UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) | |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2013
OR
¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF | |
THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from _________to_________
Commission File Number 000-49757
FIRST RELIANCE BANCSHARES, INC.
(Exact name of small business issuer as specified in its charter)
South Carolina | 80-0030931 |
(State or incorporation or | (I.R.S. Employer Identification No.) |
2170 West Palmetto Street
Florence, South Carolina 29501
(Address of Principal Executive
(843) 656-5000
(Issuer’s telephone number, including area code)
State the number of shares outstanding of each of the issuer’s classes of common equity as of the latest practicable date:
4,566,6504,569,895 shares of common stock, par value $0.01 per share, as of October 31, 2013April 30, 2014
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.
x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YesxNo¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨ Accelerated filer o Non-accelerated filer o Smaller reporting company x
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes.Yes ¨ No x
INDEX
Page No. | |||
PART I.FINANCIAL INFORMATION | |||
Item 1. Financial Statements | |||
2013 | 3 | ||
(Unaudited) | 4 | ||
(Unaudited) | 5 | ||
(Unaudited) | 6 | ||
(Unaudited) | 7 | ||
(Unaudited) | 8 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||
40 | |||
Item 4. Controls and Procedures | 40 | ||
PART II. OTHER INFORMATION | |||
1.Legal Proceedings | |||
1A.Risk Factors | |||
Exhibits | 41 |
FIRST RELIANCE BANCSHARES, INC.
September 30, | December 31, | ||||||
2013 | 2012 | ||||||
Assets | (Unaudited) | (Audited) | |||||
Cash and cash equivalents: | |||||||
Cash and due from banks | $ | 2,910,140 | $ | 2,893,020 | |||
Interest-bearing deposits with other banks | 22,895,029 | 35,169,883 | |||||
Total cash and cash equivalents | 25,805,169 | 38,062,903 | |||||
Time deposits in other banks | 101,207 | 100,953 | |||||
Securities available-for-sale | 51,243,713 | 60,071,012 | |||||
Nonmarketable equity securities | 1,055,000 | 1,297,400 | |||||
Total investment securities | 52,298,713 | 61,368,412 | |||||
Mortgage loans held for sale | 825,704 | 5,621,860 | |||||
Loans receivable | 231,093,043 | 260,257,334 | |||||
Less allowance for loan losses | (2,899,368) | (4,167,482) | |||||
Loans, net | 228,193,675 | 256,089,852 | |||||
Premises, furniture and equipment, net | 24,466,238 | 24,626,975 | |||||
Accrued interest receivable | 1,063,083 | 1,276,898 | |||||
Other real estate owned | 13,913,979 | 15,289,991 | |||||
Cash surrender value life insurance | 12,858,461 | 12,599,787 | |||||
Other assets | 2,296,990 | 3,239,579 | |||||
Total assets | $ | 361,823,219 | $ | 418,277,210 | |||
Liabilities and Shareholders’ Equity | |||||||
Liabilities | |||||||
Deposits: | |||||||
Noninterest-bearing transaction accounts | $ | 63,983,317 | $ | 58,023,250 | |||
Interest-bearing transaction accounts | 47,720,863 | 42,568,838 | |||||
Savings | 91,308,501 | 104,031,114 | |||||
Time deposits $100,000 and over | 46,607,446 | 83,703,846 | |||||
Other time deposits | 46,578,269 | 60,987,086 | |||||
Total deposits | 296,198,396 | 349,314,134 | |||||
Securities sold under agreement to repurchase | 4,918,396 | 4,377,978 | |||||
Advances from Federal Home Loan Bank | 11,000,000 | 11,000,000 | |||||
Junior subordinated debentures | 10,310,000 | 10,310,000 | |||||
Accrued interest payable | 564,519 | 465,409 | |||||
Other liabilities | 1,551,423 | 1,611,762 | |||||
Total liabilities | 324,542,734 | 377,079,283 | |||||
Shareholders’ Equity | |||||||
Preferred stock | |||||||
Series A cumulative perpetual preferred stock - 15,349 shares issued and outstanding | 15,096,562 | 15,120,344 | |||||
Series B cumulative perpetual preferred stock - 767 shares issued and outstanding | 774,054 | 786,399 | |||||
Series C cumulative mandatory convertible preferred stock - 2,293 shares shares issued and outstanding at December 31, 2012 | - | 2,293,000 | |||||
Common stock, $0.01 par value; 20,000,000 shares authorized, 4,566,650 and 4,094,861 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively | 45,667 | 40,949 | |||||
Capital surplus | 30,605,907 | 27,991,132 | |||||
Treasury stock, at cost, 29,846 and 19,289 shares at September 30, 2013 and December 31, 2012, respectively | (201,634) | (182,234) | |||||
Nonvested restricted stock | (40,078) | (123,466) | |||||
Retained deficit | (9,318,058) | (6,207,116) | |||||
Accumulated other comprehensive income | 318,065 | 1,478,919 | |||||
Total shareholders’ equity | 37,280,485 | 41,197,927 | |||||
Total liabilities and shareholders’ equity | $ | 361,823,219 | $ | 418,277,210 |
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
(Unaudited) | (Audited) | |||||||
Assets | ||||||||
Cash and cash equivalents: | ||||||||
Cash and due from banks | $ | 3,368,635 | $ | 3,548,974 | ||||
Interest-bearing deposits with other banks | 17,877,291 | 14,698,851 | ||||||
Total cash and cash equivalents | 21,245,926 | 18,247,825 | ||||||
Time deposits in other banks | 101,309 | 101,207 | ||||||
Securities available-for-sale | 11,253,414 | 12,144,843 | ||||||
Securities held-to-maturity (Estimated fair value of $35,933,179 and $36,951,934 at March 31, 2014 and December 31, 2013, respectively) | 35,643,920 | 36,951,934 | ||||||
Nonmarketable equity securities | 1,142,400 | 1,594,900 | ||||||
Total investment securities | 48,039,734 | 50,691,677 | ||||||
Mortgage loans held for sale | 937,278 | 2,248,252 | ||||||
Loans receivable | 239,634,692 | 238,502,131 | ||||||
Less allowance for loan losses | (2,802,823 | ) | (2,894,153 | ) | ||||
Loans, net | 236,831,869 | 235,607,978 | ||||||
Premises, furniture and equipment, net | 24,131,418 | 24,333,616 | ||||||
Accrued interest receivable | 954,180 | 1,129,881 | ||||||
Other real estate owned | 7,236,115 | 8,932,634 | ||||||
Cash surrender value life insurance | 13,029,218 | 12,945,693 | ||||||
Other assets | 1,152,482 | 1,169,368 | ||||||
Total assets | $ | 353,659,529 | $ | 355,408,131 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Noninterest-bearing transaction accounts | $ | 66,652,989 | $ | 65,576,524 | ||||
Interest-bearing transaction accounts | 52,101,388 | 46,046,043 | ||||||
Savings | 85,751,801 | 86,247,410 | ||||||
Time deposits $100,000 and over | 38,426,451 | 39,934,745 | ||||||
Other time deposits | 42,361,720 | 44,610,301 | ||||||
Total deposits | 285,294,349 | 282,415,023 | ||||||
Securities sold under agreement to repurchase | 5,386,566 | 4,876,118 | ||||||
Advances from Federal Home Loan Bank | 17,000,000 | 23,000,000 | ||||||
Junior subordinated debentures | 10,310,000 | 10,310,000 | ||||||
Accrued interest payable | 636,622 | 587,649 | ||||||
Other liabilities | 2,635,661 | 2,126,597 | ||||||
Total liabilities | 321,263,198 | 323,315,387 | ||||||
Shareholders’ Equity | ||||||||
Preferred stock | ||||||||
Series A cumulative perpetual preferred stock - 15,349 shares issued and outstanding at March 31, 2014 and December 31, 2013 | 15,179,709 | 15,145,597 | ||||||
Series B cumulative perpetual preferred stock - 767 shares issued and outstanding at March 31, 2014 and December 31, 2013 | 767,000 | 769,894 | ||||||
Common stock, $0.01 par value; 20,000,000 shares authorized, 4,569,895 and 4,568,695 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively | 45,699 | 45,687 | ||||||
Capital surplus | 30,611,309 | 30,609,281 | ||||||
Treasury stock, at cost, 29,846 shares at March 31, 2014 and December 31, 2013 | (201,686 | ) | (201,686 | ) | ||||
Nonvested restricted stock | (21,774 | ) | (32,138 | ) | ||||
Retained deficit | (14,132,769 | ) | (14,447,907 | ) | ||||
Accumulated other comprehensive income | 148,843 | 204,016 | ||||||
Total shareholders’ equity | 32,396,331 | 32,092,744 | ||||||
Total liabilities and shareholders’ equity | $ | 353,659,529 | $ | 355,408,131 |
See notes to condensed consolidated financial statements
-3- |
FIRST RELIANCE BANCSHARES, INC.
(Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||
Interest income: | |||||||||||||
Loans, including fees | $ | 3,246,099 | $ | 4,196,618 | $ | 10,090,301 | $ | 12,699,918 | |||||
Investment securities: | |||||||||||||
Taxable | 272,918 | 445,994 | 935,158 | 1,373,027 | |||||||||
Nontaxable | 16,987 | 128,216 | 16,987 | 506,305 | |||||||||
Other interest income | 20,295 | 22,844 | 73,230 | 80,838 | |||||||||
Total | 3,556,299 | 4,793,672 | 11,115,676 | 14,660,088 | |||||||||
Interest expense: | |||||||||||||
Time deposits | 376,271 | 823,399 | 1,502,759 | 2,833,290 | |||||||||
Other deposits | 49,458 | 87,814 | 173,446 | 346,952 | |||||||||
Other interest expense | 122,005 | 129,890 | 362,023 | 386,917 | |||||||||
Total | 547,734 | 1,041,103 | 2,038,228 | 3,567,159 | |||||||||
Net interest income | 3,008,565 | 3,752,569 | 9,077,448 | 11,092,929 | |||||||||
Provision for loan losses | 609,808 | 350,955 | 609,808 | 950,955 | |||||||||
Net interest income after provision for loan losses | 2,398,757 | 3,401,614 | 8,467,640 | 10,141,974 | |||||||||
Noninterest income: | |||||||||||||
Service charges on deposit accounts | 435,616 | 451,027 | 1,252,816 | 1,301,545 | |||||||||
Gain on sales of mortgage loans | 303,781 | 303,228 | 877,822 | 855,966 | |||||||||
Income from bank owned life insurance | 86,908 | 91,573 | 258,675 | 281,250 | |||||||||
Other charges, commissions and fees | 271,658 | 250,335 | 739,322 | 719,344 | |||||||||
Gain on sale of securities | - | 1,298,627 | 33,917 | 1,806,414 | |||||||||
Other non-interest income | 82,617 | 57,544 | 252,043 | 493,904 | |||||||||
Total | 1,180,580 | 2,452,334 | 3,414,595 | 5,458,423 | |||||||||
Noninterest expenses: | |||||||||||||
Salaries and employee benefits | 1,939,545 | 1,975,606 | 5,845,209 | 5,771,871 | |||||||||
Occupancy expense | 390,355 | 375,971 | 1,123,502 | 1,108,232 | |||||||||
Furniture and equipment expense | 435,846 | 330,979 | 908,688 | 1,083,915 | |||||||||
Other operating expenses | 3,283,492 | 2,494,982 | 6,656,392 | 6,501,651 | |||||||||
Total | 6,049,238 | 5,177,538 | 14,533,791 | 14,465,669 | |||||||||
Net income (loss) before income taxes | (2,469,901) | 676,410 | (2,651,556) | 1,134,728 | |||||||||
Income tax expense | - | - | - | - | |||||||||
Net income (loss) | (2,469,901) | 676,410 | (2,651,556) | 1,134,728 | |||||||||
Preferred stock dividends | 254,449 | 249,248 | 752,944 | 747,743 | |||||||||
Deemed dividends on preferred stock resulting from | |||||||||||||
net accretion of discount and amortization | |||||||||||||
of premium | 44,876 | 44,876 | 133,164 | 133,652 | |||||||||
Net income (loss) available to common shareholders | $ | (2,769,226) | $ | 382,286 | $ | (3,537,664) | $ | 253,333 | |||||
Average common shares outstanding, basic | 4,413,119 | 4,096,774 | 4,202,251 | 4,093,148 | |||||||||
Average common shares outstanding, diluted | 4,413,119 | 4,281,099 | 4,202,251 | 4,290,298 | |||||||||
Basic earnings (loss) per share | $ | (0.63) | $ | 0.09 | $ | (0.84) | $ | 0.06 | |||||
Diluted earnings (loss) per share | (0.63) | 0.09 | (0.84) | 0.06 |
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Interest income | ||||||||
Loans, including fees | $ | 3,273,679 | $ | 3,471,204 | ||||
Investment securities | ||||||||
Taxable | 287,981 | 347,984 | ||||||
Nontaxable | 28,571 | - | ||||||
Other interest income | 11,902 | 26,343 | ||||||
Total | 3,602,133 | 3,845,531 | ||||||
Interest expense | ||||||||
Time deposits | 249,119 | 604,663 | ||||||
Other deposits | 33,333 | 73,711 | ||||||
Other interest expense | 81,480 | 121,537 | ||||||
Total | 363,932 | 799,911 | ||||||
Net interest income | 3,238,201 | 3,045,620 | ||||||
Provision for loan losses | - | - | ||||||
Net interest income after provision for loan losses | 3,238,201 | 3,045,620 | ||||||
Noninterest income | ||||||||
Service charges on deposit accounts | 383,375 | 413,315 | ||||||
Gain on sale of mortgage loans | 201,240 | 293,569 | ||||||
Income from bank owned life insurance | 83,525 | 85,040 | ||||||
Other charges, commissions and fees | 258,614 | 241,925 | ||||||
Gain on sale of securities available-for-sale | 5,321 | - | ||||||
Other non-interest income | 73,709 | 83,649 | ||||||
Total | 1,005,784 | 1,117,498 | ||||||
Noninterest expenses | ||||||||
Salaries and benefits | 1,812,735 | 1,928,709 | ||||||
Occupancy expense | 367,030 | 358,087 | ||||||
Furniture and equipment expense | 414,449 | 295,515 | ||||||
Other operating expenses | 1,303,415 | 1,567,386 | ||||||
Total | 3,897,629 | 4,149,697 | ||||||
Income before taxes | 346,356 | 13,421 | ||||||
Income tax | - | - | ||||||
Net income | 346,356 | 13,421 | ||||||
Preferred stock dividends | 209,120 | 249,248 | ||||||
Deemed dividends on preferred stock resulting from net accretion of discount and amortization of premium | 31,218 | 43,900 | ||||||
Net income (loss) available to common shareholders | $ | 106,018 | $ | (279,727 | ) | |||
Average common shares outstanding, basic | 4,569,122 | 4,094,866 | ||||||
Average common shares outstanding, diluted | 4,649,502 | 4,094,866 | ||||||
Income (loss) per common share: | ||||||||
Basic | $ | 0.02 | $ | (0.07 | ) | |||
Diluted | 0.02 | (0.07 | ) |
See notes to condensed consolidated financial statements
-4- |
(Unaudited)
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2013 | 2012 | 2013 | 2012 | ||||||||||
Net income (loss) from operations | $ | (2,469,901) | $ | 676,410 | $ | (2,651,556) | $ | 1,134,728 | |||||
Other comprehensive income (loss), net of tax: | |||||||||||||
Unrealized holding gains (losses) on available-for-sale securities arising during the period | (593,067) | 742,089 | (1,735,378) | 1,488,136 | |||||||||
Income tax expense (benefit) | (201,643) | 252,310 | (550,709) | 505,966 | |||||||||
Net of income taxes | (391,424) | 489,779 | (1,184,669) | 982,170 | |||||||||
Reclassification adjustment for gains (losses) realized in net income from operations | - | 1,298,627 | (36,083) | 1,806,414 | |||||||||
Income tax expense (benefit) | - | 441,533 | (12,268) | 614,181 | |||||||||
Net of income taxes | - | 857,094 | (23,815) | 1,192,233 | |||||||||
Other comprehensive income (loss) | (391,424) | (367,315) | (1,160,854) | (210,063) | |||||||||
Comprehensive income (loss) | $ | (2,861,325) | $ | 309,095 | $ | (3,812,410) | $ | 924,665 |
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Net income from operations | $ | 346,356 | $ | 13,421 | ||||
Other comprehensive income (loss), net of tax: | ||||||||
Securities available-for-sale | ||||||||
Unrealized holding losses arising during the period | (64,972 | ) | (252,025 | ) | ||||
Income tax benefit | (22,090 | ) | (31,246 | ) | ||||
Net of income taxes | (42,882 | ) | (220,779 | ) | ||||
Reclassification adjustment for gains (loss) realized in net income from operations | 5,321 | - | ||||||
Income tax expense | 1,809 | - | ||||||
Net of income taxes | 3,512 | - | ||||||
Other-than-temporary impairment on available-for-sale securities | - | (70,000 | ) | |||||
Income tax benefit | - | (8,678 | ) | |||||
Net of income taxes | - | (61,322 | ) | |||||
Other comprehensive loss attributable to securities available-for-sale | (46,394 | ) | (159,457 | ) | ||||
Securities held-to-maturity | ||||||||
Amortization of net unrealized gains capitalized on securities transferred from available-for-sale | (13,302 | ) | - | |||||
Income tax benefit | (4,523 | ) | - | |||||
Net of income taxes | (8,779 | ) | - | |||||
Other comprehensive loss | (55,173 | ) | (159,457 | ) | ||||
Comprehensive income (loss) | $ | 291,183 | $ | (146,036 | ) |
See notes to condensed consolidated financial statements
-5- | ||
FIRST RELIANCE BANCSHARES, INC.
For the NineThree Months Ended September 30,March 31, 2014 and 2013 and 2012
(Unaudited)
Accumulated | |||||||||||||||||||||||||
Other | |||||||||||||||||||||||||
Nonvested | Retained | Comprehensive | |||||||||||||||||||||||
Preferred | Common | Capital | Treasury | Restricted | Earnings | Income | |||||||||||||||||||
Stock | Stock | Surplus | Stock | Stock | (Deficit) | (Loss) | Total | ||||||||||||||||||
Balance, December 31, 2011 | $ | 18,021,216 | $ | 40,844 | $ | 27,992,485 | $ | (173,650) | $ | (320,196) | $ | (6,304,429) | $ | 1,861,720 | $ | 41,117,990 | |||||||||
Net income | 1,134,728 | 1,134,728 | |||||||||||||||||||||||
Changes in unrealized gains and losses on securities | (210,064) | (210,064) | |||||||||||||||||||||||
Accretion of Series A | |||||||||||||||||||||||||
Preferred stock discount | 146,041 | (146,041) | - | ||||||||||||||||||||||
Amortization of Series B | |||||||||||||||||||||||||
Preferred stock premium | (12,390) | 12,390 | - | ||||||||||||||||||||||
Issuance Common Stock | 8 | 993 | 1,001 | ||||||||||||||||||||||
Net Change in Restricted Stock | 116 | 7,766 | 144,219 | 152,101 | |||||||||||||||||||||
Purchase of treasury stock | (8,565) | (8,565) | |||||||||||||||||||||||
Balance, September 30, 2012 | $ | 18,154,867 | $ | 40,968 | $ | 28,001,244 | $ | (182,215) | $ | (175,977) | $ | (5,303,352) | $ | 1,651,656 | $ | 42,187,191 | |||||||||
Balance, December 31, 2012 | $ | 18,199,743 | $ | 40,949 | $ | 27,991,132 | $ | (182,234) | $ | (123,466) | $ | (6,207,116) | $ | 1,478,919 | $ | 41,197,927 | |||||||||
Net loss | (2,651,556) | (2,651,556) | |||||||||||||||||||||||
Changes in unrealized gains and losses on securities | (1,160,854) | (1,160,854) | |||||||||||||||||||||||
Expense of auctioning Series A and Series B | |||||||||||||||||||||||||
Preferred stock | (169,291) | (169,291) | |||||||||||||||||||||||
Accretion of Series A | |||||||||||||||||||||||||
Preferred stock discount | 145,509 | (145,509) | - | ||||||||||||||||||||||
Amortization of Series B | |||||||||||||||||||||||||
Preferred stock premium | (12,345) | 12,345 | - | ||||||||||||||||||||||
Conversion of Series C | |||||||||||||||||||||||||
Preferred stock to Common stock | (2,293,000) | 4,709 | 2,614,513 | (326,222) | - | ||||||||||||||||||||
Issuance Common Stock | 5 | 997 | 1,002 | ||||||||||||||||||||||
Net Change in Restricted Stock | 4 | (735) | 83,388 | 82,657 | |||||||||||||||||||||
Purchase of treasury stock | (19,400) | (19,400) | |||||||||||||||||||||||
Balance, September 30, 2013 | $ | 15,870,616 | $ | 45,667 | $ | 30,605,907 | $ | (201,634) | $ | (40,078) | $ | (9,318,058) | $ | 318,065 | $ | 37,280,485 |
Accumulated | ||||||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||
Nonvested | Retained | Comprehensive | ||||||||||||||||||||||||||||||
Preferred | Common | Capital | Treasury | Restricted | Earnings | Income | ||||||||||||||||||||||||||
Stock | Stock | Surplus | Stock | Stock | (Deficit) | (Loss) | Total | |||||||||||||||||||||||||
Balance, December 31, 2012 | $ | 18,199,743 | $ | 40,949 | $ | 27,991,132 | $ | (182,234 | ) | $ | (123,466 | ) | $ | (6,207,116 | ) | $ | 1,478,919 | $ | 41,197,927 | |||||||||||||
Net income | 13,421 | 13,421 | ||||||||||||||||||||||||||||||
Changes in unrealized gains and losses on securities | (159,457 | ) | (159,457 | ) | ||||||||||||||||||||||||||||
Accretion of Series A Preferred stock discount | 47,970 | (47,970 | ) | - | ||||||||||||||||||||||||||||
Amortization of Series B Preferred stock premium | (4,070 | ) | 4,070 | - | ||||||||||||||||||||||||||||
Net Change in Restricted Stock | 4 | (735 | ) | 39,770 | 39,039 | |||||||||||||||||||||||||||
Purchase of treasury stock | (1,210 | ) | (1,210 | ) | ||||||||||||||||||||||||||||
Balance, March 31, 2013 | $ | 18,243,643 | $ | 40,953 | $ | 27,990,397 | $ | (183,444 | ) | $ | (83,696 | ) | $ | (6,237,595 | ) | $ | 1,319,462 | $ | 41,089,720 | |||||||||||||
Balance, December 31, 2013 | $ | 15,915,491 | $ | 45,687 | $ | 30,609,281 | $ | (201,686 | ) | $ | (32,138 | ) | $ | (14,447,907 | ) | $ | 204,016 | $ | 32,092,744 | |||||||||||||
Net income | 346,356 | 346,356 | ||||||||||||||||||||||||||||||
Changes in unrealized gains and losses on securities | (55,173 | ) | (55,173 | ) | ||||||||||||||||||||||||||||
Accretion of Series A Preferred stock discount | 34,112 | (34,112 | ) | - | ||||||||||||||||||||||||||||
Amortization of Series B Preferred stock premium | (2,894 | ) | 2,894 | - | ||||||||||||||||||||||||||||
Amortization of nonvested restricted stock | 10,364 | 10,364 | ||||||||||||||||||||||||||||||
Issuance of common stock | 12 | 2,028 | 2,040 | |||||||||||||||||||||||||||||
Balance, March 31, 2014 | $ | 15,946,709 | $ | 45,699 | $ | 30,611,309 | $ | (201,686 | ) | $ | (21,774 | ) | $ | (14,132,769 | ) | $ | 148,843 | $ | 32,396,331 |
See notes to condensed consolidated financial statements
-6- |
FIRST RELIANCE BANCSHARES, INC.
