Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-Q

 

 

 

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

For the quarterly period ended March 31, 2011

OR

 

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

For the transition period from              to             

Commission file number: 000-33021

 

 

GREER BANCSHARES INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

 

South Carolina		57-1126200
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1111 W. Poinsett Street, Greer, South Carolina		29650
(Address of principal executive offices)		(Zip Code)

(864) 877-2000

(Registrant’s telephone number, including area code)

[None]

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class		Outstanding at 5/13/11
Common Stock, $5.00 par value per share		2,486,692 shares

 

 

 

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GREER BANCSHARES INCORPORATED

Index

 

PART I – Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010					3
Consolidated Statements of Loss for the Three months Ended March 31, 2011 and 2010					4
Consolidated Statements of Comprehensive Income (Loss) for the Three months Ended March  31, 2011 and 2010					5
Consolidated Statement of Changes in Stockholders’ Equity for the Three months Ended March 31, 2011					6
Consolidated Statements of Cash Flows for the Three months Ended March 31, 2011 and 2010					7
Notes to Consolidated Financial Statements					9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations					26
Item 3. Quantitative and Qualitative Disclosures about Market Risk					37
Item 4. Controls and Procedures					37
PART II - OTHER INFORMATION
Item 1.		Legal Proceedings			37
Item 1A.		Risk Factors			37
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 3.		Defaults Upon Senior Securities			38
Item 4.		(Intentionally deleted)
Item 5.		Other Information			38
Item 6.		Exhibits			38
Signatures					39
Index to Exhibits					40

 

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

GREER BANCSHARES INCORPORATED

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except per share data)

 

		March 31, 2011				December 31, 2010*
Assets
Cash and due from banks		$	26,582			$	23,700
Interest bearing deposits in banks			1,765				512
Federal funds sold			3,567				3,754
Cash and cash equivalents			31,914				27,966
Investment securities:
Available for sale			130,455				132,813
Loans, net of allowance for loan losses of $7,486 and $7,495, respectively			250,635				262,505
Loans held for sale			705				1,082
Premises and equipment, net			5,189				5,253
Accrued interest receivable			1,645				1,829
Restricted stock			5,309				5,309
Other real estate owned			9,042				9,038
Deferred tax asset			305				457
Other assets			9,166				10,515
Total Assets		$	444,365			$	456,767
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Noninterest bearing		$	33,195			$	36,434
Interest bearing			288,776				284,951
Total deposits			321,971				321,385
Long term borrowings			100,841				113,841
Other liabilities			3,067				3,280
Total Liabilities			425,879				438,506
Stockholders’ Equity:
Preferred stock—no par value 200,000 shares authorized;
Preferred stock, Series 2009-SP, no par value, 9,993 shares issued and outstanding at March 31, 2011 and December 31, 2010			9,602				9,571
Preferred stock, Series 2009-WP, no par value, 500 shares issued and outstanding at March 31, 2011 and December 31, 2010			550				555
Common stock—par value $5 per share, 10,000,000 shares authorized; 2,486,692 shares issued and outstanding at March 31, 2011 and December 31, 2010			12,433				12,433
Additional paid in capital			3,654				3,634
Accumulated deficit			(7,268	)			(7,203	)
Accumulated other comprehensive loss			(485	)			(729	)
Total Stockholders’ Equity			18,486				18,261
Total Liabilities and Stockholders’ Equity		$	444,365			$	456,767

 

*	This information is derived from Audited Consolidated Financial Statements.

The accompanying notes are an integral part of these consolidated financial statements.

 

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GREER BANCSHARES INCORPORATED

Consolidated Statements of Loss

(Unaudited)

(Dollars in thousands, except per share data)

 

		For Three months Ended
		3/31/11				3/31/10
Interest Income:
Loans		$	3,506			$	4,002
Investment securities:
Taxable			719				927
Exempt from federal income tax			301				247
Federal funds sold			13				6
Other			1				7
Total interest income			4,540				5,189
Interest Expense:
Interest on deposit accounts			1,062				1,202
Interest on short term borrowings			—				5
Interest on long term borrowings			757				1,026
Total interest expense			1,819				2,233
Net interest income			2,721				2,956
Provision for loan losses			100				1,112
Net interest income after provision for loan losses			2,621				1,844
Non-interest income:
Customer service fees			178				187
Gain on sale of investment securities			1				956
Other noninterest income			428				433
Total noninterest income			607				1,576
Non-interest expenses:
Salaries and employee benefits			1,337				1,407
Occupancy and equipment			168				199
Postage and supplies			53				61
Marketing			27				51
Directors fees			23				44
Professional fees			157				88
FDIC deposit insurance assessments			193				155
Other real estate owned and foreclosure			968				1,093
Other			341				417
Total noninterest expenses			3,267				3,515
Loss before income taxes			(39	)			(95	)
Provision for income taxes:			—				—
Net loss			(39	)			(95	)
Preferred stock dividends and net discount accretion			(164	)			(159	)
Net loss available to common shareholders		$	(203	)		$	(254	)
Basic net loss per share of common stock		$	(.08	)		$	(.10	)
Diluted net loss per share of common stock		$	(.08	)		$	(.10	)

The accompanying notes are an integral part of these consolidated financial statements.

 

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GREER BANCSHARES INCORPORATED

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(Dollars in thousands)

 

		For Three months Ended
		3/31/11				3/31/10
Net Loss		$	(39	)		$	(95	)
Other comprehensive income(loss), net of tax:
Unrealized holding gain on available for sale investment securities			245				62
Less reclassification adjustments for gains included in net loss			(1	)			(631	)
Other comprehensive income (loss), net of tax			244				(569	)
Comprehensive Income (Loss)		$	205			$	(664	)

The accompanying notes are an integral part of these consolidated financial statements.

 

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GREER BANCSHARES INCORPORATED

Consolidated Statement of Changes in Stockholders’ Equity

for the Three Months Ended March 31, 2011

(Unaudited)

(Dollars in thousands, except per share data)

 

										Common Stock				Additional Paid In  capital				Accumulated Deficit				Accumulated Other Comprehensive Loss				Total Stockholders’ Equity
		Preferred stock
		Series 2009-SP				Series 2009-WP
Balances at December 31, 2010		$	9,571			$	555			$	12,433			$	3,634			$	(7,203	)		$	(729	)		$	18,261
Net loss			—				—				—				—				(39	)			—				(39	)
Other comprehensive income, net of tax			—				—				—				—				—				244				244
Amortization of premium and discount on preferred stock			31				(5	)			—				—				(26	)			—				—
Preferred stock dividends declared			—				—				—				—				—				—				—
Stock based compensation			—				—				—				20				—				—				20
Balances at March 31, 2011		$	9,602			$	550			$	12,433			$	3,654			$	(7,268	)		$	(485	)		$	18,486

The accompanying notes are an integral part of these consolidated financial statements.

 

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GREER BANCSHARES INCORPORATED

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

 

		For the Three months Ended
		3/31/11				3/31/10
Operating activities
Net loss		$	(39	)		$	(95	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation			94				91
Amortization of premiums on mortgage-backed securities			399				—
Gain on sale/call of investment securities			(1	)			(956	)
Loss on sale of land			—				4
(Gain) loss on sale of other real estate owned			(47	)			41
Impairment loss on restricted stock			—				964
Impairment loss on other real estate owned			657				—
Provision for loan losses			100				1,112
Origination of loans held for sale			(4,278	)			(2,028	)
Proceeds from sales of loans held for sale			4,688				1,516
Gain on sale of loans held for sale			(33	)			(34	)
Deferred income tax benefit			(1	)			(355	)
Decrease in prepaid FDIC deposit insurance			183				146
Stock based compensation			20				23
Increase in cash surrender value of life insurance			(74	)			(81	)
Net change in:
Accrued interest receivable			183				161
Other assets			1,240				180
Accrued interest payable			(213	)			(109	)
Other liabilities			1				(168	)
Net cash provided by operating activities			2,879				412
Investing activities
Activity in available-for-sale securities:
Sales			—				34,413
Maturities, payment and calls			7,019				7,991
Purchases			(4,664	)			(30,070	)
Net decrease in loans			9,480				3,670
Proceeds from sale of other real estate owned			1,677				741
Proceeds from sale of land			—				590
Purchase of premises and equipment			(29	)			(33	)
Net cash provided by investing activities			13,483				17,302

The accompanying notes are an integral part of these consolidated financial statements.

 

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GREER BANCSHARES INCORPORATED

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

 

		For the Three months Ended
		3/31/11				3/31/10
Financing activities
Net increase in deposits			586				12,234
Repayment of notes payable to FHLB			(13,000	)			(22,000	)
Proceeds from notes payable to FHLB			—				9,000
Net decrease in short term borrowings			—				(13,993	)
Preferred stock cash dividends paid			—				(68	)
Net cash used for financing activities			(12,414	)			(14,827	)
Net increase in cash and cash equivalents			3,948				2,887
Cash and equivalents, beginning of period			27,966				12,664
Cash and equivalents, end of period		$	31,914			$	15,551
Cash paid for:
Income taxes		$	—			$	—
Interest		$	2,032			$	2,342
Non-cash investing and financing activities
Real estate acquired in satisfaction of loans		$	2,508			$	407
Loans to facilitate sale of other real estate owned		$	217			$	410
Unrealized gains (losses) on available for sale investment securities, net of tax		$	243			$	(569	)
Preferred stock dividends declared not paid		$	—			$	68

The accompanying notes are an integral part of these consolidated financial statements.

