|
|
|
442
|
|
|
|
833
|
|
Debit card expense
|
|
|
253
|
|
|
|
216
|
|
Gain on sales of foreclosed assets
|
|
|
(73
|
)
|
|
|
(280
|
)
|
Other
|
|
|
1,272
|
|
|
|
1,351
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,760
|
|
|
$
|
2,941
|
|
Note 8 – Regulatory Matters
Regulatory Actions and Management’s
Compliance Efforts
On February 25, 2011, the Bank entered
into a Consent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina Commission of
Banks (“NCCOB”). Under the terms of the Consent Order among other things, the Bank has agreed to:
|
·
|
Strengthen
Board oversight
of the management
and operations
of the Bank;
|
|
·
|
Comply
with minimum capital
requirements of
8% Tier 1 leverage
capital and 11%
total risk-based
capital;
|
|
·
|
Formulate
and implement a
plan to reduce
the Bank’s
risk exposure in
assets classified
“Substandard
or Doubtful”
in the FDIC’s
most recent report
of examination
by 15% in 180 days,
35% in 360 days,
60% in 540 days
and 75% in 720
days;
|
|
·
|
Within
90 days, implement
effective lending
and collection
policies;
|
|
·
|
Not
pay cash dividends
without the prior
written approval
of the FDIC and
the Commissioner;
and
|
|
·
|
Neither
renew, rollover
or accept any brokered
deposits without
obtaining a waiver
from the FDIC.
|
On June 23, 2011, the Company entered
into a Written Agreement with the Federal Reserve Bank of Richmond under which the Company agreed to, among other things:
|
·
|
Not,
directly or indirectly,
do the following
without the prior
approval of the
Federal Reserve:
|
|
¾
|
Declare
or pay dividends
on its, common
or preferred stock;
|
|
¾
|
Make
any distributions
of interest or
principal on trust
preferred securities;
|
|
¾
|
Incur,
increase or guarantee
any debt; and
|
|
¾
|
Purchase
or redeem any shares
of its stock.
|
|
·
|
Formulate
and implement a
written plan to
maintain sufficient
capital at the
Company on a consolidated
basis.
|
As previously reported, the Company suspended
the payment of quarterly cash dividends on the preferred stock issued to the US Treasury and the Company elected to defer the
payment of quarterly scheduled interest payments on both issues of junior subordinated debentures, relating to its outstanding
trust preferred securities. The Company continues to account for the obligation for the preferred dividend to the US Treasury
and the interest due on the subordinated debentures. Although the Company has suspended the declaration and payment of preferred
stock dividends at the present time, net income (loss) available to common shareholders reflects the dividends as if declared
because of their cumulative nature. As of March 31, 2012, the cumulative amount of dividends owed to the US Treasury and the cumulative
amount of interest due on the subordinated debentures were $3.2 million and $3.7 million, respectively.
The Bank has already undertaken the following
actions, among others, to comply with the Consent Order:
|
·
|
The
Bank has exceeded
all minimum capital
requirements of
the Consent Order.
|
|
·
|
As
of March 31, 2012,
the Bank reduced
its risk exposure
to adversely classified
assets identified
in the Bank’s
June 30, 2010 Report
of Examination
by an amount (52%)
exceeding its scheduled
reduction of 35%
at its second measurement
point (by the one
year anniversary
of the Consent
Order, February
25, 2012).
|
The process of responding to the provisions
of the Consent Order is well underway. To date, management believes that the Company’s compliance efforts have been satisfactory
and within the scheduled time frames. Compliance efforts remain ongoing.
Note 8 – Regulatory Matters (continued)
The Consent Order, as set forth above,
requires the Bank to achieve and maintain minimum capital requirements of 8% Tier 1 (leverage) capital and total risk-based capital
of 11%. As shown in the table below, the Bank had regulatory capital in excess of the Consent Order requirements as of March 31,
2012.
The minimum capital requirements to be
characterized as “well capitalized”, as defined by regulatory guidelines, the capital requirements pursuant to the
Consent Order and the Bank’s actual capital ratios were as follows for March 31, 2012:
|
|
|
|
|
Minimum Regulatory Requirement
|
|
|
|
|
|
|
"Well
|
|
|
Pursuant to
|
|
Captial ratios
|
|
Bank
|
|
|
Capitalized"
|
|
|
Consent Order
|
|
Total risk-based
|
|
|
14.16
|
%
|
|
|
10
|
%
|
|
|
11
|
%
|
Tier 1 risk-based
|
|
|
12.90
|
%
|
|
|
6
|
%
|
|
|
N/A
|
|
Tier 1 leverage
|
|
|
9.36
|
%
|
|
|
5
|
%
|
|
|
8
|
%
|
If the Bank fails to comply with the minimum
capital levels in the Consent Order, the Bank may be subject to further restrictions, the extent of which is dependent upon the
magnitude of noncompliance. A bank may be prohibited from engaging in a new line of business, acquiring any interest in any company
or insured depository institution, or opening or acquiring a new branch office, except under certain circumstances, including
the acceptance by the FDIC of a capital restoration plan for the bank. Therefore, failure to maintain adequate capital could have
a material adverse effect on operations.