(Unaudited)
Nine Months Ended | |||||||
September 30, | |||||||
2013 | 2012 | ||||||
Cash flows from operating activities: | |||||||
Net Income (loss) | $ | (2,651,556) | $ | 1,134,728 | |||
Adjustments to reconcile net income (loss) to net cash | |||||||
Provided by operating activities: | |||||||
Provision for loan losses | 609,808 | 950,955 | |||||
Depreciation and amortization expense | 623,828 | 702,635 | |||||
Gain on sale of available-for-sale securities | (33,917) | (1,806,414) | |||||
Impairment loss on available-for-sale securities | 70,000 | - | |||||
Loss on sale of other real estate owned | 331,626 | 109,516 | |||||
Write down of other real estate owned | 1,403,712 | 882,189 | |||||
Discount accretion and premium amortization on available-for-sale securities | 246,007 | 169,887 | |||||
Disbursements for loans held-for-sale | (23,514,839) | (36,145,420) | |||||
Proceeds from loans held-for-sale | 28,310,995 | 35,031,017 | |||||
Decrease in interest receivable | 213,815 | 561,862 | |||||
Increase in cash surrender value of life insurance | (258,674) | (281,250) | |||||
Increase in interest payable | 99,110 | 92,221 | |||||
Amortization of deferred compensation on restricted stock | 82,657 | 152,101 | |||||
Increase (decrease) in other liabilities | (60,339) | 1,223,126 | |||||
Decrease in other assets | 1,381,037 | 840,699 | |||||
Net cash provided by operating activities | 6,853,270 | 3,617,852 | |||||
Cash flows from investing activities: | |||||||
Increase in time deposits | (254) | (580) | |||||
Net decrease in loans receivable | 22,683,679 | 23,792,006 | |||||
Purchases of securities available-for-sale | (6,954,182) | (13,220,603) | |||||
Proceeds on sales of securities available-for-sale | 712,248 | 25,677,784 | |||||
Maturities of securities available-for-sale | 13,087,848 | 8,891,082 | |||||
Net decrease of nonmarketable equity securities | 242,400 | 1,044,400 | |||||
Proceeds from sales of other real estate owned | 4,243,364 | 5,882,445 | |||||
Purchases of premises and equipment | (363,098) | (233,662) | |||||
Net cash provided by investing activities | 33,652,005 | 51,832,872 | |||||
Cash flows from financing activities: | |||||||
Net decrease in demand deposits, interest-bearing and savings accounts | (1,610,521) | (9,782,700) | |||||
Net decrease in certificates of deposit and other time deposits | (51,505,217) | (53,689,447) | |||||
Net increase in securities sold under agreements to repurchase | 540,418 | 4,711,362 | |||||
Expense of auctioning Series A and Series B Preferred stock | (169,291) | - | |||||
Issuance of common stock to employees | 1,002 | 1,001 | |||||
Purchase of treasury stock | (19,400) | (8,565) | |||||
Net cash used by financing activities | (52,763,009) | (58,768,349) | |||||
Net decrease in cash and cash equivalents | (12,257,734) | (3,317,625) | |||||
Cash and cash equivalents, beginning of period | 38,062,903 | 44,020,830 | |||||
Cash and cash equivalents, end of period | $ | 25,805,169 | $ | 40,703,205 | |||
Cash paid during the period for: | |||||||
Interest | $ | 1,939,118 | $ | 3,474,938 | |||
Income taxes | - | - | |||||
Supplemental noncash investing and financing activities: | |||||||
Foreclosures on loans | $ | 4,602,690 | $ | 5,317,584 | |||
Net change in valuation allowance – available-for-sale | (1,160,853) | (210,064) |
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 346,356 | $ | 13,421 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization expense | 242,654 | 226,360 | ||||||
Gain on sale of securities available-for-sale | (5,321 | ) | - | |||||
(Gain) loss on sale of other real estate owned | (112,594 | ) | 24,340 | |||||
Impairment loss on available-for-sale securities | - | 70,000 | ||||||
Discount accretion and premium amortization | 41,118 | 78,908 | ||||||
Disbursements for mortgage loans held for sale | (5,682,944 | ) | (5,781,617 | ) | ||||
Proceeds from sale of mortgage loans held for sale | 6,993,918 | 8,518,513 | ||||||
Decrease in interest receivable | 175,701 | 63,508 | ||||||
Increase in interest payable | 48,973 | 30,882 | ||||||
Increase for cash surrender value of life insurance | (83,525 | ) | (85,040 | ) | ||||
Amortization of deferred compensation on restricted stock | 10,364 | 39,039 | ||||||
(Increase) decrease in other assets | (16,500 | ) | 157,334 | |||||
Increase in other liabilities | 537,486 | 204,011 | ||||||
Net cash provided by operating activities | 2,495,686 | 3,559,659 | ||||||
Cash flows from investing activities: | ||||||||
Net (increase) decrease in loans receivable | (1,235,891 | ) | 3,133,351 | |||||
Purchases of securities available-for-sale | (5,153,110 | ) | - | |||||
Maturities of securities available-for-sale | 1,269,650 | 4,667,566 | ||||||
Maturities of securities held-to-maturity | 667,981 | - | ||||||
Sales of securities available-for-sale | 5,295,529 | - | ||||||
Increase in time deposits in other banks | (102 | ) | (100,153 | ) | ||||
Decrease in nonmarketable equity securities | 452,500 | 242,400 | ||||||
Sales of other real estate owned | 1,821,113 | 635,534 | ||||||
Purchases of premises and equipment | (7,069 | ) | (37,929 | ) | ||||
Net cash provided by investing activities | 3,110,601 | 8,540,769 | ||||||
Cash flows from financing activities: | ||||||||
Net increase in demand deposits, interest-bearing transaction accounts and savings accounts | 6,636,201 | 2,197,497 | ||||||
Net decrease in certificates of deposit and other time deposits | (3,756,875 | ) | (16,345,580 | ) | ||||
Net increase in securities sold under agreements to repurchase | 510,448 | 200,176 | ||||||
Net decrease in advances from Federal Home Loan Bank | (6,000,000 | ) | - | |||||
Issuance of common stock | 2,040 | - | ||||||
Purchase of treasury stock | - | (1,210 | ) | |||||
Net cash used by financing activities | (2,608,186 | ) | (13,949,117 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 2,998,101 | (1,848,689 | ) | |||||
Cash and cash equivalents, beginning | 18,247,825 | 38,062,903 | ||||||
Cash and cash equivalents, end | $ | 21,245,926 | $ | 36,214,214 | ||||
Cash paid during the period for: | ||||||||
Income taxes | $ | - | $ | - | ||||
Interest | 314,959 | 769,029 | ||||||
Supplemental noncash investing and financing activities: | ||||||||
Foreclosures on loans transferred to other real estate owned | $ | 12,000 | $ | 444,910 | ||||
Net change in unrealized losses on investment securities | (55,173 | ) | (159,457 | ) |
See notes to condensed consolidated financial statements
-7- |
Note 1 - Basis of Presentation
First Reliance Bancshares, Inc. (the “Company”) was incorporated to serve as a bank holding company for its subsidiary, First Reliance Bank (the “Bank”). First Reliance Bank was incorporated on August 9, 1999 and commenced business on August 16, 1999. The principal business activity of the Bank is to provide banking services to domestic markets, principally in Florence, Lexington, and Charleston Counties in South Carolina. The Bank is a state-chartered commercial bank, and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”).
The accompanying condensed consolidated financial statements of First Reliance Bancshares, Inc. (“the Company”), have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are condensed and omit certain disclosures that would appear in audited annual consolidated financial statements. The consolidated financial statements as of September 30, 2013March 31, 2014 and for the interim periods ended September 30,March 31, 2014 and 2013 and 2012 are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. The consolidated financial information as of December 31, 20122013 has been derived from the audited consolidated financial statements as of that date. For further information, refer to the consolidated financial statements and the notes included in the Company’sFirst Reliance Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2012.
Note 2 - Recently Issued Accounting Pronouncements
The following is a summary of recent authoritative pronouncements: – First Quarter
In January 2014, the Financial Accounting Standards Board (the “FASB”) amended the Receivables - Troubled Debt Restructurings by Creditors subtopic of the ASC was amended in June 2011. The amendment eliminatedCodification to address the option to present other comprehensive income as a partreclassification of the statement of changes in stockholders’ equity and required consecutive presentation of the statement of net income and other comprehensive income.consumer mortgage loans collateralized by residential real estate upon foreclosure. The amendments were applicableclarify the criteria for concluding that an in substance repossession or foreclosure has occurred, and a creditor is considered to the Company January 1, 2012 and have been applied retrospectively. In December 2011, the topic was further amended to defer the effective datereceived physical possession of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements while the FASB redeliberated the presentation requirements for the reclassification adjustments. In February 2013, the FASB further amended the Comprehensive Income topic clarifying the conclusions from such redeliberations. Specifically, the amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, in certain circumstances an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income.residential real estate property collateralizing a consumer mortgage loan. The amendments werealso outline interim and annual disclosure requirements. The amendments will be effective for the Company on a prospective basis for interim and annual reporting periods beginning after December 15, 2012. These2014. Companies are allowed to use either a modified retrospective transition method or a prospective transition method when adopting this update. Early adoption is permitted. The Company does not expect these amendments did notto have a material effect on the Company’sits financial statements.
Note 3 - Reclassifications
Certain captions and amounts in the financial statements in the Company’s Form 10-Q for the quarter ended September 30, 2012March 31, 2013 were reclassified to conform to the September 30, 2013March 31, 2014 presentation.
Note 4 - Investment Securities
The amortized cost and estimated fair values of securities available-for-sale were:
Amortized | Gross Unrealized | Estimated | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
March 31, 2014 | ||||||||||||||||
Mortgage-backed securities | $ | 8,450,875 | $ | 35,043 | $ | 13,833 | $ | 8,472,085 | ||||||||
Corporate bonds | 2,771,515 | - | 20,186 | 2,751,329 | ||||||||||||
Equity security | 30,000 | - | - | 30,000 | ||||||||||||
Total | $ | 11,252,390 | $ | 35,043 | $ | 34,019 | $ | 11,253,414 | ||||||||
December 31, 2013 | ||||||||||||||||
Mortgage-backed securities | $ | 9,277,577 | $ | 87,635 | $ | 46,579 | $ | 9,318,633 | ||||||||
Corporate bonds | 2,765,950 | 30,260 | - | 2,796,210 | ||||||||||||
Equity security | 30,000 | - | - | 30,000 | ||||||||||||
Total | $ | 12,073,527 | $ | 117,895 | $ | 46,579 | $ | 12,144,843 |
Amortized | Gross Unrealized | Estimated | |||||||||||
Cost | Gains | Losses | Fair Value | ||||||||||
September 30, 2013 | |||||||||||||
U.S. Government-sponsored agencies | $ | 7,213,758 | $ | 100,023 | $ | 169,049 | $ | 7,144,732 | |||||
Municipals | 3,166,424 | 20,625 | 27,084 | 3,159,965 | |||||||||
Cooperate bonds | 2,760,261 | 42,519 | - | 2,802,780 | |||||||||
Mortgage-backed securities | 37,591,353 | 693,831 | 178,948 | 38,106,236 | |||||||||
Equity security | 30,000 | - | - | 30,000 | |||||||||
Total | $ | 50,761,796 | $ | 856,998 | $ | 375,081 | $ | 51,243,713 |
December 31, 2012 | |||||||||||||
U.S. Government-sponsored agencies | $ | 7,591,892 | $ | 517,136 | $ | - | $ | 8,109,028 | |||||
Mortgage-backed securities | 50,197,908 | 1,758,576 | - | 51,956,484 | |||||||||
Equity security | 100,000 | - | 94,500 | 5,500 | |||||||||
Total | $ | 57,889,800 | $ | 2,275,712 | $ | 94,500 | $ | 60,071,012 |
-8- |
The amortized cost and estimated fair values of securities held-to-maturity were:
Amortized | Gross Unrealized | Estimated | ||||||||||||||
Cost | Gains | Losses | Fair Value | |||||||||||||
March 31, 2014 | ||||||||||||||||
U.S. Government sponsored agencies | $ | 6,912,687 | $ | 90,591 | $ | 114,576 | $ | 6,888,702 | ||||||||
Mortgage-backed securities | 25,346,867 | 630,243 | 184,657 | 25,792,453 | ||||||||||||
Municipals | 3,159,870 | 92,154 | - | 3,252,024 | ||||||||||||
35,419,424 | $ | 812,988 | $ | 299,233 | $ | 35,933,179 | ||||||||||
Unamortized capitalization of net unrealized gains on securities transferred from available-for-sale | 224,496 | |||||||||||||||
Total | $ | 35,643,920 | ||||||||||||||
December 31, 2013 | ||||||||||||||||
U.S. Government sponsored agencies | $ | 7,146,409 | $ | 80,707 | $ | 156,131 | $ | 7,070,985 | ||||||||
Mortgage-backed securities | 26,404,573 | 537,133 | 210,365 | 26,731,341 | ||||||||||||
Municipals | 3,163,155 | 17,569 | 31,116 | 3,149,608 | ||||||||||||
36,714,137 | $ | 635,409 | $ | 397,612 | $ | 36,951,934 | ||||||||||
Capitalization of net unrealized gains on securities transferred from available-for-sale | 237,797 | |||||||||||||||
Total | $ | 36,951,934 |
At December 31, 2013, the Company transferred certain securities to the held-to-maturity category from available-for-sale, since the Company has the ability and management intends to hold these securities to maturity. At the time of the reclassification, the securities were carried at their estimated fair value of $36,951,934, including net unrealized gains of $237,797. The net unrealized gain is being amortized to other comprehensive income (loss) over the life of the underlying securities.
The following is a summary of maturities of securities available-for-sale and held-to-maturity as of September 30, 2013.March 31, 2014. The amortized cost and estimated fair values are based on the contractual maturity dates. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty. Mortgage-backed securities are presented as a separate line, the maturities of which are based on expected maturities assince paydowns are expected to occur before the securities’ contractual maturity dates.
Securities | |||||||
Available-For-Sale | |||||||
Amortized | Estimated | ||||||
Cost | Fair Value | ||||||
U.S. Government-sponsored agencies, municipals and corporate bonds | |||||||
Due after ten years | $ | 13,140,443 | $ | 13,107,477 | |||
Mortgage-backed securities | 37,591,353 | 38,106,236 | |||||
Equity security | 30,000 | 30,000 | |||||
Total | $ | 50,761,796 | $ | 51,243,713 |
Securities | Securities | |||||||||||||||
Available-for-Sale | Held-to-Maturity | |||||||||||||||
Amortized | Estimated | Amortized | Estimated | |||||||||||||
Cost | Fair Value | Cost | Fair Value | |||||||||||||
Due after ten years | $ | 2,771,515 | $ | 2,751,329 | $ | 9,991,039 | $ | 10,140,726 | ||||||||
Mortgage-backed securities | 8,450,875 | 8,472,085 | 25,652,881 | 25,792,453 | ||||||||||||
Equity security | 30,000 | 30,000 | - | - | ||||||||||||
Total | $ | 11,252,390 | $ | 11,253,414 | $ | 35,643,920 | $ | 35,933,179 |
The following table shows gross unrealized losses and fair value of securities available-for-sale, aggregated by investment category, and length of time that individual securities have been in a continuous realized loss position at March 31, 2014 and December 31, 2013.
March 31, 2014 | December 31, 2013 | |||||||||||||||
Fair | Unrealized | Fair | Unrealized | |||||||||||||
Value | Losses | Value | Losses | |||||||||||||
Less Than 12 Months | ||||||||||||||||
Mortgage-backed securities | $ | 1,925,806 | $ | 13,833 | $ | 1,999,360 | $ | 46,579 | ||||||||
Corporate bonds | 2,751,329 | 20,186 | - | - | ||||||||||||
Total securities available-for-sale | $ | 4,677,135 | $ | 34,019 | $ | 1,999,360 | $ | 46,579 |
-9- |
The following table shows gross unrealized losses and fair value of securities held-to-maturity, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2013March 31, 2014 and December 31, 2012.
September 30, 2013 | December 31, 2012 | ||||||||||||
Fair | Unrealized | Fair | Unrealized | ||||||||||
Value | Losses | Value | Losses | ||||||||||
Less Than 12 Months | |||||||||||||
U.S. Government-sponsored agencies | $ | 4,537,489 | $ | 169,049 | $ | - | $ | - | |||||
Municipals | 2,043,109 | 27,084 | - | - | |||||||||
Mortgage-backed securities | 7,371,927 | 178,948 | - | - | |||||||||
13,952,525 | 375,081 | - | - | ||||||||||
12 Months or More | |||||||||||||
Equity security | - | - | 5,500 | 94,500 | |||||||||
Total securities available-for-sale | $ | 13,952,525 | $ | 375,081 | $ | 5,500 | $ | 94,500 |
March 31, 2014 | December 31, 2013 | |||||||||||||||
Fair | Unrealized | Fair | Unrealized | |||||||||||||
Value | Losses | Value | Losses | |||||||||||||
Less Than 12 Months | ||||||||||||||||
U.S. Government sponsored agencies | $ | 4,402,949 | $ | 114,576 | $ | 4,549,325 | $ | 156,131 | ||||||||
Mortgage-backed securities | 4,889,633 | 184,657 | 5,011,313 | 210,365 | ||||||||||||
Municipals | - | - | 2,037,029 | 31,116 | ||||||||||||
Total securities held-to-maturity | $ | 9,292,582 | $ | 299,233 | $ | 11,597,667 | $ | 397,612 |
At September 30,March 31, 2014 and December 31, 2013, there were no investment securities that had been in a loss position for twelve months or more. However, during
During the first quarter of 2013 management determined that the Company’s equity investment of $100,000 in a local community bank was other-than-temporarily impaired. Based on industry analyst reports and market trading prices, it was determined that the estimated fair market value of this investment was $30,000. Consequently, an impairment loss of $70,000 was recognized. While the Company does not intend to sell this security in the near future, and it is more likely than not that the Company will not be required to sell it, there is no assurance that the carrying value of this security will be realized in the future.
Note 5 – Loans Receivable and Allowance for Loan Losses
Major classifications of loans receivable are summarized as follows:
September 30, | December 31, | ||||||
2013 | 2012 | ||||||
Real estate loans: | |||||||
Construction | $ | 25,983,333 | $ | 31,985,532 | |||
Residential: | |||||||
Residential 1-4 family | 34,619,592 | 35,091,846 | |||||
Multifamily | 4,460,305 | 5,563,043 | |||||
Second mortgages | 4,361,528 | 4,077,692 | |||||
Equity lines of credit | 21,042,326 | 22,502,339 | |||||
Total residential | 64,483,751 | 67,234,920 | |||||
Nonresidential | 103,285,343 | 122,309,917 | |||||
Total real estate loans | 193,752,427 | 221,530,369 | |||||
Commercial and industrial | 26,747,037 | 29,255,564 | |||||
Consumer | 10,521,865 | 9,304,913 | |||||
Other | 71,714 | 166,488 | |||||
Total loans | $ | 231,093,043 | $ | 260,257,334 |
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
Real estate loans: | ||||||||
Construction | $ | 23,890,521 | $ | 24,175,347 | ||||
Residential: | ||||||||
Residential 1-4 family | 35,761,717 | 35,873,036 | ||||||
Multifamily | 3,890,201 | 4,312,057 | ||||||
Second mortgages | 4,077,550 | 4,245,778 | ||||||
Equity lines of credit | 21,427,102 | 21,270,126 | ||||||
Total residential | 65,156,570 | 65,700,997 | ||||||
Nonresidential | 105,861,288 | 104,378,485 | ||||||
Total real estate loans | 194,908,379 | 194,254,829 | ||||||
Commercial and industrial | 32,584,523 | 32,486,848 | ||||||
Consumer | 12,136,195 | 11,725,319 | ||||||
Other | 5,595 | 35,135 | ||||||
Total loans | $ | 239,634,692 | $ | 238,502,131 |
The Company has pledged certain loans as collateral to secure its borrowings from the Federal Home Loan Bank. The total of loans pledged was $75,250,210$79,515,357 and $84,692,901$76,972,548 at
The following is an analysis of the allowance for loan losses by class of loans for the ninethree months ended September 30, 2013March 31, 2014 and the year ended December 31, 2012.2013.
March 31, 2014
Total | ||||||||||||||||||||||||||||
Real Estate Loans | Real | |||||||||||||||||||||||||||
(Dollars in Thousands) | Non- | Estate | Consumer | |||||||||||||||||||||||||
Total | Construction | Residential | Residential | Loans | Commercial | and Other | ||||||||||||||||||||||
Beginning balance | $ | 2,894 | $ | 303 | $ | 1,043 | $ | 1,382 | $ | 2,728 | $ | 65 | $ | 101 | ||||||||||||||
Provisions | - | (31 | ) | 2 | 20 | (9 | ) | 28 | (19 | ) | ||||||||||||||||||
Recoveries | 111 | 9 | 3 | 89 | 101 | 7 | 3 | |||||||||||||||||||||
Charge-offs | (202 | ) | (1 | ) | (3 | ) | (188 | ) | (192 | ) | - | (10 | ) | |||||||||||||||
Ending balance | $ | 2,803 | $ | 280 | $ | 1,045 | $ | 1,303 | $ | 2,628 | $ | 100 | $ | 75 |
-10- |
September 30, 2013 | ||||||||||||||||||||||
Total | ||||||||||||||||||||||
Real Estate Loans | Real | |||||||||||||||||||||
(Dollars in Thousands) | Non- | Estate | Consumer | |||||||||||||||||||
Total | Construction | Residential | Residential | Loans | Commercial | and Other | ||||||||||||||||
Beginning balance | $ | 4,167 | $ | 1,441 | $ | 951 | $ | 1,129 | $ | 3,521 | $ | 616 | $ | 30 | ||||||||
Provisions | 610 | (1,150) | 1,071 | 1,001 | 922 | (348) | 36 | |||||||||||||||
Recoveries | 396 | 123 | 174 | 18 | 315 | 69 | 12 | |||||||||||||||
Charge-offs | (2,274) | (249) | (981) | (914) | (2,144) | (92) | (38) | |||||||||||||||
Ending balance | $ | 2,899 | $ | 165 | $ | 1,215 | $ | 1,234 | $ | 2,614 | $ | 245 | $ | 40 |
December 31, 2012 | ||||||||||||||||||||||
Total | ||||||||||||||||||||||
Real Estate Loans | Real | |||||||||||||||||||||
(Dollars in Thousands) | Non- | Estate | Consumer | |||||||||||||||||||
Total | Construction | Residential | Residential | Loans | Commercial | and Other | ||||||||||||||||
Beginning balance | $ | 7,743 | $ | 3,291 | $ | 2,757 | $ | 1,081 | $ | 7,129 | $ | 575 | $ | 39 | ||||||||
Provisions | 1,946 | 148 | (850) | 1,819 | 1,117 | 819 | 10 | |||||||||||||||
Recoveries | 1,104 | 298 | 129 | 54 | 481 | 613 | 10 | |||||||||||||||
Charge-offs | (6,626) | (2,296) | (1,085) | (1,825) | (5,206) | (1,391) | (29) | |||||||||||||||
Ending balance | $ | 4,167 | $ | 1,441 | $ | 951 | $ | 1,129 | $ | 3,521 | $ | 616 | $ | 30 |
December 31, 2013
Total | ||||||||||||||||||||||||||||
Real Estate Loans | Real | |||||||||||||||||||||||||||
(Dollars in Thousands) | Non- | Estate | Consumer | |||||||||||||||||||||||||
Total | Construction | Residential | Residential | Loans | Commercial | and Other | ||||||||||||||||||||||
Beginning balance | $ | 4,167 | $ | 1,441 | $ | 951 | $ | 1,129 | $ | 3,521 | $ | 616 | $ | 30 | ||||||||||||||
Provisions | 610 | (980 | ) | 903 | 1,136 | 1,059 | (548 | ) | 99 | |||||||||||||||||||
Recoveries | 455 | 138 | 177 | 35 | 350 | 89 | 16 | |||||||||||||||||||||
Charge-offs | (2,338 | ) | (296 | ) | (988 | ) | (918 | ) | (2,202 | ) | (92 | ) | (44 | ) | ||||||||||||||
Ending balance | $ | 2,894 | $ | 303 | $ | 1,043 | $ | 1,382 | $ | 2,728 | $ | 65 | $ | 101 |
The following is a summary of loans evaluated for impairment individually and collectively, by class at September 30, 2013as of March 31, 2014 and December 31, 2012.2013.
