Document And Entity Information
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Document And Entity Information (USD $)
12 Months Ended
Dec. 31, 2011
Mar. 14, 2012
Jun. 30, 2011
Document And Entity Information [Abstract]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2011    
Document Fiscal Period Focus FY    
Document Fiscal Year Focus 2011    
Entity Registrant Name CORNERSTONE BANCORP/SC    
Entity Central Index Key 0001087455    
Current Fiscal Year End Date --12-31    
Entity Filer Category Smaller Reporting Company    
Entity Common Stock, Shares Outstanding   2,210,769  
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Well-known Seasoned Issuer No    
Entity Public Float     $ 1,906,692

Consolidated Balance Sheets
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Consolidated Balance Sheets (USD $)
Dec. 31, 2011
Dec. 31, 2010
Assets    
Cash and due from banks $ 6,803,057 $ 7,043,911
Federal funds sold 12,620,000 5,110,000
Cash and cash equivalents 19,423,057 12,153,911
Investment securities    
Available-for-sale 27,742,623 23,592,336
Other investments 883,850 1,063,350
Loans, net 91,338,925 117,210,770
Property and equipment, net 5,024,113 5,230,835
Cash surrender value of life insurance policies 1,975,187 1,908,112
Property acquired in foreclosure 16,545,488 10,278,599
Other assets 1,390,168 2,530,552
Total assets 164,323,411 173,968,465
Liabilities And Shareholders' Equity    
Noninterest bearing 17,087,736 10,382,882
Interest bearing 121,774,858 130,263,510
Total deposits 138,862,594 140,646,392
Customer repurchase agreements 1,767,550 2,945,937
Borrowings from Federal Home Loan Bank of Atlanta 2,441,505 6,592,338
Broker repurchase agreements 3,000,000 5,000,000
Other liabilities 769,152 425,086
Total liabilities 146,840,801 155,609,753
Commitments and contingencies - Notes 12 and 16      
Shareholders' equity    
Preferred stock, 10,000,000 shares authorized, 1,038 shares issued at December 31, 2011 and 2010 998,538 998,538
Common stock, no par value, 20,000,000 shares authorized, 2,210,769 shares issued at December 31, 2011 and 2010 18,909,600 18,859,924
Retained deficit (2,907,929) (1,418,781)
Accumulated other comprehensive (loss) income 482,401 (80,969)
Total shareholders' equity 17,482,610 18,358,712
Total liabilities and shareholders' equity $ 164,323,411 $ 173,968,465

Consolidated Balance Sheets (Parenthetical)
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Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2011
Dec. 31, 2010
Consolidated Balance Sheets [Abstract]    
Preferred stock, shares authorized 10,000,000 10,000,000
Preferred stock, shares issued 1,038 1,038
Common stock, no par value      
Common stock, shares authorized 20,000,000 20,000,000
Common stock, shares issued 2,210,769 2,210,769

Consolidated Statements Of Income (Loss)
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Consolidated Statements Of Income (Loss) (USD $)
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Interest Income      
Loans and fees on loans $ 5,862,832 $ 6,912,550 $ 6,997,466
Investment securities 820,729 916,464 1,025,983
Federal funds sold and other 17,132 18,968 16,378
Total interest income 6,700,693 7,847,982 8,039,827
Interest Expense      
Deposits 1,467,215 2,331,067 2,930,929
Federal funds and customer repurchase agreements 26,718 38,259 78,438
Federal Home Loan Bank advances 93,871 200,885 237,870
Broker repurchase agreements 239,746 177,103 176,619
Total interest expense 1,827,550 2,747,314 3,423,856
Net interest income 4,873,143 5,100,668 4,615,971
Provision for loan losses 670,000 1,260,000 2,955,000
Net interest income after provision for loan losses 4,203,143 3,840,668 1,660,971
Noninterest Income      
Service fees on deposit accounts 531,437 536,480 572,973
Gain on sale of available-for-sale investments   325,656 299,063
Mortgage loan origination fees     154,905
Other 214,919 206,540 183,225
Total noninterest income 746,356 1,068,676 1,210,166
Noninterest Expenses      
Salaries and benefits 2,181,085 2,238,400 2,392,717
Occupancy and equipment 530,827 542,138 572,025
Data processing 240,702 233,631 218,110
Advertising 27,171 21,225 30,258
Supplies 76,596 67,136 69,383
Professional and regulatory fees 574,367 584,539 551,330
Directors' fees 130,550 137,025 138,475
Loan expenses 222,515 213,035 322,687
Holding costs of foreclosed property 527,850 461,598 117,272
Loss on sale of foreclosed property 193,693 180,397 228,547
Impairment of foreclosed property 430,513 709,751  
Other operating expenses 394,337 406,509 411,344
Total noninterest expenses 5,530,206 5,795,384 5,052,148
Loss before income taxes (580,707) (886,040) (2,181,011)
Income tax expense (benefit) 908,441 (388,273) (819,737)
Net loss (1,489,148) (497,767) (1,361,274)
Dividend on preferred stock (88,077) (30,476)  
Loss available to common shareholders $ (1,577,225) $ (528,243) $ (1,361,274)
Loss Per Common Share      
Basic $ (0.71) $ (0.24) $ (0.62)
Diluted $ (0.71) $ (0.24) $ (0.62)
Weighted Average Common Shares Outstanding      
Basic 2,210,769 2,210,769 2,208,191
Diluted 2,210,769 2,210,769 2,208,191

Consolidated Statements Of Shareholders' Equity And Comprehensive Income (Loss)
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Consolidated Statements Of Shareholders' Equity And Comprehensive Income (Loss) (USD $)
Preferred Stock [Member]
Common Stock [Member]
Retained Earnings (Deficit) [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Total
Balance at Dec. 31, 2008   $ 18,323,333 $ 765,906 $ 47,708 $ 19,136,947
Balance, shares at Dec. 31, 2008   1,991,565      
Net loss     (1,361,274)   (1,361,274)
Other comprehensive income, net of income taxes:          
Unrealized gain/loss on investment securities       112,983 112,983
Comprehensive loss         (1,248,291)
Stock based compensation   72,464     72,464
Stock option exercises   80,000     80,000
Stock option exercises, shares   14,172      
Stock dividend (5%), net of cash in lieu of fractional shares   323,931 (325,646)   (1,715)
Stock dividend (5%), net of cash in lieu of fractional shares, shares   100,001      
Balance at Dec. 31, 2009   18,799,728 (921,014) 160,691 18,039,405
Balance, shares at Dec. 31, 2009   2,105,738      
Net loss     (497,767)   (497,767)
Other comprehensive income, net of income taxes:          
Unrealized gain/loss on investment securities       (241,660) (241,660)
Comprehensive loss         (739,427)
Stock based compensation   61,220     61,220
Preferred stock issuance, net of offering expenses 998,538       998,538
Preferred stock issuance, net of offering expenses, shares 1,038        
Stock dividend (5%), net of cash in lieu of fractional shares   (1,024)     (1,024)
Stock dividend (5%), net of cash in lieu of fractional shares, shares   105,031      
Balance at Dec. 31, 2010 998,538 18,859,924 (1,418,781) (80,969) 18,358,712
Balance, shares at Dec. 31, 2010 1,038 2,210,769      
Net loss     (1,489,148)   (1,489,148)
Other comprehensive income, net of income taxes:          
Unrealized gain/loss on investment securities       563,370 563,370
Comprehensive loss         (925,778)
Stock based compensation   49,676     49,676
Balance at Dec. 31, 2011 $ 998,538 $ 18,909,600 $ (2,907,929) $ 482,401 $ 17,482,610
Balance, shares at Dec. 31, 2011 1,038 2,210,769      