Failure by the Bank to comply with the
requirements set forth in the Consent Order may result in further adverse regulatory actions, sanctions, and restrictions on the
Bank’s activities, which could have a material adverse effect on the business, future prospects, financial condition or
results of operations of the Bank and the Company.
As a bank holding company subject to regulation
by the Federal Reserve, the Company must comply with regulatory capital ratios. Under the June 23, 2011 Written Agreement, there
were no minimum regulatory ratios imposed by the Federal Reserve. In the written capital plan submitted to the Federal Reserve
in June 2011, the Company set the regulatory well capitalized minimum requirements as its capital targets. As of March 31, 2012,
the Company’s capital exceeded the minimum requirements for a “well capitalized” bank holding company. Information
regarding the Company’s capital at March 31, 2012 is set forth below:
|
|
|
|
|
|
|
|
Minimum
|
|
|
|
Actual
|
|
|
"Well Capitalized"
|
|
Captial ratios
|
|
Amount
|
|
|
Ratio
|
|
|
Requirements
|
|
Total risk-based
|
|
$
|
156,936
|
|
|
|
14.49
|
%
|
|
|
10
|
%
|
Tier 1 risk-based
|
|
|
129,847
|
|
|
|
11.99
|
%
|
|
|
6
|
%
|
Tier 1 leverage
|
|
|
129,847
|
|
|
|
8.71
|
%
|
|
|
5
|
%
|
Note 9 – Cumulative Perpetual
Preferred Stock
Under the United States Treasury’s
Capital Purchase Program (CPP), the Company issued $42.75 million to the United States Treasury in Cumulative Perpetual Preferred
Stock, Series A, on December 5, 2008. In addition, the Company provided warrants to the Treasury to purchase 1,623,418 shares
of the Company’s common stock at an exercise price of $3.95 per share. These warrants are immediately exercisable and expire
ten years from the date of issuance. The preferred stock is non-voting, other than having class voting rights on certain matters,
and pays cumulative dividends quarterly at a rate of 5% per annum for the first five years and 9% per annum thereafter. The preferred
shares are redeemable at the option of the Company subject to regulatory approval.
In February 2011, the Company suspended
the payment of quarterly cash dividends to the US Treasury on this preferred stock. Although the Company has suspended the declaration
and payment of preferred stock dividends at the present time, net income (loss) available to common shareholders reflects the
dividends as if declared because of their cumulative nature. As of March 31, 2012, the total amount of cumulative dividends and
interest owed to the US Treasury was $3.2 million. If the Company defers more than six quarterly payments to the US Treasury,
then the US Treasury will have the right to elect two new board members. Directors elected by the US Treasury may not have the
same interests as other shareholders and may desire the Company to take certain actions not supported by other shareholders. There
can be no assurances that directors elected to represent the US Treasury would be supportive of our management’s business
plans or the interests of other shareholders. Therefore, the election of directors to represent the US Treasury could have a material
adverse effect on our business or the direction of its future prospects. As a part of the merger with Capital Bank, it is expected
that the Treasury’s investment in the Company’s preferred stock will be redeemed.
As a condition of the CPP, the Company
must obtain consent from the United States Department of the Treasury to repurchase its common stock or to increase its cash dividend
on its common stock from the September 30, 2008 quarterly level of $0.04 per common share. Furthermore, the Company has agreed
to certain restrictions on executive compensation. Under the American Recovery and Reinvestment Act of 2009, the Company is limited
to using restricted stock as the form of payment to the top five highest compensated executives under any incentive compensation
programs.
Note 10 - Derivatives
Derivative Financial Instruments
The Company utilizes stand-alone derivative
financial instruments, primarily in the form of interest rate swap and option agreements, in its asset/liability management program.
These transactions involve both credit and market risk. The Company uses derivative instruments to mitigate exposure to adverse
changes in fair value or cash flows of certain assets and liabilities. Derivative instruments designated in a hedge relationship
to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk,
such as interest rate risk, are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate
exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
Fair value hedges are accounted for by
recording the fair value of the derivative instrument and the fair value related to the risk being hedged of the hedged asset
or liability on the balance sheet with corresponding offsets recorded in the income statement. The adjustment to the hedged asset
or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as a freestanding
asset or liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in
a fair value hedge relationship are recorded as adjustments to the income or expense on the hedged asset or liability. Cash flow
hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either a freestanding
asset or liability, with a corresponding offset recorded in accumulated other comprehensive income within stockholders’
equity, net of tax. Amounts are reclassified from accumulated other comprehensive income to the income statement in the period
or periods the hedged transaction affects earnings. Under both the fair value and cash flow hedge methods, derivative gains and
losses not effective in hedging the change in fair value or expected cash flows of the hedged item are recognized immediately
in the income statement.
