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EX-23 - EXHIBIT 23 - WACCAMAW BANKSHARES INCv303696_ex23.htm
EX-32 - EXHIBIT 32 - WACCAMAW BANKSHARES INCv303696_ex32.htm
EX-21 - EXHIBIT 21 - WACCAMAW BANKSHARES INCv303696_ex21.htm
EX-31.1 - EXHIBIT 31.1 - WACCAMAW BANKSHARES INCv303696_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - WACCAMAW BANKSHARES INCv303696_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2010

 

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 001-33046

 

WACCAMAW BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

 

NORTH CAROLINA   52-2329563
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)

 

110 nORTH j. k. pOWELL bOULEVARD    
WHITEVILLE, North Carolina   28472
(Address of Principal Executive Offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (910) 641-0044

 

Securities registered pursuant to Section 12(b) of the Act:

 

None

 

Securities registered pursuant to Section 12(g) of the Act:

  

COMMON STOCK, NO PAR VALUE

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No

 

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 Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

¨ Yes £ No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x

 

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

 

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 x No

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing sales price of the Registrant’s Common Stock reported on the NASDAQ Global Market on June 30, 2010 was $7,721,205. Solely for purposes of this calculation, the term “affiliate” includes all directors and executive officers of the Registrant and all beneficial owners of more than 5% of the Registrant’s voting securities.

 

As of February 27, 2012, the Registrant had outstanding 7,466,224 shares of Common Stock.

 

Documents incorporated by reference:

None

 

 
 

 

PART I

 

ITEM 1 – BUSINESS

 

Note Regarding Forward-Looking Statements

 

Statements contained in this report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Actual results could vary as a result of market and other factors. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the U.S. Securities and Exchange Commission from time to time. Such forward-looking statements may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “might,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

  

·the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs;

 

·changes in general economic conditions, either nationally or in our market areas;

 

·changes in the levels of general interest rates, deposit interest rates, our net interest margin and funding sources;

 

·fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas;

 

·results of examinations of us by the Federal Reserve Bank and the Office of the Commissioner of Banks or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses or to write down assets;

 

·recent and future economic stimulus and recovery actions by the government;

 

·our ability to control operating costs and expenses;

 

·governmental action as a result of our inability to comply with regulatory orders and agreements;

 

·Asset/liability matching risks and liquidity risks;

 

·our ability to manage loan delinquency rates;

 

·our ability to retain key members of our senior management team;

 

·costs and effects of litigation;

 

·increased competitive pressures in the banking industry;

 

·changes in consumer spending, borrowing and savings habits;

 

·legislative or regulatory changes that adversely affect our business;

 

·adverse changes in the securities markets;

 

·inability of key third-party providers to perform their obligations to us;

 

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·changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board;

 

·changes in our borrowers’ performance on loans;

 

·Changes in critical accounting policies and judgments;

 

·Changes in the equity and debt securities markets;

 

·Fluctuations of our stock price;

 

·Success and timing of our business strategies;

 

·Political developments, wars or other hostilities that may disrupt or increase volatility in securities markets or otherwise affect economic conditions;

 

Additionally, the timing and occurrence or non-occurrence of events may be subject to circumstances beyond our control.

 

You should not place undue reliance on these forward-looking statements, which reflect our expectations only as of the date of this annual report.  We do not assume any obligation to revise forward-looking statements except as may be required by law.

 

General

 

Waccamaw Bankshares, Inc. (the “Company”) was formed during 2001 as a bank holding company chartered in the State of North Carolina. On July 1, 2001, the Company acquired all the outstanding shares of Waccamaw Bank (the “Bank”) in a tax-free reorganization. To date, the only business activities of the Company consist of the activities of the Bank.

 

Waccamaw Bank was organized and incorporated under the laws of the State of North Carolina on August 28, 1997 and commenced operations on September 2, 1997. The Bank currently serves Columbus County, North Carolina and surrounding areas through three banking offices, Brunswick County through seven banking offices, New Hanover County through one banking office, Bladen County through one banking office, and Lancaster County, South Carolina through one banking office and Horry County through four banking offices. As a state-chartered bank which is a member of the Federal Reserve, the Bank is subject to regulation by the North Carolina Office of the Commissioner of Banks and the Federal Reserve.

 

Regulatory Actions

 

Effective June 14, 2010, the Company and the Bank entered into a Written Agreement (the “Agreement”) with the Federal Reserve Bank of Richmond (the “Reserve Bank”) and the North Carolina Commissioner of Banks (the “Commissioner”).