 

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

Note 1 – Basis of Presentation

Greer Bancshares Incorporated (the “Company”) is a one-bank holding company for Greer State Bank (the “Bank”). The Company currently engages primarily in owning and managing the Bank.

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. The statements of loss and comprehensive loss for the interim periods are not necessarily indicative of the results that may be expected for the entire year or any other future interim period.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the Company for the year ended December 31, 2010, which are included in the 2010 Annual Report on Form 10-K.

Note 2 – Net Loss per Common Share

Basic and diluted loss per common share is computed by dividing net loss adjusted for cumulative preferred stock dividends by the weighted average number of common shares outstanding during each period presented. The weighted average common shares outstanding were 2,486,692 (basic and diluted) for the three months ended March 31, 2011 and 2010. Anti-dilutive options totaling 321,621 and 350,197 have been excluded from the loss per share calculation for the three months ended March 31, 2011 and 2010, respectively.

Note 3 – Income Taxes

The Company files a consolidated federal income tax return and separate state income tax returns. Income taxes are allocated to each company as if filed separately for federal purposes and based on the separate returns filed for state purposes.

Certain items of income and expense for financial reporting are recognized differently for income tax purposes (principally the provision for loan losses, deferred compensation and depreciation). Provisions for deferred taxes are made in recognition of such temporary differences as required by the Income Taxes Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Current income taxes are recorded based on amounts due with the current income tax returns.

The need for a valuation allowance is considered when it is determined more likely than not that a deferred tax asset will not be realized. In making this determination, management considers all available evidence, including the existence of available reversing temporary differences, the ability to generate future taxable income and available tax planning strategies. Primarily as the result of recent earnings history and the inability to reasonably predict future taxable income caused by the volatility in the loan portfolio, the Company maintained a full valuation allowance, exclusive of deferred taxes on the investment securities, on the net deferred tax assets outstanding at March 31, 2011.

 

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

 

Note 4 – Fair Value

Fair value is defined as the exchange 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 which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency mortgage-backed debt securities, corporate debt securities, derivative contracts and residential mortgage loans held-for-sale.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes collateralized debt obligations, impaired loans and other real estate owned (“OREO”).

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices of like or similar securities, 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.

Impaired 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 losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with GAAP. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2011, substantially all of the total impaired loans were evaluated based on either the fair value of the collateral or its liquidation value. In accordance with GAAP, impaired loans where an allowance is established based on the fair value of collateral require classification

 

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

 

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 impaired 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 impaired loan as nonrecurring Level 3.

Other Real Estate Owned

Other real estate owned, consisting of properties obtained through foreclosure or in satisfaction of loans, is reported at net realizable value, determined on the basis of current appraisals, comparable sales and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated as a charge against the allowance for loan losses. Gains or losses on sale and any subsequent adjustments to the value are recorded as a component of foreclosed real estate expense. Other real estate owned is included in Level 3 of the valuation hierarchy.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Below is a table that presents information about certain assets and liabilities measured at fair value:

 

(Dollars in thousands)						Fair Value Measurements at Reporting Date Using
Description		Fair Value				Level 1				Level 2				Level 3
March 31, 2011
Available for sale securities:
Municipal securities		$	30,490			$	—			$	30,490			$	—
Mortgage-backed securities			99,619				—				99,619				—
Collateralized debt obligation			346				—				—				346
Total available for sale securities		$	130,455			$	—			$	130,109			$	346
December 31, 2010
Available for sale securities:
Municipal securities		$	30,638			$	—			$	30,638			$	—
Mortgage-backed securities			101,793				—				101,793				—
Collateralized debt obligation			382				—				—				382
Total available for sale securities		$	132,813			$	—			$	132,431			$	382

Changes in Level 3 Fair Value Measurements

When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement. However, since Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources), the gains and losses below include changes in fair value due in part to observable factors that are part of the valuation methodology.

 

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

 

A reconciliation of the beginning and ending balances of Level 3 assets, which consists of one collateralized debt obligation, and liabilities recorded at fair value on a recurring basis for the three months ended March 31, 2011 is as follows:

 

(Dollars in thousands)		Assets				Liabilities
Fair value, December 31, 2010		$	382			$	—
Total unrealized (loss) included in other comprehensive income			(36	)			—
Transfers in and/or out of level 3			—				—
Fair value March 31, 2011		$	346			$	—

There were no Level 3 liabilities recorded at fair value on a recurring basis during the three months ended March 31, 2011 and 2010.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below.

 

(Dollars in thousands)						Fair Value Measurements at Reporting Date Using
Description		3/31/2011				Level 1				Level 2				Level 3
Impaired loans		$	9,074			$	—			$	—			$	9,074
OREO			9,042				—				—				9,042
(Dollars in thousands)						Fair Value Measurements at Reporting Date Using
Description		12/31/2010				Level 1				Level 2				Level 3
Impaired loans		$	9,382			$	—			$	—			$	9,382
OREO			9,038				—				—				9,038

The Bank had impaired loans with outstanding balances of approximately $15,356,000 and $19,980,000 at March 31, 2011 and December 31, 2010, respectively. Impaired loans with either charge-offs or specific reserves totaled $12,208,000 (Gross of charge-off) at March 31, 2011. Of this amount $1,835,000 has been charged-off and $1,299,000 has been specifically reserved. Collateral dependent impaired loans were approximately $11,747,000 at December 31, 2010 with valuation allowances of $1,485,000.

Although the Company did not elect to adopt the fair value option for any financial instruments, accounting standards require disclosure of fair value information, whether or not recognized in the balance sheet, when it is practicable to estimate the fair value. A financial instrument is defined as cash, evidence of an ownership interest in an entity, or contractual obligations that require the exchange of cash or other financial instruments. Certain items are specifically excluded from the disclosure requirements, including common stock, premises and equipment, real estate held for sale and other assets and liabilities. The following methods and assumptions were used in estimating fair values of financial instruments:

 

•

Fair value approximates carrying amount for cash and due from banks due to the short-term nature of the instruments.

 

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

 

•

Investment securities are valued using quoted fair market prices for actively traded securities, pricing models for investment securities traded in less active markets and discounted future cash flows for securities with no active market.

 

•

Fair value for variable rate loans that re-price frequently and for loans that mature in less than 90 days is based on the carrying amount. Fair value for mortgage loans, personal loans and all other loans (primarily commercial) is based on the discounted present value of the estimated future cash flows. Discount rates used in these computations approximate the rates currently offered for similar loans of comparable terms, credit quality and adjustments for liquidity related to the current market environment.

 

•

Due to the redemptive provisions of the restricted stock, fair value equals cost. The carrying amount is adjusted for any other than temporary declines in value.

 

•

The carrying amount for the cash surrender value of life insurance is a reasonable estimate of fair value.

 

•

The carrying value for accrued interest receivable and payable is a reasonable estimate of fair value.

 

•

Fair value for demand deposit accounts and interest-bearing accounts with no fixed maturity date is equal to the carrying amount. Certificate of deposit accounts maturing within thirty days are valued at their carrying amount. Certificate of deposit accounts maturing after thirty days are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments.

 

•

Fair value for federal funds sold and purchased is based on the carrying amount since these instruments typically mature within three days from the transaction date.

 

•

Fair value for variable rate long-term debt that re-prices frequently is based on the carrying amount. Fair value for fixed rate debt is based on the discounted present value of the estimated future cash flows. Discount rates used in these computations approximate rates currently offered for similar borrowings of comparable terms and credit quality.

 

•

Fair values for derivatives are based on the present value of future cash flows based on the interest rate spread between the fixed rate and the floating rate.

 

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

 

Management uses its best judgment in estimating fair value based on the above assumptions. Thus, the fair values presented may not be the amounts that could be realized in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses that would be incurred in an actual sale or settlement are not taken into consideration in the fair values presented. The estimated fair values of the Company’s financial instruments are as follows:

 

		March 31, 2011								December 31, 2010
(Dollars in thousands)		Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
Financial assets
Cash and cash equivalents		$	31,914			$	31,914			$	27,966			$	27,966
Investment securities			130,455				130,455				132,813				132,813
Loans - net			250,635				245,469				262,505				257,625
Loans held for sale			705				714				1,082				1,100
Restricted stock			5,309				5,309				5,309				5,309
Accrued interest receivable			1,645				1,645				1,829				1,829
Bank owned life insurance			7,065				7,065				6,991				6,991
Financial liabilities
Deposits		$	321,971			$	322,746			$	321,385			$	322,438
Repurchase agreements			15,000				15,474				15,000				15,389
Notes payable to FHLB			74,500				76,488				87,500				89,848
Junior subordinated debentures			11,341				11,341				11,341				11,341
Accrued interest payable			1,135				1,135				1,399				1,399

 

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

 

Note 5 – Investment Securities

The amortized cost, gross unrealized gains and losses, and estimated fair value of investment securities are as follows:

 

		March 31, 2011
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Available for sale:
Municipal securities		$	30,557			$	357			$	424			$	30,490
Mortgage-backed securities			100,353				587				1,321				99,619
Collateralized debt obligation			336				10				—				346
		$	131,246			$	954			$	1,745			$	130,455
		December 31, 2010
(Dollars in thousands)		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Fair Value
Available for sale:
Municipal securities		$	31,263			$	188			$	813			$	30,638
Mortgage-backed securities			102,400				618				1,225				101,793
Collateralized debt obligation			336				46				—				382
		$	133,999			$	852			$	2,038			$	132,813

The amortized cost and estimated fair value of investment securities at March 31, 2011 by contractual maturity for debt securities are shown below. Mortgage-backed securities have not been scheduled since expected maturities will differ from contractual maturities because borrowers may have the right to prepay the obligations. All mortgage-backed securities owned by the Company are those of government sponsored enterprises.