The Company does not enter into derivative
financial instruments for speculative or trading purposes. For derivatives that are economic hedges, but are not designated as
hedging instruments or otherwise do not qualify for hedge accounting treatment, all changes in fair value are recognized in non-interest
income during the period of change. The net cash settlement on these derivatives is included in non-interest income.
The Company is exposed to credit-related
losses in the event of nonperformance by the counterparties to these agreements. The Company controls the credit risk of its financial
contracts through credit approvals, limits and monitoring procedures and agreements that specify collateral levels to be maintained
by the Company and the counterparties. These collateral levels are based on the credit rating of the counterparties and the value
of the derivatives.
The Company currently has twelve derivative
instrument contracts consisting of one interest rate cap, nine interest rate swaps and two foreign exchange contracts. The primary
objective for each of these contracts is to minimize risk, interest rate risk being the primary risk for the interest rate cap
and swaps while foreign exchange risk is the primary risk for the foreign exchange contracts. The Company’s strategy is
to use derivative contracts to stabilize and improve net interest margin and net interest income currently and in future periods.
In order to acquire low cost, long term funding without incurring currency risk, the Company entered into the foreign exchange
contract to convert foreign currency denominated certificates of deposit into long term dollar denominated time deposits. The
interest rate on the underlying certificates of deposit with an original notional value/amount of $10.0 million is based on a
proprietary index (Barclays Intelligent Carry Index USD ER) managed by the counterparty (Barclays Bank). The currency swap is
also based on this proprietary index.
Note 10 – Derivatives (continued)
The fair value of the Company’s
derivative assets and liabilities and their related notional amounts is summarized below.
|
|
March 31, 2012
|
|
|
December 31, 2011
|
|
|
|
Fair Value
|
|
|
Notional
Amount
|
|
|
Fair Value
|
|
|
Notional
Amount
|
|
|
|
(Amounts in thousands)
|
|
Fair value hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps associated with deposit
activities: Certificate of Deposit contracts
|
|
$
|
378
|
|
|
$
|
65,000
|
|
|
$
|
436
|
|
|
$
|
65,000
|
|
Currency Exchange contracts
|
|
|
(458
|
)
|
|
|
10,000
|
|
|
|
(457
|
)
|
|
|
10,000
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps associated with borrowing activities:
Loan contracts
|
|
|
(46
|
)
|
|
|
35,000
|
|
|
|
-
|
|
|
|
-
|
|
Trust Preferred contracts
|
|
|
(143
|
)
|
|
|
10,000
|
|
|
|
(202
|
)
|
|
|
10,000
|
|
Interest rate cap contracts
|
|
|
2
|
|
|
|
12,500
|
|
|
|
9
|
|
|
|
12,500
|
|
|
|
$
|
(267
|
)
|
|
$
|
132,500
|
|
|
$
|
(214
|
)
|
|
$
|
97,500
|
|
See Note 11 for additional information
on fair values of net derivatives.
The following table further breaks down
the derivative positions of the Company:
|
|
As of March 31, 2012
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
Balance Sheet
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
Location
|
|
Fair Value
|
|
|
Location
|
|
Fair Value
|
|
|
|
(Amounts in thousands)
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap contracts
|
|
Other Assets
|
|
$
|
2
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
Other Assets
|
|
|
378
|
|
|
Other Liabilities
|
|
$
|
189
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
|
|
|
-
|
|
|
Other Liabilities
|
|
|
458
|
|
Total derivatives
|
|
|
|
$
|
380
|
|
|
|
|
$
|
647
|
|
Net Derivative Asset (Liability)
|
|
|
|
|
|
|
|
|
|
$
|
(267
|
)
|
|
|
As of December 31, 2011
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
Balance Sheet
|
|
|
|
|
Balance Sheet
|
|
|
|
|
|
Location
|
|
Fair Value
|
|
|
Location
|
|
Fair Value
|
|
|
|
(Amounts in thousands)
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
Interest rate cap contracts
|
|
Other Assets
|
|
$
|
9
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
Other Assets
|
|
|
436
|
|
|
Other Liabilities
|
|
$
|
202
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
|
|
|
|
-
|
|
|
Other Liabilities
|
|
|
457
|
|
Total derivatives
|
|
|
|
$
|
445
|
|
|
|
|
$
|
659
|
|
Net Derivative Asset (Liability)
|
|
|
|
|
|
|
|
|
|
$
|
(214
|
)
|
Note 10 – Derivatives (continued)
The tables below illustrate the effective
portion of the gains (losses) recognized in other comprehensive income and the gains (losses) reclassified from accumulated other
comprehensive income into earnings.