 

The Agreement is a formal corrective action pursuant to which the Bank has agreed to address specific issues set forth below, through the adoption and implementation of procedures, plans and policies designed to enhance the safety and soundness of the Bank.

 

Among other things, the Agreement requires the Bank to:

 

Retain an independent consultant acceptable to the Reserve Bank and the Commissioner to conduct a review of the effectiveness of the Bank’s corporate governance, board and management structure, to assess staffing needs and to prepare a written report of findings and recommendations;

 

Formulate a plan to strengthen board oversight of the management and operations of the Bank;

 

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Formulate and implement a plan to strengthen credit risk management practices;

 

Formulate a plan for the ongoing review and grading of the Bank’s loan portfolio by a qualified independent party or by qualified staff that is independent of the Bank’s lending function;

 

Develop a plan to maintain sufficient capital at the Company, on a consolidated basis;

 

Not pay cash dividends without the prior written consent of the Reserve Bank and the Commissioner; and

 

Not renew or accept any new brokered deposits.

 

The Company must furnish periodic progress reports to the Reserve Bank and the Commissioner regarding its compliance with the Agreement. The Agreement will remain in effect until modified or terminated by the Reserve Bank and the Commissioner.

 

Effective November 29, 2011, the Company and the Bank entered into a Prompt Corrective Action Directive (the “Directive”) with the Board of Governors of the Federal Reserve System (the “Board of Governors”).

 

The Directive is a formal corrective action in which the Board of Governors has determined that, as of October 30, 2011, Waccamaw Bank is critically undercapitalized, as defined in section 208.43(b)(5) of Regulation H of the Board of Governors.

 

Among other things, the Directive requires the Bank no later than January 6, 2012 to:

 

Increase the Bank’s equity through the sale of shares or contributions to surplus in an amount sufficient to make the Bank adequately capitalized as defined in section 208.43(b)(2) of Regulation H of the Board of Governors;

 

Enter into and close a contract to be acquired by a depository institution holding company or combine with another insured depository institution, closing under which contract is conditioned only on the receipt of necessary regulatory approvals, the continued accuracy of customary representations and warranties and the performance of customary pre-closing covenants;

 

Take other necessary measures to make the Bank adequately capitalized;

 

Restrict the making of any capital distributions, including, but not limited to, the payment of dividends;

 

Restrict the payment of bonuses to senior executive officers and increases in compensation of such officers; and

 

Restrict certain activities, including, but not limited to, making any material change in accounting methods and engaging in any covered transaction, as defined in section 23A of the Federal Reserve Act, without the prior written approval of the FDIC.

 

Due to the recent favorable ruling by the Federal Reserve Board of Governors allowing a portion of the preferred stock to be regulatory capital, the Bank’s capital status at September 30, 2011, changed from critically undercapitalized to significantly undercapitalized. Although the Directive has not been terminated, the Company continues to take measures to make the Bank adequately capitalized through the sale of branches and selling stock through a private stock offering.

 

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Market Area

 

The Company’s primary service area is Columbus, Brunswick, Bladen and New Hanover Counties of North Carolina and Lancaster and Horry Counties of South Carolina. The principal business of the Company is to provide individual and commercial banking services in its main service area. These services include demand and time deposits as well as commercial, installment, mortgage and other consumer lending services that are traditionally available from community banks.

 

Columbus County is located in the southeastern portion of North Carolina near the South Carolina border. Whiteville, the largest city in the county, is approximately 45 miles west of Wilmington, North Carolina, 150 miles southeast of Charlotte, North Carolina, and 45 miles north of Myrtle Beach, South Carolina. These cities all have national or regional airports.

 

Brunswick County is a coastal county adjacent to Columbus County to the southeast and also borders South Carolina. Shallotte, the largest city in the county, is approximately 35 miles southwest of Wilmington and 35 miles northeast of Myrtle Beach.

 

New Hanover County is a coastal county and adjacent to Brunswick County to the north. Wilmington, the largest city in the county, has a diversified economy which includes shipping, manufacturing, medical and retail industries.

 

Bladen County is rural county adjacent to Columbus County to the north. Elizabethtown, the largest city in the county, is approximately 50 miles northwest of Wilmington and 80 miles northwest of Myrtle Beach.

 

Lancaster County is a rural county located near the central region of South Carolina near the North Carolina border and approximately 40 miles south of Charlotte, North Carolina and fifty miles north of Columbia. These cities all have national or regional airports.