March 31, 2014
Allowance for Loan Losses
Total | ||||||||||||||||||||||||||||
Real Estate Loans | Real | |||||||||||||||||||||||||||
(Dollars in Thousands) | Non- | Estate | Consumer | |||||||||||||||||||||||||
Total | Construction | Residential | Residential | Loans | Commercial | and Other | ||||||||||||||||||||||
Allowance | ||||||||||||||||||||||||||||
Evaluated for impairment Individually | $ | 561 | $ | 2 | $ | 144 | $ | 369 | $ | 515 | $ | 46 | $ | - | ||||||||||||||
Collectively | 2,242 | 278 | 901 | 934 | 2,113 | 54 | 75 | |||||||||||||||||||||
Allowance for loan losses | $ | 2,803 | $ | 280 | $ | 1,045 | $ | 1,303 | $ | 2,628 | $ | 100 | $ | 75 | ||||||||||||||
Total Loans | ||||||||||||||||||||||||||||
Evaluated for impairment Individually | $ | 15,243 | $ | 2,456 | $ | 3,212 | $ | 8,049 | $ | 13,717 | $ | 1,435 | $ | 91 | ||||||||||||||
Collectively | 224,392 | 21,434 | 61,945 | 97,812 | 181,191 | 31,150 | 12,051 | |||||||||||||||||||||
Loans receivable | $ | 239,635 | $ | 23,890 | $ | 65,157 | $ | 105,861 | $ | 194,908 | $ | 32,585 | $ | 12,142 |
December 31, 2013
Total | ||||||||||||||||||||||||||||
Real Estate Loans | Real | |||||||||||||||||||||||||||
(Dollars in Thousands) | Non- | Estate | Consumer | |||||||||||||||||||||||||
Total | Construction | Residential | Residential | Loans | Commercial | and Other | ||||||||||||||||||||||
Allowance | ||||||||||||||||||||||||||||
Evaluated for impairment Individually | $ | 405 | $ | 2 | $ | 185 | $ | 163 | $ | 350 | $ | 53 | $ | 2 | ||||||||||||||
Collectively | 2,489 | 301 | 858 | 1,219 | 2,378 | 12 | 99 | |||||||||||||||||||||
Allowance for loan losses | $ | 2,894 | $ | 303 | $ | 1,043 | $ | 1,382 | $ | 2,728 | $ | 65 | $ | 101 | ||||||||||||||
Total Loans | ||||||||||||||||||||||||||||
Evaluated for impairment Individually | $ | 18,160 | $ | 2,495 | $ | 3,091 | $ | 10,998 | $ | 16,584 | $ | 1,480 | $ | 96 | ||||||||||||||
Collectively | 220,342 | 21,680 | 62,610 | 93,381 | 177,671 | 31,007 | 11,664 | |||||||||||||||||||||
Loans receivable | $ | 238,502 | $ | 24,175 | $ | 65,701 | $ | 104,379 | $ | 194,255 | $ | 32,487 | $ | 11,760 |
September 30, 2013 | ||||||||||||||||||||||
Total | ||||||||||||||||||||||
Real Estate Loans | Real | |||||||||||||||||||||
(Dollars in Thousands) | Non- | Estate | Consumer | |||||||||||||||||||
Total | Construction | Residential | Residential | Loans | Commercial | and Other | ||||||||||||||||
Allowance | ||||||||||||||||||||||
Evaluated for impairment | ||||||||||||||||||||||
Individually | $ | 280 | $ | 6 | $ | 189 | $ | 18 | $ | 213 | $ | 66 | $ | 1 | ||||||||
Collectively | 2,619 | 159 | 1,026 | 1,216 | 2,401 | 179 | 39 | |||||||||||||||
Allowance for loan losses | $ | 2,899 | $ | 165 | $ | 1,215 | $ | 1,234 | $ | 2,614 | $ | 245 | $ | 40 | ||||||||
Total Loans | ||||||||||||||||||||||
Evaluated for impairment | ||||||||||||||||||||||
Individually | $ | 14,795 | $ | 2,601 | $ | 3,259 | $ | 7,315 | $ | 13,175 | $ | 1,524 | $ | 96 | ||||||||
Collectively | 216,298 | 23,382 | 61,225 | 95,970 | 180,577 | 25,223 | 10,498 | |||||||||||||||
Loans receivable | $ | 231,093 | $ | 25,983 | $ | 64,484 | $ | 103,285 | $ | 193,752 | $ | 26,747 | $ | 10,594 |
-11- |
December 31, 2012 | ||||||||||||||||||||||
Total | ||||||||||||||||||||||
Real Estate Loans | Real | |||||||||||||||||||||
(Dollars in Thousands) | Non- | Estate | Consumer | |||||||||||||||||||
Total | Construction | Residential | Residential | Loans | Commercial | and Other | ||||||||||||||||
Allowance | ||||||||||||||||||||||
Evaluated for impairment | ||||||||||||||||||||||
Individually | $ | 524 | $ | 23 | $ | 106 | $ | 362 | $ | 491 | $ | 20 | $ | 13 | ||||||||
Collectively | 3,643 | 1,418 | 845 | 767 | 3,030 | 596 | 17 | |||||||||||||||
Allowance for loan losses | $ | 4,167 | $ | 1,441 | $ | 951 | $ | 1,129 | $ | 3,521 | $ | 616 | $ | 30 | ||||||||
Total Loans | ||||||||||||||||||||||
Evaluated for impairment | ||||||||||||||||||||||
Individually | $ | 28,030 | $ | 6,151 | $ | 5,323 | $ | 14,464 | $ | 25,938 | $ | 1,973 | $ | 119 | ||||||||
Collectively | 232,227 | 25,834 | 61,912 | 107,846 | 195,592 | 27,283 | 9,352 | |||||||||||||||
Loans receivable | $ | 260,257 | $ | 31,985 | $ | 67,235 | $ | 122,310 | $ | 221,530 | $ | 29,256 | $ | 9,471 |
The Company identifies impaired loans through its normal internal loan review process. Loans on the Company’s problem loan watch list are considered potentially impaired loans. These loans are evaluated in determining whether all outstanding principal and interest are expected to be collected. Loans are not considered impaired if a minimal delay occurs and all amounts due, including accrued interest at the contractual interest rate for the period of delay, are expected to be collected.
The following summarizes the Company’s impaired loans as of
Unpaid | Average | ||||||||||||
(Dollars in Thousands) | Recorded | Principal | Related | Recorded | |||||||||
Investment | Balance | Allowance | Investment | ||||||||||
With no related allowance recorded: | |||||||||||||
Real estate | |||||||||||||
Construction | $ | 753 | $ | 856 | $ | - | $ | 1,829 | |||||
Residential | 2,368 | 2,411 | - | 3,266 | |||||||||
Nonresidential | 6,500 | 6,946 | - | 8,722 | |||||||||
Total real estate loans | 9,621 | 10,213 | - | 13,817 | |||||||||
Commercial | 13 | 13 | - | 1,411 | |||||||||
Consumer and other | 38 | 38 | - | 73 | |||||||||
9,672 | 10,264 | - | 15,301 |
With an allowance recorded: | |||||||||||||
Real estate | |||||||||||||
Construction | 1,848 | 1,848 | 6 | 1,767 | |||||||||
Residential | 891 | 909 | 189 | 1,382 | |||||||||
Nonresidential | 815 | 1,365 | 18 | 2,267 | |||||||||
Total real estate loans | 3,554 | 4,122 | 213 | 5,416 | |||||||||
Commercial | 1,511 | 1,511 | 66 | 391 | |||||||||
Consumer and other | 58 | 58 | 1 | 32 | |||||||||
5,123 | 5,691 | 280 | 5,839 | ||||||||||
Total | |||||||||||||
Real estate | |||||||||||||
Construction | 2,601 | 2,704 | 6 | 3,596 | |||||||||
Residential | 3,259 | 3,320 | 189 | 4,648 | |||||||||
Nonresidential | 7,315 | 8,311 | 18 | 10,989 | |||||||||
Total real estate loans | 13,175 | 14,335 | 213 | 19,233 | |||||||||
Commercial | 1,524 | 1,524 | 66 | 1,802 | |||||||||
Consumer and other | 96 | 96 | 1 | 105 | |||||||||
Total | $ | 14,795 | $ | 15,955 | $ | 280 | $ | 21,140 |
Unpaid | Average | |||||||||||||||
(Dollars in Thousands) | Recorded | Principal | Related | Recorded | ||||||||||||
Investment | Balance | Allowance | Investment | |||||||||||||
With no related allowance recorded: | ||||||||||||||||
Real estate | ||||||||||||||||
Construction | $ | 674 | $ | 849 | $ | - | $ | 677 | ||||||||
Residential | 2,496 | 3,468 | - | 2,312 | ||||||||||||
Nonresidential | 6,735 | 6,938 | - | 6,391 | ||||||||||||
Total real estate loans | 9,905 | 11,255 | - | 9,380 | ||||||||||||
Commercial | 21 | 27 | - | 17 | ||||||||||||
Consumer and other | 90 | 99 | - | 86 | ||||||||||||
10,016 | 11,381 | - | 9,483 | |||||||||||||
With an allowance recorded: | ||||||||||||||||
Real estate | ||||||||||||||||
Construction | 1,782 | 1,782 | 2 | 1,799 | ||||||||||||
Residential | 716 | 750 | 144 | 840 | ||||||||||||
Nonresidential | 1,314 | 1,417 | 369 | 3,132 | ||||||||||||
Total real estate loans | 3,812 | 3,949 | 515 | 5,771 | ||||||||||||
Commercial | 1,414 | 1,484 | 46 | 1,441 | ||||||||||||
Consumer and other | 1 | 1 | - | 7 | ||||||||||||
5,227 | 5,434 | 561 | 7,219 | |||||||||||||
Total | ||||||||||||||||
Real estate | ||||||||||||||||
Construction | 2,456 | 2,631 | 2 | 2,476 | ||||||||||||
Residential | 3,212 | 4,218 | 144 | 3,152 | ||||||||||||
Nonresidential | 8,049 | 8,355 | 369 | 9,523 | ||||||||||||
Total real estate loans | 13,717 | 15,204 | 515 | 15,151 | ||||||||||||
Commercial | 1,435 | 1,511 | 46 | 1,458 | ||||||||||||
Consumer and other | 91 | 100 | - | 93 | ||||||||||||
Total | $ | 15,243 | $ | 16,815 | $ | 561 | $ | 16,702 |
The following summarizes the Company’s impaired loans as of December 31, 2012.
Unpaid | Average | |||||||||||||||
(Dollars in Thousands) | Recorded | Principal | Related | Recorded | ||||||||||||
Investment | Balance | Allowance | Investment | |||||||||||||
With no related allowance recorded: | ||||||||||||||||
Real estate | ||||||||||||||||
Construction | $ | 680 | $ | 849 | $ | - | $ | 1,599 | ||||||||
Residential | 2,127 | 2,272 | - | 3,038 | ||||||||||||
Nonresidential | 6,047 | 6,365 | - | 8,187 | ||||||||||||
Total real estate loans | 8,854 | 9,486 | - | 12,824 | ||||||||||||
Commercial | 12 | 18 | - | 1,131 | ||||||||||||
Consumer and other | 83 | 91 | - | 75 | ||||||||||||
8,949 | 9,595 | - | 14,030 |
-12- |
Unpaid | Average | ||||||||||||
(Dollars in Thousands) | Recorded | Principal | Related | Recorded | |||||||||
Investment | Balance | Allowance | Investment | ||||||||||
With no related allowance recorded: | |||||||||||||
Real estate | |||||||||||||
Construction | $ | 3,157 | $ | 3,827 | $ | - | $ | 3,755 | |||||
Residential | 3,825 | 4,209 | - | 4,138 | |||||||||
Nonresidential | 10,311 | 11,439 | - | 9,941 | |||||||||
Total real estate loans | 17,293 | 19,475 | - | 17,834 | |||||||||
Commercial | 1,953 | 1,990 | - | 1,334 | |||||||||
Consumer and other | 80 | 81 | - | 42 | |||||||||
19,326 | 21,546 | - | 19,210 | ||||||||||
With an allowance recorded: | |||||||||||||
Real estate | |||||||||||||
Construction | 2,994 | 3,102 | 23 | 3,099 | |||||||||
Residential | 1,498 | 1,500 | 106 | 1,410 | |||||||||
Nonresidential | 4,153 | 4,744 | 362 | 3,183 | |||||||||
Total real estate loans | 8,645 | 9,346 | 491 | 7,692 | |||||||||
Commercial | 20 | 20 | 20 | 603 | |||||||||
Consumer and other | 39 | 39 | 13 | 27 | |||||||||
8,704 | 9,405 | 524 | 8,322 | ||||||||||
Total | |||||||||||||
Real estate | |||||||||||||
Construction | 6,151 | 6,929 | 23 | 6,854 | |||||||||
Residential | 5,323 | 5,709 | 106 | 5,548 | |||||||||
Nonresidential | 14,464 | 16,183 | 362 | 13,124 | |||||||||
Total real estate loans | 25,938 | 28,821 | 491 | 25,526 | |||||||||
Commercial | 1,973 | 2,010 | 20 | 1,937 | |||||||||
Consumer and other | 119 | 120 | 13 | 69 | |||||||||
Total | $ | 28,030 | $ | 30,951 | $ | 524 | $ | 27,532 |
Unpaid | Average | |||||||||||||||
(Dollars in Thousands) | Recorded | Principal | Related | Recorded | ||||||||||||
Investment | Balance | Allowance | Investment | |||||||||||||
With an allowance recorded: | ||||||||||||||||
Real estate | ||||||||||||||||
Construction | $ | 1,815 | $ | 1,815 | $ | 2 | $ | 1,777 | ||||||||
Residential | 964 | 999 | 185 | 1,299 | ||||||||||||
Nonresidential | 4,951 | 5,087 | 163 | 2,803 | ||||||||||||
Total real estate loans | 7,730 | 7,901 | 350 | 5,879 | ||||||||||||
Commercial | 1,468 | 1,538 | 53 | 606 | ||||||||||||
Consumer and other | 13 | 14 | 2 | 28 | ||||||||||||
9,211 | 9,453 | 405 | 6,513 | |||||||||||||
Total | ||||||||||||||||
Real estate | ||||||||||||||||
Construction | 2,495 | 2,664 | 2 | 3,375 | ||||||||||||
Residential | 3,091 | 3,271 | 185 | 4,337 | ||||||||||||
Nonresidential | 10,998 | 11,452 | 163 | 10,990 | ||||||||||||
Total real estate loans | 16,584 | 17,387 | 350 | 18,702 | ||||||||||||
Commercial | 1,480 | 1,556 | 53 | 1,737 | ||||||||||||
Consumer and other | 96 | 105 | 2 | 104 | ||||||||||||
Total | $ | 18,160 | $ | 19,048 | $ | 405 | $ | 20,543 |
Interest income on impaired loans other than nonaccrual loans is recognized on an accrual basis. Interest income on nonaccrual loans is recognized only as collected. For the nine monthsquarters ended September 30,March 31, 2014 and 2013, and 2012, interest income recognized on nonaccrual loans was $478,475$31,086 and $605,750,$148,728, respectively. If the nonaccrual loans had been accruing interest at their original contracted rates, related income would have been $654,639$110,227 and $927,891$289,706 for the nine monthsquarters ended September 30,March 31, 2014 and 2013, and 2012, respectively.
A summary of current, past due and nonaccrual loans as of September 30, 2013March 31, 2014 was as follows:
Past Due | Past Due Over 90 days | ||||||||||||||||||
(Dollars in Thousands) | 30-89 | and | Non- | Total | Total | ||||||||||||||
Days | Accruing | Accruing | Past Due | Current | Loans | ||||||||||||||
Real estate | |||||||||||||||||||
Construction | $ | - | $ | - | $ | 554 | $ | 554 | $ | 25,429 | $ | 25,983 | |||||||
Residential | 282 | - | 1,696 | 1,978 | 62,506 | 64,484 | |||||||||||||
Nonresidential | 21 | - | 5,168 | 5,189 | 98,096 | 103,285 | |||||||||||||
Total real estate loans | 303 | - | 7,418 | 7,721 | 186,031 | 193,752 | |||||||||||||
Commercial | 25 | - | 1,432 | 1,457 | 25,290 | 26,747 | |||||||||||||
Consumer and other | 31 | - | 77 | 108 | 10,486 | 10,594 | |||||||||||||
Totals | $ | 359 | $ | - | $ | 8,927 | $ | 9,286 | $ | 221,807 | $ | 231,093 |
Past Due | Past Due Over 90 days | |||||||||||||||||||||||
30-89 | and | Non- | Total | Total | ||||||||||||||||||||
(Dollars in Thousands) | Days | Accruing | Accruing | Past Due | Current | Loans | ||||||||||||||||||
Real estate | ||||||||||||||||||||||||
Construction | $ | - | $ | - | $ | 475 | $ | 475 | $ | 23,415 | $ | 23,890 | ||||||||||||
Residential | 176 | - | 1,796 | 1,972 | 63,185 | 65,157 | ||||||||||||||||||
Nonresidential | - | - | 3,986 | 3,986 | 101,875 | 105,861 | ||||||||||||||||||
Total real estate loans | 176 | - | 6,257 | 6,433 | 188,475 | 194,908 | ||||||||||||||||||
Commercial | - | - | 1,353 | 1,353 | 31,232 | 32,585 | ||||||||||||||||||
Consumer and other | 12 | - | 79 | 91 | 12,051 | 12,142 | ||||||||||||||||||
Totals | $ | 188 | $ | - | $ | 7,689 | $ | 7,877 | $ | 231,758 | $ | 239,635 |
A summary of current, past due and nonaccrual loans as of December 31, 20122013 was as follows:
Past Due | Past Due Over 90 days | ||||||||||||||||||
(Dollars in Thousands) | 30-89 | Non- | Total | Total | |||||||||||||||
Days | Accruing | Accruing | Past Due | Current | Loans | ||||||||||||||
Real estate | |||||||||||||||||||
Construction | $ | 62 | $ | - | $ | 2,874 | $ | 2,936 | $ | 29,049 | $ | 31,985 | |||||||
Residential | 1,340 | - | 3,779 | 5,119 | 62,116 | 67,235 | |||||||||||||
Nonresidential | 566 | - | 12,354 | 12,920 | 109,390 | 122,310 | |||||||||||||
Total real estate loans | 1,968 | - | 19,007 | 20,975 | 200,555 | 221,530 | |||||||||||||
Commercial | 37 | - | 1,879 | 1,916 | 27,340 | 29,256 | |||||||||||||
Consumer and other | 22 | 6 | 88 | 116 | 9,355 | 9,471 | |||||||||||||
Totals | $ | 2,027 | $ | 6 | $ | 20,974 | $ | 23,007 | $ | 237,250 | $ | 260,257 |
Past Due | Past Due Over 90 days | |||||||||||||||||||||||
(Dollars in Thousands) | 30-89 | and | Non- | Total | Total | |||||||||||||||||||
Days | Accruing | Accruing | Past Due | Current | Loans | |||||||||||||||||||
Real estate | ||||||||||||||||||||||||
Construction | $ | 11 | $ | - | $ | 481 | $ | 492 | $ | 23,683 | $ | 24,175 | ||||||||||||
Residential | 344 | - | 1,672 | 2,016 | 63,685 | 65,701 | ||||||||||||||||||
Nonresidential | 24 | 127 | 5,006 | 5,157 | 99,222 | 104,379 | ||||||||||||||||||
Total real estate loans | 379 | 127 | 7,159 | 7,665 | 186,590 | 194,255 | ||||||||||||||||||
Commercial | 3 | - | 1,393 | 1,396 | 31,091 | 32,487 | ||||||||||||||||||
Consumer and other | 19 | 8 | 74 | 101 | 11,659 | 11,760 | ||||||||||||||||||
Totals | $ | 401 | $ | 135 | $ | 8,626 | $ | 9,162 | $ | 229,340 | $ | 238,502 |
Included in the loan portfolio are particular loans that have been modified in order to maximize the collection of loan balances. If, for economic or legal reasons related to the customer’s financial difficulties, the Company grants a concession compared to the original terms and conditions on the loan, the modified loan is classified as a troubled debt restructuring (“TDR”).
Concessions can relate to the contractual interest rate, maturity date or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing financial challenges in the current economic environment.-13- |
At September 30, 2013March 31, 2014 there were 2930 loans classified as TDRsa TDR totaling $7,341,485.$7,274,231. Of the 2930 loans, 1516 loans totaling $3,501,541$4,564,197 were performing while 14 loans totaling $3,839,944$2,710,034 were not performing. As of December 31, 20122013 there were 5230 loans classified as a TDRTDRs totaling $15,155,121.$7,157,230. Of the 5230 loans, seven16 loans totaling $3,128,542$3,481,589 were performing while 4514 loans totaling $12,026,579$3,675,641 were not performing. All of these restructured loans resulted in either extended maturity or lowered rates and were included in the impaired loan balance.
The following table provides, by class, the number of loans modified in TDRs during the threefirst quarters of 2014 and nine months ended September 30, 2013.
(Dollars in Thousands) | Three Months Ended September 30, 2013 | Nine Months Ended September 30, 2013 | |||||||||||||||||
Unpaid | Unpaid | ||||||||||||||||||
Number | Recorded | Principal | Number | Recorded | Principal | ||||||||||||||
of Loans | Investment | Balance | of Loans | Investment | Balance | ||||||||||||||
Extended maturity | |||||||||||||||||||
Real estate – | |||||||||||||||||||
Residential | - | $ | - | $ | - | 2 | $ | 76 | $ | 76 | |||||||||
Nonresidential | - | - | - | 1 | 204 | 204 | |||||||||||||
Commercial | - | - | - | 1 | 14 | 14 | |||||||||||||
Consumer and other | - | - | - | 1 | 13 | 13 | |||||||||||||
Total | - | - | - | 5 | 307 | 307 |
Reduced Rate | |||||||||||||||||
Real estate – | |||||||||||||||||
Residential | 2 | $ | 281 | $ | 281 | 4 | $ | 738 | $ | 738 | |||||||
Total | 2 | 281 | 281 | 4 | 738 | 738 | |||||||||||
Totals | 2 | $ | 281 | $ | 281 | 9 | $ | 1,045 | $ | 1,045 |
(Dollars in Thousands) | Three Months Ended September 30, 2012 | Nine Months Ended September 30, 2012 | |||||||||||||||
Unpaid | Unpaid | ||||||||||||||||
Number | Recorded | Principal | Number | Recorded | Principal | ||||||||||||
of Loans | Investment | Balance | of Loans | Investment | Balance | ||||||||||||
Extended maturity | |||||||||||||||||
Real estate – | |||||||||||||||||
Construction | 1 | $ | 495 | $ | 514 | 4 | $ | 3,800 | $ | 3,819 | |||||||
Residential | 5 | 1,546 | 1,731 | 6 | 2,560 | 2,745 | |||||||||||
Nonresidential | 3 | 1,759 | 1,816 | 4 | 1,777 | 1,834 | |||||||||||
Commercial | - | - | - | 1 | 110 | 110 | |||||||||||
Consumer and other | 2 | 69 | 74 | 4 | 307 | 312 | |||||||||||
Total | 11 | 3,869 | 4,135 | 19 | 8,554 | 8,820 |
(Dollars in Thousands) | Three Months Ended September 30, 2012 | Nine Months Ended September 30, 2012 | |||||||||||||||||
Unpaid | Unpaid | ||||||||||||||||||
Number | Recorded | Principal | Number | Recorded | Principal | ||||||||||||||
of Loans | Investment | Balance | of Loans | Investment | Balance | ||||||||||||||
Reduced Rate | |||||||||||||||||||
Real estate – | |||||||||||||||||||
Residential | - | - | - | 1 | 30 | 30 | |||||||||||||
Nonresidential | 1 | 30 | 30 | 2 | 446 | 566 | |||||||||||||
Commercial | - | - | - | 2 | 1,588 | 1,588 | |||||||||||||
Total | 1 | 30 | 30 | 5 | 2,064 | 2,184 | |||||||||||||
Totals | 12 | $ | 3,899 | $ | 4,165 | 24 | $ | 10,618 | $ | 11,004 |
(Dollars in Thousands) | For the Quarter Ended March 31, 2014 | For the Quarter Ended March 31, 2013 | ||||||||||||||||||||||
Unpaid | Unpaid | |||||||||||||||||||||||
Number | Recorded | Principal | Number | Recorded | Principal | |||||||||||||||||||
of Loans | Investment | Balance | of Loans | Investment | Balance | |||||||||||||||||||
Extended maturity | ||||||||||||||||||||||||
Consumer and other | - | $ | - | $ | - | 1 | $ | 13 | $ | 13 | ||||||||||||||
Reduced Rate | ||||||||||||||||||||||||
Real estate - Residential | 1 | 62 | 62 | 1 | 170 | 170 | ||||||||||||||||||
Totals | 1 | $ | 62 | $ | 62 | 2 | $ | 183 | $ | 183 |
The following table provides the number of loans and leases modified in troubled debt restructuringsTDRs during the previous 12 months which subsequently defaulted during the threequarter ended March 31, 2014 and nine months ended September 30, 2013, respectively, as well as the recorded investments and unpaid principal balances as of September 30,March 31, 2014 and 2013. Loans in default are those past due greater than 89 days.
(Dollars in Thousands) | Three Months Ended September 30, 2013 | Nine Months Ended September 30, 2013 | |||||||||||||||
Unpaid | Unpaid | ||||||||||||||||
Number | Recorded | Principal | Number | Recorded | Principal | ||||||||||||
of Loans | Investment | Balance | of Loans | Investment | Balance | ||||||||||||
Extended Maturity | |||||||||||||||||
Real estate – | |||||||||||||||||
Nonresidential | - | $ | - | $ | - | 1 | $ | 104 | $ | 104 | |||||||
Total | - | - | - | 1 | 104 | 104 | |||||||||||
Reduced Rate | |||||||||||||||||
Real estate – | |||||||||||||||||
Residential | - | - | - | 1 | 171 | 171 | |||||||||||
Nonresidential | - | - | - | 1 | 119 | 119 | |||||||||||
Total | - | - | - | 2 | 290 | 290 | |||||||||||
Totals | - | $ | - | $ | - | 3 | $ | 394 | $ | 394 |
(Dollars in Thousands) | Three Months Ended September 30, 2012 | Nine Months Ended September 30, 2012 | |||||||||||||||
Unpaid | Unpaid | ||||||||||||||||
Number | Recorded | Principal | Number | Recorded | Principal | ||||||||||||
of Loans | Investment | Balance | of Loans | Investment | Balance | ||||||||||||
Extended maturity | |||||||||||||||||
Real estate – | |||||||||||||||||
Construction | 1 | $ | 496 | $ | 514 | 4 | $ | 1,969 | $ | 1,987 | |||||||
Residential | 5 | 841 | 842 | 7 | 1,873 | 1,874 | |||||||||||
Nonresidential | - | - | - | 1 | 110 | 110 | |||||||||||
Commercial | - | - | - | 1 | 222 | 222 | |||||||||||
Consumer and other | - | - | - | 1 | 23 | 23 | |||||||||||
Total | 6 | 1,337 | 1,356 | 14 | 4,197 | 4,216 | |||||||||||
Reduced Rate | |||||||||||||||||
Real estate – | |||||||||||||||||
Residential | - | - | - | 2 | 471 | 591 | |||||||||||
Nonresidential | - | - | - | 1 | 16 | 16 | |||||||||||
Commercial | - | - | - | 1 | 237 | 237 | |||||||||||
Consumer and other | - | - | - | 1 | 4 | 4 | |||||||||||
Total | - | - | - | 5 | 728 | 848 | |||||||||||
Totals | 6 | $ | 1,337 | $ | 1,356 | 19 | $ | 4,925 | $ | 5,064 |
(Dollars in Thousands) | For the Quarter Ended March 31, 2014 | For the Quarter Ended March 31, 2013 | ||||||||||||||||||||||
Unpaid | Unpaid | |||||||||||||||||||||||
Number | Recorded | Principal | Number | Recorded | Principal | |||||||||||||||||||
of Loans | Investment | Balance | of Loans | Investment | Balance | |||||||||||||||||||
Reduced Rate | ||||||||||||||||||||||||
Real estate | ||||||||||||||||||||||||
Residential | 1 | $ | 62 | $ | 62 | 1 | $ | 170 | $ | 170 | ||||||||||||||
Nonresidential | - | - | - | 1 | 119 | 119 | ||||||||||||||||||
Totals | 1 | $ | 62 | $ | 62 | 2 | $ | 289 | $ | 289 |
All loans modified in TDRs are evaluated for impairment. The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, are considered in determining an appropriate level of allowance for credit losses.