Consolidated Statements Of Shareholders' Equity And Comprehensive Income (Loss) (Parenthetical)
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Consolidated Statements Of Shareholders' Equity And Comprehensive Income (Loss) (Parenthetical)
12 Months Ended
Dec. 31, 2010
Dec. 31, 2009
Consolidated Statements Of Shareholders' Equity And Comprehensive Income (Loss) [Abstract]    
Stock dividend declared, percentage 5.00% 5.00%

Consolidated Statements Of Cash Flows
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Consolidated Statements Of Cash Flows (USD $)
12 Months Ended
Dec. 31, 2011
Dec. 31, 2010
Dec. 31, 2009
Operating Activities      
Net loss $ (1,489,148) $ (497,767) $ (1,361,274)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities      
Depreciation and net amortization 538,477 484,081 351,303
Deferred income tax expense (benefit) 908,441 (132,306) (37,863)
Provision for loan losses 670,000 1,260,000 2,955,000
Impairment of foreclosed property 430,513 709,751  
Gain on sale of available-for-sale investments   (325,656) (299,063)
Loss on sale of repossessed collateral 193,693 180,397 228,547
(Gain) loss on sale/disposal of property and equipment 3,539 1,881 (625)
Non-cash option expense 49,676 61,220 72,464
(Increase) decrease in other assets 164,868 1,508,383 (2,459,514)
Increase in other liabilities 53,844 101 145,474
Net cash provided by (used for) operating activities 1,523,903 3,250,085 (405,551)
Investing Activities      
Proceeds from maturities and principal paydowns of investment securities 8,932,818 8,277,549 5,901,304
Proceeds from sale of investment securities   8,120,975 10,752,749
Proceeds from sale of foreclosed property 4,389,988 3,947,388 2,498,705
Purchase of investment securities (12,532,290) (11,385,110) (25,495,248)
(Purchase) sale of FHLB and Federal Reserve stock, net 179,500 78,700 (27,900)
(Increase) decrease in loans, net 14,112,651 8,558,681 (17,167,459)
Proceeds from sale of property and equipment 425   625
Capitalization of improvements to foreclosed property (191,889) (364,989) (63,943)
Purchase of property and equipment (32,942) (169,697) (5,448)
Net cash provided by (used for) investing activities 14,858,261 17,063,497 (23,606,615)
Financing Activities      
Net (decrease) increase in deposits (1,783,798) (11,734,882) 29,799,700
Net decrease in customer repurchase agreements (1,178,387) (311,065) (1,325,617)
Net decrease Federal funds purchased     (1,810,000)
Borrowings from Federal Home Loan Bank of Atlanta     4,500,000
Repayments to Federal Home Loan Bank of Atlanta (4,150,833) (3,150,834) (5,150,833)
Proceeds from sale of preferred stock, net of expenses   998,538  
Repayments of broker repurchase agreements (2,000,000)    
Proceeds from exercise of stock options     80,000
Cash paid in lieu of fractional shares   (1,024) (1,715)
Net cash (used for) provided by financing activities (9,113,018) (14,199,267) 26,091,535
Net increase in cash and cash equivalents 7,269,146 6,114,315 2,079,369
Cash and cash equivalents, beginning of year 12,153,911 6,039,596 3,960,227
Cash and cash equivalents, end of year 19,423,057 12,153,911 6,039,596
Cash paid for:      
Interest 1,860,780 2,776,547 3,457,004
Income taxes (refunds, received) (208,897) (892,557) 54,946
Non-cash Supplemental information:      
Loans transferred to foreclosed property 11,089,194 8,038,463 8,922,517
Loans charged-off, net $ 1,330,990 $ 1,251,907 $ 1,958,726

Summary Of Significant Accounting Policies And Activities
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Summary Of Significant Accounting Policies And Activities
12 Months Ended
Dec. 31, 2011
Summary Of Significant Accounting Policies And Activities [Abstract]  
Summary Of Significant Accounting Policies And Activities

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES

     Cornerstone Bancorp, (the "Company") was incorporated under the laws of the State of South Carolina for the purpose of operating as a bank holding company for Cornerstone National Bank (the "Bank"). The Company obtained regulatory approval to acquire the Bank and opened the Bank for business in 1999 with a total capitalization of $6.0 million. To increase capital available for growth, the Company offered 445,000 shares of its common stock pursuant to a prospectus dated October 4, 2005. Upon completion in January 2006, the offering added approximately $6.0 million to the Company's total capitalization. In 2010 the Company offered 8% cumulative perpetual preferred stock ("the Preferred") to accredited investors. The Company sold 1,038 shares of the Preferred, raising $998,538 net of offering expenses. The Company increased its investment in the Bank by approximately $500,000 and held the remaining cash in order to pay future expenses and dividends on the Preferred.

     The Bank provides full commercial banking services to customers and is subject to regulation by the Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation. The Company is subject to regulation by the Federal Reserve and to limited regulation by the South Carolina State Board of Financial Institutions. The Bank maintains branch locations in the Berea area of Greenville County and the Powdersville area of Anderson County, South Carolina in addition to its headquarters in Easley in Pickens County, South Carolina. In 2004, the Bank established a wholly owned subsidiary, Crescent Financial Services, Inc. ("Crescent"), which is an insurance agency. In 2011, 2010 and 2009, Crescent's transactions were immaterial to the consolidated financial statements.

Basis of presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. The Company operates as one business segment. All significant intercompany balances and transactions have been eliminated. The accounting and reporting policies conform to accounting principles generally accepted in the United States of America ("GAAP") and to general practices in the banking industry. The Company uses the accrual basis of accounting.

Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amount of income and expenses during the reporting periods. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, including valuation allowances for impaired loans, and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the valuation of foreclosed real estate, management obtains independent appraisals for significant properties and takes into account other current market information. While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowance for loan losses and changes to valuation of foreclosed real estate may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses and valuation of foreclosed real estate. Such agencies may require the Company to recognize additions to the allowance for loan losses or additional write-downs on foreclosed real estate based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that estimates related to the allowance for loan losses and valuation of foreclosed real estate may change materially in the near term.

Investment securities

The Company accounts for investment securities in accordance with financial accounting standards which require investments in equity and debt securities to be classified into three categories:

 

1. Available-for-sale securities: These are securities that are not classified as either held to maturity or as trading securities. These securities are reported at fair market value. Unrealized gains and losses are reported, net of income taxes, as separate components of shareholders' equity (accumulated other comprehensive income).

2. Held-to-maturity securities: These are investment securities that the Company has the ability and intent to hold until maturity. These securities are stated at cost, adjusted for amortization of premiums and the accretion of discounts. The Company has no held-to-maturity securities.

3. Trading securities: These are securities that are bought and held principally for the purpose of selling in the near future. Trading securities are reported at fair market value, and related unrealized gains and losses are recognized in the income statement. The Company has no trading securities.

The Company reviews all investments with unrealized losses as of the balance sheet date for possible impairment. Our review consists of an examination of each security with regard to its issuer, credit rating, time to maturity and likelihood of sale prior to maturity. Any losses determined to be other than temporary are recognized through the income statement. Unrealized gains and losses are determined using fair values estimated by the Company's bond accounting vendor. The vendor uses several pricing services for valuing securities, depending on the issuer of the security. Management reviews the fair values for appropriateness and consults an additional vendor to ensure that fair value estimates are reasonable. The portfolio contained Agency mortgage backed securities and municipal bonds as of December 31, 2011. There were no private-label mortgage-backed securities, collateralized mortgage obligations, or derivative products in the portfolio as of December 31, 2011. The fair values of the Company's available for sale investments, other than municipal bonds, are measured on a recurring basis using quoted market prices in active markets for identical assets and liabilities ("Level 1 inputs" under the standard). Due to the lower level of trading activity in municipal bonds, the fair market values of these investments are measured based on other inputs such as inputs that are observable or can be corroborated by observable market data for similar assets with substantially the same terms ("Level 2 inputs" under the standard.)