 

Horry County is located in the northeastern portion of South Carolina near the North Carolina border. Myrtle Beach, the largest city in the county, has a diversified economy which includes tourism, manufacturing, medical and retail industries.

 

The principal components of the economy in our market area are manufacturing, agriculture and tourism. The coastal markets are real estate driven, as demand for property along the coastal regions will continue to grow as the economy improves. Manufacturing employment is concentrated in the wood products and textile industries. The primary agriculture products are tobacco and hogs.

 

Competition

 

The primary business activity of the Company is commercial banking. This activity is conducted by the Bank which is the subsidiary of the Company.

 

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Banking is a highly competitive industry. The principal areas and methods of competition in the banking industry are the services that are offered, the pricing of those services, the convenience and availability of the services and the degree of expertise and personal manner with which those services are offered. The Bank encounters strong competition from other commercial banks operating in the Bank’s market area, including several of the largest North Carolina banks. At June 30, 2010 (the most current data provided by the FDIC Deposit Market Share Report prior to December 31, 2010), there were 14 offices of 6 other commercial banks operating in Columbus County, 44 offices of 12 other commercial banks operating in Brunswick County, 78 offices of 20 other commercial banks operating in New Hanover County, 7 offices of 5 other commercial banks operating in Bladen County, 11 offices of 6 other commercial banks operating in Lancaster County and 130 offices of 25 other commercial banks operating in Horry County.

 

In the conduct of certain aspects of its business, the Bank also competes with credit unions, money market mutual funds, and other non-bank financial institutions, some of which are not subject to the same degree of regulation as the Bank. Many of these competitors have substantially greater resources and lending abilities than the Company and offer certain services, such as investment banking, trust and international banking services that the Company cannot or will not provide.

 

Supervision and Regulation

 

The Company and the Bank are subject to state and federal banking laws and regulations. These impose specific requirements and restrictions and provide for general regulatory oversight with respect to virtually all aspects of operations. These laws and regulations are generally intended to protect depositors, not stockholders. To the extent that the following summary describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws or regulations may have a material effect on the business and prospects of the Company. Beginning with the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and following with the Federal Deposit Insurance Corporation Improvement Act ("FDICIA") in 1991, the Gramm-Leach-Bliley Act in 1999, and the Dodd-Frank Act in 2010, numerous additional regulatory requirements have been placed on the banking industry in the past several years, and additional changes have been proposed. The operations of the Company and the Bank may be affected by legislative changes and the policies of various regulatory authorities. The Company is unable to predict the nature or the extent of the effect on its business and results of operations that fiscal or monetary policies, economic control, or new federal or state legislation may have in the future.

 

Federal Bank Holding Company Regulation (Financial Holding Company Regulations)

 

The Company is a bank holding company within the meaning of the Gramm-Leach-Bliley Act of 1999 (the "GLB Act"). Under the GLB Act, which became effective on March 11, 2000, the types of activities in which a bank holding company may engage were significantly expanded. Subject to various limitations, the GLB Act generally permits a bank holding company to elect to become a "financial holding company." A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are "financial in nature." Among the activities that are deemed "financial in nature" are, in addition to traditional lending activities, securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, certain merchant banking activities and activities that the Federal Reserve considers to be closely related to banking.

 

A bank holding company may become a financial holding company under the GLB Act if each of its subsidiary banks is "well capitalized" under the Federal Deposit Insurance Corporation Improvement Act prompt corrective action provisions, is well managed and has at least a satisfactory rating under the Community Reinvestment Act. In addition, the bank holding company must file a declaration with the Federal Reserve if it falls out of compliance with these requirements and may be required to cease engaging in some of its activities.

 

Under the GLB Act, the Federal Reserve serves as the primary "umbrella" regulator of financial holding companies, with supervisory authority over each parent company and limited authority over its subsidiaries. Expanded financial activities of financial holding companies generally will be regulated according to the type of such financial activity, banking activities by banking regulators, securities activities by securities regulators and insurance activities by insurance regulators. The GLB Act also imposes additional restrictions and heightened disclosure requirements regarding information collected by financial institutions. The Company is not a financial holding company.

 

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The Company is subject to the Bank Holding Company Act (the "BHCA"). Under the BHCA, the Company is subject to periodic examination by the Federal Reserve and is required to file periodic reports of its operations and such other information as the Federal Reserve may require.

 

“Investments, Control, and Activities.” With certain limited exceptions, the BHCA requires every holding company to obtain the prior approval of the Federal Reserve before (i) acquiring substantially all the assets of any bank, (ii) acquiring direct or indirect ownership or control of any voting shares of any bank if after such an acquisition it would own or control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares), or (iii) merging or consolidating with another holding company.