For the Three Months Ended March 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain or
|
|
|
Amount of Gain or (Loss)
|
|
|
|
Amount of Gain or (Loss)
|
|
|
(Loss) Reclassified from
|
|
|
Reclassified from
|
|
|
|
Recognized in OCI on
|
|
|
Accumulated OCI
|
|
|
Accumulated OCI into
|
|
Cash Flow Hedging
|
|
Derivative (Effective
|
|
|
into Income
|
|
|
Income (Effective
|
|
Relationships
|
|
Portion)
|
|
|
(Effective Portion)
|
|
|
Portion)
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
(53
|
)
|
|
Interest Expense
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ineffective Portion
|
|
|
|
|
|
Ineffective Portion
|
|
|
|
$
|
59
|
|
|
|
|
|
$
|
(70
|
)
|
For the Three Months Ended March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain or
|
|
|
Amount of Gain or (Loss)
|
|
|
|
Amount of Gain or (Loss)
|
|
|
(Loss) Reclassified from
|
|
|
Reclassified from
|
|
|
|
Recognized in OCI on
|
|
|
Accumulated OCI
|
|
|
Accumulated OCI into
|
|
Cash Flow Hedging
|
|
Derivative (Effective
|
|
|
into Income
|
|
|
Income (Effective
|
|
Relationships
|
|
Portion)
|
|
|
(Effective Portion)
|
|
|
Portion)
|
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
$
|
(1
|
)
|
|
Interest Expense
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ineffective Portion
|
|
|
|
|
|
Ineffective Portion
|
|
|
|
$
|
(12
|
)
|
|
|
|
|
$
|
(74
|
)
|
Prior to 2011, no gain or loss has been
recognized in the income statement due to any ineffective portion of any cash flow hedging relationship. During the first quarter
of 2011, the Company recorded a $384 thousand mark to market loss in the income statement on an interest rate swap relating to
trust preferred securities. The Company recorded a $59 thousand gain on this swap into non-interest income during the three months
ended March 31, 2012. The payment of interest on the trust preferred securities was suspended in February 2011 which resulted
in the swap changing its status from effective to ineffective. The change to an ineffective status disqualified the instrument
from hedge accounting and required mark to market adjustments to be included in the income statement instead of other comprehensive
income as previously recorded.
Note 10 – Derivatives (continued)
The tables below show the location and
amount of gains (losses) recognized in earnings for fair value hedges, the ineffective portion of cash flow hedges and other economic
hedges.
.For the Three Months Ended March 31, 2012
|
|
|
|
|
Location of Gain or
|
|
|
Amount of Gain or (Loss)
|
|
|
|
|
(Loss) Recognized in
|
|
|
Recognized in Income on
|
|
Description
|
|
|
Income on Derivative
|
|
|
Derivative
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Interest rate contracts - Not designated as hedging instruments
|
|
|
Other Income (Expense)
|
|
|
$
|
85
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts - Fair value hedging relationships
|
|
|
Interest Income/(Expense)
|
|
|
$
|
326
|
|
For the Three Months Ended March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain or
|
|
|
Amount of Gain or (Loss)
|
|
|
|
|
(Loss) Recognized in
|
|
|
Recognized in Income on
|
|
Description
|
|
|
Income on Derivative
|
|
|
Derivative
|
|
|
|
|
|
|
|
|
(Amounts in thousands)
|
|
Interest rate contracts - Not designated as hedging instruments
|
|
|
Other Income (Expense)
|
|
|
$
|
(605
|
)
|
|
|
|
|
|
|
|
|
|
Interest rate contracts - Fair value hedging relationships
|
|
|
Interest Income/(Expense)
|
|
|
$
|
528
|
|
The interest rate swap with borrowing
activities on trust preferred securities has a maturity date of September 6, 2012. The maturity date for the interest rate cap
contract is February 18, 2014. The currency exchange contracts have maturity dates of November 29, 2013 and December 30, 2013.
The interest rate swaps on certificates of deposit have maturity dates of July 16, 2017, January 3, 2018, January 11, 2018, July
28, 2025, August 27, 2030, September 30, 2030, October 12, 2040 and December 17, 2040. All of these swaps have the ability to
be called by the counterparty prior to their maturity date. Three interest rate swaps on certificates of deposit have passed their
call dates (July 28, 2011, May 27, 2011 and September 30, 2011) and are now callable quarterly. Two others have original call
dates of October 14, 2014 and November 28, 2014. On April 28, 2012, an interest rate swap on certificates of deposit with a notional
amount of $15.0 million was called by the counterparty.
Certain derivative liabilities were collateralized
by securities, which are held by the counterparty or in safekeeping by third parties. The fair value of these securities was $5.0
million and $7.3 million at March 31, 2012 and December 31, 2011, respectively. Collateral calls can be required at any time that
the market value exposure of the contracts is less than the collateral pledged. The degree of overcollateralization is dependent
on the derivative contracts to which the Company is a party.
As part of our banking activities, the
Company originates certain residential loans and commits these loans for sale. The commitments to originate residential loans
and the sales commitments are freestanding derivative instruments and are generally funded within 90 days. The fair value of these
commitments was not significant at March 31, 2012.