 

		Available for Sale
(Dollars in thousands)		Amortized Cost				Fair Value
Due in 1 year		$	265			$	266
Over 1 year through 5 years			1,038				1,073
After 5 years through 10 years			8,917				9,012
Over 10 years			20,673				20,485
			30,893				30,836
Mortgage backed securities			100,353				99,619
Total		$	131,246			$	130,455

Investment securities with an aggregate book value of approximately $94,374,000 and $92,579,000 at March 31, 2011 and December 31, 2010, respectively, were pledged to secure public deposits, Federal Home Loan borrowings and repurchase agreements.

 

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

 

The fair value of securities with temporary impairment at March 31, 2011 and December 31, 2010 is shown below:

 

(Dollars in thousands)		Impairment Less Than Twelve Months								Impairment Over Twelve Months
March 31, 2011		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Description of securities:
Mortgage backed securities		$	58,199			$	1,321			$	—			$	—
Municipal securities			12,459				366				942				58
Total		$	70,658			$	1,687			$	942			$	58
(Dollars in thousands)		Impairment Less Than Twelve Months								Impairment Over Twelve Months
December 31, 2010		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
Description of securities:
Mortgage backed securities		$	56,367			$	1,225			$	—			$	—
Municipal securities			14,930				695				882				118
Total		$	71,297			$	1,920			$	882			$	118

Management believes all of the unrealized losses as of March 31, 2011 and December 31, 2010 are temporary and as a result of temporary changes in the market. Twenty-eight municipal and seventeen mortgage-backed securities had unrealized losses at March 31, 2011 while at December 31, 2010, thirty-three were municipals and sixteen were mortgage-backed securities. The temporary impairment is due primarily to changes in the short and long term interest rate environment since the purchase of the securities and is not related to credit issues of the issuer. The Bank has sufficient cash, investments showing unrealized gains and borrowing sources to provide sufficient liquidity to hold the securities with unrealized losses until maturity or a recovery of fair value, if necessary.

The Company reviews its investment portfolio on a quarterly basis, judging each investment for OTTI. For securities for which there is no expectation to sell or it is more likely than not that management will not be required to sell, the OTTI is separated into credit and noncredit components. The credit-related OTTI, represented by the expected loss in principal, is recognized in noninterest income, while the noncredit-related OTTI is recognized in the other comprehensive income (loss) (“OCI”). Noncredit-related OTTI results from other factors, including increased liquidity spreads and extension of the security. For securities for which there is an expectation to sell, all OTTI is recognized in earnings.

The Company owns a collateralized debt obligation which it would sell prior to fully recovering any unrealized loss. The security is collateralized by subordinated debt issued by approximately forty-two commercial banks located throughout the United States. This security was valued considering multiple stress scenarios using conservative assumptions for underlying collateral defaults, loss severity and prepayments. The present value of the future cash flows was calculated using 10% as a discount rate. The difference in the present value and the carrying value of the security would be OTTI, if any. The security is currently carried at an estimated fair value of approximately $346,000 at March 31, 2011.

 

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

 

The following table presents more detail on the collateralized debt obligation as of March 31, 2011 with an original par value of approximately $1,087,000. These details are listed separately due to the inherent level of risk for continued OTTI on this security.

 

(Dollars in thousands) Description		Cusip#				Current Credit Rating				Book Value				Fair Value				Unrealized Gain				Present Value Discounted Cash Flow
Collateralized debt obligation
Trapeza 2003-5A			89412RAL9				Ca			$	336			$	346			$	10			$	346

Gross realized gains, gross realized losses, sale and call proceeds for available for sale securities for the three months ended March 31 are summarized as follows. These net gains or losses are shown in noninterest income as gain on sale of available for sale securities.

 

(Dollars in thousands)		2011				2010
Gross realized gains		$	1			$	968
Gross realized losses			—				12
Net gain on sale of securities		$	1			$	956
Call proceeds		$	275			$	34,413

Note 6 – Loans

A summary of loans outstanding by major classification follows:

 

 

(Dollars in thousands)		March 31, 2011				December 31, 2010
Commercial and industrial:
Commercial		$	45,597			$	49,467
Leases & other			276				342
Total commercial and industrial:			45,873				49,809
Commercial real estate:
Construction/land			37,949				40,243
Commercial mortgages - owner occupied			43,426				42,569
Other commercial mortgages			65,945				71,213
Total commercial real estate			147,320				154,025
Consumer real estate:
1-4 residential			34,059				35,027
Home equity loans and lines of credit			25,660				25,846
Total consumer real estate			59,719				60,873
Consumer installment:			5,209				5,293
Total loans			258,121				270,000
Allowance for loan losses			(7,486	)			(7,495	)
Net loans		$	250,635			$	262,505

 

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

 

Loans totaling approximately $94,543,000 were pledged as collateral for borrowings from the FHLB and Federal Reserve.

Loan Origination/Risk Management. The Bank has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria.

With respect to loans to developers and builders that are secured by non-owner occupied properties that may be originated from time to time, management generally requires the borrower to have had an existing relationship with the Bank and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing.

Consumer loans are originated and underwritten based on policies and procedures developed and modified by Bank management. The relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Underwriting standards for 1-4 residential and home equity loans include, but are not limited to, a maximum loan-to-value percentage of 80%, collection remedies, the number of such loans a borrower can have at one time and documentation requirements.

The Bank engages an independent loan review company to review and validate the credit risk program on a periodic basis. Results of these reviews are presented to management. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the lending policies and procedures.

 

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

 

Non-Accrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans that are 90 days past due are placed on non-accrual status or when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Non-accrual loans, segregated by class of loans, were as follows:

 

(Dollars in thousands)		March 31, 2011				December 31, 2010
Commercial and industrial:
Commercial		$	3,253			$	2,739
Leases & other			—				—
Commercial real estate:
Construction/land			5,918				6,995
Commercial mortgages - owner occupied			3,329				2,865
Other commercial mortgages			2,788				4,750
Consumer real estate:
1-4 residential			670				311
Home equity loans and lines of credit			1,400				794
Consumer installment:
Consumer installment			108				251
Total		$	17,466			$	18,705

The gross interest income that would have been recorded under the original terms of the non-accrual loans amounted to approximately $277,000 and $194,000 for the three months ended March 31, 2011 and 2010, respectively. $70,400 and $24,200 in gross interest income was recorded on non-accrual loans for the three months ended March 31, 2011 and 2010, respectively.

 

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

 

An analysis of past due loans, segregated by class of loans, as of March 31, 2011 and December 31, 2010 follows:

 

(Dollars in thousands)		Loans 30-89 days				Loans 90 or more days				Total past due				Current loans				Total loans				>90 days and still accruing
March 31, 2011
Commercial and industrial:
Commercial		$	4,772			$	983			$	5,755			$	39,842			$	45,597			$	—
Leases & other			—				—				—				276				276				—
Commercial real estate:
Construction/land			396				5,251				5,647				32,302				37,949				—
Commercial mortgages - owner occupied			1,001				2,812				3,813				39,613				43,426				—
Other commercial mortgages			2,291				1,227				3,518				62,427				65,945				—
Consumer real estate:
1-4 residential			1,676				672				2,348				31,711				34,059				—
Home equity loans and lines of credit			1,092				1,337				2,429				23,231				25,660				—
Consumer installment:
Consumer installment			201				62				263				4,946				5,209				—
Total		$	11,429			$	12,344			$	23,773			$	234,348			$	258,121			$	—
		Loans 30-89 days				Loans 90 or more days				Total past due				Current loans				Total loans				>90 days and still accruing
December 31, 2010
Commercial and industrial:
Commercial		$	4,734			$	311			$	5,045			$	44,422			$	49,467			$	—
Leases & other			—				—				—				342				342				—
Commercial real estate:
Construction/land			910				5,598				6,508				33,735				40,243				—
Commercial mortgages - owner occupied			2,596				1,840				4,436				38,132				42,568				—
Other commercial mortgages			1,419				1,955				3,374				67,840				71,214				—
Consumer real estate:
1-4 residential			1,743				96				1,839				33,188				35,027				—
Home equity loans and lines of credit			1,047				749				1,796				24,050				25,846				—
Consumer installment:
Consumer installment			377				124				501				4,792				5,293				—
Total		$	12,826			$	10,673			$	23,499			$	246,501			$	270,000			$	—

Impaired Loans. Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

 

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

 

Impaired loans are summarized as follows:

 

(Dollars in thousands)		Unpaid contractual principal balance				Recorded investment with no allowance				Recorded investment with allowance				Total recorded investment				Related allowance				Average Recorded Investment in 2011
March 31, 2011
Commercial and industrial:
Commercial		$	4,380			$	2,854			$	790			$	3,644			$	437			$	3,586
Leases & other			—				—				—				—				—				—
Commercial real estate:
Construction/land			5,936				4,082				1,231				5,313				246				7,792
Commercial mortgages - owner occupied			3,696				1,276				2,248				3,524				565				3,245
Other commercial mortgages			3,183				2,359				516				2,875				51				3,514
Total		$	17,195			$	10,571			$	4,785			$	15,356			$	1,299			$	18,137

 

		Unpaid contractual principal balance				Recorded investment with no allowance				Recorded investment with allowance				Total recorded investment				Related allowance
December 31, 2010
Commercial and industrial:
Commercial		$	4,145			$	2,564			$	853			$	3,417			$	492
Leases & other			—				—				—				—				—
Commercial real estate:
Construction/land			7,498				5,314				1,883				7,197				444
Commercial mortgages - owner occupied			1,884				1,185				566				1,751				35
Other commercial mortgages			8,818				6,200				1,415				7,615				514
Total		$	22,345			$	15,263			$	4,717			$	19,980			$	1,485

Credit Quality Indicators. As part of the on-going monitoring of credit quality of the Bank’s loan portfolio, management tracks certain credit quality indicators including trends related to 1) the weighted-average risk rate of loan pools, 2) the level of classified loans, 3) non-performing loans and 4) general local economic conditions.