 

In addition, and subject to certain exceptions, the BHCA and the Change in Bank Control Act, together with regulations thereunder, require Federal Reserve approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring "control" of a holding company, such as the Company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the holding company. In the case of the Company, under Federal Reserve regulations there will be a rebuttable presumption of control if a person acquires at least 10% of the outstanding shares of any class of voting securities.

 

“Source of Strength; Cross-Guarantee.” In accordance with Federal Reserve policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances in which the Company might not otherwise do so. Under the BHCA, the Federal Reserve may require a holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution's financial condition. The Bank may be required to indemnify, or cross-guarantee, the FDIC against losses it incurs with respect to any other bank which the Company controls, which in effect makes the Company's equity investments in healthy bank subsidiaries available to the FDIC to assist any failing or failed bank subsidiary of the Company. The Bank is the only bank currently controlled by the Company.

 

The Bank

 

The Company is the holding company for the Bank, which is a North Carolina banking corporation. The Bank is subject to examination and supervision by the Federal Reserve and the North Carolina Commissioner of Banks (the “Commissioner”). The Federal Reserve monitors the Bank’s compliance with federal statutes, including the Community Reinvestment Act of 1977 and the Depository Institution Management Interlocks Act. The Federal Reserve has broad enforcement authority to prevent the continuance or development of unsafe and unsound banking practices, including the issuance of cease and desist orders and the removal of officers and directors. The Federal Reserve must approve the establishment of branch offices, conversions, and mergers, assumptions of deposit liabilities between insured and uninsured institutions, and the acquisition or establishment of certain subsidiary corporations. The Federal Reserve can prevent capital or surplus diminution in such transactions where the deposit accounts of the resulting, continuing or assuring bank are federally insured.

 

The Bank is subject to capital requirements and limits on activities established by the Federal Reserve. Under the capital regulations, the Bank generally is required to maintain Tier 1 risk-based capital, in such terms as defined therein, of 4.0% and total risk-based capital of 8.0%. In addition, the Bank is required to provide a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets (leverage ratio) equal to 3.0%, plus an additional cushion of one to two percent if the Bank has less than the highest regulatory rating. The Bank is not permitted to engage in any activity not permitted for a national bank unless (i) it is in compliance with its capital requirements and (ii) the FDIC determines that the activity would not pose a risk to the deposit insurance fund. With certain exceptions, the Bank also is not permitted to acquire equity investments of a type, or in an amount, not permitted for a national bank.

 

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Federal banking law requires the federal banking agencies to take “prompt corrective action” in respect of insured depository institutions that do not meet minimum capital requirements. There are five tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized,” as defined by regulations promulgated by the FDIC and the other federal depository institution regulatory agencies. A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure, adequately capitalized if it meets each such measure, undercapitalized if it fails to meet any such measure, significantly undercapitalized if it is below such measures, and critically undercapitalized if it fails to meet any critical capital level set forth in the regulations. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating.

 

Dodd-Frank Act

 

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law.  The Dodd-Frank Act has resulted in dramatic changes across the financial regulatory system, some of which become effective immediately and some of which will not become effective until various future dates.  Implementation of the Dodd-Frank Act will require many new rules to be made by various federal regulatory agencies over the next several years.  Uncertainty remains until final rulemaking is complete as to the ultimate impact of the Dodd-Frank Act, which could have a material adverse impact either on the financial services industry as a whole or on Waccamaw Bank’s business, results of operations, and financial condition.  Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits, and interchange fees could increase the costs associated with deposits and place limitations on certain revenues those deposits may generate.  The Dodd-Frank Act includes provisions that, among other things, will:

 

·Centralize responsibility for consumer financial protection by creating a new agency, the Bureau of Consumer Financial Protection, responsible for implementing, examining, and enforcing compliance with federal consumer financial laws.
·Create the Financial Stability Oversight Council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity.
·Provide mortgage reform provisions regarding a customer’s ability to repay, restricting variable-rate lending by requiring that the ability to repay variable-rate loans be determined by using the maximum rate that will apply during the first five years of a variable-rate loan term, and making more loans subject to provisions for higher cost loans, new disclosures, and certain other revisions.
·Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminate the ceiling on the size of the Deposit Insurance Fund (“DIF”), and increase the floor on the size of the DIF, which generally will require an increase in the level of assessments for institutions with assets in excess of $10 billion.
·Make permanent the $250,000 limit for federal deposit insurance and provide unlimited federal deposit insurance until January 1, 2013 for noninterest-bearing demand transaction accounts at all insured depository institutions.
·Implement corporate governance revisions, including with regard to executive compensation, which apply to all public companies, not just financial institutions.
·Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transactional and other accounts.
·Amend the Electronic Fund Transfer Act (“EFTA”) to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.
·Transfer regulatory and rulemaking authority over federal savings banks from the Office of Thrift Supervision (“OTS”) to the Office of the Comptroller of the Currency effective July 21, 2011, and abolish the OTS effective October 19, 2011. In addition, the Board of Governors of the Federal Reserve System will supervise and regulate all savings and loan holding companies that were formerly regulated by the OTS.