In January 2012, the Company entered into
$35.0 million notional forward starting interest rate swaps. The purpose of these swaps is to lock in currently low fixed rate
funding costs for intermediate term FHLB advances maturing from July 2012 through November 2013.
Note 11 - Disclosures About Fair Values
of Financial Instruments
Financial instruments include cash and
due from banks, federal funds sold, investment securities, loans, bank-owned life insurance, deposit accounts and other borrowings,
accrued interest and derivatives. Fair value estimates are made at a specific moment in time, based on relevant market information
and information about the financial instrument. These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no active market
readily exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The following methods and assumptions
were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and due from banks,
federal funds sold and overnight deposits
The carrying amounts for cash
and due from banks, federal funds sold and overnight deposits approximate fair value because of the short maturities of those
instruments.
Investment securities
Fair value for investment securities
equals quoted market price if such information is available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities. The Company utilizes a third party pricing service to provide valuations on
its securities portfolio. Most of these securities are US government agency debt obligations and agency mortgage-backed securities
traded in active markets. The third party valuations are determined based on the characteristics of each security (such as maturity,
duration, rating, etc.) and in reference to similar or comparable securities. Due to the nature and methodology of these valuations,
the Company considers these fair value measures as Level 2.
Loans
The fair value of commercial and other types of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining
maturities. For these loans, internal credit risk methodologies are used to adjust values for expected losses. For certain homogeneous
categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed
by similar loans, adjusted for differences in loan characteristics. In addition for residential mortgage loans, internal prepayment
risk assumptions are incorporated to adjust contractual cash flows.
Investment in bank-owned
life insurance
The carrying value of bank-owned
life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer.
In assessing the fair value of the cash surrender value of this asset, we evaluate quantitative factors such as the level of death
claims on the underlying policies and the impact of aging/actuarial factors.
Deposits
The fair value of demand deposits
is the amount payable on demand at the reporting date. The fair value of time deposits is estimated based on discounting expected
cash flows using the rates currently offered for deposits of similar remaining maturities.
Note 11 - Disclosures About Fair Values
of Financial Instruments (continued)
Borrowings
As it relates to the Company’s
subordinated debentures, a portion of this debt is publicly traded on NASDAQ under the ticker “SCMFO”. The remaining
fair values on the subordinated debentures are calculated by reference to the market price of the publicly traded comparable trust
preferred securities as an indication of the Company’s credit risk. The remaining fair values are based on discounting expected
cash flows at the current interest rate for debt with the same or similar remaining maturities and collateral requirements.
Accrued interest
The carrying amounts of accrued
interest receivable and payable approximate fair value.
Derivative financial instruments
Interest rate swaps and the interest rate option are recorded at fair value on a recurring basis. Fair
value measurement is based on discounted cash flow models run by a third-party on a monthly basis. All future floating cash flows
are projected and both floating and fixed cash flows are discounted to the valuation date using interest rates appropriate for
the term structure of the financial instrument hedged and for the counterparty involved. As a result, the Company classifies interest
rate swaps as Level 3.
The carrying amounts and estimated fair
values of the Company’s financial instruments, none of which are held for trading purposes, are as follows at March 31,
2012 and December 31, 2011:
|
|
March 31, 2012
|
|
|
|
|
|
Estimated fair value
|
|
|
Carrying amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
22,206
|
|
|
$
|
22,206
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Federal funds sold and overnight deposits
|
|
|
46,050
|
|
|
|
46,050
|
|
|
|
-
|
|
|
|
-
|
|
Investment securities available for sale
|
|
|
350,577
|
|
|
|
-
|
|
|
|
350,577
|
|
|
|
-
|
|
Investment securities held to maturity
|
|
|
52,260
|
|
|
|
-
|
|
|
|
54,209
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale and loans, net of allowance
|
|
|
911,547
|
|
|
|
-
|
|
|
|
-
|
|
|
|
850,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life insurance
|
|
|
31,173
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,173
|
|
Accrued interest receivable
|
|
|
5,438
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,181,758
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,184,317
|
|
Short-term borrowings
|
|
|
62,145
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,387
|
|
Long-term borrowings
|
|
|
147,470
|
|
|
|
33,431
|
|
|
|
9,500
|
|
|
|
110,952
|
|
Accrued interest payable
|
|
|
5,503
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
(269
|
)
|
|
|
-
|
|
|
|
189
|
|
|
|
(458
|
)
|
Interest rate option
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
Note 11 - Disclosures About Fair Values
of Financial Instruments (continued)
|
|
December 31, 2011
|
|
|
|
|
|
Estimated fair value
|
|
|
Carrying amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
23,356
|
|
|
$
|
23,356
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Federal funds sold and overnight deposits
|
|
|
23,198
|
|
|
|
23,198
|
|
|
|
-
|
|
|
|
-
|
|
Investment securities available for sale
|
|
|
362,298
|
|
|
|
-
|
|
|
|
362,298
|
|
|
|
-
|
|
Investment securities held to maturity
|
|
|
44,403
|
|
|
|
-
|
|
|
|
45,514
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale and loans, net of allowance
|
|
|
930,316
|
|
|
|
-
|
|
|
|
-
|
|
|
|
867,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life insurance
|
|
|
30,919
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,919
|
|
Accrued interest receivable
|
|
|
5,843
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,183,172
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,177,073
|
|
Short-term borrowings
|
|
|
33,629
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,334
|
|
Long-term borrowings
|
|
|
177,514
|
|
|
|
14,352
|
|
|
|
4,160
|
|
|
|
143,376
|
|
Accrued interest payable
|
|
|
5,219
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On-balance sheet derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
(223
|
)
|
|
|
-
|
|
|
|
234
|
|
|
|
(457
|
)
|
Interest rate option
|
|
|
9
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
Note 12 – Fair Values of Assets
and Liabilities
Accounting standards establish a framework
for measuring fair value according to GAAP and expands disclosures about fair value measurements. Under these standards, there
is a three level fair value hierarchy that is fully described below. The Company reports fair value on a recurring basis for certain
financial instruments, most notably for available for sale investment securities and certain derivative instruments. The Company
may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These include assets that
are measured at the lower of cost or market that were recognized at fair value which was below cost at the end of the period.