Credit Indicators
Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt, including:including, among other factors: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.trends. The following definitions are utilized for risk ratings, which are consistent with the definitions used in supervisory guidance:
Special Mention -Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.
Substandard -Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.
-14- |
As of September 30,March 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
Total | ||||||||||||||||||||||||||||
Real Estate Loans | Real | |||||||||||||||||||||||||||
(Dollars in Thousands) | Non- | Estate | Consumer | |||||||||||||||||||||||||
Total | Construction | Residential | Residential | Loans | Commercial | and Other | ||||||||||||||||||||||
Pass | $ | 196,445 | $ | 14,565 | $ | 55,823 | $ | 84,372 | $ | 154,760 | $ | 29,737 | $ | 11,948 | ||||||||||||||
Special mention | 31,032 | 8,850 | 5,987 | 14,695 | 29,532 | 1,412 | 88 | |||||||||||||||||||||
Substandard | 12,158 | 475 | 3,347 | 6,794 | 10,616 | 1,436 | 106 | |||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | |||||||||||||||||||||
Totals | $ | 239,635 | $ | 23,890 | $ | 65,157 | $ | 105,861 | $ | 194,908 | $ | 32,585 | $ | 12,142 |
As of December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
Total | ||||||||||||||||||||||
Real Estate Loans | Real | |||||||||||||||||||||
(Dollars in Thousands) | Non- | Estate | Consumer | |||||||||||||||||||
Total | Construction | Residential | Residential | Loans | Commercial | and Other | ||||||||||||||||
Pass | $ | 185,172 | $ | 15,886 | $ | 54,685 | $ | 79,799 | $ | 150,370 | $ | 24,366 | $ | 10,436 | ||||||||
Special mention | 32,624 | 9,334 | 6,101 | 16,271 | 31,706 | 855 | 63 | |||||||||||||||
Substandard | 13,297 | 763 | 3,698 | 7,215 | 11,676 | 1,526 | 95 | |||||||||||||||
Doubtful | - | - | - | - | - | - | - | |||||||||||||||
Totals | $ | 231,093 | $ | 25,983 | $ | 64,484 | $ | 103,285 | $ | 193,752 | $ | 26,747 | $ | 10,594 |
Total | ||||||||||||||||||||||
Real Estate Loans | Real | |||||||||||||||||||||
(Dollars in Thousands) | Non- | Estate | Consumer | |||||||||||||||||||
Total | Construction | Residential | Residential | Loans | Commercial | and Other | ||||||||||||||||
Pass | $ | 200,723 | $ | 19,871 | $ | 54,280 | $ | 90,871 | $ | 165,022 | $ | 26,407 | $ | 9,294 | ||||||||
Special mention | 29,371 | 7,931 | 6,534 | 14,421 | 28,886 | 423 | 62 | |||||||||||||||
Substandard | 30,163 | 4,183 | 6,421 | 17,018 | 27,622 | 2,426 | 115 | |||||||||||||||
Doubtful | - | - | - | - | - | - | - | |||||||||||||||
Totals | $ | 260,257 | $ | 31,985 | $ | 67,235 | $ | 122,310 | $ | 221,530 | $ | 29,256 | $ | 9,471 |
Total | ||||||||||||||||||||||||||||
Real Estate Loans | Real | |||||||||||||||||||||||||||
(Dollars in Thousands) | Non- | Estate | Consumer | |||||||||||||||||||||||||
Total | Construction | Residential | Residential | Loans | Commercial | and Other | ||||||||||||||||||||||
Pass | $ | 193,839 | $ | 14,406 | $ | 56,227 | $ | 81,891 | $ | 152,524 | $ | 29,735 | $ | 11,580 | ||||||||||||||
Special mention | 27,926 | 9,085 | 5,904 | 11,588 | 26,577 | 1,271 | 78 | |||||||||||||||||||||
Substandard | 16,737 | 684 | 3,570 | 10,900 | 15,154 | 1,481 | 102 | |||||||||||||||||||||
Doubtful | - | - | - | - | - | - | - | |||||||||||||||||||||
Totals | $ | 238,502 | $ | 24,175 | $ | 65,701 | $ | 104,379 | $ | 194,255 | $ | 32,487 | $ | 11,760 |
The Company enters into financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other parties to the instrument is represented by the contractual notional amount of the instrument. Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments. Letters of credit are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as other lending facilities.
Collateral held for commitments to extend credit and standby letters of credit varies but may include accounts receivable, inventory, property, plant, equipment, and income-producing commercial properties.
The following table summarizes the Company’s off-balance sheet financial instruments as of September 30, 2013 and December 31, 2012 whose contract amounts represent credit risk:
September 30, | December 31, | ||||||
2013 | 2012 | ||||||
Commitments to extend credit | $ | 36,506,437 | $ | 28,919,003 | |||
Standby letters of credit | 83,000 | 8,000 |
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
Commitments to extend credit | $ | 35,508,578 | $ | 34,397,688 | ||||
Standby letters of credit | 75,000 | 8,000 |
Note 6 – Other Real Estate Owned
Transactions in other real estate owned (“OREO”) for the ninethree months ended September 30, 2013March 31, 2014 and year ended December 31, 20122013 are summarized below:
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
Beginning balance | $ | 8,932,634 | $ | 15,289,991 | ||||
Additions | 12,000 | 4,827,496 | ||||||
Sales | (1,708,519 | ) | (6,279,377 | ) | ||||
Write downs | - | (4,905,476 | ) | |||||
Ending balance | $ | 7,236,115 | $ | 8,932,634 |
-15- |
September 30, | December 31, | ||||||
2013 | 2012 | ||||||
Beginning balance | $ | 15,289,991 | $ | 22,135,921 | |||
Additions | 4,602,690 | 6,596,760 | |||||
Sales | (4,574,990) | (12,251,603) | |||||
Write downs | (1,403,712) | (1,191,087) | |||||
Ending balance | $ | 13,913,979 | $ | 15,289,991 |
The Company recognized a net gain of $112,594 and a net loss of $331,626 and $109,516$24,340 on the sale of other real estate ownedOREO for the ninethree months ended September 30,March 31, 2014 and 2013, and 2012, respectively.
OREO expense for the ninethree months ended September 30,March 31, 2014 and 2013 was $115,286 and 2012 was $2,738,692 and $1,766,182,$216,265, respectively, which includes gains and losses on sales.
Note 7 – Shareholders’ Equity Common Stock – Preferred Stock - The Series A Preferred Stock is a senior cumulative perpetual preferred stock that has a liquidation preference of $1,000 per share, pays cumulative dividends at a rate of 5% per year (approximately $767,000 annually) for the first five years and beginning May 15, 2014, at a rate of 9% per year (approximately $1,381,000 annually). The Series B Preferred Stock is a cumulative The Company must request prior approval from the Federal Reserve Bank of Richmond (the “Federal Reserve”) prior to As of March The Note 9 – Net Income (Loss) Per Common Share Net income (loss) available to common shareholders represents net income (loss) adjusted for preferred dividends including dividends declared, accretions of discounts and amortization of premiums on preferred stock issuances and cumulative dividends related to the current dividend period that have not been declared as of period end. All potential dilutive common The following is a summary of the net income (loss) per common share calculations for the three months ended March 31, 2014 and Note 10 - Equity Incentive Plan On January 19, 2006, the Company adopted the 2006 Equity Incentive Plan (the “Plan”), which provides for the granting of dividend equivalent rights options, performance unit awards, phantom shares, stock appreciation rights and stock awards, each of which are subject to such conditions based upon continued employment, passage of time or satisfaction of performance criteria or other criteria as permitted by the plan. The plan, as amended on September 17, 2010, allows the Company to award, subject to approval by the Board of Directors, up to 950,000 shares of stock, to officers, employees, and directors, consultants and service providers of the Company or its affiliates. Awards may be granted for a term of up to ten years from the effective date of grant. Under The Company can issue the restricted shares as of the grant date either by the issuance of share certificate(s) evidencing restricted shares or by documenting the issuance in uncertificated or book entry form on the Company's stock records. Except as provided by the Plan, the employee does not have the right to make or permit to exist any transfer or hypothecation of any restricted shares. When restricted shares vest, the employee must either pay the Company within two business days the amount of all tax withholding obligations imposed on the Company or make an election pursuant to Section 83(b) of the Internal Revenue Code to pay taxes at grant date. Restricted shares may be subject to one or more objective employment, performance or other forfeiture conditions established by the Plan Committee at the time of grant. The restricted shares will not vest unless the Company’s retained earnings at the end of the fiscal quarter preceding the third anniversary of the restricted share award date are greater than the award value of the restricted shares. Any shares of restricted stock that are forfeited will again become available for issuance under the Plan. An employee or director has the right to vote the shares of restricted stock after grant until they are The Company did not issue any shares of restricted stock, nor were there any forfeitures of restricted stock, during the first quarter of 2014. During the The Note 11 – Fair Value Measurements Generally accepted accounting principles (“GAAP”) provide a framework for measuring and disclosing fair value that requires disclosures about the fair value of assets and liabilities recognized in the balance sheet, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans). Fair value is defined as the exchange in price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of the lower of cost or market accounting or the writing down of individual assets. The following methods and assumptions were used to estimate the fair value of significant financial instruments: Fair Value Hierarchy The Company groups assets and liabilities 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 the fair value. These levels are: Assets Recorded at Fair Value on a Recurring Basis Following is a description of valuation methodologies used for assets and liabilities recorded at fair value. Securities Available-for-Sale -Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the counter markets and money market funds. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets. Loans- The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss 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 are considered impaired. Once a loan is identified as individually impaired, management measures impairment. The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At Mortgage Loans Held for Sale -The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification. Other Real Estate Owned - Foreclosed assets are adjusted to fair value upon transfer of the loans to The tables below present the balances of assets and liabilities measured at fair value on a recurring basis by level within the hierarchy at (1) Carried at the lower of cost or market. There were no liabilities measured at fair value on a recurring basis at Assets Recorded at Fair Value on a Nonrecurring Basis Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the assets and liabilities measured at fair value on a nonrecurring basis at For level 3 assets measured at fair value on a non-recurring basis as of There were no liabilities measured at fair value on a nonrecurring basis at March 31, 2014 and December 31, 2013. Disclosures about Fair Value of Financial Instruments The following describes the valuation methodologies used by the Company for estimating fair value of financial instruments not recorded at fair value in the balance sheet on a recurring or nonrecurring basis: Cash and Due from Banks and Interest-bearing Deposits with Other Banks- The carrying amount is a reasonable estimate of fair value. Time Deposits in other Banks- The carrying amount is a reasonable estimate of fair value. Securities Held-to-Maturity - The fair values of securities held-to-maturity are based on quoted market prices or dealer quotes. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities Loans Receivable– For certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk, fair values are based on the carrying amounts. The fair value of 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. Deposits- The fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities. Advances From Federal Home Loan Bank-The fair values of fixed rate borrowings are estimated using a discounted cash flow calculation that applies the Company’s current borrowing rate from the Federal Home Loan Bank. The carrying amounts of variable rate borrowings are reasonable estimates of fair value because they can be repriced frequently. Junior Subordinated Debentures - The carrying value of the junior subordinated debentures approximates their fair value since they were issued at a floating rate. Accrued Interest Receivable and Payable- The carrying value of these instruments is a reasonable estimate of fair value. Off-Balance Sheet Financial Instruments- Fair values of off-balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of Note 12 - Subsequent Events Subsequent Item 2. Management's Discussion and Analysis of Financial Condition and Results of The following discussion reviews our results of operations and assesses our financial condition as of and for the periods indicated. You should read the following discussion and analysis in conjunction with the Cautionary Note Regarding Forward-Looking Statements The statements contained in this report on Form 10-Q that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. We caution readers of this report that such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. Although we believe that our expectations of future performance are based on reasonable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that actual results will not differ materially from our expectations. These forward-looking statements involve risks and uncertainties and may not be realized due to a variety of factors, including, but not limited to the following: ·deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; Forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made to reflect the occurrence of unanticipated events. Overview The following discussion describes our results of operations for the Like most community bank holding companies, we derive the majority of our income from interest received on our loans and investments. Our primary source of funds for making these loans and investments is our deposits, on which we pay interest. Consequently, one of the key measures of our success is our amount of net interest income, or the difference between the income on our interest-earning assets, such as loans and investments, and the expense on our interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield we earn on these interest-earning assets and the rate we pay on our interest-bearing liabilities, which is called our net interest spread. Due to risks inherent in all loans, we maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. We maintain this allowance by charging a provision for loan losses against our operating earnings for each period. We have included a detailed discussion of this process, as well as several tables describing our allowance for loan losses. In addition to earning interest on our loans and investments, we earn income through fees and other charges to our customers. We have also included a discussion of the various components of this non-interest income, as well as our non-interest expense. The following discussion and analysis also identifies significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements. We encourage you to read this discussion and analysis in conjunction with our financial statements and the other statistical information included in our filings with the SEC. Critical Accounting Policies We have adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in the notes to the consolidated financial statements at December 31, We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for a description of our processes and methodology for determining our allowance for loan losses. Regulatory Matters Following an examination of In addition, on the basis of the same examination by the FDIC and the SC The Federal Reserve A policy statement published by the Board of Governors of the Federal Reserve System indicates that, as a general matter, it believes the board of directors of a bank holding company should eliminate, defer, or significantly reduce the company’s dividends if: The policy statement notes that a failure to do so could result in a supervisory finding that the organization is operating in an unsafe and unsound manner. We believe that the criteria noted above will be heavily weighted by the Federal Reserve in evaluating any future request by the Company to pay dividends on its Series A Shares and the Series B Shares and interest on its outstanding trust preferred securities. Accordingly, we do not anticipate submitting further approval requests until such time as each of the stated criteria has been met or there are other compelling reasons to believe such a request, if submitted, would be approved. In response to these regulatory matters, the Bank and the Company have taken various actions designed to improve our lending procedures, nonperforming assets, liquidity and capital position and other conditions related to our operations, which are more fully described in turn as part of this discussion. We believe that the successful completion of these initiatives, and the continued improvement of the local economy of the communities we serve, will result in full compliance with our regulatory obligations with the FDIC, the SC Effect of Economic Trends Economic conditions, competition and federal monetary and fiscal policies also affect financial institutions. Lending activities are also influenced by regional and local economic factors, such as housing supply and demand, competition among lenders, customer preferences and levels of personal income and savings in our primary market area. Results of Operations Our results of operations for the first quarter of 2014 were $385,745 higher than results achieved in the first quarter of 2013. Specifically, for the first quarter 2014, we realized a net income available to common shareholders of $106,018, or a basic and diluted income per share of $0.02. For the Our 2014 operating results Income Statement Review Net Interest Income The largest component of our net income is net interest income, which is the difference between the income earned on assets and interest paid on deposits and on the borrowings used to support such assets. Net interest income is determined by the yields earned on our interest-earning assets and the rates paid on interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of Net For the Our net interest margin and net interest spread were Because loans often provide a higher yield than other types of earning assets, one of our goals is to maintain our loan portfolio as the largest component of total earning assets. Loans comprised Available-for-sale and held-to-maturity investment securities averaged Our average interest-bearing deposits were The average balance of our other interest-bearing liabilities was The following table sets forth, for the Net interest income can be analyzed in terms of the impact of changing interest rates and changing volume. The following tables set forth the effect which the varying levels of interest-earning assets and interest-bearing liabilities and the applicable rates have had on changes in net interest income for the periods presented. Provision and Allowance for Loan Losses We have developed policies and procedures for evaluating the overall quality of our credit portfolio and the timely identification of potential problem credits. On a quarterly basis, our Board of Directors reviews and approves the appropriate level for the allowance for loan losses based upon management’s recommendations, the results of our internal monitoring and reporting system, and an analysis of economic conditions in our market. The objective of management has been to fund the allowance for loan losses at a level greater than or equal to our internal risk measurement system for loan risk. Additions to the allowance for loan losses, which are expensed as the provision for loan losses on our statement of operations, are made periodically to maintain the allowance at an appropriate level based on management’s analysis of the potential risk in the loan portfolio. Loan losses and recoveries are charged or credited directly to the allowance. The amount of the provision is a function of the level of loans outstanding, the level of nonperforming loans, historical loan loss experience, the amount of loan losses actually charged against the reserve during a given period, and current and anticipated economic conditions. The allowance represents an amount which management believes will be adequate to absorb inherent losses on existing loans that may become uncollectible. Our judgment as to the adequacy of the allowance for loan losses is based on a number of assumptions about future events, which we believe to be reasonable, but which may or may not prove to be accurate. Our determination of the allowance for loan losses is based on regular evaluations of the collectability of loans, including consideration of factors such as the balance of impaired loans, the quality, mix, and size of our overall loan portfolio, economic conditions that may affect the borrower’s ability to repay, the amount and quality of collateral securing the loans, our historical loan loss experience, and a review of specific problem loans. We also consider subjective issues such as changes in our lending policies and procedures, changes in the local and national economy, changes in volume or type of credits, changes in the volume or severity of problem loans, quality of loan review and board of director oversight, concentrations of credit, and peer group comparisons. More specifically, in determining our allowance for loan losses, we regularly review loans for specific and impaired reserves based on the appropriate impairment assessment methodology. Pooled reserves are determined using historical loss trends measured over a four-quarter average applied to risk rated loans grouped by Federal Financial Institutions Examination Council (“FFIEC”) call code and segmented by impairment status. The pooled reserves are calculated by applying the appropriate historical loss ratio to the loan categories. Impaired loans greater than a minimum threshold established by management are excluded from this analysis. The sum of all such amounts determines our pooled reserves. As we mention above, we track our portfolio and analyze loans grouped by FFIEC call code categories. The first step in this process is to risk grade each loan in the portfolio based on one common set of parameters. These parameters include items like debt-to-worth ratio, liquidity of the borrower, net worth, experience in a particular field and other factors such as underwriting exceptions. Weight is also given to the relative strength of any guarantors on the loan. After risk grading each loan, we then segment the portfolio by FFIEC call code groupings, separating out substandard and impaired loans. The remaining loans are grouped into “performing loan pools.” The loss history for each performing loan pool is measured over a specific period of time to create a loss factor. The relevant look back period is determined by management, regulatory guidance, and current market events. The loss factor is then applied to the pool balance and the reserve per pool calculated. Loans deemed to be substandard but not impaired are segregated and a loss factor is applied to this pool as well. Loans are segmented based upon sizes as smaller impaired loans are pooled and a loss factor applied, while larger impaired loans are assessed individually using the appropriate impairment measuring methodology. Finally, five qualitative factors are utilized to assess economic and other trends not currently reflected in the loss history. These factors include concentration of credit across the portfolio, the experience level of management and staff, effects of changes in risk selection and underwriting practice, industry conditions and the current economic and business environment. A quantitative value is assigned to each of the five factors, which is then applied to the performing loan pools. Negative trends in the loan portfolio increase the quantitative values assigned to each of the qualitative factors and, therefore, increase the reserve. For example, as general economic and business conditions decline, this qualitative factor’s quantitative value will increase, which will increase the reserve requirement for this factor. Similarly, positive trends in the loan portfolio, such as improvement in general economic and business conditions, will decrease the quantitative value assigned to this qualitative factor, thereby decreasing the reserve requirement for this factor. These factors are reviewed and updated by our management committee on a regular basis to arrive at a consensus for our qualitative adjustments. Periodically, we adjust the amount of the allowance based on changing circumstances. We recognize loan losses to the allowance and add subsequent recoveries back to the allowance for loan losses. In addition, on a quarterly basis, we informally compare our allowance for loan losses to various peer institutions; however, we recognize that allowances will vary, as financial institutions are unique in the make-up of their loan portfolios and customers, which necessarily creates different risk profiles and risk weighting of qualitative factors for the institutions. We would only consider further adjustments to our allowance for loan losses based on this peer review if our allowance was significantly different from our peer group. To date, we have not made any such adjustment. There can be no assurance that charge-offs of loans in future periods will not exceed the allowance for loan losses as estimated at any point in time or that provisions for loan losses will not be significant to a particular accounting period, especially considering the overall economic weakness in many of our market areas due to a slow recovery from the recent downturn. Various regulatory agencies review our allowance for loan losses through their periodic examinations, and they may require additions to the allowance for loan losses based on their judgment and assumptions about the economic condition of our market and the loan portfolio at the time of their examinations. Our losses will undoubtedly vary from our estimates, and it is possible that charge-offs in future periods will exceed the allowance for loan losses as estimated at any point in time. As of For the first quarters of 2014 and 2013, we did not record a provision for loan We believe the allowance for loan losses at Noninterest Income For the Noninterest For the The expense for salaries and benefits was Furniture and equipment expense for the Other operating expenses for Income Taxes The Balance Sheet Review General At At December 31, 2013, we had total assets of Investment Securities The investment securities portfolio, which is also a component of our total earning assets, consists of securities available-for-sale, securities held-to-maturity and nonmarketable equity securities. Securities Securities Held-to-Maturity -At March 31, 2014 and December 31, 2013, securities held-to-maturity were $35,643,920 and $36,951,934, respectively, a decrease of $1,308,014, or 3.54%. These securities are carried at amortized cost, including the net unrealized gain in available-for-sale-securities that were reclassified as held-to-maturity on December 31, 2013. The net unrealized gain is being amortized to other comprehensive income over the life of the underlying securities. The net unrealized gain included in the amortized cost at March 31, 2014 and December 31, 2013, was $224,496 and $237,797, respectively. We intend to hold these securities to maturity and have the ability to do so. The amortized costs and the estimated fair value of our securities available-for-sale and held-to-maturities at Available-for-Sale Held-to-Maturity At Distribution and Yields Contractual maturities and yields on our securities available-for-sale Available-for-Sale (1) Held-to-Maturity (2) Nonmarketable Equity Securities–Nonmarketable equity securities are recorded at their original cost since no ready market exists for these securities. At Loans Loans, including loans held for sale, are the largest category of earning assets and typically provide higher yields than the other types of earning assets. Associated with the higher loan yields are the inherent credit and liquidity risks, The following table summarizes the composition of our loan portfolio In the context of this discussion, a “real estate mortgage loan” is defined as any loan, other than a loan for construction purposes, secured by real estate, regardless of the purpose of the loan. It is common practice for financial institutions in our market area to obtain a mortgage on the The largest component of our loan portfolio is real estate mortgage loans. At Residential mortgage loans totaled Nonresidential mortgage loans, which include commercial loans and other loans secured by multi-family properties and farmland, totaled Real estate construction loans were Currently, the demand for Commercial and industrial loans Our loan portfolio is also comprised of consumer and other loans that totaled Our loan portfolio reflects the diversity of our markets. The economies of our markets contain elements of medium and light manufacturing, higher education, regional health care, and distribution facilities. We expect our local economy to remain stable; however, due to the slow economic recovery in some of our markets, we do not expect any material growth in our loan portfolio in the near future. We do not engage in foreign lending. Maturities and Sensitivity of Loans to Changes in Interest Rates The information in the following tables is based on the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below because borrowers have the right to prepay obligations with or without prepayment penalties. The following table summarizes Allowance for Loan Losses The following table summarizes the allocation of the allowance for loan losses at Activity in the Allowance for Loan Losses The following table summarizes the activity related to our allowance for loan losses for the Risk Elements in the Loan Portfolio The following table shows the nonperforming assets, Loans over 90 days past due and still accruing– Nonaccruing loans – At Restructured loans - In situations where, for economic or legal reasons related to a borrower’s financial difficulties, a concession to the borrower is granted that we would not otherwise consider, the related loan is classified as a At Impaired loans - At During the The downturn in the real estate market that began in 2008 and continued into On a quarterly basis, we analyze each loan that is classified as impaired during the period to determine the potential for possible loan losses. This analysis is focused upon determining the then current estimated value of the collateral, local market condition, and estimated costs to foreclose, repair and resell the property. The net realizable value of the property is then computed and compared to the loan balance to determine the appropriate amount of specific reserve for each loan. Other nonperforming assets As of From The write downs noted in the previous paragraph were primarily the result of an extensive marketing analysis of our OREO properties OREO expense for the Deposits and Other Interest-Bearing Liabilities Average interest-bearing liabilities decreased Deposits - For the Average interest-bearing deposits decreased The average balance of non-interest bearing deposits increased The following table shows the average balance amounts and the average rates paid on deposits held by us for the Core deposits, which exclude time deposits of $100,000 or more, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were Included in time deposits of $100,000 and over, at Deposits, and particularly core deposits, have been our primary source of funding and have enabled us to meet successfully both our short-term and long-term liquidity needs. We anticipate that such deposits will continue to be our primary source of funding in the future. Our loan-to-deposit ratio was The maturity distribution of our time deposits of $100,000 or more at Approximately Other Borrowings - Securities sold under agreements to repurchase mature on a one to seven day basis. These agreements are secured by U.S. government agency securities. Advances from the Federal Home Loan Bank mature at different periods, as discussed in the footnotes to the financial statements, and are secured by our one to four family residential mortgage loans and our investment in the Federal Home Loan Bank stock. The junior subordinated debentures mature on November 23, 2035 and have an interest rate of LIBOR plus 1.83%. Capital Resources Total shareholders' equity at The following table shows the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), and equity to assets ratio (average equity divided by average total assets) for the The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Currently, the Bank MOU requires that the Bank maintain a Tier 1 leverage ratio of 8%, and our other regulatory capital ratios at such levels so as to be considered well capitalized for regulatory purposes. We continue to be in full compliance with this requirement of the Bank MOU. Additional discussion of the Bank MOU is included above as part of “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Regulatory Matters.” Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital of the Company consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. The Company’s Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 capital and 8% for total risk-based capital; under the provisions of the Bank MOU the Bank will be required to maintain a Tier 1 leverage ratio of 8% and a total risk-based capital ratio of 10%. However, as the Company has less than $500 million in assets, its activities and regulatory capital structure are de-emphasized pursuant to the Federal Reserve's Small Bank Holding Company Policy Statement, with all significant business activities attributed to the Bank by the Company's regulators. The Company and the Bank are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio. Only the strongest banks are allowed to maintain capital at the minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the minimum. The Company and the Bank were each considered to be “well capitalized” for regulatory purposes at The following table shows the regulatory capital ratios for the Company and the Bank at In July 2013, the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency each approved final rules to implement the Basel III regulatory capital reforms, among other changes required by the Dodd-Frank Act. The rules will apply to all national and state banks, such as the Bank, and savings associations and most bank holding companies and savings and loan holding companies, which we collectively refer to herein as “covered banking organizations.” Bank holding companies with less than $500 million in total consolidated assets, such as the Company, are not subject to the final rules, nor are savings and loan holding companies substantially engaged in commercial activities or insurance underwriting. The framework requires covered banking organizations to hold more and higher quality capital, which acts as a financial cushion to absorb losses, taking into account the impact of risk. The approved rules include a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% as well as a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and include a minimum leverage ratio of 4% for all banking institutions. In terms of quality of capital, the final rules emphasize common equity Tier 1 capital and implement strict eligibility criteria for regulatory capital instruments. The final rules also change the methodology for calculating risk-weighted assets to enhance risk sensitivity. The requirements in the rules begin to phase in on January 1, 2015 for covered banking organizations such as the Bank. The requirements in the rules will be fully phased in by January 1, 2019. The ultimate impact of the new capital standards on the Bank is currently being reviewed. Effect of Inflation and Changing Prices The effect of relative purchasing power over time due to inflation has not been taken into account in our consolidated financial statements. Rather, our financial statements have been prepared on Unlike most industrial companies, Off-Balance Sheet Risk Through our operations, we have made contractual commitments to extend credit in the ordinary course of The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at Market Risk Market risk is the risk of loss from adverse changes in market prices and rates and We actively monitor and manage our interest rate risk exposure principally by measuring our interest sensitivity "gap," which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available for sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in this same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates. We generally would benefit from increasing market rates of interest when we have an asset-sensitive gap position and generally would benefit from decreasing market rates of interest when we are liability-sensitive. Liquidity and Interest Rate Sensitivity Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and the ability to raise additional funds by increasing liabilities. Liquidity management involves monitoring our sources and use of funds in order to meet our day-to-day cash flow requirements while maximizing profits. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of securities in our investment portfolio is fairly predictable and is subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. At Our ability to maintain and expand our deposit base and borrowing capabilities serves as our primary source of liquidity. For the near future, it is our intention to reduce the use of wholesale funding to fund loan demand, instead relying on lower-cost funding sources, particularly core deposits. We plan to meet our future cash needs through the liquidation of temporary investments, the generation of deposits, and from additional borrowings. In addition, we will receive cash upon the maturity and sale of loans and the maturity of investment securities. At The Company is largely dependent upon dividends from the Bank as a source of cash. The Bank MOU restricts the ability of the Bank to declare and pay dividends to the Company. The Company MOU requires the Company to obtain approval of the Federal Reserve Asset/liability management is the process by which we monitor and control the mix and maturities of our assets and liabilities. The essential purposes of Interest Sensitivity Analysis The following table sets forth information regarding our rate sensitivity as of The following table sets forth our interest rate sensitivity March 31, 2014. See "Market Risk" and "Liquidity and Interest Rate Sensitivity" in Item 2, Item 4. Controls and As of the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer have evaluated the effectiveness of our “disclosure controls and procedures” (“Disclosure Controls”). Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our management, including the CEO and CFO, does not expect that our Disclosure Controls will prevent all Based upon their controls evaluation, our CEO and CFO have concluded that our Disclosure Controls are effective at a reasonable assurance level. There have been no changes in our internal controls over financial reporting during our There are no material, pending legal proceedings to which the Company or its subsidiary is a party or of which any of their property is the subject. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, __________ SIGNATURE In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. –The following is a summary of the changes in common shares outstanding for the ninethree months ended September 30, 2013March 31, 2014 and 2012.2013. Nine Months Ended September 30, 2013 2012 Common shares outstanding at beginning of the period 4,094,861 4,084,400 Conversion of Series C preferred stock to common stock 470,829 - Issuance of common stock 550 770 Issuance of non-vested restricted shares 1,245 13,627 Forfeiture of restricted shares (835) (2,023) Common shares outstanding at end of the period 4,566,650 4,096,774 Three Months Ended March 31, 2014 2013 Common shares outstanding at beginning of the period 4,568,695 4,094,861 Issuance of common stock 1,200 - Issuance of non-vested restricted shares - 1,245 Forfeiture of restricted shares - (835 ) Common shares outstanding at end of the period 4,569,895 4,095,271 - BeginningOn March 6, 2009, the Company completed a transaction with the payment date of December 1, 2011,United States Treasury (the “Treasury”) under the Troubled Asset Relief Program Capital Purchase Program, whereby the Company deferred dividend payments onsold 15,349 shares of its Fixed RateSeries A Cumulative Perpetual Preferred Stock Series A (the “Series A Shares”), and to the Treasury. In addition, the Treasury received a warrant to purchase 767 shares of the Company’s Series B Cumulative Perpetual Preferred Stock (the “Series B Shares”), which was immediately exercised for a nominal exercise price. The preferred shares issued to the Treasury qualify as Tier 1 capital for regulatory purposes. On March 1, 2013, the Treasury auctioned the subject securities in a private transaction with unaffiliated third-party investors.AlthoughDividends are payable quarterly. At any time, the Company may, defer dividend payments,at its option and with regulatory approval, redeem the dividendSeries A Preferred Stock at par value plus accrued and unpaid dividends. The Series A Preferred Stock is generally non-voting.dividendperpetual preferred stock that has the same rights, preferences, privileges, voting rights and failureother terms as the Series A Preferred Stock, except that dividends will be paid at the rate of 9% per year and may not be redeemed until all the Series A Preferred Stock has been redeemed. The Series A and Series B Preferred Shares will receive preferential treatment in the event of liquidation, dissolution or winding up of the Company.paydeclaring or paying dividends on its common stock or preferred stock, or making scheduled interest payments on its trust-preferred securities. Such approval was not granted by the Federal Reserve for six dividend periods triggered board appointment rightspayment of the Company’s dividends and interest payments due and payable in the ten consecutive quarters ended March 31, 2014. Additionally, such approval was not granted for payments due in the holdersecond quarter of these shares.2014. Since the Company has not paid the dividend on its Series A and Series B sharesShares for more than six consecutive quarterly periods, the holders of the Company’s Series A and Series Bthese shares currently have the right to appoint up to two individuals to the Company’s board of directors. To date, the right to appoint directors has not been exercised by the holders.On1, 2013, the United States Department of the Treasury (the “Treasury”), the initial holder of all15,349 shares of the Series A Shares, and all 767 shares of the Series B Shares, announced that it had auctioned the securities31, 2014, dividends in a private transaction with unaffiliated third-party investors. The Company received no proceeds from the transaction; however, it incurred $169,291 of auction-related expenses which were charged against the initial proceeds from the sale of the preferred stock reflected in the accounts for each series of stock. The clearing prices for the Series A Shares and the Series B Shares were $679.61 per share and $822.61, respectively. Both series have a liquidation preference of $1,000 per share. The closing of the private sale occurred on March 11, 2013.-16-The sale of the securities had no effect on their terms, including the Company’s obligation to satisfy accrued and unpaid dividends (aggregating approximately $1.7 million) prior to payment of any dividend or other distribution to holders of pari pasu or junior stock and its common stock, and an increase in the dividend ratearrears on the Series A Shares from 5% to 9% on May 15, 2014. Further, the sale of the securities by the Treasury is not expected to have any effect on the Company’s capital, financial condition or results of operations. However, the Company generally will not be subject to certain executive compensation and corporate governance requirements to which it was subject while Treasury held the securities.On July 31, 2013(the “Mandatory Conversion Date”),2,293Series B shares of the Company’s totaled $2,091,200.7% Cumulative Mandatorily Convertible Series C Preferred Stock (the “Series C Shares”) converted automatically to 470,829 shares of common stock pursuant to the terms of the Company’s articles of incorporation, as amended to create the Series C Shares. On the Mandatory Conversion Date, eachSeries C Share was automatically converted into the number of shares of common stock obtained by dividing the initial purchase price per share of $1,000, plus the amount of accrued but unpaid dividends per share, by $5.563, which was the Company‘s tangible common equity per share as of June 30, 2013. A de minimis amount of cash was also paid to each holder of Series C Shares to avoid the issuance of fractional shares as result of the conversion. income tax benefit related to the Company's pretax loss for the three and nine months ended September 30, 2013 was offset by the increase of an equal amount in the valuation allowance related to its deferred tax assets. Likewise, the income tax expense related to the Company’s pretax income for the threefirst quarters of 2014 and nine months ended September 30, 20122013 was offset by a reversal of an equal amount of the Company’s valuation allowance related to its deferred tax assets. Therefore, no income tax provision was recorded for the threefirst quarters of 2014 and nine months ended September 30, 2013 and 2012 respectively.shareshares equivalents were deemed to be anti-dilutive for the three and nine monthsquarter ended September 30,March 31, 2013, due to the net loss available to common shareholders.-16- nine months ended September 30, 2013 and 2012. Three Months Ended Nine Months Ended September 30, September 30, 2013 2012 2013 2012 Net income (loss) available to common shareholders Net income (loss) $ (2,469,901) $ 676,410 $ (2,651,556) $ 1,134,728 Preferred stock dividends 254,449 249,248 752,944 747,743 Deemed dividends on preferred stock resulting from
net accretion of discount and amortization of premium 44,876 44,876 133,164 133,652 Net income (loss) available to common shareholders $ (2,769,226) $ 382,286 $ (3,537,664) $ 253,333 Basic net income (loss) per common share: Net income (loss) available to common shareholders $ (2,769,226) $ 382,286 $ (3,537,664) $ 253,333 Average common shares outstanding - basic 4,413,119 4,096,774 4,202,251 4,093,148 Basic net income (loss) per share $ (0.63) $ 0.09 $ (0.84) $ 0.06 Diluted net income (loss) per common share: Net income (loss) available to common shareholders $ (2,769,226) $ 382,286 $ (3,537,664) $ 253,333 Average common shares outstanding – basic 4,413,119 4,096,774 4,202,251 4,093,148 Dilutive potential common shares - 184,325 - 197,150 Average common shares outstanding - diluted 4,413,119 4,281,099 4,202,251 4,290,298 Diluted income (loss) per share $ (0.63) $ 0.09 $ (0.84) $ 0.06 -17- 2014 2013 Net income (loss) available to common shareholders Net income $ 346,356 $ 13,421 Preferred stock dividends 209,120 249,248 Deemed dividends on preferred stock resulting from net accretion of discount and amortization of premium 31,218 43,900 Net income (loss) available to common shareholders $ 106,018 $ (279,727 ) Basic net income (loss) per common share: Net income (loss) available to common shareholders $ 106,018 $ (279,727 ) Average common shares outstanding – basic 4,569,122 4,094,866 Basic income (loss) per common share $ 0.02 $ (0.07 ) Diluted net income (loss) per common share: Net income (loss) available to common shareholders $ 106,018 $ (279,727 ) Average common shares outstanding – basic 4,569,122 4,094,866 Dilutive potential common shares 80,380 - Average common shares outstanding – diluted 4,649,502 4,094,866 Diluted net income (loss) per common share $ 0.02 $ (0.07 ) thisthe Plan, our Board of Directors has sole discretion as to the exercise date of any awards granted. The per-share exercise price of incentive stock option awards may not be less than the market value of a share of common stock on the date the award is granted. Any awards that expire unexercised or are canceled become available for re-issuance.forfeited or vested.forfeited. Compensation cost for restricted stock is equal to the market value of the shares at the date of the award and is amortized to compensation expense over the vesting period. Dividends, if any, will be paid on awarded but unvested stock.ninethree months ended September 30,March 31, 2013 and 2012 the Company issued 1,245 and 13,627 shares respectively, of restricted stock underpursuant to the Plan. The shares issued in 2013 and 2012 cliff vest in three years and are fully vested in 2016, and 2015, respectively, subject to meeting the performance criteria of the Plan. The weighted-average fair value per share of restricted stock issued during the ninethree months ended September 30,March 31, 2013 and 2012 was $1.76 and $1.05 per share, respectively.$1.76. Compensation cost associated with the issuanceissuances was $2,191 for 2013 and 2012 was $2,191 and $14,308, respectively, to be amortized over three years.the quarter ended March 31, 2013. During the first nine monthsquarter of 2013, and 2012, 835 and 2,023 shares respectively, were forfeited, having a weighted average price of $3.50$3.50. Shares vested in the first quarters of 2014 and $3.18,2013 were 14,827 and 30,229, respectively. Deferred compensation expense of $82,657 and $152,101, relating to restricted stock, wasCompensation cost amortized to income duringexpense for the nine months ended September 30,first quarters of 2014 and 2013 was $10,364 and 2012,$39,039, respectively.-17- 2006 Equity Incentive Plan also allows for the issuance of Stock Appreciation Rights ("SARs"). The SARs entitle the participant to receive the excess of (1) the market value of a specified or determinable number of shares of the stock at the exercise date over the fair value at grant date or (2) a specified or determinable price which may not in any event be less than the fair market value of the stock at the time of the award. Upon exercise, the Company can elect to settle the awards using either Company stock or cash. The shares start vesting after five years and vest at 20%20% per year until fully vested. Compensation cost for SARs is amortized to compensation expense over the vesting period.During the first quarter of 2012, the Board of Directors cancelled all 84,334 SARs that were outstanding at December 31, 2011. Holders of these SARs were given cash and restricted stock totaling $37,500 in exchange for the cancellation. The cancellation resulted in the removal of all accrued SARs expense and related unrecognized compensation costs. For the year ended December 31, 2012, net income of $337,153 was recognized as a result of the cancellation. No SARs were issued during 2012 or during the first nine monthsquarters of 2014 and 2013.-18-Level 1 -Valuation is based upon quoted prices for identical instruments traded in active markets.Level 2 -Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.Level 3 -Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.Level 1- Valuation is based upon quoted prices for identical instruments traded in active markets. Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques. September 30, 2013March 31, 2014 and December 31, 2012, substantially all2013, a significant portion of the impaired loans were evaluated based upon the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.-18- -19-other real estate owned.OREO. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charges to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.September 30, 2013March 31, 2014 and December 31, 2012. Total Level 1 Level 2 Level 3 September 30, 2013 Available-for-sale securities: U.S. Government-sponsored agencies $ 7,144,732 $ - $ 7,144,732 $ - Municipals 3,159,965 - 3,159,965 - Corporate bonds 2,802,780 - 2,802,780 - Mortgage-backed securities 38,106,236 - 38,106,236 - Equity security 30,000 - 30,000 - 51,243,713 - 51,243,713 - Mortgage loans held for sale (1) 825,704 - 825,704 - $ 52,069,417 $ - $ 52,069,417 $ - Total Level 1 Level 2 Level 3 March 31, 2014 Available-for-sale securities: Mortgage-backed securities $ 8,472,085 $ - $ 8,472,085 $ - Corporate bonds 2,751,329 - 2,751,329 - Equity security 30,000 - 30,000 - 11,253,414 - 11,253,414 - Mortgage loans held for sale (1) 937,278 - 937,278 - $ 12,190,692 $ - $ 12,190,692 $ - December 31, 2013 Available-for-sale securities: Mortgage-backed securities $ 9,318,633 $ - $ 9,318,633 $ - Corporate bonds 2,796,210 - 2,796,210 - Equity security 30,000 - 30,000 - 12,144,843 - 12,144,843 - Mortgage loans held for sale (1) 2,248,252 - 2,248,252 - $ 14,393,095 $ - $ 14,393,095 $ - Total Level 1 Level 2 Level 3 December 31, 2012 Available-for-sale securities: U.S. Government-sponsored agencies $ 8,109,028 $ - $ 8,109,028 $ - Mortgage-backed securities 51,956,484 - 51,956,484 - Equity security 5,500 - 5,500 - 60,071,012 - 60,071,012 - Mortgage loans held for sale (1) 5,621,860 - 5,621,860 - $ 65,692,872 $ - $ 65,692,872 $ - (1) Carried at the lower of cost or market.September 30, 2013March 31, 2014 and December 31, 2012.September 30, 2013March 31, 2014 and December 31, 2012,2013, aggregated by level in the fair value hierarchy within which those measurements fall. Total Level 1 Level 2 Level 3 March 31, 2014 Collateral-dependent impaired loans receivable $ 10,392,155 $ - $ - $ 10,392,155 Other real estate owned 7,236,115 - - 7,236,115 Total assets at fair value $ 17,628,270 $ - $ - $ 17,628,270 Total Level 1 Level 2 Level 3 September 30, 2013 Collateral-dependent impaired loans receivable $ 11,977,786 $ - $ - $ 11,977,786 Other real estate owned 13,913,979 - - 13,913,979 Total assets at fair value $ 25,891,765 $ - $ - $ 25,891,765 Total Level 1 Level 2 Level 3 December 31, 2012 Collateral-dependent impaired loans receivable $ 18,951,232 $ - $ - $ 18,951,232 Other real estate owned 15,289,991 - - 15,289,991 Total assets at fair value $ 34,241,223 $ - $ - $ 34,241,223 There were no liabilities measured at fair value on a nonrecurring basis at September 30, 2013 and December 31, 2012.-19- -20- Total Level 1 Level 2 Level 3 December 31, 2013 Collateral-dependent impaired loans receivable $ 13,359,438 $ - $ - $ 13,359,438 Other real estate owned 8,932,634 - - 8,932,634 Total assets at fair value $ 22,292,072 $ - $ - $ 22,292,072 September 30, 2013March 31, 2014 and December 31, 2012,2013, the significant unobservable inputs in the fair value measurements were as follows: General Valuation Technique Significant Unobservable Inputs Range Collateral-dependant
impaired loans receivable Appraised Value Collateral discounts 0-10%0-10% Other real estate owned Appraised Value Collateral discounts and