 

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Insurance of Deposit Accounts. The Bank’s deposits are insured up to limits set by the Deposit Insurance Fund (the “DIF”) of the FDIC. The DIF was formed on March 31, 2006, upon the merger of the Bank Insurance Fund and the Savings Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). The Reform Act established a range of 1.15% to 1.50% within which the FDIC may set the Designated Reserve Ratio (the “reserve ratio”). The Dodd-Frank Act gave the FDIC greater discretion to manage the DIF, raised the minimum DIF reserve ratio to 1.35%, and removed the upper limit of 1.50%. In October 2010, the FDIC adopted a restoration plan to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. The FDIC also proposed a comprehensive, long-range plan for management of the DIF. As part of this comprehensive plan, the FDIC has adopted a final rule to set the reserve ratio at 2.0%.

 

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 was enacted and temporarily raised the standard limit of FDIC deposit insurance coverage from $100,000 to $250,000 per depositor. On May 20, 2009, the Helping Families Save Their Homes Act extended the temporary increase in the standard maximum deposit insurance amount (SMDIA) to per depositor through December 31, 2013. On July 21, 2010, the Dodd-Frank Act permanently increased FDIC insurance coverage to $250,000 per depositor.

 

The FDIC imposes a risk-based deposit insurance premium assessment on member institutions in order to maintain the DIF. This assessment system was amended by the Reform Act and further amended by the Dodd-Frank Act. Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, its long-term debt ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. The Dodd-Frank Act changed the methodology for calculating deposit insurance assessments from the amount of an insured institution’s domestic deposits to its total assets minus tangible capital. On February 7, 2011, the FDIC issued a new regulation implementing these revisions to the assessment system. The regulation became effective on April 1, 2011.

 

On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program (the “TLGP”) to strengthen confidence and encourage liquidity in the banking system. The TLGP consists of two components: a temporary guarantee of newly-issued senior unsecured debt named the Debt Guarantee Program, and a temporary unlimited guarantee of funds in noninterest-bearing transaction accounts at FDIC insured institutions named the Transaction Account Guarantee Program (“TAG”). All newly-issued senior unsecured debt will be charged an annual assessment of up to 100 basis points (depending on term) multiplied by the amount of debt issued and calculated through the date of that debt or June 30, 2012, whichever is earlier. The Bank elected to opt out of the Debt Guarantee Program and elected to participate in the TAG Program. On August 26, 2009, the FDIC adopted a final rule extending the TAG portion of the TLGP for six months through June 30, 2010 and it was extended again through December 31, 2010. The Bank elected to continue to participate in the TAG Program through December 31, 2010. On July 21, 2010, the Dodd-Frank Act extended unlimited FDIC insurance coverage to noninterest-bearing transaction deposit accounts through December 31, 2012. It does not apply to accounts earning any level of interest with the exception of Interest on Lawyers’ Trust Accounts (“IOLTA”) accounts. This unlimited FDIC insurance coverage is applicable to all applicable deposits at any FDIC-insured financial institution. Therefore, there is no additional FDIC insurance surcharge related to this coverage after December 31, 2010.

 

During 2009, the FDIC took several measures aimed at replenishing the DIF. On May 22, 2009, the FDIC imposed a 5 basis point special assessment on each insured institution’s assets minus Tier 1 capital as of June 30, 2009. On November 17, 2009, the FDIC voted to require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, as well as all of 2010, 2011, and 2012. For purposes of determining the prepayment, the FDIC used an institution’s assessment rate in effect on September 30, 2009.

 

The FDIC has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.