Assets subject to nonrecurring use of fair value measurements could include loans held for sale and foreclosed assets. At March
31, 2012 and December 31, 2011, the Company had certain impaired loans and foreclosed assets that are measured at fair value on
a nonrecurring basis.
The Company groups financial assets and
financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded
and the reliability of the assumptions used to determine fair value. These levels are:
|
·
|
Level
1 – Valuations
for assets and
liabilities traded
in active exchange
markets, such as
the New York Stock
Exchange. Valuations
are obtained from
readily available
pricing sources
for market transactions
involving identical
assets or liabilities.
There were no investments
held with level
1 valuations.
|
|
·
|
Level
2 – Valuations
for assets and
liabilities traded
in less active
dealer or broker
markets. Level
2 securities include
asset-backed securities
issued by government
sponsored entities,
municipal bonds
and corporate debt
securities. Valuations
are obtained from
third party services
for similar or
comparable assets
or liabilities.
|
|
·
|
Level
3 – Valuations
for assets and
liabilities that
are derived from
other valuation
methodologies,
including option
pricing models,
discounted cash
flow models and
similar techniques,
and not based on
market exchange,
dealer, or brokered
traded transactions.
Level 3 valuations
incorporate certain
assumptions and
projections in
determining the
fair value assigned
to such assets
or liabilities.
|
Note 12 – Fair Values of Assets
and Liabilities (continued)
There were no transfers between any of
the levels during first quarter 2012. The table below presents the balances of assets and liabilities measured at fair value on
a recurring basis.
|
|
March 31, 2012
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government agencies
|
|
$
|
23,800
|
|
|
$
|
-
|
|
|
$
|
23,800
|
|
|
$
|
-
|
|
Asset-backed securities
|
|
|
292,369
|
|
|
|
-
|
|
|
|
292,369
|
|
|
|
-
|
|
Municipals
|
|
|
27,560
|
|
|
|
-
|
|
|
|
27,560
|
|
|
|
-
|
|
Trust preferred securities
|
|
|
2,332
|
|
|
|
-
|
|
|
|
2,332
|
|
|
|
-
|
|
Common stocks and mutual funds
|
|
|
3,525
|
|
|
|
-
|
|
|
|
3,525
|
|
|
|
-
|
|
Other
|
|
|
991
|
|
|
|
-
|
|
|
|
991
|
|
|
|
-
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
(267
|
)
|
|
|
-
|
|
|
|
191
|
|
|
|
(458
|
)
|
|
|
December 31, 2011
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US government agencies
|
|
$
|
34,729
|
|
|
$
|
-
|
|
|
$
|
34,729
|
|
|
$
|
-
|
|
Asset-backed securities
|
|
|
291,368
|
|
|
|
-
|
|
|
|
291,368
|
|
|
|
-
|
|
Municipals
|
|
|
29,220
|
|
|
|
-
|
|
|
|
29,220
|
|
|
|
-
|
|
Trust preferred securities
|
|
|
2,321
|
|
|
|
-
|
|
|
|
2,321
|
|
|
|
-
|
|
Corporate bonds
|
|
|
3,659
|
|
|
|
-
|
|
|
|
3,659
|
|
|
|
-
|
|
Other
|
|
|
1,001
|
|
|
|
-
|
|
|
|
1,001
|
|
|
|
-
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
(214
|
)
|
|
|
-
|
|
|
|
243
|
|
|
|
(457
|
)
|
The table below presents reconciliation
for the period of January 1, 2012 to March 31, 2012, for all Level 3 assets and liabilities that are measured at fair value on
a recurring basis.