estimated costs to sell 0-10%0-10% Nonmarketable Equity Securities- The carrying amount of nonmarketable equity securities is a reasonable estimate of fair value since no ready market exists for these securities.Loans-20- September 30, 2013March 31, 2014 and December 31, 2012.2013. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.-21- Fair Value Measurements Quoted Prices in Active Markets for Identical Other Significant Assets or Observable Unobservable Carrying Fair Liabilities Inputs Inputs Amount Value (Level 1) (Level 2) (Level 3) September 30, 2013 Financial Assets: Loans receivable $ 231,093,043 $ 233,541,000 $ - $ - $ 233,541,000 Financial Liabilities: Certificates of deposit $ 93,185,715 $ 93,783,000 $ - $ 93,783,000 $ - Advances from Federal Home Loan Bank 11,000,000 11,033,000 - 11,033,000 - December 31, 2012 Financial Assets: Loans receivable $ 260,257,334 $ 258,758,000 $ - $ - $ 258,758,000 Financial Liabilities: Certificates of deposit $ 144,690,932 $ 146,539,000 $ - $ 146,539,000 $ - Advances from Federal Home Loan Bank 11,000,000 11,077,000 - 11,077,000 - Fair Value Measurements Quoted Prices in Active Markets for Identical Other Significant Assets or Observable Unobservable Carrying Fair Liabilities Inputs Inputs Amount Value (Level 1) (Level 2) (Level 3) March 31, 2014 Financial Assets: Securities held-to-maturity $ 35,643,920 $ 35,933,179 $ - $ 35,933,179 $ - Loans receivable 239,634,692 241,656,000 - - 241,656,000 Financial Liabilities: Certificates of deposit $ 80,788,171 $ 81,138,000 $ - $ 81,138,000 $ - Advances from Federal Home Loan Bank 17,000,000 17,009,000 - 17,009,000 - December 31, 2013 Securities held-to-maturity $ 36,951,934 $ 36,951,934 $ - $ 36,951,934 $ - Loans receivable 238,502,131 240,472,000 - - 240,472,000 Financial Liabilities: Certificates of deposit $ 84,545,046 $ 85,081,000 $ - $ 85,081,000 $ - Advances from Federal Home Loan Bank 23,000,000 23,010,000 - 23,010,000 - events areeventsare events or transactions that occur after the balance sheet date but before 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. Unrecognized 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 issued and no subsequent events have occurred that require accrual or disclosure.-21- -22-Operations.Operationaccompanying consolidated financial statements. The commentary should be read in conjunction with the discussion of forward-looking statements theand unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2014 and 2013 included elsewhere in this report and the related notes andaudited consolidated financial statements included our Annual Report on Form 10-K for the other statistical information included in this report.⋅deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses;⋅·changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; ⋅·the failure of assumptions underlying the establishment of reserves for possible loan losses; ⋅·changes in political and economic conditions, including the political and economic effects of the current economic downturn and other major developments, including the ongoing war on terrorism, continued tensions in the Middle East, and the ongoing economic challenges facing the European Union; ⋅·changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts its operations, including, without limitation, reduced rates of business formation and growth, commercial and residential real estate development, and real estate prices; ⋅·the Company’s ability to comply with any requirements imposed on it or the Bank by their respective regulators, and the potential negative consequences that may result; ⋅·the impacts of renewed regulatory scrutiny on consumer protection and compliance led by the newly-created Consumer Finance Protection Bureau;⋅·fluctuations in markets for equity, fixed-income, commercial paper and other securities, which could affect availability, market liquidity levels, and pricing; ⋅·governmental monetary and fiscal policies, including the undetermined effects of the Federal Reserve’s “Quantitative Easing” program, as well as other legislative and regulatory changes; ⋅·changes in capital standards and asset risk-weighting included in promulgated rules to implement the so-called “Basel III” accords; ⋅·the risks of changes in interest rates or an unprecedented period of record-low interest rates on the level and composition of deposits, loan demand and the values of loan collateral, securities and interest sensitive assets and liabilities; and ⋅·the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in our market area and elsewhere, including institutions operating regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone and the Internet. -23--22- three and nine monthsquarter ended September 30, 2013March 31, 2014 as compared to the three and nine monthsquarter ended September 30, 2012March 31, 2013 and also analyzes our financial condition as of September 30, 2013March 31, 2014 as compared to December 31, 2012.20122013 as filed onin our annual reportAnnual Report on Form 10-K. Certain accounting policies involve significant judgments and assumptions we have made, which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on the historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of our judgments and assumptions, actual results could differ from these judgments and estimates which could have a major impact on our carrying values of assets and liabilities and our results of operations.Recent DevelopmentsDuring the third quarter of 2013, the Company executed a sale of adversely classified loans that had a book value of $3,197,096 to a third party buyer for $2,297,275 in cash consideration (the “Loan Sale”). As a result of the loan sale, the Company incurred a charge off of $899,821, which reflects the reduced value of the loans as represented by the sales price, versus the value of the loans as recorded on the Company’s books. The loans included in this sale were risk-rated substandard with no short-term resolutions available. Additional factors reviewed in the decision to sell these loans included the probability of loss, the amount of management time required on each loan, legal collection processes, as well as deferred maintenance cost associated with the repair of the underlying collateral and the marketing timeframe for the properties.-24-We continue to review opportunities to reduce the level of classified assets and to reduce exposure to higher-risk assets; as such, we may conduct further loan sales in the future.Additional information relating to the terms and conditions of the Series C Shares, including provisions relating to the Conversion, can be found in the Company’s Current Report on Form 8-K, filed with the U.S. Securities and Exchange Commission on May 29, 2010.First Reliancethe Bank (“the Bank”) by the Federal Deposit Insurance Corporation (the “FDIC”)FDIC during the first quarter of 2010, the Bank’sBank's Board of Directors agreed to enter into a Memorandum of Understanding (the “Bank MOU”"Bank MOU") with the FDIC and the South Carolina CommissionerBoard of BanksFinancial Institutions (the “SC State Board”) that became effective August 19, 2010. Among other things, the Bank MOU provides for the Bank to (i) review and formulate objectives relative to liquidity and growth, including a reduction in reliance on volatile liabilities, (ii) formulate plans for the reduction and improvement in adversely classified assets, (iii) maintain a Tier 1 leverage capital ratio of 8% and continue to be “well capitalized”"well capitalized" for regulatory purposes, (iv) continue to maintain an adequate allowance for loan and lease losses, (v) not pay any dividend to the Bank’sBank's parent holding company without the approval of the regulators, (vi) review officer performance and consider additional staffing needs, and (vii) provide progress reports and submit various other information to the regulators.State Board, the Federal Reserve Bank of Richmond (the “Federal Reserve Bank”) requested that the Company enter into a separate Memorandum of Understanding, which the Company entered into in December 2010 (the “Company MOU”"Company MOU"). While this agreement provides for many of the same measures suggested by the Memorandum already in place for the Bank MOU, the Company MOU requires that the Company seek pre-approval from the Federal Reserve Bank prior to the declaration or payment of dividends or other interest payments relating to its securities. As a result, until the Company is no longer subject to the Company MOU, it will be required to seek regulatory approval prior to paying scheduled dividends on its preferred stock and on its trust preferred securities, including the Series A and Series B Preferred Shares. This provision will also apply to the Company’sCompany's common stock, although to date, the Company has not elected to pay dividends on its shares of common stock.-23- Bank approved the scheduled payment of dividends on the Company’s preferred stock and interest payments on the Company’s trust preferred securities for the first three quarters of 2011; however, the Federal Reserve did not approve the Company’s request to pay dividends and interest payments relating to its outstanding classes of preferred stock and trust preferred securities due and payable in the thirdfourth quarter of 2011, and such consent has not been granted thereafter, largely out of deference to the Federal Reserve’s policy statement on dividends.·the company’s net income available to shareholders for the preceding four quarters is not sufficient to fully fund the dividends;·the prospective rate of earnings retention is not consistent with the company’s capital needs and overall current and prospective financial condition; or·the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.· the company’s net income available to shareholders for the preceding four quarters is not sufficient to fully fund the dividends; · the prospective rate of earnings retention is not consistent with the company’s capital needs and overall current and prospective financial condition; or · the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. State Board and the Federal Reserve Bank and position us well for stability and growth over the long term.-25-three months ended September 30,first quarter 2013, we incurred a net loss available to common shareholders of $2,769,226,$279,727, or a basic and diluted loss per common share of $0.63 compared to realizing net income available to common shareholders of $382,286, or a basic and diluted income per common share of $0.09 for the three months ended September 30, 2012. $0.07.forwere positively impacted by the three months ended September 30, 2013reduction of $252,068 in our noninterest expenses and an increase of $192,581 in our net interest income.However,our operating results were negatively impacted by the reduction of $744,004 in our net interest income, and the reduction of $1,271,754 in our noninterest income, Additionally, the operating results for the three months ended September 30, 2013 were negatively impacted by the net increase of $871,700$111,714 in noninterest expenses, which includes a significant write-down in the value of our other real estate owned, and the increase of $258,853 in our provision for loan losses. The increase in the provision reflects a one -time charge-off of $899,821 associated with the Loan Sale. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Income Statement Review” for aincome. A detailed discussion of each of these items.We incurred a net loss available to common shareholders of $3,537,664, or a basic and diluted loss per common share of $0.84, for the nine months ended September 30, 2013. For the nine months ended September 30, 2012, we realized net income available to common shareholders of $253,333, or a basic and diluted income per common share of $0.06. Comparing the first nine months of 2013 with those of 2012, we experienced a reduction of $3,790,997 in operating results. This reduction is primarily attributable to the $2,015,481 decline in net interest income and to the decline of $2,043,828 in noninterest income. However, our operating results for the first nine months of 2013 were favorably impacted by the $341,147 reduction in our provision for loan. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Income Statement Review” for a detailed discussion of each of these items.its interest-earning assets and interest-bearing liabilities. TotalThe total interest-earning assets yield rate less the total interest-bearing liabilities rate represents our net interest rate spread.-24- interest income decreased $744,004 or 19.83%, to $3,008,565 for the three months ended September 30, 2013, from $3,752,569 for the comparable period of 2012. Our net interest income for the nine months ended September 30,first quarter of 2014 was $3,238,201 compared to $3,045,620 for the first quarter of 2013, and 2012 was $9,077,448 and $11,092,929, respectively. This represents a decreasean increase of $2,015,481$192,581, or 18.17%6.32%. The decrease in both periodsincrease is due primarily to the significant reduction18.95% decline in the average volume of our loans, which are our highest yielding earning assets. While this reduction reflects,interest bearing liabilities, slightly offset by a decline in part, the reduced balances of certain classified loans, it also reflects relatively weak loan demand in our core markets. The average volume of our loans was $46,803,137 and $42,839,937, lower forearning assets of 16.06%. Additionally, we reduced the three and nine months ended September 30, 2013, respectively, than theyaverage rate paid on our interest bearing liabilities by 46 basis points, while we were for comparable 2012 periods.three months ended September 30, 2013,first quarter of 2014, average-earning assets totaled $313,365,157$299,638,201 with an annualized average yield of 4.50%4.88% compared to $396,609,932,$356,963,528 and 4.81%4.37%, respectively, for the three months ended September 30, 2012.first quarter of 2013. Average interest-bearing liabilities totaled $265,812,505$249,959,338 with an annualized average cost of 0.82%0.59% for the three months ended September 30, 2013first quarter of 2014 compared to $350,062,011$308,409,906 and 1.18%1.05%, respectively, for the three months ended September 30, 2012.Average earning assets for the nine months ended September 30, 2013 and 2012 were $335,896,069 and $412,638,664, respectively, with an annualized average yieldfirst quarter of 4.42% and 4.75% respectively. Average interest-bearing liabilities totaled $287,544,924 and $369,728,688 with an annualized average cost of 0.95% and 1.29% for the nine months ended September 30, 2013 and 2012, respectively.3.81%4.38% and 3.68%4.29%, respectively, for the three months ended September 30, 2013first quarter of 2014 compared to 3.76%3.46% and 3.63%3.32%, respectively, for the three months ended September 30, 2012. For the nine months ended September 30, 2013, our net interest margin and net interest spread were 3.61% and 3.47%, respectively compared to 3.59% and 3.46%, respectively for the comparable periodfirst quarter of 2012.75.66%80.86% and 74.33%73.40% of average earning assets for the threeat March 31, 2014 and nine months ending September 30, 2013, respectively compared to 71.58% and 70.92%, respectively for the comparable period of 2012.-26-and nine months ended September 30,March 31 2014 and 2013 was $3,246,099$3,273,679 and $10,090,301, respectively, compared to $4,196,618 and $12,699,918, respectively, for the comparable periods of 2012.$3,471,204, respectively. The annualized average yield on loans was 5.43%5.48% and 5.40%, respectively,5.37% for the threefirst quarters of 2014 and nine months ended September 30, 2013, comparedrespectively. Average balances of loans decreased to 5.88% and 5.80%, respectively, for$242,289,822 during the comparable 2012 periods. For the three and nine months ended September 30, 2013, compared to the three and nine months ended September 30, 2012,first quarter of 2014, a decrease of $19,734,496 from the average balances of our loans decreased $46,803,137, or 16.49% and $42,839,937, or 14.64%, respectively, primarily reflecting relatively weak loan demand in our core markets, as well as consistent reductions in the level$262,024,318 during first quarter of our non-performing assets.2013. Our loan interest income for the three and nine months ended September 30, 2013,first quarter of 2014 was negatively affectedfavorably impacted by the significant decrease in the average volumereduction of our non-performing loans. At March 31, 2014 our nonaccruing loans andtotaled $7,688,522 compared to $19,539,884 as of March 31, 2013, a slow recovery in our local real estate markets.decrease of $11,851,362, or 60.65%. Additional information may be found in the “Rate/Volume Analysis” presented below.$51,708,168, or 16.50%$48,070,625 and $57,969,319 for the first quarters of 2014 and 2013, respectively. Their percentage of average earning assets was relatively the same for the third quarter of 2013both periods, 16.04% for 2014 compared to $79,668,045, or 20.09% of average earning assets,16.24% for the third quarter of 2012. Available-for-sale investment securities averaged $54,372,752 and 16.19% of average earning assets for the nine months ended September 30, 2013 compared to $83,961,032 and 20.35% for the nine months ended September 30, 2012. Comparing the three and nine months ended September 30, 2013, to the comparable 2012 periods, the average balances of these securities was $27,959,877 and $29,588,280 lower, respectively. During the third quarter of 2012, we significantly reduced our portfolio of municipal securities because of our concerns about the deterioration in their market bond ratings and to lower the credit risk associated with our securities portfolio. For the three and nine months ended September 30, 2013, municipal securities averaged $1,838,277 and $619,493, respectively, compared to $13,356,340 and $17,358,424, respectively, for the comparable 2012 periods. It is our intention to invest primarily in U. S. Government-sponsored agency securities and mortgage-backed securities in the near future in order to avoid additional credit risk on relatively low yielding assets.2013. Interest earned on available-for-salethese securities amounted to $289,905totaled $316,552 and $952,145$347,984 for the threefirst quarters of 2014 and nine months ended September 30, 2013, respectively, compared to $574,210 and $1,879,332 respectively, for the same periodsresulting in 2012. Thean annualized average yield on available-for-sale investment securities was 2.22%of 2.67% and 2.87% for the third quarter of 2013 and 2012,2.43%, respectively. The annualized average yield on available-for-sale investment securities was 2.34% and 2.99% for the nine months ended September 30, 2013 and 2012, respectively. The decrease in yield on our available-for-sale investment securities was caused, in part, by a historically flat yield curve for investment securities that has diminished returns available for this asset type.$239,491,852$215,923,992 and $322,060,860$282,714,350 for the third quarterfirst quarters of 20132014 and 2012,2013, respectively. This represented a decrease of $82,569,008,$66,790,358, or 25.64%. Our average interest-bearing deposits were $261,251,687 and $343,214,204 for the nine months ended September 30, 2013 and 2012, respectively. This represented a decrease of $81,962,517, or 23.88%23.62%. Total interest paid on deposits for the threefirst quarters of 2014 and nine months ended September 30, 2013 was $425,729$282,452 and $1,676,205, respectively, compared to $911,213 and $3,180,242, for the same periods of 2012. The annualized average cost of deposits was 0.70% and 1.13% for the three months ended September 30, 2013 and 2012, respectively. The annualized average cost of deposits was 0.86% and 1.24% for the nine months ended September 30, 2013 and 2012,$678,374, respectively. As our loan demand declined, we concurrently lowered our rates paid for deposits, especiallyspecifically for time deposits, which is the primary reason whythat the volumeamount of our average time deposits were 40.66% and 35.26%are $53,289,342, or 38.89%, lower during the three and nine months ended September 30, 2013first quarter of 2014 than during the comparable 2012 periods.$26,320,653$34,035,346 and $28,001,151$25,695,556 for the three months ended September 30,first quarters of 2014 and 2013, and 2012, respectively. This represented a decreasean increase of $1,680,498, 6.00%. For the nine months ended September 30, 2013 and 2012, the average balance of other interest-bearing liabilities was $26,292,237 and $26,514,484, respectively. This represented a decrease of $221,247, 0.83%. The decrease in both periods$8,339,790, or 32.46%, which is mainlyprimarily attributable to the $2,000,000 reductionincrease of $6,835,658 in our average borrowings from the Federal Home Loan Bank. With the diminished loan demand we experienced during the past year, we utilized fewer borrowingsvolume of borrowing from the Federal Home Loan Bank, andthat replaced them with securities sold under agreements to repurchase, which have a lowerour higher cost to meet our funding needs.time deposits. For three and nine months ended September 30, 2013,the first quarter of 2014, the annualized average cost of borrowingsborrowing from the Federal Home LoanLand Bank was 2.31% and 2.29%0.43%, respectively. Whereaswhile the annualized average cost of securities sold under agreements to repurchaserate paid on time deposits was 0.08% and 0.11%,1.21% for three and nine months ended September 30, 2013.Rate/Volume Analysisperiodperiods indicated, certain information related to our average balance sheet and our average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from the daily balances throughout the periods indicated. Average Balances, Income and Expenses, and Rates Period ended March 31, 2014 2013 2012 Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate Assets Earning assets: Loans (1) $ 242,290 $ 3,274 5.48 % $ 262,024 $ 3,471 5.37 % $ 303,831 $ 4,400 5.82 % Securities, taxable 44,922 288 2.60 57,969 348 2.43 66,157 465 2.82 Securities, nontaxable 3,148 28 3.61 - - 0.00 20,155 197 3.93 Other earning assets 9,278 12 0.52 36,970 27 0.30 39,732 27 0.28 Total earning assets 299,638 3,602 4.88 356,963 3,846 4.37 429,875 5,089 4.76 Non-earning assets 48,546 55,168 58,599 Total assets $ 348,184 $ 412,131 $ 488,474 -25- -27-Three Months Ended September 30, Average Balances, Income and Expenses, and Rates 2013 2012 2011 (Dollars in thousands) Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate Assets Earning assets: Loans (1) $ 237,106 $ 3,246 $ 5.43 % $ 283,909 $ 4,197 5.88 % $ 327,696 $ 5,038 6.17 % Securities, taxable 49,870 273 2.17 66,312 446 2.68 68,323 532 3.12 Securities, nontaxable 1,838 17 3.67 13,356 128 3.82 26,722 276 4.15 Other earning assets 24,551 20 0.32 33,033 23 0.28 28,503 20 0.28 Total earning assets 313,365 3,556 4.50 396,610 4,794 4.81 451,244 5,866 5.21 Non-earning assets: 56,272 56,829 65,590 Total assets $ 369,637 $ 453,439 $ 516,834 Liabilities and Shareholders' Equity Interest-bearing deposits: Transaction accounts $ 45,633 $ 13 0.11 % $ 41,409 $ 15 0.15 % $ 40,478 $ 43 0.43 % Savings and money market accounts 93,776 36 0.15 111,986 73 0.26 124,239 218 0.70 Time deposits 100,083 376 1.49 168,666 823 1.94 217,053 1,205 2.23 Total interest-bearing deposits 239,492 425 0.70 322,061 911 1.13 381,770 1,466 1.54 Other interest-bearing liabilities: Federal Home Loan Bank bank borrowing 11,000 64 2.31 13,000 68 2.07 20,000 71 1.42 Junior subordinated debentures 10,310 57 2.19 10,310 61 2.36 10,310 55 2.14 Other 5,011 1 0.08 4,691 1 0.10 45 - 0.00 Total other interest-bearing liabilities 26,321 122 1.84 28,001 130 1.85 30,355 126 1.66 Total interest-bearing liabilities 265,813 547 0.82 350,062 1,041 1.18 412,125 1,592 1.55 Noninterest-bearing deposits 61,920 57,833 52,285 Other liabilities 2,550 3,240 2,564 Shareholders' equity 39,354 42,304 49,860 Total liabilities and equity $ 369,637 $ 453,439 $ 516,834 Net interest income/interest spread $ 3,009 3.68 % $ 3,753 3.63 % $ 4,274 3.66 % Net yield on earning assets 3.81 % 3.76 % 3.80 % (1) Includes mortgage loans held for sale and nonaccruing loansNine Months Ended September 30, Average Balances, Income and Expenses, and Rates 2013 2012 2011 (Dollars in thousands) Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate Assets Earning assets: �� Loans (1) $ 249,806 $ 10,090 5.40 % $ 292,645 $ 12,700 5.80 % $ 337,594 $ 15,127 5.99 % Securities, taxable 53,753 935 2.33 66,603 1,373 2.75 47,890 1,204 3.36 Securities, nontaxable 619 17 3.67 17,358 506 3.90 39,783 1,294 4.35 Other earning assets 31,718 73 0.31 36,033 81 0.30 32,516 75 0.31 Total earning assets 335,896 11,115 4.42 412,639 14,660 4.75 457,783 17,700 5.17 Non earning assets: 55,763 58,709 63,476 Total assets $ 391,659 $ 471,348 $ 521,259 Liabilities and Shareholders' Equity Interest-bearing deposits: Transaction accounts $ 44,249 $ 38 0.11 % $ 41,966 $ 65 0.21 % $ 38,425 $ 139 0.48 % Savings and money market accounts 97,160 135 0.19 116,145 282 0.32 119,634 690 0.77 Time deposits 119,843 1,503 1.68 185,104 2,833 2.04 233,306 4,034 2.31 Total interest-bearing deposits 261,252 1,676 0.86 343,215 3,180 1.24 391,365 4,863 1.66 Average Balances, Income and Expenses, and Rates Period ended March 31, 2014 2013 2012 Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate Liabilities and Shareholders' Equity Interest-bearing deposits: Transaction accounts $ 46,462 $ 9 0.08 % $ 43,956 $ 14 0.13 % $ 42,449 $ 32 0.31 % Savings and moneymarket accounts 85,721 25 0.12 101,728 60 0.24 120,732 122 0.41 Time deposits 83,741 249 1.21 137,030 605 1.79 201,244 1,052 2.10 Total interest-bearing deposits 215,924 283 0.53 282,714 679 0.97 364,425 1,206 1.33 Other interest-bearing liabilities: Federal Home Loan Bank borrowing 17,835 19 0.43 11,000 64 2.36 13,000 66 2.04 Junior subordinated debentures 10,310 60 0.58 10,310 56 0.54 10,310 63 0.61 Other 5,890 2 0.14 4,386 1 0.09 470 - 0.10 Total other interest-bearingLiabilities 34,035 81 0.97 25,696 121 1.91 23,780 129 2.18 Total interest-bearing liabilities 249,959 364 0.59 308,410 800 1.05 388,205 1,335 1.38 Noninterest-bearing deposits 63,080 60,799 55,929 Other liabilities 2,883 1,901 2,695 Shareholders' equity 32,262 41,021 41,645 Total liabilities and equity $ 348,184 $ 412,131 $ 488,474 Net interest income/interest spread $ 3,238 4.29 % $ 3,046 3.32 % $ 3,754 3.38 % Net yield on earning assets 4.38 % 3.46 % 3.51 % -28-(1)
Includes mortgage loans held for sale and nonaccruing loans Average Balances, Income and Expenses, and Rates 2013 2012 2011 (Dollars in thousands) Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate Other interest-bearing liabilities: Federal Home Loan Bank bank borrowing 11,000 188 2.29 13,000 200 2.06 19,513 207 1.42 Junior subordinated debentures 10,310 170 1.65 10,310 185 1.79 10,310 (19) (0.25) Other 4,983 4 0.11 3,204 2 0.10 107 - 1.00 Total other interest-bearing liabilities 26,293 362 1.84 26,514 387 1.95 29,930 188 0.84 Total interest-bearing liabilities 287,545 2,038 0.95 369,729 3,567 1.29 421,295 5,051 1.60 Noninterest-bearing deposits 61,433 56,774 48,949 Other liabilities 2,318 2,974 2,542 Shareholders' equity 40,363 41,871 48,473 Total liabilities and equity $ 391,659 $ 471,348 $ 521,259 Net interest income/interest spread $ 9,077 3.47 % $ 11,093 3.46 % $ 12,649 3.57 % Net yield on earning assets 3.61 % 3.59 % 3.69 % (1) Includes mortgage loans held for sale and nonaccruing loansThree Months Ended March 31, 2014 Compared to 2013 2013 Compared to 2012 Due to increase (decrease) in Due to increase (decrease) in (Dollars in thousands) Volume Rate Total Volume Rate Total Interest income: Loans $ (269 ) $ 70 $ (199 ) $ (595 ) $ (334 ) $ (929 ) Securities, taxable (83 ) 23 (60 ) (55 ) (62 ) (117 ) Securities, tax exempt - 29 29 (98 ) (98 ) (196 ) Other earning assets (27 ) 13 (14 ) (3 ) 1 (2 ) Total interest income (379 ) 135 (244 ) (751 ) (493 ) (1,244 ) Interest expense: Interest-bearing deposits Interest-bearing transaction accounts 1 (6 ) (5 ) 1 (20 ) (19 ) Savings and money market accounts (8 ) (27 ) (35 ) (17 ) (45 ) (62 ) Time deposits (194 ) (162 ) (356 ) (306 ) (142 ) (448 ) Total interest-bearing deposits (201 ) (195 ) (396 ) (322 ) (207 ) (529 ) Other interest-bearing liabilities: Federal Home Loan Bank borrowings 25 (70 ) (45 ) (11 ) 9 (2 ) Junior subordinated debentures - 4 4 - (6 ) (6 ) Other 1 - 1 ) 1 - 1 Total other interest-bearing liabilities 26 (66 ) (40 ) (10 ) 3 (7 ) Total interest expense (175 ) (261 ) (436 ) (332 ) (204 ) (536 ) Net interest income $ (204 ) $ 396 $ 192 $ (419 ) $ (289 ) $ (708 ) Three Months Ended September 30, 2013 Compared to 2012 2012 Compared to 2011 (Dollars in thousands) Due to increase (decrease) in Due to increase (decrease) in Volume Rate Total Volume Rate Total Interest income: Loan $ (650) $ (301) $ (951) $ (622) $ (219) $ (841) Securities, taxable (98) (75) (173) (15) (71) (86) Securities, tax exempt (106) (5) (111) (128) (20) (148) Other earning assets (6) 3 (3) 3 - 3 Total interest income (860) (378) (1,238) (762) (310) (1,072) Interest expense: Interest-bearing deposits Interest-bearing transaction accounts 1 (3) (2) 1 (29) (28) Savings and money market accounts (10) (27) (37) (20) (125) (145) Time deposits (285) (162) (447) (241) (141) (382) Total interest-bearing deposits (294) (192) (486) (260) (295) (555) Other interest-bearing liabilities Federal Home Loan Bank borrowings (11) 7 (4) (30) 27 (3) Junior subordinated debentures - (4) (4) - 6 6 Other - - - 1 - 1 Total other interest-bearing liabilities (11) 3 (8) (29) 33 4 Total interest expense (305) (189) (494) (289) (262) (551) Net interest income $ (555) $ (189) $ (744) $ (473) $ (48) $ (521) Nine Months Ended September 30, 2013 Compared to 2012 2012 Compared to 2011 (Dollars in thousands) Due to increase (decrease) in Due to increase (decrease) in Volume Rate Total Volume Rate Total Interest income: Loans $ (1,774) $ (836) $ (2,610) $ (1,960) $ (467) $ (2,427) Securities, taxable (244) (194) (438) 414 (245) 169 Securities, tax exempt (461) (28) (489) (663) (125) (788) Other earning assets (11) 3 (8) 8 (2) 6 Total interest income (2,490) (1,055) (3,545) (2,201) (839) (3,040) -26- -29- 2013 Compared to 2012 2012 Compared to 2011 (Dollars in thousands) Due to increase (decrease) in Due to increase (decrease) in Volume Rate Total Volume Rate Total Interest expense: Interest-bearing deposits Interest-bearing transaction accounts $ 4 $ (31) $ (27) $ 12 $ (86) $ (74) Savings and money market accounts (42) (105) (147) (19) (389) (408) Time deposits (887) (443) (1,330) (767) (434) (1,201) Total interest-bearing deposits (925) (579) (1,504) (774) (909) (1,683) Other interest-bearing liabilities Federal Home Loan Bank borrowings (33) 21 (12) (82) 75 (7) Junior subordinated debentures - (15) (15) - 204 204 Other 1 1 2 2 0 2 Total other interest-bearing liabilities (32) 7 (25) (80) 279 199 Total interest expense (957) (572) (1,529) (854) (630) (1,484) Net interest income $ (1,533) $ (483) $ (2,016) $ (1,347) $ (209) $ (1,556) We have shortened the period over which we review historical losses from eight quarters to four in response to industry trends and conditions; the shorter loss history window is more inIn line with our peer group, and tracks more closely the unusual market volatility of the past several years, making thewe review historical losses over four quarters, which results in a provision estimate more responsive to current economic conditions. The historical loss factors utilized in our model have been updated as of the end of the thirdfourth quarter 20132014 to reflect losses realized through the end of secondfourth quarter 2013.-30--27- September 30,March 31, 2014 and 2013, and 2012, the allowance for loan losses was $2,899,368$2,802,823 and $4,341,422,$4,198,520, respectively, a decrease of $1,442,054,$1,395,697, or 33.22%33.20%, from the 20122013 allowance, which reflects thereflecting significant reductionreductions in practically all categories of our problem loans. As a percentage of total loans, the allowance for loan losses was 1.25%1.17% and 1.58%1.64% at September 30,March 31, 2014 and 2013, and 2012, respectively. See the discussion regarding the provision expense and “Activity in the Allowance for Loan Losses” below for additional information regarding our asset quality and loan portfolio.Thelosses was $609,808 for both the third quarter and first nine monthslosses. Our analysis of 2013 compared to $350,955 and $950,955, respectively, for the same periods of 2012. The increase in the provision for the third quarter of 2013 is attributable to having to replenish the allowance for loan losses becauseas of March 31, 2014, revealed that our overall loss rates have been stabilizing over the past several allowance calculations and that our credit exposure is phasing out in the Myrtle Beach market and the Charleston market, which were particularly hard-hit by the downturn in real estate markets. Additionally, not having to record a provision for loan losses is reflective of our net charge-offs forsuccess in aggressively reducing our exposure in these markets and the quarter were $1,225,323. Included involume of high-risk construction loans on our third quarter net-charge-offs is a charge of $899,821 from the bulk sale ofadversely classified loans that had a book value of $3,197,096, with the charge-off reflecting the difference between the sales price and our book value for the loans. These loans were risk rated substandard with no short-term resolutions available. We continue to review opportunities to reduce the level of classified assets and to reduce exposure to higher-risk assets; as such, we may conduct further loan sales in the future. See the discussion regarding the “Activity in the Allowance for Loan Losses” below for additional information regarding our asset quality and loan portfolio.books.