Management utilizes a risk rating matrix to assign a risk rate to each of its loans. Loans are rated on a scale of 1-7. A description of the general characteristics of the 7 risk ratings is as follows:

 

•

Risk ratings 1-3 (Pass) - These risk ratings include loans to high credit quality borrowers with satisfactory credit and repayment history, stable trends in industry and company performance, management that exhibits average strength in comparison to others in the industry, sound repayment sources and average to above average individual or guarantor support.

 

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

 

•

Risk rating 4 (Monitor) - This risk rating includes loans to borrowers with satisfactory credit, some slow repayment history, stable trends in their industry and positive operating trends. Financial conditions are achieving performance expectations at a slower pace than anticipated. Management changes, interim losses and repayment sources are somewhat strained but there is satisfactory individual or guarantor support.

 

•

Risk rating 5 (Watch) - This risk rating includes loans to borrowers with increasing delinquency history, stable to decreasing or adverse trends in their industry and company performance, adverse trends in operations, marginal primary repayment sources with secondary repayment sources available, marginal debt service coverage, some identifiable risk of collection and limited individual or guarantor support.

 

•

Risk rating 6 (Substandard) - This risk rating includes loans to borrowers with demonstration of inability to perform in a timely manner, decreasing or adverse trends in their industry and company performance, well-defined weakness in management, profitability or liquidity, limited repayment sources and individual or guarantor support is declining. There is a distinct possibility the Bank will sustain losses related to this risk rating if deficiencies are not corrected.

 

•

Risk rating 7 (Doubtful) - This risk rating includes loans to borrowers with demonstration of inability to perform in a timely manner and no customer response, decreasing or adverse trends in industry, high possibility Bank will sustain loss unless pending factors are successful, full collection or liquidation is highly questionable and improbable, repayment sources are severely impaired or nonexistent and no individual or guarantor support.

The following table represents risk rating loan totals, segregated by class.

 

(Dollars in thousands)		Risk rating 1-3				Risk rating 4				Risk rating 5				Risk rating 6				Total
March 31, 2011
Commercial and industrial:
Commercial		$	14,380			$	18,153			$	3,113			$	9,951			$	45,597
Leases & other			276				—				—				—				276
Commercial real estate:
Construction/land			9,019				13,087				708				15,136				37,950
Commercial mortgages - owner occupied			23,021				11,855				3,534				5,017				43,427
Other commercial mortgages			22,652				27,799				3,470				12,023				65,944
Consumer real estate:
1-4 residential			25,669				3,435				2,972				1,983				34,059
Home equity loans and lines of credit			20,609				2,131				926				1,994				25,660
Consumer installment:
Consumer installment			4,325				60				298				525				5,208
Total		$	119,951			$	76,520			$	15,021			$	46,629			$	258,121

 

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

 

		Risk rating 1-3				Risk rating 4				Risk rating 5				Risk rating 6				Total
December 31, 2010
Commercial and industrial:
Commercial		$	17,730			$	16,847			$	4,012			$	10,878			$	49,467
Leases & other			342				—				—				—				342
Commercial real estate:
Construction/land			9,731				12,256				1,679				16,577				40,243
Commercial mortgages - owner occupied			28,329				5,511				2,624				6,104				42,568
Other commercial mortgages			26,221				24,494				4,171				16,328				71,214
Consumer real estate:
1-4 residential			27,000				3,389				3,100				1,538				35,027
Home equity loans and lines of credit			21,089				1,957				1,192				1,608				25,846
Consumer installment:
Consumer installment			4,373				110				190				620				5,293
Total		$	134,815			$	64,564			$	16,968			$	53,653			$	270,000

Allowance for Loan Losses. The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company’s allowance for possible loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for possible loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.

The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The Company’s allowance for loan losses consists of two elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific impaired loans; and (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for groups of loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions.

 

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

 

The allowances established for losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. When a loan has a calculated grade of 6 or higher, an analysis is performed on the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things.

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off, adjusted for various qualitative factors. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on an average six quarter history of actual charge-offs experienced within the loan pools. An adjusted historical valuation allowance is established for each pool of similar loans based upon the product of the adjusted historical loss ratio and the total dollar amount of the loans in the pool. The Company’s pools of similar loans include similarly risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer real estate loans and consumer and other loans.

Loans identified as losses by management, internal or external loan review are charged off.

The change in the allowance for loan losses is summarized as follow:

 

 

(Dollars in thousands)		Dec 31, 2010				Re-Allocation				Provision				Charge-offs				Recoveries				March 31, 2011
Commercial and industrial:		$	1,998			$	(203	)		$	—			$	42			$	3			$	1,756
Commercial real estate:			5,185				203				25				52				35				5,396
Consumer real estate:			245				—				25				—				—				270
Consumer installment:			67				—				50				64				11				64
Total		$	7,495			$	—			$	100			$	158			$	49			$	7,486

The following is the recorded investment in loans related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the impairment methodology and the corresponding period-end amount of allowance for loan losses. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

(Dollars in thousands)		Commercial and Industrial				Commercial Real Estate				Consumer Real Estate				Consumer Installment				Total
March 31, 2011
Loans individually evaluated for impairment		$	3,644			$	11,712			$	—			$	—			$	15,356
Loans collectively evaluated for impairment			42,229				135,608				59,719				5,209				242,765
Balance March 31, 2011		$	45,873			$	147,320			$	59,719			$	5,209			$	258,121
Period-end allowance for loan loss amounts allocated to:
Loans individually evaluated for impairment		$	429			$	870			$	—			$	—			$	1,299
Loans collectively evaluated for impairment			1,327				4,526				270				64				6,187
Balance March 31, 2011		$	1,756			$	5,396			$	270			$	64			$	7,486

 

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

 

 

		Commercial and Industrial				Commercial Real Estate				Consumer Real Estate				Consumer Installment				Total
December 31, 2010
Loans individually evaluated for impairment		$	3,417			$	16,563			$	—			$	—			$	19,980
Loans collectively evaluated for impairment			46,353				136,273				62,141				5,253				250,020
Balance December 31, 2010		$	49,770			$	152,836			$	62,141			$	5,253			$	270,000
Period-end allowance for loan loss amounts allocated to:
Loans individually evaluated for impairment		$	491			$	994			$	—			$	—			$	1,485
Loans collectively evaluated for impairment			1,507				4,191				245				67				6,010
Balance December 31, 2010		$	1,998			$	5,185			$	245			$	67			$	7,495

Troubled debt restructured loans (“TDRs”), which are included in the impaired loan totals, were $9,336,000 and $11,112,000 at March 31, 2011 and December 31, 2010, respectively. The decrease in TDRs was a result of principal reductions as well as status change based on TDR classification standards.

Note 7 – New Accounting Pronouncements

ASU 2010-20 – Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The ASU requires expanded disclosure about the credit quality of the loan portfolio in the notes to financial statements, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disclosures related to period-end balances and the disclosures of activity that occurs during the reporting period were effective for annual or interim reporting periods beginning after December 15, 2010. The Financial Accounting Standards Board (“FASB”) elected to defer the disclosures related to troubled debt restructurings (“TDRs”) included within ASU No. 2010-20. The Company adopted this guidance for its year end 2010 and after. These disclosures did not have a material impact on the Company’s financial statements.

ASU 2011-01 – Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The FASB issued ASU No. 2011-01 in January 2011. The provisions of ASU No. 2010-20 required the disclosure of more granular information on the nature and extent of troubled debt restructurings and their effect on the allowance for loan and lease losses effective for the Company’s reporting period ended March 31, 2011. The amendments in ASU No. 2011-01 defer the effective date related to these disclosures, enabling creditors to provide such disclosures after the FASB completes their project clarifying the guidance for determining what constitutes a troubled debt restructuring. As the provisions of this ASU only defer the effective date of disclosure requirements related to troubled debt restructurings, the adoption of this ASU had no impact on the Company’s financial statements.

ASU No. 2011-02 – A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. In April 2011, the FASB issued ASU No. 2011-02. The provisions of ASU No. 2011-02 provide additional guidance related to determining whether a creditor has granted a concession, include factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibit creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower, and add factors for creditors to use in determining whether a borrower is experiencing financial difficulties. A provision in ASU No. 2011-02 also ends the FASB’s deferral of the additional disclosures about troubled debt restructurings as required by ASU No. 2010-20 so that these disclosures are expected to be effective for the second quarter of 2011. The provisions of ASU No. 2011-02 are effective for reporting periods ending September 30, 2011. The adoption of ASU No. 2011-02 is not expected to have a material impact on the Company’s financial statements.