|
|
Fair Value Measurements Using
Significant Unobservable Inputs
|
|
|
|
(Amounts in thousands)
|
|
|
|
Net Derivatives
|
|
Beginning Balance January 1, 2012
|
|
$
|
(457
|
)
|
Total realized and unrealized gains or losses:
|
|
|
|
|
Included in earnings
|
|
|
(1
|
)
|
Included in other comprehensive income
|
|
|
-
|
|
Purchases
|
|
|
-
|
|
Issuances
|
|
|
-
|
|
Settlements
|
|
|
-
|
|
Transfers in and/or out of Level 3
|
|
|
-
|
|
Ending Balance
|
|
$
|
(458
|
)
|
The Company utilizes a third party pricing
service to provide valuations on its securities portfolio. Despite most of these securities being US government agency debt obligations,
agency mortgage-backed securities and municipal securities traded in active markets, third party valuations are determined based
on the characteristics of a security (such as maturity, duration, rating, etc.) and in reference to similar or comparable securities.
Due to the nature and methodology of these valuations, the Company considers these fair value measurements as level 2. No securities
were transferred between level 1 and level 2 during the three months ended March 31, 2012.
Note 12 – Fair Values of Assets
and Liabilities (continued)
The table below presents reconciliation
for the period of January 1, 2011 to March 31, 2011, for all Level 3 assets and liabilities that are measured at fair value on
a recurring basis.
|
|
Fair Value Measurements Using
|
|
|
|
Significant Unobservable Inputs
|
|
|
|
Securities
|
|
|
|
|
|
|
Available for sale
|
|
|
Net Derivatives
|
|
|
|
(Amounts in thousands)
|
|
Beginning Balance January 1, 2011
|
|
$
|
3,003
|
|
|
$
|
(679
|
)
|
Total realized and unrealized gains or losses:
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
537
|
|
|
|
222
|
|
Included in other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
Purchases, issuances and settlements
|
|
|
(3,540
|
)
|
|
|
-
|
|
Transfers in and/or out of Level 3
|
|
|
-
|
|
|
|
-
|
|
Ending Balance
|
|
$
|
-
|
|
|
$
|
(457
|
)
|
The fair value reporting standards allows
an entity to make an irrevocable election to measure certain financial instruments at fair value. The changes in fair value from
one reporting period to the next period must be reported in the income statement with additional disclosures to identify the effect
on net income. The Company continued to account for securities available for sale at fair value as reported in prior years. Derivative
activity is also reported at fair value. Securities available for sale and derivative activity are reported on a recurring basis.
Upon adoption of the fair value reporting standard, no additional financial assets or liabilities were reported at fair value
and there was no material effect on earnings.
The Company records loans in the ordinary
course of business and does not record loans at fair value on a recurring basis. Loans are considered impaired when it is determined
to be probable that all amounts due under the contractual terms of the loan will not be collected when due. Loans considered individually
impaired are evaluated and a specific allowance is established if required based on the most appropriate of the three measurement
methods: present value of expected future cash flows, fair value of collateral, or the observable market price of a loan method.
A specific allowance is required if the fair value of the expected repayments or the fair value of the collateral is less than
the recorded investment in the loan. At March 31, 2012, loans with a book value of $76.8 million were evaluated for impairment.
Of this total, $28.3 million required a specific allowance totaling $2.6 million for a net fair value of $25.7 million. The methods
used to determine the fair value of these loans were considered level 3.
The table below presents the balances
of assets and liabilities measured at fair value on a nonrecurring basis.
|
|
March 31, 2012
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
25,702
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
25,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed assets
|
|
|
24,032
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,032
|
|
|
|
December 31, 2011
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
21,388
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed assets
|
|
|
19,812
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,812
|
|
The Company does not record loans held-for-investment
at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses
is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual
terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment
in accordance with the Receivables topic of the FASB Accounting Standards Codification. The fair value of impaired loans is estimated
using one of several methods, including collateral value (through appraisal processes), market value of similar debt, enterprise
value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the
fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2012, the majority
of impaired loans were evaluated based on the fair value of the collateral. The Company records impaired loans as nonrecurring
Level 3. There have been no changes in valuation techniques for the quarter ended March 31, 2012. Valuation techniques are consistent
with techniques used in prior periods.
Assets acquired through, or in lieu of,
foreclosure are held for sale and are initially recorded at fair value less estimated cost to sell on the date of foreclosure.
Subsequent to foreclosure, valuations are periodically performed by management or outside appraisers and the assets are carried
at the lower of carrying amount or fair value less estimated cost to sell. These valuations generally are based on market comparable
sales data for similar type of properties. The range of discounts in these valuations is specific to the nature, type, location,
condition and market demand for each property. The methods used to determine the fair value of these foreclosed assets were considered
level 3.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk
Market risk reflects the risk of economic
loss resulting from adverse changes in market prices and interest rates. This risk of loss can be reflected in diminished current
market values and/or reduced potential net interest income in future periods.
The Company’s market risk arises
primarily from interest rate risk inherent in its lending, deposit-taking and borrowing activities. The structure of the Company’s
loan and liability portfolios is such that a significant decline in interest rates may adversely impact net market values and
net interest income. The Company does not maintain a trading account nor is the Company subject to currency exchange risk or commodity
price risk.