Other investments include the Bank's stock investments in the Federal Reserve Bank of Richmond ("Reserve Bank") and the Federal Home Loan Bank of Atlanta ("FHLB"). The Bank, as a member institution, is required to own certain stock investments in the Reserve Bank and FHLB. The stock is generally pledged against any borrowings from the Reserve Bank and FHLB. No ready market exists for the stock and it has no quoted market value. Redemption of these stock investments has historically been (including redemptions during 2011) at par value. However, there can be no assurance that future redemptions will be at par value. Other investments are carried at cost.

Gains or losses on dispositions of investment securities are based on the differences between the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method.

Loans, interest and fee income on loans

Loans are stated at the principal balance outstanding. Unearned discount and the allowance for possible loan losses are deducted from total loans in the balance sheet. Interest income is recognized over the term of the loan based on the principal amount outstanding.

Generally, the accrual of interest will be discontinued on impaired loans when principal or interest becomes 90 days past due, or when payment in full is not anticipated, and any previously accrued interest on such loans will be reversed against current income. Any subsequent interest income will be recognized on a cash basis when received unless collectibility of a significant amount of principal is in serious doubt. In such cases, collections are credited first to the remaining principal balance on a cost recovery basis. An impaired loan will not be returned to accrual status unless principal and interest are current and the borrower has demonstrated the ability to continue making payments as agreed. The ability to continue making payments as agreed is determined on a case-by-case basis due to the mainly commercial nature of the Bank's portfolio. Non-performing assets include real estate acquired through foreclosure or deed taken in lieu of foreclosure, and loans on non-accrual status. Fee income on loans is recognized as income at the time loans are originated.

 

Due to the short-term nature of the majority of the Bank's loans and the immateriality of the net deferred amount, this method approximates the income that would be earned if the Company deferred loan fees and costs.

Allowance for loan losses

The Company provides for loan losses using the allowance method. Loans that are determined to be uncollectible are charged against the allowance. Provisions for loan losses and recoveries on loans previously charged off are added to the allowance. The provision for loan losses charged to operating expenses reflects the amount deemed appropriate by management to establish an adequate reserve to meet the probable loan losses incurred in the current loan portfolio. Management's judgment is based on periodic and regular evaluation of individual loans, the overall risk characteristics of the various portfolio segments, past experience with losses, delinquency trends, and prevailing economic conditions. To estimate the amount of allowance necessary the Company separates the portfolio into segments. The portfolio is first separated into groups according to the internal loan rating assigned by management. Loans rated "Other Assets Especially Mentioned" ("OAEM") or "Special Mention", "Substandard", "Doubtful", or "Loss" as defined in the Bank's loan policy, are evaluated individually for impairment. The Company uses regulatory call report codes to stratify the remaining portfolio and tracks the Bank's own charge-offs and those of peer banks using FDIC Call Report Data. The Bank's own charge-off ratios by call code are used to project potential loan losses in the future on loans that are rated "Satisfactory" or better. Charge-off ratios may be increased or decreased based on other environmental factors which may need to be considered, such as unemployment rates and volatility of real estate values. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. The allowance for loan losses is also subject to periodic evaluation by various regulatory authorities and may be subject to adjustment upon their examination. Refer to Note 5 for additional information.

The Bank accounts for impaired loans in accordance with a financial accounting standard that requires all lenders to value a loan at the loan's fair value if it is probable that the lender will be unable to collect all amounts due according to the terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis taking into consideration all the circumstances of the loan and the borrower, including the length of the delay, reasons for the delay, the borrower's payment record and the amount of the shortfall in relation to the principal and interest owed. The fair value of an impaired loan may be determined based upon the present value of expected cash flows, market price of the loan, if available, or value of the underlying collateral. Expected cash flows are required to be discounted at the loan's effective interest rate. The Bank's loan portfolio is largely dependent on collateral for repayment if the borrower's financial position deteriorates. Therefore, the most common type of valuation is to determine collateral value less disposal costs in order to determine carrying values for loans deemed impaired. If an impaired loan is collateral dependent and the fair value is less than the outstanding principal balance, the short-fall is charged-off to the allowance for loan losses. Costs to sell the collateral may be specifically reserved in the allowance for loan losses until the foreclosure of the collateral is complete and the balance is moved to foreclosed property.

When the ultimate collectibility of an impaired loan's principal is in doubt, wholly or partially, all cash receipts are applied to principal. Once the reported principal balance has been reduced to zero, future cash receipts are applied to interest income, to the extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged off. A loan is also considered impaired if its terms are modified in a troubled debt restructuring. For these accruing impaired loans, cash receipts are typically applied to principal and interest receivable in accordance with the terms of the restructured loan agreement. Interest income is recognized on these loans using the accrual method of accounting.

Property acquired in foreclosure

Property acquired in foreclosure is carried at fair value (market value less estimated selling cost), determined using an independent appraisal. Write-downs of value occur if properties are determined to have lost value based on updated appraisals. Costs to complete properties are capitalized if the as-complete market value less estimated cost is higher than the recorded investment including the cost to complete.

 

Holding costs are charged to expense as incurred.

Property and equipment

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Maintenance and repairs are charged to operations, while major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the accounts, and gain or loss is included in income from operations.

Income taxes

The Company accounts for income taxes in accordance with a financial accounting standard that requires that deferred tax assets and liabilities be recognized for the expected future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. During 2011 the Company recorded a valuation allowance against all net deferred tax assets. Refer to Note 14 for additional information.

The Company has analyzed its filing positions in the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company believes that income tax filing positions taken or expected to be taken in its tax returns will more likely than not be sustained upon audit by the taxing authorities and does not anticipate any adjustments that will result in a material adverse impact on the Company's financial condition, results of operations, or cash flows. Therefore, no reserves for uncertain income tax positions have been recorded. The Company's federal and state income tax returns are open and subject to examination from the 2008 tax return and forward.

Advertising and public relations expense

Advertising, promotional and other business development costs are generally expensed as incurred. External costs incurred in producing media advertising are expensed the first time the advertising takes place. External costs relating to direct mailing costs are expensed in the period in which the direct mailings are sent.

Earnings per common share

Basic earnings (loss) per common share is computed on the basis of the weighted average number of common shares outstanding. The treasury stock method is used to compute the effect of stock options on the weighted average number of common shares outstanding for diluted earnings (loss) per common share. As of December 31, 2011, 2010, and 2009 there were no common stock equivalents included in the Company's loss per share calculation. Options to purchase 102,169 shares, 111,565 shares and 106,255 shares of common stock were antidilutive as of December 31, 2011, 2010 and 2009, respectively, and were excluded from the diluted share calculation. The Company declared a five percent stock dividend to shareholders of record on May 11, 2010. For 2009, per share amounts on the Consolidated Statements of income (loss) have been retroactively restated to reflect the 2010 stock dividend.

Cash surrender value of life insurance policies

Cash surrender value of life insurance policies represents the cash value of policies on certain officers of the Bank.

Statement of cash flows

For purposes of reporting cash flows, cash and cash equivalents are those amounts which have an original maturity of three months or less.

Fair values of financial instruments

 

 

The Company discloses fair value information for financial instruments, whether or not recognized in the balance sheet, when it is practicable to estimate the fair value. Under GAAP, a financial instrument is defined as cash, evidence of an ownership interest in an entity or contractual obligations that require the exchange of cash or other financial instruments. Certain items are specifically excluded from the disclosure requirements, including the Company's common stock. In addition, other nonfinancial instruments such as premises and equipment and other assets and liabilities are not subject to the disclosure requirements.

The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein: Cash and due from banks - The carrying amounts of cash and due from banks approximate their fair value.

Federal funds sold - The carrying amounts of federal funds sold approximate their fair value.

Cash surrender value of life insurance policies - The cash surrender value of life insurance policies held by the Bank approximates fair values of the policies.

Loans - For variable rate loans that reprice frequently and for loans that mature within one year, fair values are based on carrying values. Fair values for all other loans are estimated using discounted cash flow analyses, with interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values less cost to sell, where applicable.