 

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GREER BANCSHARES INCORPORATED

Notes to Consolidated Financial Statements

 

Note 8 – Other Items

On January 3, 2011, the Company elected to defer interest payments on the two junior subordinated debentures beginning with the January 2011 payments. The Company is permitted to defer paying such interest for up to twenty consecutive quarters. As a condition of deferring the interest payments, the Company is prohibited from paying dividends on its common stock or the Company’s preferred stock.

On January 6, 2011, the Company gave notice to the U.S. Treasury Department that the Company is suspending the payment of regular quarterly cash dividends on the cumulative perpetual preferred stock issued as part of the Troubled Assets Relief Program (“TARP”), beginning with the February 15, 2011 dividend. The Company’s failure to pay a total of six such dividends, whether or not consecutive, gives the U.S. Treasury Department the right to elect two directors to the Company’s board of directors. That right would continue until the Company pays all due but unpaid dividends.

The decision to elect the deferral of interest payments and to suspend the dividends payments was made in consultation with the Federal Reserve Bank of Richmond.

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

CRITICAL ACCOUNTING POLICIES

General

The financial condition and results of operations presented in the consolidated financial statements, the accompanying notes to the consolidated financial statements and this section are, to a large degree, dependent upon the Company’s accounting policies. The selection and application of these accounting policies involve judgments, estimates and uncertainties that are susceptible to change. Those accounting policies that are believed to be the most important to the portrayal and understanding of the Company’s financial condition and results of operations are discussed below. These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition or results of operations is a reasonable likelihood.

Income Taxes and Deferred Tax Asset

Income Taxes – The calculation of the provision for federal income taxes is complex and requires the use of estimates and judgments. There are two accruals for income taxes: 1) The income tax receivable (or payable) represents the estimated amount currently due from (or due to) the federal government and is reported as a component of “other assets” or “other liabilities” in the consolidated balance sheet; 2) the deferred federal income tax asset or liability represents the estimated impact of temporary differences between how assets and liabilities are recognized under GAAP, and how such assets and liabilities are recognized under the federal tax code.

The effective tax rate is based in part on interpretation of the relevant current tax laws. Appropriate tax treatment is reviewed of all transactions taking into consideration statutory, judicial and regulatory guidance in the context of our tax positions. In addition, reliance is placed on various tax positions, recent tax audits and historical experience.

Deferred Tax Asset – In considering whether a valuation allowance on deferred tax assets is needed, management considers all available evidence, including the length of time tax net operating loss (“NOL”) carryforwards are available, the existence of available reversing temporary differences, the ability to generate future taxable income and available tax planning strategies. Primarily as the result of recent earnings history and the inability to reasonably predict future taxable income caused by the volatility in the loan portfolio, the Company recorded a full valuation allowance, exclusive of the deferred tax assets on investment securities available for sale, on the net deferred tax assets.

 

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It is possible that management may conclude in future periods that it may have the ability to generate income before income taxes at a sufficient level, which may allow the Company to reverse a portion, or all of the valuation allowance.

Allowance for Loan Losses and Other Real Estate Owned

Allowance for Loan Losses - The allowance for loan losses is based on management’s ongoing evaluation of the loan portfolio and reflects an amount that, based on management’s judgment, is adequate to absorb inherent probable losses in the existing portfolio. Additions to the allowance for loan losses are provided by charges to earnings. Loan losses are charged against the allowance when the ultimate uncollectibility of the loan balance is determined. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a monthly basis by management. The evaluation includes the periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and related impairment and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision.

Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, regulatory agencies, as an integral part of the examination process, periodically review the allowance for loan losses. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impairment is measured on a loan by loan basis for commercial and commercial real estate loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, individual consumer and residential loans are not separately identified for impairment.

Other Real Estate Owned - The Company values other real estate owned that is acquired in settlement of loans at the net realizable value at the time of foreclosure. Management obtains updated appraisals on such properties as necessary, and reduces those values for estimated selling costs. While management uses the best information available at the time of the preparation of the financial statements in valuing the other real estate owned, it is possible that in future periods the Company will be required to recognize reductions in estimated fair values of these properties.

RESULTS OF OPERATIONS

Overview

The following discussion describes and analyzes our results of operations and financial condition for the quarter ended March 31, 2011 as compared to the quarter ended March 31, 2010. You are encouraged to read this discussion and analysis in conjunction with the financial statements and the related notes included in this report. Throughout this discussion, amounts are rounded to the nearest thousand, except per share data or percentages.

Like most community banks, most of our income is derived from interest received on loans and investments. The primary source of funds for making these loans and investments is deposits, most of which are interest-bearing. Consequently, one of the key measures of our success is net interest income, or the difference between the income on interest-earning assets, such as loans and investments, and the expense on interest-bearing liabilities, such as deposits and Federal Home Loan Bank advances. Another key measure is the spread between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities.

 

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Of course, there are risks inherent in all loans, so an allowance for loan losses is maintained to absorb probable losses inherent in the loan portfolio. This allowance is established and maintained by charging a provision for loan losses against current operating earnings. (See “Provision for Loan Losses” for a detailed discussion of this process.)

In addition to earning interest on loans and investments, income is also earned through fees and other charges to the Bank’s customers. The various components of this noninterest income, as well as noninterest expense, are described in the following discussion.

The Company reported a consolidated net loss of $203,000 attributed to common shareholders, or ($.08) per diluted common share, for the quarter ended March 31, 2011, compared to consolidated net loss of $254,000, or ($.10) per diluted common share, for the quarter ended March 31, 2010. The results for the first quarter of 2011 were adversely impacted by Repossessed Real Estate Owned (“REO”) valuation adjustments of $657,000.

Interest Income, Interest Expense and Net Interest Income

The Company’s total interest income for the quarter ended March 31, 2011 was $4,540,000, compared to $5,189,000 for the quarter ended March 31, 2010, a decrease of $649,000, or 12.5%. Interest and fees on loans is the largest component of total interest income and decreased $496,000, or 12.4% to $3,506,000 for the quarter ended March 31, 2011, compared to $4,002,000 for the quarter ended March 31, 2010. The decrease in interest and fees on loans was primarily the result of reductions of $41,889,000 in average loan balances for the three months ending March 31, 2011, compared to the same period in 2010. The Company has intentionally decreased the loan portfolio in efforts to boost regulatory capital levels. Average yields on the Company’s loan portfolio were 5.37% and 5.48% for the three months ended March 31, 2011 and March 31, 2010, respectively.

Interest income on investment securities decreased by $154,000 in the three months ended March 31, 2011, compared to the three months ended March 31, 2010. The decline was due primarily to reductions in the tax equivalent yields from 4.25% at March 31, 2010 to 3.50% at March 31, 2011 as the average balance of investments increased $8,532,000 in the three months ended March 31, 2011 compared to the same period in 2010. The yield decline is primarily the result of falling market rates, as securities purchased in 2010 had yields less than the average weighted yield of the portfolio.

The Company’s total interest expense declined for the three months ended March 31, 2011 by $414,000 or 18.6% compared to the same period in 2010. The largest component of the Company’s interest expense is interest expense on deposits. Interest expense declined despite increases in average balances of interest bearing deposits of $14,624,000 for the three months ended March 31, 2011, compared to the same period in 2010. Market interest rate decreases resulted in the weighted average rate on interest bearing deposits declining from 1.78% at March 31, 2010 to 1.49% at March 31, 2011.

Interest on long term borrowings declined $269,000, or 26.2% for the three month period ending March 31, 2011 compared to the same period in 2010. The decline in long term interest expense was the result of decreases in average long term borrowings outstanding and decreases in average yields on long term borrowings for the three months ended March 31, 2011 compared to the same period in 2010. Average long term borrowings outstanding declined by $22,856,000 for the three month period ending March 31, 2011 compared to the same period in 2010. This was a result of an overall decrease in the need for borrowings as a result of the loan portfolio decrease as noted above. Average yields on long term borrowings declined to 2.95% from 3.32% for the three months ended March 31, 2011 compared to the same period in 2010.

Net interest income, which is the difference between interest earned on assets and the interest paid for the liabilities used to fund those assets, measures the spread earned on lending and investing activities and is the primary contributor to the Company’s earnings. Net interest income before provision for loan losses decreased $235,000, or 7.9%, for the three months ended March 31, 2011, compared to the same period in 2010.

 

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The Company monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on net interest income. The principal monitoring technique employed by the Company is the use of an interest rate risk management model which measures the effects that movements in interest rates will have on net interest income and the present value of equity. Included in the interest rate risk management reports generated by the model is a report that measures 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. Balance sheets that are asset sensitive typically produce more earnings as interest rates rise and likewise, earnings decrease as interest rates fall. Balance sheets that are liability sensitive typically produce less earnings as interest rates rise and likewise, more earnings as interest rates fall. The Company was asset sensitive in the up to three months gap analysis and liability sensitive from three to twelve months as of March 31, 2011. Interest rate sensitivity can be managed by repricing assets or liabilities, 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 the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates.

Provision for Loan Losses

The Company has developed policies and procedures for evaluating the overall quality of its credit portfolio and the timely identification of potential problem credits. On a quarterly basis, the Bank’s Board of Directors reviews and approves the appropriate level for the allowance for loan losses based upon management’s recommendations and the results of the internal monitoring and reporting system. Management also monitors historical statistical data for both the Bank and other financial institutions. The adequacy of the allowance for loan losses and the effectiveness of the monitoring and analysis system are also reviewed by the Bank’s regulators and the Company’s internal auditor.