 

Insurance of deposits may be terminated by the FDIC upon a finding that an insured institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

 

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Incentive Compensation Policies and Restrictions. In July 2010, the federal banking agencies issued guidance which applies to all banking organizations supervised by the agencies. Pursuant to the guidance, to be consistent with safety and soundness principles, a banking organization’s incentive compensation arrangements should: (1) provide employees with incentives that appropriately balance risk and reward; (2) be compatible with effective controls and risk management; and (3) be supported by strong corporate governance including active and effective oversight by the banking organization’s board of directors. Monitoring methods and processes used by a banking organization should be commensurate with the size and complexity of the organization and its use of incentive compensation.

 

Federal Reserve Policies. The earnings of the Bank are affected significantly by the policies of the Federal Reserve Board, a federal agency which regulates the money supply in order to mitigate recessionary and inflationary pressures. Among the techniques used to implement these objectives are open market transactions in United States government securities, changes in the rate paid by banks on bank borrowings, and changes in the reserve requirement against bank deposits. These techniques are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect interest rates charged on loans or paid on deposits.

 

The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Bank.

 

State Regulation. The Bank is chartered by the State of North Carolina and is subject to extensive supervision and regulation by the Commissioner. The Commissioner enforces state laws that set specific requirements for bank capital, the payment of dividends, loans to officers and directors, record keeping, and types and amounts of loans and investments made by commercial banks. Among other things, the approval of the Commissioner is generally required before a North Carolina chartered commercial bank may establish branch offices. North Carolina banking law requires that any merger, liquidation or sale of substantially all of the assets of the Bank must be approved by the Commissioner and the holders of two-thirds of the Bank’s outstanding common stock. All of the outstanding common stock of Waccamaw Bank is owned by the Company.

 

Pursuant to North Carolina banking laws, no person may directly or indirectly purchase or acquire voting stock of the Bank which would result in the change of control of the Bank unless the Commissioner has approved the acquisition. A person will be deemed to have acquired “control” of the Bank if that person directly or indirectly (i) owns, controls or has power to vote 10% or more of the voting stock of the Bank, or (ii) otherwise possesses the power to direct or cause the direction of the management and policy of the Bank.

 

In its lending activities, the Bank is subject to North Carolina usury laws which generally limit or restrict the rates of interest, fees and charges and other terms and conditions in connection with various types of loans.

 

North Carolina banking law requires that bank holding companies register with the Commissioner. The Commissioner must also approve any acquisition of control of a state-chartered bank by a bank holding company.

 

Interstate Banking. Federal law allows the Federal Reserve Board to approve an application of an adequately capitalized and adequately managed bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than the holding company’s home state, without regard to whether the transaction is prohibited by the laws of any state.  The Federal Reserve Board may not approve the acquisition of a bank that has not been in existence for a minimum of five years without regard for a longer minimum period specified by the law of the host state.  The Federal Reserve Board is prohibited from approving an application if the applicant (and its depository institution affiliates) controls or would control (i) more than 10% of the insured deposits in the United States, or (ii) 30% or more of the deposits in the target bank’s home state or in any state in which the target bank maintains a branch.  Federal law does not limit a state’s authority to restrict the percentage of total insured deposits in the state which may be held or controlled by a bank or bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies.  Individual states may also waive the 30% state-wide concentration limit.

 

9
 

 

The federal banking agencies are also authorized to approve interstate merger transactions without regard to whether such transaction is prohibited by the law of any state, unless the home state of one of the banks has adopted a law opting out of the interstate mergers.  Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions.  Interstate mergers and branch acquisitions are subject to the nationwide and statewide insured deposit concentration amounts described above. North Carolina has enacted legislation permitting interstate banking acquisitions.

 

The Dodd-Frank Act allows national and state banks to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state.

 

Material Customers

 

Deposits are derived from customers in the Company’s market area. No material portion of deposits has been obtained from a single person or a group of persons. Management does not believe the loss of any one customer would have a material adverse effect on the business of the Company.

 

The majority of loans and commitments to extend credit have been granted to customers in the Company’s market area. The majority of such customers are depositors.

 

Rights

 

No patents, trademarks, licenses, franchises or concessions held are of material significance to the Company.

 

Environmental Laws

 

Compliance with federal, state, or local provisions regulating the discharge of materials into the environment has not had, nor is it expected to have in the future, a material effect upon the Company’s capital expenditures, results of operations or competitive position.

 

Employees

 

The Bank presently has 131 full-time equivalent employees consisting of 121 full-time employees and 19 part-time employees.

 

ITEM 1A – RISK FACTORS

 

Smaller reporting companies such as the Company are not required to provide the information required by this item.

 

ITEM 1B – UNRESOLVED STAFF COMMENTS

 

Smaller reporting companies such as the Company are not required to provide the information required by this item.