September 30, 2013,March 31, 2014, is adequate to meet potential loan losses inherent in the loan portfolio and, as described earlier, weto maintain the flexibility to adjust the allowance to respond to short-term and long-term trends inshould our local economy that are reflectedand loan portfolio either improve or decline in our loan portfolio.three and nine months ended September 30,first quarter of 2014 compared to first quarter 2013, noninterest income decreased $1,271,754 and $2,043,828,$111,714, or 51.86% and 37.44%, respectively.As a result of selling fewer available-for-sale securities during the quarter and nine months ended September 30, 2013, as compared10.10%. The decrease is due primarily to the comparable 2012 periods,following. During the realizedfirst half of 2013, the U.S. economy experienced historically low mortgage rates, which resulted in a high volume of homeowners choosing to refinance their existing mortgages. However, during latter half of 2013, mortgage interest rates began to rise, resulting in a decrease in the number of refinanced mortgages. This led to the $92,329 decline in the gain on the sales of available-for-sale securities was $1,298,627 and $1,772,497 lower, respectively. -31-Other non-interest income for the quarters ended September 30, 2013 and 2012 was $82,617 and $57,544, respectively. Comparing the nine months ended September 30, 2013 with the comparable 2012 period, our other non-interest income was $241,861 lower. This decline is mainly due to a recovery of previously incurred expenses of $210,320 received during the second quarter of 2012, and to a one-time gain of $119,328 on the sale of a participation loan duringmortgage loans for the first quarter of 2012.Expensequarterquarters ended September 30,March 31, 2014 and 2013, noninterest expense totaled $6,049,238 which is $871,700,$3,897,629 and $4,149,697, respectively, a decrease of $252,068, or 16.84%, higher than our noninterest expense for the quarter ended September 30, 2012. For the nine months ended September 30, 2013 and 2012, noninterest expense totaled $14,533,791 and $14,465,669, respectively, an increase of $68,122, or 0.47% for 2013 compared to 2012.$1,939,545$1,812,735 and $1,975,606$1,928,709 for the thirdfirst quarters of 2014 and 2013, and 2012, respectively, a decrease of $36,061,respectively. By improving operating efficiencies, we were able to reduce the expense for this category by $115,974, or 1.83%. For the nine months ended September 30, 2013 and 2012, salaries and benefits were $5,845,209 and $5,771,871, respectively, an increase of $73,338. During the first quarter of 2012, we recognized a $337,153 reduction in this expense category as the result of canceling all stock appreciation rights outstanding at December 31, 2011. This reduction was offset by customary salaries and benefits increases.Occupancy, furniture6.01%thirdfirst quarters of 2014 and 2013 was $414,449 and 2012 was $826,201 and $706,950,$295,515, respectively, for an increase of $119,251. This$118,934. The increase is duerelated to the credits wedata processing refunds received in the thirdfirst quarter of 20122013 for prior year service issues relating to our data processing. For the nine months of 2013interruptions and 2012, occupancy, furniture and equipment expense was $2,032,190 and $2,192,147, respectively, a decrease of $159,957. This decrease is due to the outsourcing of our data processing and servers to a vendor during the latter part of 2012.Other operating expenses increased $788,510 from $2,494,982 for the third quarter of 2012 to $3,283,492 for the third quarter of 2013. lost income.the nine months ended September 30, 2013,first quarter of 2014 were $154,741 higher$263,971, or 16.84% lower than they wereexperienced in for the comparable 2012 period.first quarter of 2013. For the nine months ended September 30,first quarters of 2014 and 2013, and 2012, other operating expenses were $6,656,392$1,303,415 and $6,501,651,$1,567,386, respectively. The following explainsA detailed explanation for the significant changes in this expense category for both periods.follows.1. Professional fees were higher for the first quarter of 2014 as a result of legal fees relating to litigation arising in the ordinary course of our business as well defending a lawsuit filed by certain clients of the Schurlknight and Rivers Law Firm (“S&R”), which was a customer of the Bank. -28- 1. OREO expenses for the third of quarter of 2013 and for the nine months ended September 30, 2013, were $1,508,344 and $972,509 higher than the comparable 2012 periods. Expenses related to OREO include maintenance costs, marketing costs, property taxes, and other professional services. During the third quarter of 2013, based on our analysis of the value of our OREO, we wrote down the values of certain properties by $1,403,712, whereas no similar write downs were required for the third quarter of 2012. Write downs were $551,523 higher for the nine months ended September 30, 2013 than they were for the comparable 2012 period.2. The cost of our Federal Deposit Insurance Corporation insurance assessments for the three and nine months ended September 30, 2013, declined $80,811 and $205,830, respectively, from the comparable 2012 periods. The decline in both periods is primarily attributable to a significant reduction in our deposits. From September 30, 2012 to September 30, 2013, our total deposits declined by $68,145,954, or 18.70%, largely because of the 76.80% decline in our time deposits, which bear the highest interest rate we pay for deposits.3. During the first quarter of 2013, we recorded a $70,000 impairment loss on an investment in an illiquid equity security issued by another financial institution that was purchased for $100,000. At September 30, 2013, this security, with a carrying value of $30,000, is included in available-for-sale securities. While we believe there will be no further impairment, there is no assurance that the carrying value of this security will be realized in the future. There were no impairment losses during the third quarter of 2013 or during the nine months ended September 30, 2012.4. Mortgage loan expenses for the third of quarter of 2013 and for the nine months ended September 30, 2013, were $779,437 and $754,037 lower than the comparable 2012 periods. The decrease in both periods is primarily attributable to the significant reduction in our expenses relating to the repurchasing of previously sold mortgage loans.2. OREO expenses for the first quarter of 2014 were $100,979 lower than the first quarter of 2013. The decrease is attributable to the net gain/loss recognized on the sale of OREO properties that are included in OREO expenses. For the first quarter of 2014 we realized a net gain of $112,594, while for the first quarter of 2013 we realized a net loss of $24,340. 3. During the first quarter of 2013, we recorded a $70,000 impairment loss on our equity security that was purchased for $100,000. In the first quarter of 2014, there was no impairment loss. 4. The cost of our FDIC insurance assessments for the first quarter of 2014 declined $59,426, largely because we successfully reduced the average volume of our higher cost time deposits. income tax benefit related to the Company's pretax loss for the three and nine months ended September 30, 2013 was offset by the increase of an equal amount in the valuation allowance related to its deferred tax assets. Likewise, the income tax expense related to theour pretax income for the comparable 2012 periodsfirst quarters of 2014 and 2013 was offset by a reversal of an equal amount of the Company’sin our valuation allowance related to itsour deferred tax assets. Therefore no income tax provision was recordedrequired for the threefirst quarters of 2014 and nine months ended September 30, 2013 and 2012 respectively.-32-September 30,March 31, 2014, we had total assets of $353.7 million, consisting principally of $240.6 million in loans, $48.0 million in investments, and $21.2 million in cash and due from banks. Our liabilities at March 31, 2014, totaled $321.3 million, which consisted principally of $285.3 million in deposits, $17.0 million in FHLB advances, and $15.7 million in other borrowings. At March 31, 2014, our shareholders’ equity was $32.4 million.$361.8$355.4 million, consisting principally of $231.1$240.8 million in loans, $52.3$50.7 million in investment securities, $25.8investments, and $18.2 million in cash and due from banks, and $13.9 million in other real estate owned.banks. Our liabilities at September 30,December 31, 2013 totaled $324.5$323.3 million, which consistedconsisting principally of $296.2$282.4 million in deposits, $11.0$23.0 million in FHLB advances, and $15.2 million in other borrowings. At September 30, 2013, our shareholders’ equity was $37.3 million.At December 31, 2012, we had total assets of $418.3 million, consisting principally of $260.3 million in loans, $61.4 million in investments, $38.1 million in cash and due from banks, and $15.2 million in other real estate owned. Our liabilities at December 31, 2012 totaled $377.1 million, consisting principally of $349.3 million in deposits, $11.0 million in FHLB advances, and $14.7 million in other borrowings. At December 31, 2012,2013, our shareholders' equity was $41.2$32.1 million.available-for-saleAvailable-for-Sale- At September 30, 2013,March 31, 2014, our investment in available-for-sale securities was $51,243,713.$11,253,414. This is $8,827,299,$891,429, or 14.69%7.34%, lower than our investment of $60,071,012$12,144,843 in available-for-sale securities at December 31, 2012. 2013. These securities are carried at their estimated fair value.-29- September 30, 2013March 31, 2014 and December 31, 20122013 are shown in the following table. September 30, 2013 December 31, 2012 Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value U.S Government-sponsored agencies $ 7,213,758 $ 7,144,732 $ 7,591,892 $ 8,109,028 Municipals 3,166,424 3,159,965 - - Corporate bonds 2,760,261 2,802,780 - - Mortgage-backed securities 37,591,353 38,106,236 50,197,908 51,956,484 Equity security 30,000 30,000 100,000 5,500 Total $ 50,761,796 $ 51,243,713 $ 57,889,800 $ 60,071,012 March 31, 2014 December 31, 2013 Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value Mortgage-backed securities $ 8,450,875 $ 8,472,085 $ 9,277,577 $ 9,318,633 Corporate bonds 2,771,515 2,751,329 2,765,950 2,796,210 Equity security 30,000 30,000 30,000 30,000 Total $ 11,252,390 $ 11,253,414 $ 12,073,527 $ 12,144,843 March 31, 2014 December 31, 2013 Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value Government sponsored enterprises $ 6,912,687 $ 6,888,702 $ 7,146,409 $ 7,070,985 Mortgage-backed securities 25,346,867 25,792,453 26,404,573 26,731,341 Municipals 3,159,870 3,252,024 3,163,155 3,149,608 Total 35,419,424 $ 35,933,179 36,714,137 $ 36,951,934 Capitalization of net unrealized gains on securities transferred from available-for-sale 224,496 237,797 Total $ 35,643,920 $ 36,951,934 September 30, 2013,March 31, 2014, there were no securities available-for-sale or securities held-to-maturity that had been in a loss position for twelve months or more. However, during the first quarter of 2013 we determined that our equity investment of $100,000 in a local community bank was other-than-temporarily impaired. Based on industry analyst reports and market trading prices, it was determined that the estimated fair market value of this investment was $30,000. Consequently, an impairment loss of $70,000 was recognized. While we do not intend to sell this security in the near future, and it is more likely than not that we will not be required to sell it, there is no assurance that the carrying value of this security will be realized in the future.Securities Available-for-Sale Maturity securitiesand held-to-maturity at September 30, 2013March 31, 2014 are shown in the following table.tables. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.(Dollars in thousands) Amount Yield Due after ten years U.S Government-sponsored agencies $ 7,144 3.23 % Municipals 3,160 4.20 Corporate bonds 2,803 0.57 Total securities (1) $ 13,107 2.85 % (1) Excludes mortgage-backed Mortgage-backed securities totaling $38,106,236 with a yieldare presented separately, maturities of 3.12% and equity security of $30,000. Due after ten years (Dollars in thousands) Amount Yield Corporate bonds $ 2,751 0.54 % -33-(1)
Excludes mortgage-backed securities totaling $8,472,085 with a yield of 2.58% and an equity security in the amount $30,000. Due after ten years (Dollars in thousands) Amount Yield U.S. Government sponsored agencies $ 6,845 3.24 % Municipals 3,146 4.20 Total $ 9,991 3.53 % (2) Excludes mortgage-backed securities totaling $25,653 with a yield of 3.19%. September 30, 2013March 31, 2014 and December 31, 2012,2013, nonmarketable equity securities consisted of Federal Home Loan Bank and Community Bankers Bank stock, which are recorded at their original cost of $996,900$1,084,300 and $58,100, respectively and $1,239,300$1,536,800 and $58,100, respectively. These securities are held primarily as a pre-requisite for accessing liquidity sources provided by the issuers of these securities.-30- thatwhich we attempt to control and counterbalance. Loans averaged $249,805,558$242,289,822 during the first nine months ended September 30, 2013quarter of 2014 compared to $292,645,495$262,024,318 during the nine months ended September 30, 2012,first quarter of 2013, a decrease of $42,839,937,$19,734,496, or 14.64%7.53%. At September 30,From March 31, 2013 total loans were $231,918,747 compared to $265,879,194 at DecemberMarch 31, 2012, a decrease of $33,960,447, or 12.77%. Excluding loans held for sale, loans were $231,093,043 at September 30, 2013, compared to $260,257,334 at December 31, 2012, which equated to a decrease of $29,164,291, or 11.21%. During the first nine months of 20132014, we charged off loans totaling $2,273,922, including $899,821 related to the Loan Sale,approximately $2,374,000 and foreclosed on loans totaling $4,602,690,approximately $4,395,000, whereby the loan balances were transferred to other real estate owned. The remainder of this decrease iswas the result of the economic downturn in our markets and worldwide deleveraging that has caused the volume of new loan customers and average loan balances carried by current customers to decrease.September 30, 2013at March 31, 2014 and December 31, 2012. September 30, % of December 31, % of 2013 Total 2012 Total Mortgage loans on real estate Construction $ 25,983,333 11.24 % $ 31,985,532 12.29 % Residential 1-4 family 34,619,592 14.98 35,091,846 13.48 Multifamily 4,460,305 1.93 5,563,043 2.14 Second mortgages 4,361,528 1.89 4,077,692 1.56 Equity lines of credit 21,042,326 9.12 22,502,339 8.65 Total residential 64,483,751 27.92 67,234,920 25.83 Nonresidential 103,285,343 44.69 122,309,917 47.00 Total real estate loans 193,752,427 83.85 221,530,369 85.12 Commercial and industrial 26,747,037 11.57 29,255,564 11.24 Consumer 10,521,865 4.55 9,304,913 3.58 Other, net 71,714 0.03 166,488 0.06 Total loans $ 231,093,043 100.00 % $ 260,257,334 100.00 % March 31, % of December 31, % of 2014 Total 2013 Total Mortgage loans on real estate Construction $ 23,890,521 9.97 % $ 24,175,347 10.14 % Residential 1-4 family 35,761,717 14.92 35,873,036 15.04 Multifamily 3,890,201 1.62 4,312,057 1.81 Second mortgages 4,077,550 1.70 4,245,778 1.78 Equity lines of credit 21,427,102 8.94 21,270,126 8.92 Total residential 65,156,570 27.18 65,700,997 27.55 Nonresidential 105,861,288 44.18 104,378,485 43.76 Total real estate loans 194,908,379 81.33 194,254,829 81.45 Commercial and industrial 32,584,523 13.60 32,486,848 13.62 Consumer 12,136,195 5.06 11,725,319 4.92 Other, net 5,595 0.01 35,135 0.01 Total loans $ 239,634,692 100.00 % $ 238,502,131 100.00 % Borrower’sborrower’s real estate when possible, in addition to any other available collateral. This real estate collateral is taken as security to reinforce the likelihood of the ultimate repayment of the loan and tends to increase management’s willingness to make real estate loans and, to that extent, also tends to increase the magnitude of the real estate loan portfolio component.September 30, 2013,March 31, 2014, real estate mortgage loans totaled $193,752,427$194,908,379 and represented 83.85%81.33% of the total loan portfolio, compared to $221,530,369,$194,254,829, or 85.12%81.45%, at December 31, 2012.2013. This represents a decreasean increase of $27,777,942,$653,550, or 12.54%0.34%, from the December 31, 20122013 balance.$64,483,751$65,156,570 at September 30, 2013March 31, 2014, and represented 27.92%27.18% of the total loan portfolio, compared to $67,234,920$65,700,997 and 25.83%,27.55% respectively, at December 31, 2012.2013. Residential mortgagereal estate loans consist of first and second mortgages on single or multi-family residential dwellings.$103,285,343$105,861,288 at September 30, 2013March 31, 2014, compared to $122,309,917$104,378,485 at December 31, 2012.2013. This represents a decreasean increase of $19,024,574,$1,482,803, or 15.55%1.42%, from the December 31, 20122013 balance. These loans represented 44.69%44.18% and 47.00%43.76% of the total loans at September 30, 2013March 31, 2014 and December 31, 2012,2013, respectively.$25,983,333$23,890,521 and $31,985,532$24,175,348 at September 30, 2013March 31, 2014 and December 31, 2012,2013, respectively, and represented 11.24%9.97% and 12.29%10.14% of the total loan portfolio, respectively. From December 31, 20122013 to September 30, 2013,March 31, 2014, these loans declined $6,002,199,$284,827, or 18.77%1.18%.-34- all types of real estate loans in our market area is weak, largely because of a slow recovery from the recent recession that affected many businesses and individuals in our market area.-31- decreased $2,508,527,increased $97,675, or 8.57%0.30%, to $26,747,037$32,584,523 at September 30, 2013,March 31, 2014, from $29,255,564$32,486,848 at December 31, 2012.2013. The increase is attributable to our renewed emphasis on marketing commercial loan products to small business owners. At September 30, 2013March 31, 2014 and December 31, 2012,2013, commercial and industrial loans represented 11.57%13.60% and 11.24%13.62%, respectively, of the total loan portfolio.$10,593,579$12,141,790 and $9,471,401$11,760,454 at September 30, 2013March 31, 2014 and December 31, 2012, respectively. At September 30, 2013, respectively, and December 31, 2012, these loans represented 4.58%5.07% and 3.64%4.93%, respectively, of the total loan portfolio. From December 31, 20122013 to September 30, 2013,March 31, 2014, our consumer and other loans have increased by $1,122,178,$381,336, resulting primarily from the implementation of several marketing programs designed to increase consumer borrowings.Loan Maturity Schedule and Sensitivity to Changes in Interest Ratesthe loan maturity distribution by collateral type and related interest rate characteristics at September 30, 2013. Over One Year One Year or Through Over Five (Dollars in thousands) Less Five Years Years Total Real Estate $ 58,991 $ 114,473 $ 20,288 $ 193,752 Commercial and industrial 12,863 13,775 109 26,747 Consumer and other 2,016 7,281 1,297 10,594 $ 73,870 $ 135,529 $ 21,694 $ 231,093 Loans maturing after one year with: Fixed interest rates $ 113,311 Floating interest rates 43,912 $ 157,223 Over One Year One Year or Through Over Five (Dollars in thousands) Less Five Years Years Total Real estate $ 46,059 $ 123,239 $ 25,610 $ 194,908 Commercial and industrial 16,883 15,506 196 32,585 Consumer and other 1,670 7,921 2,551 12,142 $ 64,612 $ 146,666 $ 28,357 $ 239,635 Loans maturing after one year with: Fixed interest rates $ 129,281 Floating interest rates 45,742 $ 175,023 September 30, 2013March 31, 2014 and December 31, 2012. March 31, % of December 31, % of (Dollars in thousands) 2014 Total 2013 Total Real estate loans Construction $ 280 9.99 % $ 303 10.47 % Residential 1,045 37.28 1,043 36.04 Nonresidential 1,303 46.49 1,382 47.75 Total real estate loans 2,628 93.76 2,728 94.26 Commercial and industrial 100 3.57 65 2.25 Consumer and other 75 2.67 101 3.49 Total loans $ 2,803 100.00 % $ 2,894 100.00 % September 30, % of December 31, % of (Dollars in thousands) 2013 Total 2012 Total Real estate loans Construction $ 165 5.69 % $ 1,441 34.58 % Residential 1,215 41.91 951 22.82 Nonresidential 1,234 42.57 1,129 27.10 Total real estate loans 2,614 90.17 3,521 84.50 Commercial and industrial 245 8.45 616 14.78 Consumer and other 40 1.38 30 0.72 Total loans $ 2,899 100.00 % $ 4,167 100.00 % -32- -35-ninethree months ended September 30, 2013March 31, 2014 and 2012. Nine Months Ended September 30, (Dollars in thousands) 2013 2012 Balance, January 1 $ 4,167 $ 7,743 Loans charged off: Real estate – Construction 249 2,220 Real estate – Residential 981 897 Real estate – Nonresidential 914 899 Commercial and industrial 92 1,107 Consumer and other 38 11 Total loan losses 2,274 5,134 Recoveries of previous loan losses: Real estate – Construction 123 296 Real estate – Residential 174 127 Real estate – Nonresidential 18 54 Commercial and industrial 69 296 Consumer and other 12 8 Total recoveries 396 781 Net charge-offs (1,878) (4,353) Provision for loan losses 610 951 Balance, September 30 $ 2,899 $ 4,341 Total loans outstanding, end of period $ 231,093 $ 275,156 Allowance for loan losses to loans outstanding 1.25 % 1.58 % Since September 30, 2012, we have significantly reduced all categories of problems loans, either through charge-offs, foreclosures or sale of problem loans. In the third quarter of 2013 we recognized a charge of $899,821 to the allowance for loan losses from the sale of $3,197,096 of problem loans. These loans were risk rated substandard with no short-term resolutions available, Additional factors reviewed in the decision to sell these loans included the probability of loss, the amount of management time required on each loan, legal collection processes, as well as deferred maintenance cost to repair the underlying collateral and marketing timeframe. Three Months Ended March 31, (Dollars in thousands) 2014 2013 Balance, January 1, $ 2,894 $ 4,167 Loans charged off: Real estate – Construction 1 7 Real estate – Residential 3 95 Real estate – Nonresidential 188 48 Total real estate loans 192 150 Commercial and industrial - 3 Consumer and other 10 13 Total loan losses 202 166 Recoveries of previous loan losses: Real estate – Construction 9 78 Real estate – Residential 3 90 Real estate – Nonresidential 89 - Total real estate loans 101 168 Commercial and industrial 7 28 Consumer and other 3 2 Total recoveries 111 198 Net charge-offs (recoveries) 91 (32 ) Provision for loan losses - - Balance, March 31, $ 2,803 $ 4,199 Total loans outstanding, end of period $ 239,635 $ 256,710 Allowance for loan losses to loans outstanding 1.17 % 1.64 % at September 30, 2013percentages of net charge-offs, and 2012. September 30, (Dollars in thousands) 2013 2012 Loans over 90 days past due and still accruing $ - $ 1 Loans on nonaccrual: Real estate – Construction 554 3,858 Real estate – Residential 1,696 3,922 Real estate – Nonresidential 5,168 13,642 Commercial and industrial 1,432 619 Consumer and other 77 34 Total nonaccrual loans 8,927 22,075 Total of nonperforming loans 8,927 22,076 Other nonperforming assets 13,914 15,359 Total nonperforming assets $ 22,841 $ 37,435 Percentage of: Nonperforming assets to total assets 6.31 % 8.54 % Nonperforming assets to total capital 61.27 % 88.74 % Nonperforming loans to total loans 3.86 % 8.02 % Nonperforming loans to the allowance for loan losses 32.47 % 19.66 % -36- March 31, (Dollars in thousands) 2014 2013 Loans over 90 days past due and still accruing $ - $ 544 Loans on nonaccrual: Real Estate Construction 475 2,288 Real Estate Residential 1,796 3,454 Real Estate Nonresidential 3,986 11,908 Total real estate loans 6,257 17,650 Commercial 1,353 1,808 Consumer 79 82 Total nonaccrual loans 7,689 19,540 Total of nonperforming loans 7,689 20,084 Other nonperforming assets 7,236 15,075 Total nonperforming assets $ 14,925 $ 35,159 Percentage of nonperforming assets to total assets 4.20 % 8.70 % Percentage of nonperforming loans to total loans 3.21 % 7.82 % Allowance for loan losses as a percentage of non-performing loans 36.45 % 20.91 % As of September 30,At March 31, 2014 and 2013, and 2012, we had loans totaling $0 and $943, respectively, that were past due over 90 days past due and still accruing interest. interest totaled $0 and $544,017, respectively.This improvement was achieved primarily by aggressively monitoring past due loans.-33- September 30,March 31, 2014 and 2013, and 2012, loans totaling $8,926,687$7,688,522 and $22,074,789,$19,539,884, respectively, were in nonaccrual status. The improvement in nonaccrual loans was due primarily to charge-offs, foreclosures, and repayments. Generally, loans are placed on nonaccrual status if principal or interest payments become 90 days past due and/or we deem the collectabilitycollectibility of the principal and/or interest to be doubtful. Generally, onceOnce a loan is placed in nonaccrual status, all previously accrued and uncollected interest is reversed against interest income, unless collection of interest accrued to date is expected.income. Interest income on nonaccrual loans is recognized on a cash basis when the ultimate collectability is no longer considered doubtful. Loans are returned to accrual status when the principal and interest amounts contractually due are brought current and future payments are reasonably assured. For the nine months ended September 30,first quarters of 2014 and 2013, and 2012, interest income recognized on nonaccrual loans was $478,475$31,086 and $605,750,$148,728, respectively. If the nonaccrual loans had been accruing interest at their original contracted rates, related income would have been $654,639$110,227 and $927,891$289,706 for the nine monthsquarters ended September 30,March 31, 2014 and 2013, and 2012, respectively. We note that the increased volume of nonaccrual nonresidential real estate loans was roughly offset by a reduction in the volume of nonaccrual real estate construction loans that were primarily located in coastal markets that were harder hit by the economic downturn. All nonaccruing loans at September 30,March 31, 2014 and 2013 and 2012 were included in our classification of impaired loans at those dates.troubled debt restructuring (“TDR”).TDR. The restructuring of a loan may include the transfer of real estate collateral, either through the pledge of additional properties by the borrower or through a transfer to the Bank in lieu of foreclosures. Restructured loans may also include the borrower transferring to the Bank receivables from third parties, other assets, or an equity interest in the borrower in full or partial satisfaction of the loan, a modification of the loan terms, or a combination of the above.September 30, 2013March 31, 2014 there were 2930 loans classified as TDRsa TDR totaling $7,341,485.$7,274,231. Of the 2930 loans, 1516 loans totaling $3,501,541$4,564,197 were performing while 14 loans totaling $3,839,944$2,710,034 were not performing. As of DecemberMarch 31, 20122013 there were 5251 loans classified as a TDR totaling $15,155,121.