The Bank’s allowance for loan losses is based upon judgments and assumptions of risk elements in the portfolio, economic conditions and other factors affecting borrowers. The process includes identification and analysis of loss inherent in various portfolio segments utilizing a credit risk grading process and specific reviews and evaluations of significant problem credits. In addition, management monitors the overall portfolio quality through observable trends in delinquency, charge-offs and general conditions in the Company’s market area.

The provision for loan losses during the three months ended March 31, 2011 was $100,000, compared to $1,112,000, for the same period in 2010. While the credit market has not improved greatly since the period in 2010, it does appear to have stabilized compared to the prior quarter. Non-performing assets have increased since the prior year quarter from $21.1 million to $26.5 million, but provisions have been accounted for in previous quarters and the loan portfolio has decreased $45,664,000 since March 31, 2010. The amount of provision is based on the results of the loan loss model. Also see the discussion below under “Allowance for Loan Losses.”

Noninterest Income

Noninterest income decreased $969,000 for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. The decline in noninterest income during the three months ended March 31, 2011 compared to the same period in 2010 is due to reduced gains on the sale of investment securities which attributed $956,000 in the prior year period.

Noninterest Expenses

Total noninterest expenses decreased $248,000, or 7.1%, for the three months ended March 31, 2011, to $3,267,000 compared to $3,515,000 for the three months ended March 31, 2010. The primary cause of decreased noninterest expense for the three months ended March 31, 2011 relates to a decrease in other real estate owned and foreclosure expenses. Salaries and employee benefits, the largest component of noninterest expenses, decreased slightly for three months ended March 31, 2011 compared to the same period in 2010. This is due to the Company temporarily suspending Company match for 401-k Plan contributions and certain other employee incentive programs. Occupancy and equipment, marketing, postage and supplies, and directors fees all declined as the result of continued budget control. Professional expense increased $69,000 primarily due to legal and consulting fees associated with Company regulatory issues. The Federal Deposit Insurance Corporation (“FDIC”) deposit insurance assessments increased for the three months period ended March 31, 2011 primarily as the result of increased assessment rates.

 

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Income Tax Expense

There was no income tax expense for the three months ended March 31, 2011 or during the same period in 2010. See “- Critical Accounting Policies - Deferred Tax Asset” above. In evaluating whether the full benefit of the net deferred tax asset will be realized, both positive and negative evidence was considered including recent earnings trends, projected earnings and asset quality. As of March 31, 2011, management concluded that the negative evidence outweighed any positive evidence in determining realization of any deferred tax temporary differences and has recorded a full valuation allowance on its net deferred tax assets, exclusive of deferred tax assets on its investment securities available for sale. The Company will continue to monitor deferred tax assets closely to evaluate future realization of the full benefit of the net deferred tax asset and the potential need to reduce the valuation allowance. Significant positive trends in credit quality and pre-tax income from operations could impact the level of valuation allowances deemed necessary on deferred tax assets in the future.

BALANCE SHEET REVIEW

Loans

Outstanding loans represent the largest component of earning assets at 62.2% of total earning assets as of March 31, 2011. Gross loans totaled $258,121,000 as of March 31, 2011, a decline of $11,879,000, or 4.4%, from gross loans of $270,000,000 as of December 31, 2010. As a result of the adverse economic environment, management has intentionally slowed loan growth and enhanced underwriting requirements. Adjustable rate loans totaled 67.3% of the loan portfolio as of March 31, 2011, which allows the Company to be in a favorable position as interest rates rise. The Company’s loan portfolio consists primarily of real estate mortgage loans, commercial loans and consumer loans with concentrations in commercial real estate, including construction and land development loans. Substantially all of these loans are to borrowers located in South Carolina, with the majority in the Company’s local market area.

Given the negative asset and credit quality trends within the loan portfolio since 2008, management continues to work aggressively to identify and quantify potential losses and execute plans to reduce problem assets. The analyses included internal and external loan reviews that required detailed, written summaries of the loans reviewed and vetting of the risk rating, accrual status and collateral valuation of the loans by the loan officers, credit administration and an external loan review firm.

The credit administration function was also enhanced in 2010 with the addition of three new employees. A credit administrative assistant, credit analyst and OREO manager were hired to address the extensive time needed to manage the credit portfolio and Bank owned real estate. In addition, a special assets committee was formed in August 2010 which meets monthly to form strategies on problem loans and the disposition of OREO. The members include the chief executive officer, the chief credit officer, the chief credit administrator and two members of the board of directors.

Allowance for Loan Losses

The allowance for loan losses at March 31, 2011 was $7,486,000, or 2.90% of gross loans outstanding, compared to $7,495,000 or 2.78% of gross loans outstanding at December 31, 2010. The net increase of .12% in the allowance was primarily a result of the decrease in the loans outstanding balance. The allowance at March 31, 2011 includes an allocation of $1,299,000 related to specifically identified impaired loans compared to $1,485,000 at December 31, 2010.

Internal reviews and evaluations of the Company’s loan portfolio for the purpose of identifying potential problem loans, external reviews by federal and state banking examiners, management’s consideration of current economic conditions, historical loan losses and other relevant risk factors are used in evaluating the adequacy of the allowance for loan losses. The level of loan loss reserves is monitored on an on-going basis. The evaluation is inherently subjective as it requires estimates that are susceptible to significant change. Actual losses will

 

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undoubtedly vary from the estimates. Also, there is a possibility that charge-offs in future periods will exceed the allowance for loan losses as estimated at any point in time. If delinquencies and defaults increase, additional loan loss provisions may be required which would adversely affect the Company’s results of operations and financial condition.

At March 31, 2011, the Company had $26,508,000 in non-performing assets, comprised of non-accruing loans of $17,466,000 and $9,042,000 in OREO. This compares to $18,705,000 in non-accruing loans and $9,038,000 in OREO at December 31, 2010. Non-performing loans consisted of $14,105,000 in real estate loans, $3,253,000 in commercial loans and $108,000 in consumer loans at March 31, 2011. The nonperforming real estate loans have had appraisals within the past twelve months to support the loan balances.

Net charge-offs for the first three months of 2011 and 2010 were approximately $109,000 and $817,000, respectively. The allowance for loan losses as a percentage of non-performing loans was 42.86% and 40.07% as of March 31, 2011 and December 31, 2010, respectively.

Troubled debt restructured loans (“TDRs”), which are included in the impaired loan totals, were $9,336,000 and $11,112,000 at March 31, 2011 and December 31, 2010, respectively. The decrease in TDRs was a result of principal reductions as well as status change based on TDR classification standards.

Potential problem loans, which are not included in non-performing or impaired loans, amounted to approximately $29,163,000, or 11.3%, of total loans outstanding at March 31, 2011. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers or the performance of construction or development projects has caused management to have concerns about the borrower’s ability to comply with present repayment terms.

Securities

The investment portfolio is an important contributor to the earnings of the Company. The Company strives to maintain a portfolio that provides necessary liquidity for the Company while maximizing income consistent with the ability of the Company’s capital structure to accept nominal amounts of investment risk. During years when loan demand has not been strong, the Company has utilized the investment portfolio as a means for investing “excess” funds for higher yields, instead of accepting low overnight investment rates. The investment portfolio also provides securities that can be pledged against borrowings as a source of funding for loans. It is management’s intent to maintain a significant percentage of the Company’s earning assets in the loan portfolio as loan demand allows.

As of March 31, 2011, investment securities totaled $130,455,000 or 31.99% of total earning assets. Investment securities decreased $2,358,000, or 1.78%, from $132,813,000 as of December 31, 2010, due to the call of three municipal securities totaling $1,215,000 and cash inflows from principal prepayments on mortgage backed securities, offset by the purchase of $4,149,000 in mortgage backed securities and $516,000 in municipal securities.

Cash and Cash Equivalents

The Company’s cash and cash equivalents were $31,914,000 at March 31, 2011, compared to $27,966,000 at December 31, 2010, an increase of $3,948,000. Balances in due from bank accounts vary depending on the settlement of cash letters and other transactions.

Deposits

The Company receives its primary source of funding for loans and investments from its deposit accounts. Total deposits remained stable at $321,971,000 as of March 31, 2011 compared to $321,385,000 as of December 31, 2010. A slight increase in retail certificates of deposit was partially offset by a decline of $1,826,000 in brokered deposits. Total core deposits, defined as all deposits excluding time deposits of $250,000 or more and brokered deposits have increased by approximately $3,234,000 in the three months ended March 31, 2011.

 

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At March 31, 2011 and December 31, 2010, interest bearing deposits comprised 89.8% and 88.7% of total deposits, respectively. Noninterest bearing deposits decreased by $3,522,000 through the first three months of 2011. Included in the interest bearing total were brokered deposits of $11,117,000, or 3.5%, and $13,000,000, or 4.0%, of total deposits at March 31, 2011 and December 31, 2010, respectively. The Company takes into consideration liquidity needs, direction and level of interest rates and market conditions when pricing deposits. The reduction in brokered deposits was primarily the result of management’s efforts to raise core deposits and reduce alternative funding, coupled with the use of cash inflows from the investment and loan portfolios.