 

ITEM 2 - PROPERTIES

 

The Bank has three branches in Columbus County, North Carolina, including one in Whiteville, one in Tabor City, and one in Chadbourn. The Whiteville branch is located at 110 North J.K. Powell Boulevard, Whiteville, North Carolina, in a 12,000 square foot building that includes three drive-up lanes and an ATM. The Company purchased the land on which this facility is located for $233,318 from a former Company director. This transaction was effected at arm’s length and management believes the purchase price was at or below fair market value. Construction was completed in April 2001 at a cost of $1.8 million.

 

The Bank has two additional branches in Columbus County located at 105 Hickman Road, Tabor City, North Carolina and 111 Strawberry Boulevard, Chadbourn, North Carolina. The Tabor City Branch is located in a 3,800 square foot building that includes two drive-up lanes and an ATM. The property is leased for $33,474 per year. The lease was assumed from the prior tenant and expires in 2013. The Bank has the option to extend the lease for four additional five year terms.

  

10
 

 

The Chadbourn branch is a one-story brick building with approximately 2,500 square feet of floor space that was leased following a Centura branch acquisition. The Bank has a five-year lease with the option to renew for five additional terms of five years each. The branch also has drive-up facilities.

 

The Bank has seven branches located in Brunswick County, two in Shallotte, North Carolina, one in Holden Beach, North Carolina, two in Southport, North Carolina, one in Ocean Isle, North Carolina and one in Oak Island, North Carolina. The Shallotte Main Street branch is housed in a 2,521 square foot facility that includes three drive-up lanes and an ATM. The building is leased for a term of five years beginning on February 1, 2010. The Bank has the option to renew the lease for two additional terms of five years.

 

The Shallotte Smith Street branch is housed in a 3,515 square foot facility that includes one drive-up lane and an ATM. The land and building were purchased at a cost of $2.2 million in September 2007 from BB&T.

 

The Holden Beach branch is housed in a 1,200 square foot facility that includes one drive-up lane and an ATM. The building is leased for a term of five years beginning on October 10, 2005. The Bank has renewed the first option at five additional years and The Bank has the option to renew the lease for three additional terms of five years.

 

The Ocean Isle branch is housed in a 2,982 square foot facility and has three drive-up lanes and an ATM. The construction was completed in July 2007 at a cost of $921,000. The land is leased for a term of ten years beginning on March 1, 2007. The bank has the option to renew the lease for four additional terms of five years.

 

The Southport Howe Street branch is housed in a 1,860 square foot facility. The land and building are leased for a term of five years beginning on March 1, 2010. The Bank has the option to renew the lease for four additional terms of five years.

 

The Southport Supply Road branch is housed in a 3,858 square foot facility. The construction was completed in December 2006 at a cost of $1.2 million. The land is leased for a term of five years beginning on March 1, 2010. The Bank has the option to renew the lease for four additional terms of five years.

 

The Oak Island branch is housed in a 2,490 square foot facility. The land and building were purchased from BB&T at a cost of $1.5 million. The facility has two drive-up lanes and an ATM.

 

The Elizabethtown branch is housed in a 2,016 square foot facility. The land is leased for a term of five years beginning on November 7, 2005. The Bank has extended the lease for another 5 years beginning on November 14, 2010.

 

The Kerr Avenue branch in Wilmington is housed in a 3,000 square foot facility that includes two drive-up lanes and an ATM. The building is leased for a term of five years beginning on August 1, 2009. The Bank has a five year lease with the option to renew for four additional terms of five years.

 

The Heath Springs branch is housed in a 5,500 square foot facility. The building was purchased from The Bank of Heath Springs for $463,168.

 

The Conway 16th Avenue branch is housed in a 1,350 square foot facility. The Bank has a five year lease beginning on September 1, 2006.

 

The Conway Medical Center branch is housed in a 1,508 square foot facility. The building was purchased for $600,000 from BB&T and has two drive-up lanes and an ATM.

 

The Myrtle Beach branch is housed in a 2,400 square foot facility and has three drive-up lanes and an ATM. The lease was assumed from BB&T and expires in 2010 with the option to renew the lease for an additional term of five years. The Bank chose not to renew this lease and closed this branch effective July 31, 2011.

 

The Little River branch is housed in a 10,000 square foot facility and has three drive-up lanes and an ATM. The construction was completed in August 2008 at a cost of $2.7 million and the land was purchased for $990,000.

 

11
 

 

The Bank has an operations center located on Madison Street in Whiteville which is housed in a 7,700 square foot facility. The building is leased for a term of seven years beginning on January 1, 2006. The Bank has the option to renew the lease for five additional terms of five years.