Deposits - Fair values for deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar accounts to a schedule of aggregated expected monthly maturities. Repricing time frames for non-maturing deposits are estimated using Federal Deposit Insurance Corporation Improvement Act Section 305 guidelines.

Customer repurchase agreements - Fair values of repurchase agreements are estimated using a discounted cash flow analysis that applies interest rates currently being offered on similar accounts to a schedule of aggregated expected monthly maturities.

Borrowings from Federal Home Loan Bank of Atlanta - Borrowings from the FHLB which have variable rates of interest are deemed to be carried at fair value. Fair values of fixed rate advances are estimated using a discounted cash flow calculation that applies interest rates currently being offered on advances to a schedule of aggregated expected maturities.

Broker repurchase agreements - Fair values of broker repurchase agreements are estimated using a discounted cash flow analysis that applies interest rates currently being offered on similar accounts to a schedule of aggregated expected monthly maturities.

Stock Based Compensation

The Company has a stock-based director and employee compensation plan (the "2003 Plan") as further described in Note 18. Stock dividends were declared subsequent to the grant dates of the options. Pursuant to the terms of the 2003 Plan option agreements, the number of options outstanding was increased and the exercise price was decreased to give effect to these stock dividends.

The Company accounts for stock based compensation in accordance with GAAP. Fair value of an option grant is estimated on the date of grant using the Black-Scholes option pricing model.

Cumulative Perpetual Preferred Stock (8%)

During the third quarter of 2010, the Company offered up to $2,500,000 of 8% Series A Cumulative Perpetual Preferred Stock ("the Preferred") to accredited investors and up to 35 non-accredited investors. The Preferred was offered by the Company's directors and executive officers, and no selling agents or underwriters were used. 1,038 shares of the Preferred were sold. Proceeds of the offering, net of offering expenses totaled $998,538. The Preferred is scheduled to pay a dividend quarterly. However, pursuant to the Company's Memorandum of Understanding with the Federal Reserve, the Federal Reserve has declined to approve the dividends scheduled for payment to date. Dividends that have accumulated, but have not been declared or accrued since inception of the Preferred, total $118,553 as of December 31, 2011. See Note 20 for more information about the Memorandum of Understanding.

 

 

Recently issued accounting standards

The following is a summary of recent authoritative pronouncements that affect accounting, reporting, and disclosure of financial information by the Company:

In July 2010, the Receivables topic of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") was amended by Accounting Standards Update ("ASU") 2010-20 to require expanded disclosures related to a company's allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis. The Company included these disclosures in its financial statements (see Note 5).

In April 2011, FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a Troubled Debt Restructuring ("TDR"). The determination is based on both whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties. Disclosures related to TDRs under ASU 2010-20 were effective for reporting periods beginning after June 15, 2011. Adoption of the standard did not have a material effect on the financial statements. Disclosures related to TDRs under ASU 2010-20 have been presented in Note 5.

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

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

The Comprehensive Income topic of the ASC was amended in June 2011. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders' equity. The amendment requires consecutive presentation of the statement of net income and other comprehensive income and requires an entity to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements. The amendments will be applicable to the Company on January 1, 2012 and will be applied retrospectively. They are not expected to have an effect on the financial statements.

Accounting standards that have been issued or proposed by the Financial Accounting Standards Board that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

Subsequent events

Subsequent events are events or transactions that occur after the balance sheet date but before the financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were available to be issued and no subsequent events occurred requiring accrual or disclosure.

 

 

Formal Agreement with the Office of the Comptroller of the Currency

On May 12, 2010, the Bank entered into a formal agreement with the OCC for the Bank to take various actions with respect to the operation of the Bank. The actions include creation of a committee of the Bank's board of directors to monitor compliance with the agreement and make quarterly reports to the board of directors and the OCC; assessment and evaluation of management and members of the board; development, implementation and adherence to a written program to improve the Bank's loan portfolio management; protection of the Bank's interest in its criticized assets; implementation of a program that identifies and manages concentrations of credit risk (see Note 5); extension of the Bank's strategic plan; extension of the Bank's capital program and profit plan; additional plans for ensuring that the level of liquidity at the Bank is sufficient to sustain the current operations and withstand any anticipated or extraordinary demand; and a requirement for obtaining a determination of no supervisory objection from the OCC before accepting brokered deposits. The substantive actions called for by the agreement should strengthen the Bank and make it more efficient in the long-term. The Bank believes it has taken appropriate actions at December 31, 2011 to comply with the requirements included in the formal agreement.

Risks and Uncertainties

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

The Company is subject to the regulations of various governmental agencies (regulatory risk). These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions as a result of the regulators' judgments based on information available to them at the time of their examination.

Reclassification

Certain amounts in prior years' financial statements have been reclassified to conform to current year presentation. No changes have been made that affect the reported results of operations, financial condition or cash flows.


Restrictions On Cash And Due From Banks
v0.0.0.0
Restrictions On Cash And Due From Banks
12 Months Ended
Dec. 31, 2011
Restrictions On Cash And Due From Banks [Abstract]  
Restrictions On Cash And Due From Banks

NOTE 2 – RESTRICTIONS ON CASH AND DUE FROM BANKS

     The Bank is required to maintain average reserve balances, computed by applying prescribed percentages to its various types of deposits, either at the Bank or on deposit with the Reserve Bank. At December 31, 2011 and 2010 these required reserves were met by vault cash.


Federal Funds Sold
v0.0.0.0
Federal Funds Sold
12 Months Ended
Dec. 31, 2011
Federal Funds Sold [Abstract]  
Federal Funds Sold

NOTE 3 - FEDERAL FUNDS SOLD

     When the Bank's cash reserves (Note 2) are in excess of the required amount, it may lend any excess to other banks on a daily basis. As of December 31, 2011 and 2010 federal funds sold amounted to $12,620,000 and $5,110,000, respectively.


Investment Securities
v0.0.0.0
Investment Securities
12 Months Ended
Dec. 31, 2011
Investment Securities [Abstract]  
Investment Securities

NOTE 4 – INVESTMENT SECURITIES

The amortized cost and fair value of investment securities available-for-sale are as follows:

                 
  December 31, 2011
    Amortized Gross unrealized   Fair
    Cost   Gains   Losses   Value
Mortgage-backed securities $ 18,702,842 $ 291,211 $  21,567 $ 18,972,486
Municipal bonds   8,308,992   461,145   -   8,770,137
Total investment securities available-                
for-sale $ 27,011,834 $ 752,356 $  21,567 $ 27,742,623
 
  December 31, 2010
    Amortized Gross unrealized   Fair
    Cost   Gains   Losses   Value
Government sponsored enterprise bonds $ 4,486,806 $ 21,597 $ 131,752 $ 4,376,651
Mortgage-backed securities   10,909,120   132,800   48,842   10,993,078
Municipal bonds   8,319,212   123,001   219,606   8,222,607
 
Total investment securities available- $ 23,715,138 $ 277,398 $ 400,200 $ 23,592,336
for-sale                

 

     While three of the Company's securities available-for-sale are in an unrealized loss position as of December 31, 2011, none have been in an unrealized loss position for twelve months or more. None of these securities are expected to have a loss of principal at final maturity. The unrealized losses were primarily attributable to changes in interest rates, rather than deterioration in credit quality. These securities are agency mortgage-backed securities and therefore pose minimal credit risk. The Company believes it is more likely than not it will hold these securities until such time as the value recovers or the securities mature. During 2008, the Company recognized other-than-temporary-impairment on the FNMA preferred stock of $606,054, net of tax, based on FNMA's being placed into conservatorship by the U.S. Treasury Department. The Company sold the FNMA preferred stock in 2009 at an additional loss of $58,788.

     The table below summarizes, by investment category, the length of time that individual securities have been in a continuous loss position as of December 31, 2011 and 2010.