Borrowings

The Company’s borrowings are comprised of repurchase agreements, long-term advances from the Federal Home Loan Bank of Atlanta, and junior subordinated debentures. At March 31, 2011, total borrowings were $100,841,000, compared with $113,841,000 as of December 31, 2010. There were no federal funds purchased at March 31, 2011 or December 31, 2010. At March 31, 2011 and December 31, 2010, long term repurchase agreements were $15,000,000. Notes payable to the Federal Home Loan Bank of Atlanta and the Federal Reserve Bank totaled $74,500,000 and $87,500,000, respectively, as of March 31, 2011 and December 31, 2010, respectively. The weighted average rate of interest for the Company’s portfolio of Federal Home Loan Bank of Atlanta advances was 2.89% and 3.05% as of March 31, 2011 and December 31, 2010, respectively. The weighted average remaining maturity for Federal Home Loan Bank of Atlanta advances was 2.30 years and 2.18 years as of March 31, 2011 and December 31, 2010, respectively.

In October 2004 and December 2006, the Company issued $6,186,000 and $5,155,000 of junior subordinated debentures to its wholly-owned capital trusts, Greer Capital Trust I and Greer Capital Trust II, respectively, to fully and unconditionally guarantee the trust preferred securities issued by the capital trusts.

The junior subordinated debentures issued in October 2004 mature in October 2034. Interest payments are due quarterly to Greer Capital Trust I at the three-month LIBOR plus 220 basis points.

The junior subordinated debentures issued in December 2006 mature in December 2036, but include an option to call the debt in December 2011. Interest payments are due quarterly to Greer Capital Trust II at the three-month LIBOR plus 173 basis points.

Although the interest does continue to accrue, both junior subordinated debentures allow deferral of interest payments for up to five years. Due to the financial condition of the Company, on January 3, 2011, the Company elected to defer interest payments on the two junior subordinated debentures beginning with the January 2011 payments. As a condition of deferring the interest payments, the Company is prohibited from paying dividends on its common stock or the Company’s preferred stock.

In accordance with ASC 810, Trust I and Trust II (the “Trusts”) are not consolidated with the Company. Accordingly, the Company does not report the securities issued by the Trusts as liabilities, and instead reports as liabilities the junior subordinated debentures issued by the Company and held by each Trust. However, the Company has fully and unconditionally guaranteed the repayment of the variable rate trust preferred securities. These trust preferred securities currently qualify as Tier 1 capital for regulatory capital requirements of the Company.

Liquidity and Capital Resources

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 sources and uses of funds in order to meet 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 in the investment portfolio is fairly predictable and 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. Liquidity is also a measure of the Company’s ability to provide funds to meet the needs of depositors and borrowers. The Company’s primary goal is to meet these needs at all times. In addition to these basic cash needs, the Company must meet liquidity requirements created by daily operations and regulatory requirements. Liquidity requirements of the Company are met primarily through two categories of funding: core deposits and borrowings. In the first three months of 2011, liquidity needs were met through maintaining core deposits and borrowings.

 

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Core deposits which are generally the result of stable consumer and commercial banking relationships, are considered to be a relatively stable component of the Company’s mix of liabilities. At March 31, 2011, core deposits totaled approximately $291,255,000, or 90.5%, of the Company’s total deposits, compared to approximately $288,021,000, or 89.6%, of the Company’s total deposits as of December 31, 2010.

Secured and unsecured lines of credit with correspondent banks are also sources of liquidity. At March 31, 2011, the Bank had unsecured and secured federal funds lines of credit with correspondent banks totaling $4,000,000 and $8,000,000, respectively. Approximately $12,000,000 was available for use as of March 31, 2011 and December 31, 2010. The Bank also has a collateralized borrowing capacity of 25% of total assets from the FHLB. Outstanding FHLB borrowings totaled $74,500,000 and $87,500,000 at March 31, 2011 and December 31, 2010, respectively. Unused available FHLB borrowings totaled approximately $36,504,000 and $13,473,000 at March 31, 2011 and December 31, 2010, respectively, and were subject to collateral availability. The Bank has additional borrowing capacity through the Federal Reserve Bank “discount window” and has pledged its consumer and commercial loan portfolio as collateral for approximately $15,393,000 in unused available credit as of March 31, 2011.

The Company’s liquidity ratio (Cash, federal funds and unpledged securities available for sale divided by total deposits) has remained stable at 22.3% at December 31, 2010 and March 31, 2011.

In addition to the primary funding sources discussed above, secondary sources of liquidity include sales of investment securities which are not held for pledging purposes.

Greer Bancshares Incorporated, the parent holding company generally has liquidity needs to pay limited operating expenses and dividends. These liquidity needs include interest on junior subordinated debt and dividends on preferred stock issued as a part of the Troubled Asset Relief Program. Any cash dividends paid to shareholders, as well as the Company’s other liquidity needs, are typically funded by dividends from the Company’s banking subsidiary. However, the Company has not received dividends from the banking subsidiary since August 2010. Since that time, the Company has funded interest payments on its junior subordinated debt and dividends on the TARP preferred stock from $993,000 which was held at the holding company level from the total TARP investment proceeds of $9,993,000. In 2010, the Company sold a parcel of land for $590,000 before selling costs which had been held for future expansion. The Company has approximately $128,000 in cash remaining as of March 31, 2011 to meet short term liquidity needs. This amount is considered adequate to meet the short term liquidity needs of the Company with the deferral of debenture interest payments noted above and suspending dividend payments noted below.

On January 6, 2011, the Company gave notice to the U.S. Treasury Department that the Company is suspending the payment of regular quarterly cash dividends on the cumulative perpetual preferred stock issued as part of the Troubled Assets Relief Program (“TARP”), beginning with the February 15, 2011 dividend. The Company’s failure to pay a total of six such dividends, whether or not consecutive, gives the U.S. Treasury Department the right to elect two directors to the Company’s board of directors. That right would continue until the Company pays all due but unpaid dividends.

The decision to elect the deferral of interest payments and to suspend the dividends payments was made in consultation with the Federal Reserve Bank of Richmond.

Under S.C. banking law, the Bank is authorized to pay cash dividends up to 100% of net income in any calendar year without obtaining the prior approval of the South Carolina Board of Financial Institutions (the “S.C. Bank Board”) provided that the Bank received a composite rating of one or two at the last federal or state regulatory examination. Otherwise, the Bank must obtain approval from the S.C. Bank Board prior to the payment of any cash dividends. In addition, under the FDIC Improvement Act, the Bank may not pay a dividend if, after paying the dividend, the Bank would be undercapitalized.

 

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Management believes that the Company’s available borrowing capacity and efforts to grow deposits are adequate to provide the necessary funding for its banking operations for the remainder of 2011. However, management is prepared to take other actions, including potential asset sales, if necessary to maintain appropriate liquidity.

Regulatory Capital

The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital of the Company consists of equity minus unrealized gains plus unrealized losses on securities available for sale and less a disallowed portion of our deferred tax assets. In addition to Tier 1 capital requirements, Tier 2 capital consists of the allowance for loan losses subject to certain limitations. A bank holding company’s qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital. The holding company and banking subsidiary are also required to maintain capital at a minimum level based on average assets, which is known as the leverage ratio. Only the strongest bank holding companies and banks are allowed to maintain capital at the minimum requirement, which is 4%. All others are subject to maintaining ratios 100 to 200 basis points above the minimum.

Federal Reserve MOU

On September 23, 2010, the Company entered into an informal Memorandum of Understanding (the “FRB MOU”) with the Federal Reserve Bank of Richmond (the “FRB”). Among other things, the FRB MOU requires the Company to seek permission prior to paying any dividends or trust preferred interest. The Company received permission from the FRB to make the required trust preferred interest payments in October and November of 2010 and the preferred stock dividend due in November, 2010. As discussed under “- Liquidity and Capital Resources” above, on January 3, 2011, the Company elected to defer interest payments on the two junior subordinated debentures beginning with the January 2011 payments. As a condition of deferring the interest payments, the Company is prohibited from paying dividends on its common stock or the Company’s preferred stock. Also, on January 6, 2011, the Company gave notice to the U.S. Treasury that the Company was suspending the payment of regular quarterly cash dividends on the cumulative perpetual preferred stock issued as a part of the TARP program beginning with the February 15, 2011 dividend. The decision to elect the deferral of interest payments and to suspend the dividends payments was made in consultation with the FRB. The Company otherwise has responded and continues to coordinate with the FRB with respect to the FRB MOU.

The Bank’s ability to pay dividends is also restricted by the Consent Order entered into by the Bank with the FDIC and the S.C. Bank Board on March 1, 2011. The Consent Order is discussed under “- Regulatory Capital - Consent Order” below. Pursuant to the Consent Order, the Bank may not pay any dividends to the Company without the prior written approval of the FDIC and the SC Banking Board.

It is anticipated that neither the Company nor the Bank will pay any dividends until a substantial improvement in earnings has been achieved.