In reviewing the needs of our Bank with
regard to proper management of its asset/liability program, we estimate future needs, taking into consideration investment portfolio
purchases, calls and maturities in addition to estimated loan and deposit increases (due to increased demand through marketing)
and forecasted interest rate changes. We use a number of measures to monitor and manage interest rate risk, including net interest
income simulations and gap analyses. A net interest income simulation model is the primary tool used to assess the direction and
magnitude of changes in net interest income resulting from changes in interest rates. Key assumptions in the model include prepayment
speeds on mortgage-related assets, cash flows and maturities of other investment securities, loan and deposit volumes and pricing.
These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely
predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results
due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among
other factors. The results of the most recent analysis indicated that the Company is relatively interest rate neutral. Given the
current level of market interest rates, it is not meaningful to use an assumed decrease in interest rates of more than 1%. If
interest rates decreased instantaneously by one percentage point, our net interest income over a one-year time frame could decrease
by approximately 8.7%. If interest rates increased instantaneously by two percentage points, our net interest income over a one-year
time frame could increase by approximately 13.4%.
Item 4. Controls and Procedures
The Company conducted an evaluation, under
the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Company’s disclosure controls and procedures as of March 31, 2012. The Company’s disclosure
controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective
as of March 31, 2012 at the reasonable assurance level. However, the Company believes that a system of internal controls, no matter
how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met and no evaluation
of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been
detected.
During the three months ended March 31,
2012, the Company completed a number of measures to strengthen its credit risk management, including enhancements to credit underwriting
and credit approval, more comprehensive procedures to identify and evaluate troubled debt restructurings and a strengthening of
the staffing and Board oversight for the Bank’s internal loan review function. As a part of the changes in these processes,
there were improvements in the related system of internal controls that enhanced the effectiveness of the Company’s internal
controls over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal
control over financial reporting, on an ongoing basis, and may from time to time make changes to ensure that the Company’s
systems evolve with its business.
Part II. OTHER INFORMATION
Item 1A. Risk Factors
An investment in our common stock involves
risk. Shareholders should carefully consider the risks described below in conjunction with the other information in this Form 10-Q
and information incorporated by reference in this Form 10-Q, including our consolidated financial statements and related notes.
If any of the following risks or other risks which have not been identified or which we may believe are immaterial or unlikely,
actually occur, our business, financial condition and results of operations could be harmed. This could cause the price of our
stock to decline and shareholders could lose part or all of their investment. This Form 10-Q contains forward-looking statements
that involve risks and uncertainties, including statements about our future plans, objectives, intentions and expectations. Many
factors, including those described below, could cause actual results to differ materially from those discussed in our forward-looking
statements.
Risks Related to Holding Southern Community
Common Stock
Failure to consummate the acquisition
transaction with Capital Bank Financial Corp.
While we intend and expect to meet all of the conditions required to consummate the transaction with Capital
Bank Financial Corp., there are certain closing conditions which are beyond our control whose occurrence, or failure, could result
in the transaction being terminated. These factors include the failure of Capital Bank Financial Corp. to complete its Initial
Public Offering or the consideration by our Board of a competing offer. Under certain circumstances, the consideration of a competing
offer could result in the Company paying significant termination fees and expenses as disclosed in Note 2 to the financial statements.
If the transaction with Capital Bank Financial Corp. fails to be consummated, the Company would be obligated to pay its expenses
incurred in the transaction (which could be material and would have to be expensed immediately). We could also experience material
operational disruptions, including a loss of key employees and/or key customer relationships. Failure of the transaction to be
consummated could have a material adverse effect on our business, future prospects, financial condition or results of operations
and shareholders might not be able to realize a similar value for their shares for some time.
Item 6. Exhibits
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(a)
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Exhibits.
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Exhibit
31.1
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Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a)
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Exhibit 31.2
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Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
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Exhibit 32
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Section 1350 Certification
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Exhibit
101.INS
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XBRL
Instance Document
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Exhibit
101.SCH
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XBRL
Taxonomy Extension Schema
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Exhibit
101.CAL
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XBRL
Taxonomy Extension Calculation Linkbase
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Exhibit
101.DEF
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XBRL
Taxonomy Extension Definition Linkbase
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Exhibit
101.LAB
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XBRL
Taxonomy Extension Label Linkbase
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Exhibit
101.PRE
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XBRL
Taxonomy Extension Presentation Linkbase
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SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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SOUTHERN COMMUNITY FINANCIAL CORPORATION
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Date: May 15, 2012
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By:
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/s/ F. Scott
Bauer
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F. Scott Bauer
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President and Chief Executive Officer
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(principal executive officer)
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Date: May 15, 2012
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By:
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/s/ James Hastings
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James Hastings
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Executive Vice President and Chief Financial Officer
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(principal financial and accounting officer)
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