                     
  December 31, 2011
  Less than Twelve Months Over Twelve Months Total
Unrealized
Losses
  Gross
Unrealized
Losses
Fair Value Gross
Unrealized
Losses
Fair Value    
Mortgage-backed securities $ 21,567 $ 5,944,428 $ - $ - $ 21,567
Municipal bonds   -   -   -   -   -
Total $ 21,567 $ 5,944,428 $ - $ - $ 21,567
 
  December 31, 2010
  Less than Twelve Months Over Twelve Months Total
Unrealized
Losses
  Gross
Unrealized
Losses
Fair Value Gross
Unrealized
Losses
Fair Value    
Government sponsored enterprise bonds $ 131,752 $ 1,868,247 $ - $ - $ 131,752
Mortgage-backed securities   48,842   5,279,417   -   -   48,842
Municipal bonds   219,606   4,755,566   -   -   219,606
Total $ 400,200 $ 11,903,230 $ - $ - $ 400,200

 

 

     At December 31, 2011 and 2010, securities with a fair value of $11,527,285 and $17,091,060, respectively, were pledged to collateralize public deposits, sweep accounts, advances from the FHLB, and repurchase agreements. During 2011 the Company sold no securities. During 2010, the Company sold securities with a fair value of $8,120,975 and recognized a net gain on the sale of those securities of $325,656. During 2009, the Company sold securities with a fair value of $10,752,749 and recognized a net gain on the sale of those securities of $299,063.

     The amortized cost and fair value of securities at December 31, 2011, by contractual maturity, are shown in the following chart. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

         
  December 31, 2011
  Amortized Cost Fair Value
 
Due within one year $ 11,648 $  11,790
Due after one through five years   984,346   1,024,805
Due after five through ten years   1,316,163   1,431,382
After ten years or no maturity   24,699,677   25,274,646
Total investment securities $ 27,011,834 $ 27,742,623

 

     The Bank, as a member institution, is required to own stock in the Reserve Bank and the FHLB. These stocks are included at cost in the accompanying Consolidated Balance Sheets under the caption "Other investments." No ready market exists for these stock investments and they have no quoted market value. Redemption of these stocks has historically been at par value. Redemption of the FHLB stock may be subject to limitations regarding timing and amounts may be subject to impairment risk in the future. The Company evaluates the FHLB stock for impairment based on the probability of ultimate recoverability or the recorded amount of the investment. The FHLB redeemed stock at par from the Bank and other members in 2011. No impairment has been recognized based on this evaluation. Stock held in the FHLB is pledged as collateral against advances from the FHLB.


Loans
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Loans
12 Months Ended
Dec. 31, 2011
Loans [Abstract]  
Loans

NOTE 5 – LOANS

The composition of net loans by category as used by management to evaluate the quality of the portfolio is presented below.

 

 

 

 

 

 

December 31,

 

 

 

 

 

2011

 

2010

Loans secured by real estate-construction/development

$  26,811,333

 

$  41,855,338

Loans secured by real estate- single family (1)

14,341,533

 

19,604,943

Loans secured by real estate-nonfarm, non-residential

40,005,619

 

43,080,225

Loans secured by real estate-multifamily

1,694,088

 

1,793,400

Commercial and industrial

9,841,720

 

12,580,841

Consumer

      687,072     

 

        999,453

 

 

 

 

 

 

 

 

Loans, gross

93,381,365

 

119,914,200

Less allowance for loan losses

   (2,042,440)

 

   (2,703,430)

Loans, net

$  91,338,925

 

$  117,210,770

(1)     The category includes HELOCs and junior liens.  HELOCs totaled $6.0 million and $7.6 million as of December 31, 2011 and 2010, respectively. Closed-end junior liens totaled $111,841 and $155,219 as of December 31, 2011 and 2010, respectively.

 

Loan Portfolio Composition

One of the primary components of the Bank's loan portfolio is loans secured by first or second mortgages on residential and commercial real estate. These loans generally consist of short to mid-term commercial real estate loans, construction and development loans, and residential real estate loans (including home equity and second mortgage loans). Interest rates may be fixed or adjustable and the Bank frequently charges an origination fee. The Bank has not

purchased any loans. The Bank seeks to manage market and credit risk in the commercial real estate portfolio by emphasizing loans on owner-occupied office and retail buildings where the loan-to-value ratio at origination, established by independent appraisals, does not exceed 80%. In addition, the Bank generally requires personal guarantees of the principal owners of the property. The loan-to-value ratio at origination for first and second mortgage loans generally does not exceed 80%, and for construction loans, generally does not exceed 75% of cost. The Bank employs a reappraisal policy to routinely monitor real estate collateral values on real estate loans where the repayment is dependent on sale of the collateral. The Bank generally does not offer development loans with interest reserve features. In addition, in an effort to control interest rate risk, long term residential mortgages are not originated for the Bank's portfolio.

 

The Bank does not make long term (more than 15 years) mortgage loans to be held in its portfolio, and does not offer loans with negative amortization features or long-term interest only features, or loans with loan to collateral value ratios in excess of 100% at the time the loan is made. The Bank does offer loan products with features that can increase credit risk during periods of declining economic conditions, such as adjustable rate loans, short-term interest-only loans, and loans with amortization periods that differ from the maturity date (i.e., balloon payment loans). However, the Bank evaluates each customer's creditworthiness based on the customer's individual circumstances, and current and expected economic conditions, and underwrites and monitors each loan for associated risks. Loans made with exceptions to internal loan guidelines and those with loan-to-value ratios in excess of regulatory loan-to-value guidelines are monitored and reported to the Board of Directors on a monthly basis. The regulatory loan-to-value guidelines permit exceptions to the guidelines up to a maximum of 30% of total capital for commercial loans and exceptions for all types of real estate loans up to a maximum of 100% of total capital. As of December 31, 2011, the Bank had $3.7 million of loans which exceeded the regulatory loan to value guidelines. This amount is within the maximum allowable exceptions to the guidelines. Of the $3.7 million of loans with exceptions to the regulatory loan to value guidelines, $2.4 million, or approximately 63%, were not exceptions at the time the loans were made, but became exceptions upon reappraisal. Management routinely reappraises real estate collateral based on specific criteria and circumstances. If additional collateral is available, the Bank may require the borrower to commit additional collateral to the loan or take other actions to mitigate the Bank's risk.

 

The Bank makes loans for commercial purposes in various lines of business. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), loans for business expansion (including acquisition of real estate and improvements), and loans for purchases of equipment and machinery. Equipment loans are typically made for a term of five years or less at either fixed or variable rates, with the loan fully amortized over the term and secured by the financed equipment. Working capital loans typically have terms not exceeding one year and are usually secured by accounts receivable, inventory or personal guarantees of the principals of the business. Commercial loans vary greatly depending upon the circumstances, and loan terms are structured on a case-by-case basis to better serve customer needs.

 

                The risks associated with commercial loans vary with many economic factors, including the economy in the Bank's market areas. The well-established banks in the Bank's market areas make proportionately more loans to medium- to large-sized businesses than the Bank makes. Many of the Bank's commercial loans are made to small- to medium-sized businesses, which typically are not only smaller, but also have shorter operating histories and less sophisticated record keeping systems than larger entities. As a result, these smaller entities may be less able to withstand adverse competitive, economic and financial conditions than larger borrowers. In addition, because payments on loans secured by commercial property generally depend to a large degree on the results of operations and management of the properties, repayment of such loans may be subject, to a greater extent than other loans, to adverse conditions in the real estate market or the economy.

 

The Bank makes a variety of loans to individuals for personal and household purposes, including secured and unsecured installment and term loans, and unsecured revolving lines of credit. The secured installment and term loans to consumers generally consist of loans to purchase automobiles, boats, recreational vehicles, mobile homes and household furnishings, with the collateral for each loan being the purchased property.