$13,062,003. Of the 5251 loans, seven17 loans totaling $3,128,542$5,533,207 were performing while 4534 loans totaling $12,026,579$7,528,795 were not performing. From March 31, 2013 to March 31, 2014, TDR loans decreased by $5,787,772 due to charge-offs, foreclosures and repayments. All restructured loans resulted in either extended maturity or lowered rates and were included in the impaired loan balance.September 30, 2013,March 31, 2014, we had impaired loans totaling $14,794,928$15,242,612, as compared to $30,710,491$26,613,230 at September 30, 2012. IncludedMarch 31, 2013. The improvement in impaired loans in the impairedfirst quarter of 2014 compared to the same period in 2013 was primarily attributable to the reduction of high-risk construction loans at September 30, 2013on our books and the phasing out of our credit exposure in the Myrtle Beach and Charleston markets, which were 8particularly hard hit by the downturn in real estate markets in 2013. At March 31, 2014, there were 9 borrowers that accounted for approximately 69.59%70.09% of the total amount of the impaired loans at that date. These loans were primarily commercial real estate loans located in coastalthe following South Carolina.Carolina areas: 53% in the Coastal area, 22% in the Columbia area and 25% in the Florence area. Impaired loans, as a percentage of total loans, were 6.40%6.36% at September 30, 2013March 31, 2014 as compared to 11.16%9.98% at September 30, 2012.first nine months of 2013,quarter ended March 31, 2014, the average investment in impaired loans was approximately $21,140,000$16,702,000 as compared to $27,408,000$26,739,000 during the first nine months of 2012.quarter ended March 31, 2013. Impaired loans with a specific allocation of the allowance for loan losses totaled approximately $5,123,000$5,227,045 and $10,785,000$7,729,196 at September 30,March 31, 2014 and 2013, and 2012, respectively. The amount of the specific allocation at September 30,March 31, 2014 and 2013 was $560,661 and 2012 was $280,295 and $658,262,$405,265, respectively.2013the first quarter of 2014 has resulted in an increase in loan delinquencies, defaults and foreclosures; however, we believe these trends are stabilizing as the liquidation prices for our other real estate owned haveOREO has stabilized for vertical construction, indicating some stabilization of demand for that product. In some cases, the current economic downturn has resulted in a significant impairment to the value of our collateral and limits our ability to sell the collateral upon foreclosure at its appraised value. There is also risk that downward trends could continue at a higher pace. If real estate values further decline, it is also more likely that we would be required to increase our allowance for loan losses.–- Other nonperforming assets consist of other real estate owned (“OREO”)OREO that was acquired through foreclosure. OREO is carried at fair market value minus estimated costs to sell. Current appraisals are obtained at time of foreclosure and write-downs, if any, charged to the allowance for loan losses as of the date of foreclosure. On a regular basis, we reevaluate our OREO properties for impairment. Along with gains and losses on disposal, expenses to maintain such assets and subsequent changes in the valuation allowance are included in other noninterest expense.-34- -37-September 30, 2013,March 31, 2014, we had OREO properties totaling $13,913,979,$7,236,115, geographically located in the following South Carolina areas 54.34%– 63.00% in the Coastal area, 14.30%8.21% in the Columbia area and 31.36%28.79% in the Florence area. The combined nature of these properties is 82.54%92.83% commercial and 17.46%7.17% residential and other. We are diligently trying to dispose of our OREO properties; however, the relatively low demand in many of these market segments affects our ability to do so in a timely manner without experiencing additional losses. This is especially true for properties consisting of raw land.September 30, 2012March 31, 2013 to September 30, 2013,March 31, 2014, OREO decreased $1,444,956,$7,838,912, or 9.40%52.00%. During this period, sales and write downs were $5,614,212$7,328,022 and $1,712,610,$4,905,476, respectively, while properties acquired through foreclosures totaled $5,881,866.A number$4,394,586.with improvements are income producing, either throughthat we made during the fourth quarter of 2013, taking into consideration our experience as to the time required to sell OREO properties, the volume of OREO properties held by other banks in our market area, and the deeply discounted prices being offered for the purchase of OREO properties. As a result of this analysis, we increased our write downs by $3,500,000 for estimated future losses on the sale or interim leasing. This cash flow helps offset direct costs such as taxes and insurance and offsetting opportunity cost during marketing. Duringon our OREO properties.ninethree months ended September 30,March 31, 2014 and 2013 was $115,286 and 2012, income earned$216,265, respectively, which includes a net gain of $112,594 and a net loss of $24,340 on OREO was $41,077 and $116,702, respectively, while OREO expenses, net of income earned, was $2,738,692 and $1,766,182,sales, respectively.$82,183,764,$58,450,568, or 22.23%18.95%, to $287,544,924$249,959,338 for the nine months ending September 30, 2013first quarter of 2014, from $369,728,688$308,409,906 for the nine months ended September 30, 2012.nine monthsquarters ended September 30,March 31, 2014 and 2013, and 2012, average total deposits were $322,685,164$279,004,035 and $399,988,574,$343,513,855, respectively, which is a decrease of $77,303,410,$66,790,353, or 19.32%. At September 30, 2013 and December 31, 2012, total deposits were $296,198,396 and $349,314,134 respectively, a decrease of $53,115,738, or 15.21%19.44%. As our loan demand declined, we concurrently lowered our rates paid for deposits, especiallyspecifically for time deposits, which is the primary reason whythat the amountsamount of our average time deposits are $53,289,342, or 38.89%, lower during the first quarter of 2014 than during the same period in 2013. At March 31, 2014 and December 31, 2013, total deposits were significantly lower for the period ended September 30, 2013 compared to 2012.$81,962,517,$66,790,358, or 23.88%23.62%, to $261,251,687$215,923,992 for the nine monthsquarter ended September 30, 2013,March 31, 2014, from $343,214,204$282,714,350 for the nine monthsquarter ended September 30, 2012.$4,659,107,$2,280,538, or 8.21%3.75%, to $61,433,477$63,080,043 for the ninethree months ended September 30, 2013,March 31, 2014, from $56,774,370$60,799,505 for the ninethree months ended September 30, 2012.ninethree months ended September 30, 2013March 31, 2014 and 2012. Nine Months Ended September 30, 2013 2012 Average Average Average Average Amount Rate Amount Rate Noninterest bearing demand deposits $ 61,433,477 0.00 % $ 56,774,370 0.00 % Interest bearing demand deposits 44,249,194 0.11 41,965,768 0.21 Savings accounts 97,159,512 0.19 116,145,534 0.32 Time deposits 119,842,981 1.68 185,102,902 2.04 Total $ 322,685,164 0.69 % $ 399,988,574 1.06 % 2014 2013 Average Average Average Average Amount Rate Amount Rate Non-interest bearing demand deposits $ 63,080,043 0.00 % $ 60,799,505 0.00 % Interest bearing demand deposits 46,462,181 0.08 43,955,905 0.13 Savings accounts 85,720,561 0.12 101,727,853 0.24 Time deposits 83,741,250 1.21 137,030,592 1.79 Total $ 279,004,035 0.41 % $ 343,513,855 0.80 % $249,590,950$246,867,898 and $265,610,288$242,480,278 at September 30, 2013March 31, 2014 and December 31, 2012,2013, respectively. As of September 30, 2013March 31, 2014 and December 31, 2012,2013, our core deposits were 84.26%86.53% and 76.04%85.86% of total deposits, respectively. Overall, we have placed a high priority on securing low-cost local deposits over other, more costly, funding sources in the current low-rate environment.September 30, 2013March 31, 2014 and December 31, 2012,2013, are brokered time deposits of $29,005,000 and $57,885,000, respectively, equating to a decrease of $28,880,000.$23,005,000. In accordance with our asset/liability management strategy, we do not intend to renew or replace the brokered deposits outstanding at September 30, 2013,March 31, 2014, when they mature.78.02%84.00% and 74.51%84.45% on September 30, 2013March 31, 2014 and December 31, 2012,2013, respectively.-35- -38-September 30, 2013,March 31, 2014 is set forth in the following table: September 30, 2013 Three months or less $ 12,049,571 Over three through twelve months 21,310,969 Over one year through three years 12,812,259 Over three years 434,647 Total $ 46,607,446 March 31, 2014 Three months or less $ 12,553,720 Over three through twelve months 13,793,015 Over one year through three years 11,692,887 Over three years 386,829 Total $ 38,426,451 71.58%68.56% of our time deposits of $100,000 or more had scheduled maturities within one year. Large certificate of deposit customers tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits. We expect most certificates of depositsdeposit with maturities less than one year to be renewed upon maturity. However, there is the possibility that some certificates may not be renewed. We believe that, should these certificates of deposit not be renewed, the impact would be minimal on our operations and liquidity due to the availability of other funding sources.– Other borrowings at September 30, 2013March 31, 2014 and December 31, 2012,2013, consist of the following: September 30, December 31, 2013 2012 Securities sold under agreements to repurchase $ 4,918,396 $ 4,377,978 Advances from Federal Home Loan Bank 11,000,000 11,000,000 Junior subordinated debentures 10,310,000 10,310,000 March 31, December 31, 2014 2013 Securities sold under agreements to repurchase $ 5,386,566 $ 4,876,118 Advances from Federal Home Loan Bank 17,000,000 23,000,000 Junior subordinated debentures 10,310,000 10,310,000 September 30, 2013March 31, 2014 and December 31, 20122013 was $37.3$32.4 million and $41.2$32.1 million, respectively. The $3.9$0.3 million decreaseincrease during the first ninethree months of 20132014 resulted mainly from our net loss from operationsincome of $2.7 million, other comprehensive loss of $1.2 million, and the expenses related to the auction of our Series A and B Preferred stock of $0.2$0.3 million. No material expenses were recognized or capitalized due to the conversion of our Series C Preferred Stock.ninethree months ended September 30, 2013March 31, 2014 and 2012.2013. While we have not paid a cash dividend on our common stock since our inception, the Company has declared and paid dividends on its outstanding shares of preferred stock, and made quarterly interest payments on its trust-preferred securities as agreed. Under the terms of the Company MOU, the terms of which are more fully described as part of “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Regulatory Matters,” the Company must request prior approval from the Federal Reserve prior to declaring or paying dividends on ourits common stock or preferred stock, or making scheduled interest payments on ourits trust-preferred securities. Such approval was not granted byThe Federal Reserve approved the scheduled payment of dividends on the Company’s preferred stock and interest payments on the Company’s trust preferred securities for the first three quarters of 2011; however, the Federal Reserve for payment ofdid not approve the Company’s request to pay dividends and interest payments relating to its outstanding classes of preferred stock and trust preferred securities due and payable in the eight consecutive quarters ended September 30, 2013. Also, such approval was not granted for payments due in the fourth quarter of 2013.2011, and such consent has not been granted thereafter, largely out of deference to the Federal Reserve’s policy statement on dividends. Three Months Ended March 31, 2014 2013 Return on average assets 0.40 % 0.01 % Return on average equity 4.35 0.13 Average equity to average assets ratio 9.27 9.95 -36- Nine Months Ended September 30, 2013 2012 Return on average assets (0.91) % 0.32 % Return on average equity (8.78) 3.62 Average equity to average assets ratio 10.31 8.88 -39-September 30, 2013March 31, 2014 and December 31, 2012. 2013.September 30, 2013March 31, 2014 and December 31, 2012. September 30, 2013 December 31, 2012 Holding Holding Company Bank Company Bank Total capital (to risk-weighted assets) 17.78 % 16.34 % 17.16 % 15.72 % Tier 1 capital (to risk-weighted assets) 16.75 % 15.31 % 15.91 % 14.47 % Leverage or Tier 1 capital (to total average assets) 12.75 % 11.66 % 11.48 % 10.40 % March 31, 2014 December 31, 2013 Holding Holding Company Bank Company Bank Total capital (to risk-weighted assets) 15.93 % 14.55 % 15.75 % 14.35 % Tier 1 capital (to risk-weighted assets) 14.94 % 13.56 % 14.73 % 13.34 % Leverage or Tier 1 capital (to total average assets) 12.21 % 11.08 % 11.78 % 10.67 % ana historical cost basis in accordance with generally accepted accounting principles.-37- ourthe assets and liabilities of financial institutions such as our bank subsidiary are primarily monetary in nature. Therefore, the effect of changes in interest rates will have a more significant impacteffect on our performance than willdo the effectgeneral rate of changing pricesinflation and inflation in general.of goods and services. In addition, interest rates may generally increase as the rate of inflation increases, althoughdo not necessarily move in the same magnitude.direction or in the same magnitude as the prices of goods and services. As discussed previously in "Management’s Discussion and Analysis - Rate/Volume Analysis," we seek to manage the relationships between interest sensitive assetssensitive-assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.inflation.
our business activities.��These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At September 30, 2013March 31, 2014, we had issued commitments to extend credit of $36.5$35.9 million and standby letters of credit of $83 thousand$0.1 million through various types of commercial lending arrangements. Approximately $32.6$31.8 million of these commitments to extend credit had variable rates.September 30, 2013: After After One Three Within Through Through Within Greater (Dollars in Thousands) One Three Twelve One Than Month Months Months Year One Year Total Unused commitments to extend credit $ 2,509 $ 2,417 $ 8,168 $ 13,094 $ 23,412 $ 36,506 Standby letters of credit - 75 8 83 - 83 Totals $ 2,509 $ 2,492 $ 8,176 $ 13,177 $ 23,412 $ 36,589 -40- After After One Three Within Through Through Within Greater One Three Twelve One Than (Dollars in Thousands) Month Months Months Year One Year Total Unused commitments to extend credit $ 1,565 $ 1,246 $ 11,232 $ 14,043 $ 21,465 $ 35,508 Standby letters of credit - - 75 75 - 75 Totals $ 1,565 $ 1,246 $ 11,307 $ 14,118 $ 21,465 $ 35,583 it principally arises from interest rate risk inherent in our lending, investing, deposit gathering, and borrowing activities. Other types of market risks, such as foreign currency exchange rate risk and commodity price risk, do not generally arise in the normal course of our business. Our finance committee monitors and considers methods of managing exposure to interest rate risk. We have both an internal finance committee consisting of senior management and directors that meets at various times during each quarter and a management finance committee that meets weekly as needed. The finance committees are responsible for maintaining the level of interest rate sensitivity of our interest sensitive assets and liabilities within board-approved limits.20122013 and during the ninethree months ended September 30, 2013.March 31, 2014. As of September 30, 2013,March 31, 2014, we expect to be liability sensitive for the next twelvenine months because a majority of our deposits reprice over a 12-month period. Approximately 32%33% of our loans were variable rate loans at September 30, 2013.March 31, 2014. The ratio of cumulative gap to total earning assets after 12 months was a negative 40.72%44.69% because $125.1$137.0 million more liabilities will reprice in a 12-month period than assets. However, our gap analysis is not a precise indicator of our interest rate sensitivity position. The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those rates are viewed by us as significantly less interest-sensitive than market-based rates such as those paid on noncore deposits. Net interest income may be affected by other significant factors in a given interest rate environment, including changes in the volume and mix of interest-earning assets and interest-bearing liabilities.-38- September 30, 2013,March 31, 2014, our liquid assets, consisting of cash and cash equivalents amounted to $25.8$21.2 million, or 7.13%6.01% of total assets. Our investment securities, excluding nonmarketable securities, at September 30, 2013,March 31, 2014, amounted to $51.2$46.9 million, or 14.16%13.26% of total assets. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. However, $12.9$15.5 million of these securities were pledged as collateral to secure public deposits and borrowings as of September 30, 2013.March 31, 2014. At December 31, 2012,2013, our liquid assets, consisting of cash and cash equivalents, amounted to $38.1$18.2 million, or 9.10%5.13% of total assets. Our investment securities, excluding nonmarketable securities, at December 31, 20122013 amounted to $60.1$49.1 million, or 14.36%13.81% of total assets. Investment securities traditionally provide a secondary source of liquidity since they can be converted into cash in a timely manner. However, $14.9$17.2 million of these securities were pledged as collateral to secure public deposits and borrowings as of December 31, 2012.September 30, 2013,March 31, 2014, we had a $5.0$5.6 million unused line of credit with the Federal Reserve Bank and had sufficient unpledged securities that would have allowed us to borrow an additional $38.3$31.3 million from the Federal Reserve Bank.Reserve. Also, as member of the Federal Home Loan Bank of Atlanta, (the “FHLB”), we can make applications for borrowings that can be made for leverage purposes. The FHLB requires that securities, qualifying mortgage loans, and stock of the FHLB owned by the bankBank be pledged to secure any advances from them. We have an available line to borrow funds from the FHLB up to 30% of the Bank’s total assets, which provide additional available funds of $113.9$106.4 million at September 30, 2013.March 31, 2014. At that date the bankBank had drawn $11.0$17.0 million on this line. Finally, we had available at March 31, 2014 an unsecured line of credit, which was unused, to purchase up to $10.0 million of federal funds from an unrelated correspondent institution. We believe that the sources described above will be sufficient to meet our future liquidity needs.-41-Bank prior to declaring dividends. The Federal Reserve did not approve the Company’s request to pay dividends and interest payments relating to its outstanding classes of preferred stock and trust preferred securities due and payable in the thirdfourth quarter of 2011, and such consent has not been granted thereafter, largely out of deference to the Federal Reserve’s policy statement on dividends. A policy statement published by the Board of Governors of the Federal Reserve System indicates that, as a general matter, it believes the board of directors of a bank holding company should eliminate, defer, or significantly reduce the company’s dividends if:·the company’s net income available to shareholders for the preceding four quarters is not sufficient to fully fund the dividends; ·the prospective rate of earnings retention is not consistent with the company’s capital needs and overall current and prospective financial condition; or ·the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The policy statement notes that a failure to do so could result in a supervisory finding that the organization is operating in an unsafe and unsound manner. We believe that the criteria noted above will be heavily weighted by the Federal Reserve in evaluating any future request by the Company to pay dividends on its Series A Shares and the Series B Shares and interest on its outstanding trust preferred securities. Accordingly, we do not anticipate submitting further approval requests until such time as each of the stated criteria has been met or there are other compelling reasons to believe such a request, if submitted, would be approved.Asset/asset/liability management are to ensure adequate liquidity and to maintain an appropriate balance between interest sensitive assets and liabilities in order to minimize potentially adverse impacts on earnings from changes in market interest rates. rates.We have both an internal finance committee consisting of senior management that meets at various times during each quarter and a management finance committee that meets weekly as needed. The finance committees are responsible for maintaining the level of interest rate sensitivity of our interest-sensitive assets and liabilities within board-approved limits.September 30, 2013,March 31, 2014, for each of the time intervals indicated. The information in the table may not be indicative of our rate sensitivity position at other points in time. In addition, the maturity distribution indicated in the table may differ from the contractual maturities of the earning assets and interest-bearing liabilities presented due to consideration of prepayment speeds under various interest rate change scenarios in the application of the interest rate sensitivity methods described above.-39- After Greater After One Three Than One Within Through Through Within Year or (Dollars in Thousands) One Three Twelve One Non- Month Months Months Year Sensitive Total Interest-Earning Assets Interest-bearing deposits in other banks $ 22,895 $ - $ - $ 22,895 $ - $ 22,895 Time deposits in other banks - - 101 101 - 101 Loans (1) 16,338 14,246 44,112 74,696 157,223 231,919 Securities, taxable - - - - 48,084 48,084 Securities nontaxable - - - - 3,160 3,160 Nonmarketable securities 1,055 - - 1,055 - 1,055 Total earning assets 40,288 14,246 44,213 98,747 208,467 307,214 Interest-Bearing Liabilities Interest-bearing deposits: Demand deposits $ 47,721 $ - $ - $ 47,721 $ - $ 47,721 Savings deposits 91,309 - - 91,309 - 91,309 Time deposits 8,986 12,735 48,173 69,894 23,292 93,186 Total interest-bearing deposits 148,016 12,735 48,173 208,924 23,292 232,216 Federal Home Loan Bank Advances 10,000 - - 10,000 1,000 11,000 Junior subordinated debentures - - - - 10,310 10,310 Repurchase agreements 4,918 - - 4,918 - 4,918 Total interest-bearing liabilities 162,934 12,735 48,173 223,842 34,602 258,444 Period gap $ (122,646) $ 1,511 $ (3,960) $ (125,095) $ 173,865 Cumulative gap $ (122,646) $ (121,135) $ (125,095) $ (125,095) $ 48,770 Ratio of cumulative gap to
total earning assets (39.92) % (39.43) % (40.72) % (40.72) % 15.87 % (1) Including mortgage loans held for sale. After Greater After One Three Than One Within Through Through Within Year or One Three Twelve One Non- (Dollars in Thousands) Month Months Months Year Sensitive Total Assets Interest-earning assets Interest-bearing deposits in other banks $ 17,877 $ - $ - $ 17,877 $ - $ 17,877 Time Deposits in other banks - - 101 101 - 101 Loans (1) 20,582 12,761 32,206 65,549 175,023 240,572 Securities - taxable - - - - 43,752 43,752 Securities - nontaxable - - - - 3,146 3,146 Nonmarketable securities 1,142 - - 1,142 - 1,142 Total earning assets 39,601 12,761 32,307 84,669 221,921 306,590 Liabilities Interest-bearing liabilities Interest-bearing deposits: Demand deposits 52,101 - - 52,101 - 52,101 Savings deposits 85,752 - - 85,752 - 85,752 Time deposits 17,518 7,801 36,138 61,457 19,331 80,788 Total interest-bearing deposits 155,371 7,801 36,136 199,310 19,331 218,641 Federal Home Loan Bank advances - - 17,000 17,000 - 17,000 Junior subordinated debentures - - - - 10,310 10,310 Repurchase agreements 5,387 - - 5,387 - 5,387 Total interest-bearing liabilities 160,758 7,801 53,138 221,697 29,641 251,338 Period gap $ (121,157 ) $ 4,960 $ (20,831 ) $ (137,028 ) $ 192,280 Cumulative gap $ (121,157 ) $ (116,197 ) $ (137,028 ) $ (137,028 ) $ 55,252 Ratio of cumulative gap to total earning assets (39.52 )% (37.90 )% (44.69 )% (44.69 )% 18.02 % -42-(1)
Including mortgage loans held for saleManagementManagement’s Discussion and Analysis of Financial Condition and Results of Operations, for quantitative and qualitative disclosures about market risk, which information is incorporated herein by reference.Procedures.Procedureserrorerrors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.-40- thirdfirst fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.2012,2013, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.(a) On July 31, 2013 (the “Mandatory Conversion Date”), all 2,293 shares of the Company’s 7% Cumulative Mandatorily Convertible Series C Preferred Stock (the “Series C Shares”) converted automatically into 470,829 shares of common stock pursuant to the terms of the Company’s articles of incorporation, as amended to create the Series C Shares. On the Mandatory Conversion Date, eachSeries C Share was automatically converted into the number of shares of common stock obtained by dividing the initial purchase price per share of $1,000, plus the amount of accrued but unpaid dividends per share, by $5.563, which was the Company‘s tangible common equity per share as of June 30, 2013. A de minimis amount of cash was also paid to each holder of Series C Shares to avoid the issuance of fractional shares as result of the conversion.The conversion was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Act”), pursuant to section 3(a)(9) of the Act, as the conversion was mandatory under the terms of the Series C Shares and no commission or other remuneration was paid for soliciting the exchange. See “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Regulatory Matters” for a discussion of regulatory restrictions on the Company’s ability to pay dividends.(b) Not applicable. (c)The following stock repurchases were made during the period covered by this report in connection with administration of the Company’s employee stock ownership plan.-43-Period Total Number
of Shares
Purchased Average Price
Paid per
Share Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs July 1, 2013 – July 30, 2013 - $ - - - August 1, 2013 - August 31, 2013 237 $ 1.87 - - September 1, 2013 – September 30, 2013 - $ - - - 237 $ 1.87 - - Exhibit NumberExhibit Number Exhibit 10.1 Waiver of Benefits, dated December 30, 2013, by and among F.R. Saunders, Jr., the Company and the Bank 10.2 Waiver of Benefits, dated December 30, 2013, by and among Jeffrey A. Paolucci, the Company and the Bank 10.3 Waiver of Benefits, dated December 30, 2013, by and among Thomas C. Ewart, Sr., the Company and the Bank 10.4 Employment Agreement, dated as of April 23, 2003, by and between Thomas C. Ewart, Sr. and the Bank(1) 31.1 Certification pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. 31.2 Certification pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleytheSarbanes-Oxley Act of 2002.32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101 September 30, 2013March 31, 2014 in XBRL. Pursuant to Regulation 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.(1) Incorporated by reference from the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003. -41- -44-Pursuant to November 8, 2013/s/ F.R. SAUNDERS, JR. F. R. Saunders, Jr. President and& Chief Executive Officer (Principal Executive Officer) Date: November 8, 2013May 13, 2014/s/ JEFFREYJEFFERY A. PAOLUCCI JeffreyJeffery A. Paolucci ExecutiveSenior Vice President and Chief Financial Officer(Principal Financial Officer) -45-
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