Consent Order

On March 1, 2011, the Bank entered into a Consent Order (the “Consent Order”) with the FDIC and the S.C. Bank Board. The Consent Order is based on the findings of the FDIC during their on-site examination of the Bank as of June 30, 2010. The Consent Order seeks to enhance the Bank’s existing practices and procedures in the areas of credit risk management, liquidity and funds management, interest rate risk management, capital levels and Board oversight. Specifically, under the terms of the Consent Order, the Bank is required to (i) develop, implement and adhere to a written program to reduce the high level of credit risk; (ii) update and implement written policies and procedures addressing loan policy, allowance for loan losses and other real estate owned; (iii) continue to improve its liquidity position and maintain adequate sources of funding; (iv) obtain prior written determination of no supervisory objection from the FDIC before accepting, renewing or rolling over brokered deposits; (v) update and adhere to a strategic plan designed to improve the condition of the Bank; (vi) develop and submit a capital plan to achieve and maintain certain capital requirements; and (vii) submit periodic reports to the FDIC regarding various aspects of the foregoing actions. The minimum capital ratios established by the FDIC in the Consent Order are higher than the minimum and well-capitalized ratios applicable to all banks. Specifically, by August 1, 2011, the Bank must achieve and maintain a Tier

 

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1 capital to average assets (leverage) ratio of at least 8% and a total risk-based capital to total risk-weighted assets ratio of at least 10%. The Consent Order results in the Bank being deemed “adequately capitalized” irrespective of the fact that ratios indicate “well-capitalized” status. If the Bank is unable to achieve the required capital ratios within the specified time frames, or otherwise fails to adhere to the Consent Order, further regulatory actions could be taken. Further, the ability to operate as a going concern could be negatively impacted.

Management has researched available options for raising additional capital. While there is not a ready market for bank capital investments, the minimum capital ratios required by the Consent Order may be attained through the reduction of total assets. Our plan involves principal pay downs in the loan and investment portfolios, combined with limiting lending activity, and increases in core deposits to pay off brokered certificates of deposit and Federal Home Loan Bank advances as they mature. Management is uncertain as to whether this strategy to shrink the balance sheet will be sufficient to cause the Bank to meet the capital ratios set forth in the Consent Order prior to August 1, 2011. Success of the plan is conditioned, among other things, upon retention of profits, which is in turn contingent upon expense control and decreased loan loss provisions in the future. In the absence of the plan’s success, the Company may have to seek equity investment at highly diluted prices, sell branches or other assets or seek other strategic solutions.

The Bank exceeded minimum regulatory capital requirements at March 31, 2011 and December 31, 2010 as set forth in the following table. With respect to the requirements of the Consent Order, as disclosed below, the Bank at March 31, 2011 and December 31, 2010 would have met the total risk-based capital ratio but would not have met the leverage ratio:

 

										For Capital Adequacy Purposes								To be Well Capitalized Under Consent Order Dated March 1, 2011
Bank:		Actual								Minimum								Minimum
		Amount				Ratio				Amount				Ratio				Amount				Ratio
As of March 31, 2011
Total risk-based capital (to risk-weighted assets)		$	33,101				11.2	%		$	23,739				8.0	%		$	29,674				10.0	%
Tier 1 capital (to risk-weighted assets)		$	29,381				9.9	%		$	11,870				4.0	%		$	17,805				6.0	%
Tier 1 capital (leverage) (to average assets)		$	29,381				6.6	%		$	17,895				4.0	%		$	35,789				8.0	%
As of December 31, 2010
Total risk-based capital (to risk-weighted assets)		$	33,257				10.75	%		$	24,758				8.0	%		$	30,948				10.0	%
Tier 1 capital (to risk-weighted assets)		$	29,334				9.48	%		$	12,380				4.0	%		$	18,569				6.0	%
Tier 1 capital (leverage) (to average assets)		$	29,334				6.45	%		$	18,190				4.0	%		$	36,380				8.0	%

The Holding Company is also subject to certain capital requirements. At March 31, 2011, the Tier 1 risk-based capital ratio, Tier 1 capital (leverage) ratio and the total risk-based capital ratio were 8.9%, 5.9% and 11.4%, respectively. At December 31, 2010, the Tier 1 risk-based capital ratio, Tier 1 capital ratio and the total risk-based capital ratio were 8.6%, 5.8% and 11.0%, respectively.

Forward-looking and Cautionary Statements

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements relate to, among other things, future economic performance, plans and objectives of management for future operations, and projections of revenues and other financial items that are based on the beliefs of management, as well as assumptions made by, and information currently available to, management. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “may,” and “intend,” as well as other similar words and expressions, are intended to identify forward-looking statements. Actual results may differ materially from the results discussed in the forward-looking statements. The Company’s operating performance is subject to various risks and uncertainties including, without limitation:

 

•

significant increases in competitive pressure in the banking and financial services industries;

 

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•

reduced earnings due to higher credit losses owing to economic factors, including declining home values, increasing interest rates, increasing unemployment, or changes in payment behavior or other causes;

 

•

the concentration of our portfolio in real estate based loans and the weakness in the commercial real estate market;

 

•

increased funding costs due to market illiquidity, increased competition for funding or other regulatory requirements;

 

•

market risk and inflation;

 

•

level, composition and re-pricing characteristics of our securities portfolios;

 

•

availability of wholesale funding;

 

•

adequacy of capital and future capital needs;

 

•

our reliance on secondary sources of liquidity such as FHLB advances, federal funds lines of credit from correspondent banks and brokered time deposits, to meet our liquidity needs;

 

•

operating restrictions imposed by our Consent Order, such as limitations on the use of brokered deposits;

 

•

our inability to meet the requirements set forth in our Consent Order within prescribed time frames;

 

•

changes in the interest rate environment which could reduce anticipated or actual margins;

 

•

changes in political conditions or the legislative or regulatory environment, including recently enacted and proposed legislation;

 

•

adequacy of the level of our allowance for loan losses;

 

•

the rate of delinquencies and amounts of charge-offs;

 

•

the rates of loan growth;

 

•

adverse changes in asset quality and resulting credit risk-related losses and expenses;

 

•

general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in credit quality;

 

•

changes occurring in business conditions and inflation;

 

•

changes in technology;

 

•

changes in monetary and tax policies;

 

•

loss of consumer confidence and economic disruptions resulting from terrorist activities;

 

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•

changes in the securities markets;

 

•

ability to generate future taxable income to realize deferred tax assets;

 

•

ability to have sufficient liquidity at the parent holding company level to pay preferred stock dividends and interest expense on junior subordinated debt; and

 

•

other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.

For a description of factors which may cause actual results to differ materially from such forward-looking statements, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, and other reports from time to time filed with or furnished to the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on any forward-looking statements as these statements speak only as of the date when made. The Company undertakes no obligation to update any forward-looking statements made in this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the current disclosure controls and procedures are effective as of March 31, 2011. There have been no changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

On May 24, 2010, Greer State Bank filed a Complaint for foreclosure of a mortgage against McKeown Property on Lake Robinson, LLC, Bruce A. McKeown, Robert M. McKeown, Cathy J. Lockhart, Rita W. McKeown and Connie S. Santoro f/k/a Connie S. McKeown, in the Court of Common Pleas for Greenville County, State of South Carolina. This foreclosure arises from two loans from the Bank to McKeown Property on Lake Robinson, LLC with outstanding principal balances of $4,433,837.56 and $196,485.08, respectively. In addition to foreclosure of its mortgage, Greer State Bank also seeks judgment against individual Defendants Bruce A. McKeown and Rita W. McKeown arising from personal guaranties executed by each of them.

On October 5, 2010, McKeown Property on Lake Robinson, LLC, Bruce A. McKeown and Rita W. McKeown filed an Answer denying the Bank’s right to foreclose and asserting various counterclaims, commonly referred to as “lender liability” claims, including breach of contract, negligence, breach of fiduciary duty, and wrongful foreclosure. These Defendants seek an Order depriving Greer State Bank of its right to foreclose its mortgage and an undetermined amount of actual and punitive damages.

We believe the Counterclaims are without merit, and intend to vigorously defend this action, while pursing the foreclosure action.

The Company is involved in various other legal actions arising in the normal course of business. Management believes that these proceedings will not result in a material loss to the Company.

Item 1A. Risk Factors

Information regarding risk factors appears in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward-looking and Cautionary Statements,” in Part I-Item 2 of this Form 10-Q. More detailed information concerning our risk factors may be found in Part I-Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (the “Form 10-K”).

There have been no material changes in the risk factors previously disclosed in Part I-Item 1A of our Form 10-K.

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

Not applicable

 

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Item 3. Defaults Upon Senior Securities

Not applicable

Item 5. Other Information

None

Item 6. Exhibits

 

10.1		Stipulation to the Issuance of a Consent Order between the Federal Deposit Insurance Corporation, the Commissioner of Banking on behalf of the South Carolina Board of Financial Institutions and Greer State Bank and related Consent Order, effective March 1, 2011, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed March 7, 2011.
10.2		Agreement between Kenneth M. Harper, Greer State Bank and Greer Bancshares Incorporated effective March 24, 2011, incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed March 30, 2011.
31.1*		Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Securities Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Securities Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 USC § 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002.

 

*	Filed herewith.

 

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SIGNATURES

Pursuant to 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.

 

		GREER BANCSHARES INCORPORATED
Dated: May 16, 2011		/s/ R. Dennis Hennett
		R. Dennis Hennett
		President and Chief Executive Officer
Dated: May 16, 2011		/s/ J. Richard Medlock, Jr.
		J. Richard Medlock, Jr.
		Chief Financial Officer

 

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INDEX TO EXHIBITS

 

10.1		Stipulation to the Issuance of a Consent Order between the Federal Deposit Insurance Corporation, the Commissioner of Banking on behalf of the South Carolina Board of Financial Institutions and Greer State Bank and related Consent Order, effective March 1, 2011, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed March 7, 2011.
10.2		Agreement between Kenneth M. Harper, Greer State Bank and Greer Bancshares Incorporated effective March 24, 2011, incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K filed March 30, 2011.
31.1*		Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Securities Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Securities Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 USC § 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002.

 

*	Filed herewith.

 

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