 

Consumer loans generally involve more credit risks than other loans because of the type and nature of the underlying collateral or because of the absence of any collateral. Consumer loan repayments are dependent on the borrower's continuing financial stability and are likely to be adversely affected by job loss, divorce and illness. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans in the case of default. In many cases, any repossessed personal property will not provide an adequate source of repayment of the outstanding loan balance.

 Portfolio Segment MethodologyThe Bank segments its loan portfolio into groups of loans that mirror the regulatory reporting segments for loans, which are based on specific definitions in the Code of Federal Regulations and used in the regulatory call report. Those categories are presented in the table above and are the same categories used by management to analyze credit quality and the adequacy of the allowance for loan losses.  The Bank has been, and will continue to be, reliant on loans with real estate collateral. Under the regulatory guidelines loans with real estate collateral are reported based on various additional sub-categories, such as construction loans, loans collateralized by single family homes, including home equity lines of credit ("HELOC"), and non-residential properties.

 

Allowance for loan losses

                The provision for loan losses charged to operating expenses reflects the amount deemed appropriate by management to establish an adequate reserve to meet the probable loan losses incurred in the current loan portfolio. Management's judgment is based on periodic and regular evaluation of individual loans, the overall risk characteristics of the various portfolio segments, past experience with losses, delinquency trends, and prevailing economic conditions. To estimate the amount of allowance necessary the Company separates the portfolio into segments. The portfolio is first separated into groups according to the internal loan rating assigned by management. Loans rated "Special Mention", "Substandard", "Doubtful" or "Loss," as defined in the Bank's loan policy (and below), are evaluated individually for impairment. The Company uses regulatory call report codes to stratify the remaining portfolio and tracks the Bank's own charge-offs and those of peer banks using FDIC Call Report data. The Bank's own charge-off ratios by call report code are used to project potential loan losses in the future on loans that are rated "Satisfactory" or better. Charge-off ratios may be increased or decreased based on other environmental factors which may need to be considered, such as unemployment rates and volatility of real estate values. While management uses the best information available to it to make evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. The allowance for loan losses is also subject to periodic evaluation by various regulatory authorities and may be subject to adjustment upon their examination.

 

Credit Quality Indicators

Loans on the Bank's watch list (including loans rated Special Mention, Substandard, Doubtful or Loss as defined below and in the Bank's loan policy) are evaluated individually for impairment and are shown in the table below. Loans rated Doubtful or Loss are generally charged-off, unless specific circumstances warrant the loan's remaining in the portfolio, even with a grade of Doubtful or Loss. Loans rated Satisfactory are also summarized in the table below.

 

 

 

 

 

 

December 31, 2011

 

 

 

 

 

Special Mention

 

Substandard

 

Doubtful/ Loss

 

Satisfactory

 

 

 

 

 

 

 

 

 

 

 

 

  Loans secured by real estate – construction

$  2,175,614

 

$  8,414,868

 

$                -

 

$ 16,220,851

  Loans secured by real estate – single family (1)

621,891

 

1,243,161

 

-

 

12,476,481

  Loans secured by real estate – multi-family

-

 

692,673

 

-

 

1,001,415

  Loans secured by real estate –nonfarm, nonresidential

4,087,623

 

1,963,116

 

-

 

33,954,880

  Commercial and industrial loans

225,310

 

303,192

 

-

 

9,313,218

  Consumer loans

                 -

 

           216

 

                 -

 

     686,856

          Total

$ 7,110,438

 

$ 12,617,226

 

$                 -

 

$ 73,653,701


 

 

 

 

 

 

 

 

 

 

 

December 31, 2010

 

 

 

 

 

Special Mention

 

Substandard

 

Doubtful/Loss

 

Satisfactory

 

 

 

 

 

 

 

 

 

 

 

 

  Loans secured by real estate – construction

$   2,217,173

 

$ 10,608,496

 

$                -

 

$ 29,029,669

  Loans secured by real estate – single family (1)

1,389,483

 

2,894,266

 

-

 

15,321,194

  Loans secured by real estate – multi-family

-

 

-

 

-

 

1,793,400

  Loans secured by real estate –nonfarm, nonresidential

1,439,121

 

661,532

 

-

 

40,979,572

  Commercial and industrial loans (2)

79,744

 

86,379

 

992,027

 

11,422,691

  Consumer loans

         1,796

 

        1,869

 

                 -

 

     995,788

          Total

$  5,127,317

 

$ 14,252,542

 

$     992,027

 

$ 99,542,314

(1)     Includes HELOC loans.

(2)     The total loans classified as doubtful as of December 31, 2010 were repaid in full in 2011 (with no loss to the principal balance for the Company). They were classified as doubtful as of December 31, 2010 because of the possibility that legal proceedings would lengthen the collection time significantly.

 

A loan classified as Special Mention has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may affect the likelihood of repayment for the loan or result in deterioration of the bank's credit position at some future date. The Substandard rating is applicable to loans having a well-defined weakness in the liquidity or net worth of the borrower or the collateral that could jeopardize the liquidation of the debt. Well-defined weaknesses could include deterioration in the borrower's financial condition or cash flows, significant changes in the value of underlying collateral, or other indicators of weakness. A loan classified as Doubtful has all the weaknesses inherent in one classified substandard with 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. Loans classified Loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset even though partial recovery may be affected in the future.

 

Loans in all of the above categories (special mention, substandard, doubtful, and loss) are reviewed individually for impairment (see table below) and to determine which category they will be placed in for purposes of the calculation of the allowance for loan losses. Additional assets may also be individually evaluated for impairment. Credit quality indicators are updated semi-annually unless circumstances warrant a change in the rating, which is updated as soon as practicable.

 

Delinquent loans and loans on non-accrual are presented by portfolio segment in the table below.

 

 

 

 

 

 

December 31, 2011

 

December 31, 2010

 

 

 

 

 

Past due

30-89 Days

 

Nonaccrual or

Past due over 90 Days

 

Past due

30-89 Days

 

Nonaccrual or

Past due over 90 Days

 

 

 

 

 

 

 

 

 

 

 

 

  Loans secured by real estate – construction

$               -

 

$  2,387,142

 

$     891,035

 

$  7,218,012

  Loans secured by real estate – single family (1)

 141,289

 

105,541

 

1,977,519

 

1,522,290

  Loans secured by real estate – multi-family

-

 

692,673

 

-

 

-

  Loans secured by real estate –nonfarm, nonresidential

308,700

 

899,932

 

-

 

-

  Commercial and industrial loans

18,055

 

-

 

-

 

992,027

  Consumer loans

              -

 

                -

 

                 -

 

                -

          Total

$  468,044

 

$ 4,085,288

 

$ 2,868,554

 

$  9,732,329

 

 

 

 

 

 

 

 

 

 

 

 

(1)     Includes HELOC loans.

 

Management closely monitors delinquent loans. Construction loans past due on nonaccrual as of December 31, 2011 decreased from December 31, 2010 primarily due to completion of the foreclosure process. As of December 30, 2011 construction loans on nonaccrual are comprised of three loans. Of those three, one loan continues to pay as agreed and is not in foreclosure. Of the remaining 2 loans, one loan represents 84% of the remaining balance, and is collateralized by vacant commercial property. Management has evaluated the relationship and the underlying collateral and believes that the value of the collateral is adequate to cover the Company's investment in the related loans if foreclosure is ultimately required.

 

The table below details amounts of loans collectively or individually evaluated for impairment by portfolio segment.

 

 

 

 

 

 

December 31, 2011

 

December 31, 2010

 

 

 

 

 

Collectively reviewed for impairment

 

Individually

reviewed for impairment

 

Collectively reviewed for impairment

 

Individually

reviewed for impairment

 

 

 

 

 

 

 

 

 

 

 

 

  Loans secured by real estate – construction

$ 16,220,851

 

$ 10,590,482

 

$ 29,029,669

 

$ 12,825,669

  Loans secured by real estate – single family (1)

12,476,480

 

1,865,052

 

15,321,194

 

4,283,749

  Loans secured by real estate –nonfarm, nonresidential

33,809,132

 

6,196,487

 

40,979,572

 

2,100,653

  Loans secured by real estate – multifamily

1,001,415

 

692,673

 

1,793,400

 

-

  Commercial and industrial loans

9,313,218

 

528,502

 

11,422,691

 

1,158,150

  Consumer loans

      686,857

 

          216

 

     995,788

 

        3,665

          Total

$ 73,507,953

 

$19,873,412

 

$ 99,542,314

 

$ 20,371,886

 

 

 

 

 

 

 

 

 

 

 

 

(1)     Includes HELOC loans.

 

Impaired loans by portfolio segment, the majority of which are included in the table above, as of the dates indicated, were as follows:

 

 

December 31, 2011

 

Unpaid Principal Balance

Recorded Investment

Related Specific Reserves

Average Impaired Investment

Interest Income

Loans secured by real estate – construction/development

$  3,026,785

$   2,785,868

$   16,492

$  4,062,190

$   97,871

Loans secured by real estate – single family

477,466

472,012

6,287

485,819

27,347

Loans secured by real estate – multi-family

692,673

692,673

-

694,595

39,848

Loans secured by real estate –nonfarm, nonresidential

1,387,683

1,207,728

17,600

1,300,751

68,453

Commercial and industrial

53,607

53,607

-

60,096

5,027

Consumer loans

                    -

                 -

           -

                  -

         -

 

 

 

 

 

 

Total impaired loans (1)

$   5,545,191

5,211,888

$ 40,379

$ 6,603,451

$ 235,548

        Less related allowance for

             loan losses

 

     (40,379)

 

 

 

           Net nonperforming loans

 

$  5,171,509

 

 

 

(1)     Includes loans on nonaccrual.

 

December 31, 2010

 

Unpaid Principal Balance

Recorded Investment

Related Specific Reserves

Average Impaired Investment

Interest Income

Loans secured by real estate – construction/development

$  7,355,282

$   7,218,013

$    51,280

$  7,780,357

$ 106,259

Loans secured by real estate – single family

2,269,366

2,137,335

3,287

2,185,276

82,340

Loans secured by real estate – multi-family

-

-

-

-

-

Loans secured by real estate –nonfarm, nonresidential

152,310

152,310

-

155,526

10,946

Commercial and industrial

1,129,662

1,129,662

292,000

1,137,190

9,681

Consumer loans

         1,869

           1,869

     1,869

         2,158

     415

 

 

 

 

 

 

Total impaired loans (1)

$ 10,908,489

10,639,189

$ 348,436

$ 11,260,507

$ 209,641

        Less related allowance for

             loan losses

 

   (348,436)

 

 

 

           Net nonperforming loans

 

$ 10,290,753

 

 

 

(1)     Includes loans on nonaccrual.

 

Reappraisals are routinely ordered when a loan is collateral dependent and showing signs of weakness. Specifically, the Company's reappraisal policy states that collateral for single family construction loans will be reappraised if the home is complete and remains unsold for twelve months, or if the original loan has been outstanding for eighteen months. For development loans, if lot absorption varies from the original appraiser's estimates by 25% or more, the collateral will be reappraised. Additionally, the Company's guidelines require that real property be appraised prior to renewal, modification, or extension of the loan. Collateral will also be reappraised if there is any indication that the collateral may have decreased significantly in value. An evaluation, rather than a full, certified appraisal, may or may not be used after consideration of the risk involved with the transaction, and the need to remain within safe and sound banking practices. If the value of collateral decreases significantly upon reappraisal, the Company may take any one or a combination of steps to protect its position. Possible actions include requesting additional collateral from the borrower, requiring the borrower to make principal reductions on the loan, or charge-off of a portion of the loan balance.

 

The Bank accounts for impaired loans in accordance with a financial accounting standard that requires all lenders to value a loan at the loan's fair value if it is probable that the lender will be unable to collect all amounts due according to the terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis taking into consideration all the circumstances of the loan and the borrower, including the length of the delay, reasons for the delay, the borrower's payment record and the amount of the shortfall in relation to the principal and interest owed. The fair value of an impaired loan may be determined based upon the present value of expected cash flows, market price of the loan, if available, or value of the underlying collateral. Expected cash flows are required to be discounted at the loan's effective interest rate. The Bank's loan portfolio is largely dependent on collateral for repayment if the borrower's financial position deteriorates. Therefore, the most common type of valuation is to determine collateral value less disposal costs in order to determine carrying values for loans deemed impaired. The Company has no interest income recognized on impaired loans that represents the change in present value attributable to passage of time.

 

Troubled Debt Restructurings

Loans which management identifies as impaired generally will be nonperforming loans or restructured loans (also known as "troubled debt restructurings" or "TDR's"). As a result of adopting the amendments in ASU 2011-02, at the end of the third quarter of 2011 the Company reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they were considered troubled

debt restructurings under the amended guidance. The Company identified no loans as TDRs for which the allowance for loan losses had previously been measured under a general allowance methodology.

 

The table below summarizes loans designated as TDR's during the year ended December 31, 2011.

 

 

 

For the year ended December 31, 2011

Troubled Debt Restructurings

Number of Contracts

Pre-Modification Outstanding Recorded Investment

Post-Modification

Outstanding Recorded Investment

Real estate-construction/development

2

$  1,993,166

$  1,993,166

Real estate-single family

3

339,430

339,430

Real estate- nonfarm, nonresidential

2

    489,248

   489,248

     Total

7

$  2,821,844

$  2,821,844

 

 

 

 

Troubled Debt Restructurings that

subsequently defaulted (1) during the period:

Number of Contracts

Recorded Investment

 

 

 

 

Real estate-construction/development

2

$ 2,087,285

Real estate-nonfarm, nonresidential

1

   238,400

 

 

 

     Total

3

$ 2,325,685

 

 

 

 

(1)     Loans are considered in default when the situation indicates that the loan will be repaid via foreclosure of the collateral, or if the loan is placed on nonaccrual for specific circumstances other than foreclosure of the collateral.

 

 

During the year ended December 31, 2011, the Bank modified seven loans that were considered to be troubled debt restructurings. We extended the terms for three of these loans and the interest rate was lowered for one of these loans. For three of the loans, payments were changed from amortizing payments to interest only payments.

 

Nonperforming Loans

Nonperforming loans include nonaccrual loans or loans which are 90 days or more delinquent as to principal or interest payments. As of December 31, 2011, the Bank had nonaccrual loans of $4.1 million representing 9 loans, a decrease of $5.6 million from December 31, 2010. All of these loans are secured by real estate. In addition to loans on nonaccrual, as of December 31, 2011, management considers another $1.1 million of loans impaired, all of which are TDR's. Management routinely assesses the collateral and other circumstances associated with impaired loans in an effort to determine the amount of potential impairment. These loans are currently being carried at management's best estimate of net realizable value, although no assurance can be given that no further losses will be incurred on these loans until the collateral has been acquired and liquidated or other arrangements can be made.

The foreclosure process is lengthy (generally a minimum of six months and often much longer), so loans may be on nonaccrual status for a significant time period prior to moving to other real estate owned. As soon as the amount of impairment is estimable, the amount of principal impairment is generally charged-off against the allowance for loan losses. However, until losses and selling costs can be estimated via appraisal or other means, a portion of the allowance may be allocated to specific impaired loans. The timing of the appraisal varies from loan to loan depending on the Bank's ability to access the property. As of December 31, 2011 the allowance for loan losses included approximately $40,379 of reserves specifically related to impaired loans. Of that amount, a majority is related to selling costs.

 

Management's estimates of net realizable value or fair value of real estate collateral are obtained (on a nonrecurring basis) using independent appraisals, less estimated selling costs. Estimates of net realizable value for equipment and other types of personal property collateral are estimated based on input from equipment dealers and other professionals. If an appraisal is not available or management determines that fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as determined by Level 3 inputs as defined by FASB ASC 820, "Fair Value Measurements and Disclosures."

 

Potential Problem Loans

Management identifies and maintains a list of potential problem loans. These are loans that are not included in nonaccrual status or impaired loans. A loan is added to the potential problem list when management becomes aware of information about possible credit problems of borrowers that causes serious doubts as to the ability of such borrowers to comply with the current loan repayment terms. These loans are designated as such in order to be monitored more closely than other credits in the Bank's portfolio. There were loans in the amount of $2.3 million that have been determined by management to be potential problem loans at December 31, 2011. These loans are generally secured by various types of real estate, but may also be secured with other types of collateral. Should potential problem loans become impaired, management will charge-off any impairment amount as soon as the amount of impairment can be determined.

 

Concentrations of Credit

The Company makes loans to individuals and businesses in and around Upstate South Carolina for various personal and commercial purposes. The Bank has a diversified loan portfolio and the borrowers' ability to repay their loans is not dependent upon any specific economic sector. The Bank monitors concentrations in its customer base using the North American Industry Codes ("NAIC") and using certain regulatory definitions. As of December 31, 2011, the Bank has concentrations of credit in real estate rental and leasing, accommodation and food services, construction, retail trade, health care and social assistance, and other services, which by NAIC category comprise over 25% of Tier 1 Capital adjusted for the allowance for loan losses. The Bank also has concentrations in loans collateralized by real estate according to the regulatory definition. Included in this segment of the portfolio is the category for construction and development loans. While the Bank does have a concentration of loans in this category, the Bank's business is managed in a manner intended to help reduce the risks normally associated with construction lending. Management requires lending personnel to visit job sites, maintain frequent contact with borrowers and perform or commission inspections of completed work prior to issuing additional construction loan draws. Under current policy, loans are limited to 80% of cost of construction projects, and borrowers are required to meet minimum net worth requirements and debt service coverage ratios.

 

Projects for construction of single family homes are generally limited to those projects with contracts for sale where the ultimate owner has a significant investment in the contract. These policies may be considered stricter than policies in place when some of the Bank's currently outstanding loans were originated. However, as loans mature or as new loans are made, the current guidelines described above would be used to underwrite construction loans. The Company does not currently have any acquisition and development loans with interest reserves.

 

Construction loans in the Company's portfolio can be further divided into the following sub categories as of December 31, 2011:

 

 

December 31, 2011

Single family residential construction loans

$    2,610,422

Acquisition and development loans

6,968,599

Other construction and land loans (1)

17,232,312

 

$  26,811,333

(1)     Includes loans collateralized by vacant land and loans not development-related.

 

Reappraisals are routinely ordered when a loan is collateral dependent and showing signs of weakness. Specifically, the Company's reappraisal policy states that collateral for single family construction loans will be reappraised if the home is complete and remains unsold for twelve months, or if the original loan has been outstanding for eighteen months. For development loans, if lot absorption varies from the original appraiser's estimates by 25% or more, the collateral will be reappraised. Loans with weaknesses that are collateralized with partially constructed projects are generally appraised both "as is" and "as completed." A determination is then made as to the likely disposition of the loan, whether the borrower retains the collateral and completes the project or whether the Company will ultimately foreclose and complete the construction following foreclosure. If foreclosure and completion by the Company are deemed the most likely scenario, and the cost to complete exceeds the collateral value, then the amount of cost to complete in excess of the as completed value of the collateral will generally be charged to the allowance for loan losses. To date very few impaired loans have been returned to accrual status as the result of updated appraisals. However, depending on specific circumstances, loans could potentially return to accrual status if the repayment prospects for the loan have changed significantly. Loans returned to accrual status will generally need to perform for a period of six months prior to being returned to accrual status, unless the underlying characteristics have significantly been altered in a positive manner.

 

The category "Loans secured by real estate- single family, including HELOC" contains home equity lines of credit in the amount of $6.0 million and $7.6 million as of December 31, 2011 and 2010, respectively. This portion of the single family real estate secured portfolio includes some loans with first liens on the underlying collateral and some second liens. All home equity line loans are variable rate loans with interest rate floors. As of December 31, 2011, approximately $30.9 million or 33.1% of total gross loans, including home equity line loans, were variable rate loans.

 

The FHLB has a blanket lien on certain types of the Company's loans as collateral for FHLB advance borrowings. See Note 10. The Reserve Bank has a lien on certain other loan types should the Bank borrow from the Discount Window. As of December 31, 2011 there were no borrowings from the Discount Window of the Reserve Bank.

 

Activity in the allowance for loan losses for the years ended December 31, 2011, 2010, and 2009 is summarized in the table below.

 

 

Year ended December 31,

 

2011

 

2010

 

2009

 

 

 

 

Allowance for loan losses, beginning of year

$  2,703,430

$  2,695,337

$  1,698,563

Provision for loan losses

670,000

1,260,000

2,955,000

Charge-offs

(1,355,328)

(1,251,907)

(1,958,726)

Recoveries

     24,338

                 -          

           500

 

 

 

 

        Allowance for loan losses, end of year

$  2,042,440

$  2,703,430

$  2,695,337

 

 

 

 

 

 

 

 

Activity for the year ended December 31, 2011 in the allowance, by portfolio segment, is presented in the table below.

 

 

Loans Secured by Real Estate

 

 

 

 

 

Construction

Single family (1)

Nonfarm, nonresidential

Multifamily

Commercial and industrial

Consumer

Unallocated

Total

 

(Dollars in thousands)

Beginning Balance

$ 1,093

$  361

$  341

$    4

$  526

$  16

$     362

$ 2,703

Provision

485

407

299

(2)

(303)

(1)

(215)

670

Charge-offs

(783)

(352)

(100)

-

(120)

-

 

(1,355)

Recoveries

       -

     -

      -

  -

   24

     -

         -

     24

Ending Balance

  $    795

$ 416

$ 540

$    2

$  127

$  15

$    147

$ 2,042

 

 

 

 

 

 

 

 

 

(1)     Includes home equity lines of credit.

 

The Company, through the Bank, analyzes charge-offs and calculates its estimate of the allowance for loan losses using regulatory call report codes. The codes are well-defined categories for loans and are generally based on various types of collateral. Since the Bank generally lends on various types of real-estate collateral, the regulatory call report codes provide a defined, consistent system for tracking loan balances and charge-offs. These codes are also useful in comparing the Bank to its regional community bank peers. The Bank's historical charge-off rates, by call code, are calculated, reviewed for additional subjective factors that should be considered for the current outlook, and then applied to ending balances of loans not specifically reviewed for impairment. These estimates, along with the loans specifically reviewed for impairment, are used in the analysis of the adequacy of the allowance for loan losses completed on a quarterly basis. As described in Note 1, loans rated OAEM (or Special Mention), Substandard, Doubtful, or Loss are individually evaluated for impairment, and the estimate of the amount of allowance for loan losses is computed based on individual facts and circumstances, such as appraised value of collateral, and similar factors.

 

Charge-offs, net of recoveries, for the years ended 2011, 2010 and 2009 were categorized by regulatory call report code as follows:

 

 

 

 

 

 

Year ended December 31,

 

 

 

 

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

Loan secured by real estate –construction/development

$   783,211

 

$  978,425

 

$  882,684

 

Loan secured by real estate –single family

351,549

 

249,034

 

250,072

 

Loan secured by real estate –nonfarm, nonresidential

100,527

 

-

 

156,643

 

Commercial and industrial loans

120,041

 

21,315

 

668,829

 

Loans to consumers

               -

 

        3,133

 

             500

 

       Total charge-offs

1,355,328

 

1,251,907

 

1,958,728

 

Recoveries

    (24,338)