 

ITEM 3 – LEGAL PROCEEDINGS

 

No legal proceedings are required to be disclosed pursuant to this item as of December 31, 2010.

  

ITEM 4 –RESERVED

 

12
 

 

PART II

 

ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company’s articles of incorporation authorize it to issue up to 50,000,000 shares of common stock, no par value, of which 7,466,224 shares were issued and outstanding as of February 27, 2012 and up to 1,000,000 shares of preferred stock. The approximate number of holders of the Company’s shares of common stock as of February 27, 2012 is 2,800. There were 550 shares issued and outstanding of the Company’s Series A convertible preferred stock as of February 27, 2012 and 546,375 shares issued and outstanding of the Company’s Series B convertible preferred stock as of February 27, 2012.

 

The payment of future cash dividends will be determined by the Board of Directors and is dependent upon the receipt of dividends from the Bank. To date, the Company has not paid any cash dividends. The Company does not intend to declare or pay dividends to shareholders at any time in the foreseeable future.

 

The availability of dividends from the Bank is dependant on the Bank’s earnings, financial condition, business projections, and other pertinent factors. In addition, North Carolina banking law will prohibit the payment of cash dividends if the bank’s surplus is less than 50% of its paid-in capital. Also, under federal banking law, no cash dividend may be paid if the Bank is undercapitalized or insolvent or if payment of the cash dividend would render the Bank undercapitalized or insolvent and no cash dividend may be paid by the Bank if it is in default of any deposit insurance assessment due to the FDIC.

 

Under the written agreement with the Federal Reserve Bank of Richmond and the North Carolina Commissioner of Banks, the Company and the Bank are currently prohibited from declaring or paying any dividends without the prior written approval of the Reserve Bank and the Commissioner.

 

Set forth below are the approximate high and low (bid quotations/sales price), known to the management of the Bank, for each quarter during the fiscal years ended 2009 and 2010. These quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commissions and may not represent actual transactions.

 

   2010   2009 
   High   Low   High   Low 
                 
First Quarter  $3.40   $2.08   $6.74   $2.22 
Second Quarter   5.00    1.30    4.67    2.50 
Third Quarter   2.25    0.75    4.40    2.85 
Fourth Quarter   2.10    1.00    4.97    2.85 

  

See Item 12 of this report for disclosure regarding securities authorized for issuance under equity compensation plans required by Item 201(d) of Regulation S-K.

 

13
 

 

On March 31, 2011, the Company issued 546,375 shares of its fixed rate noncumulative perpetual preferred stock, series B (the “Series B Preferred Stock”), to Monterey I Holdings, LLC. The Series B Preferred Stock was issued in exchange for 546,375 outstanding shares of the fixed rate noncumulative perpetual preferred stock, series A, of the Company’s subsidiary, Waccamaw Bank (the “Bank”). The shares of the Bank’s series A preferred stock were held by Monterey Holdings prior to the exchange and were originally issued to Monterey Holdings by the Bank pursuant to a subscription offer agreement dated December 23, 2010, whereby Monterey Holdings purchased 546,375 shares of the Bank’s series A preferred stock and a warrant covering 300,000 shares of the Company’s common stock for an aggregate contract price of $16,392,266.

 

The warrants and the rights, privileges and preferences of the Series B Preferred Stock are described in more detail below.

 

Preferred Stock. As described in the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 17, 2011, the shares of the Company’s Series B Preferred Stock are convertible by the holders thereof into shares of the Company’s common stock on the basis of 1.5 shares of common stock for each share of Series B Preferred Stock so converted. Shares of the Series B Preferred Stock are also convertible by the Company in the event that the holders of the Series B Preferred Stock are afforded any voting powers provided by law that are not granted by the Company’s articles of incorporation. In this instance, the Company may convert each share of Series B Preferred Stock into a share of the Company’s common stock on a one-for-one basis. A form of the Company’s Series B Preferred Stock certificate is attached as exhibit 4.1 hereto and is incorporated herein by reference.

 

Warrant. On May 17, 2011, the Company issued a warrant to Monterey I Holdings, LLC. The warrant gives Monterey Holdings the right to purchase 300,000 shares of the Company’s common stock at an exercise price equal to fifty percent of the “market price” (as defined in the warrant) of the Company’s common stock on May 17, 2011, or approximately $0.429 per share. The warrant was issued as part of a transaction whereby Monterey Holdings purchased 546,375 shares of the fixed rate noncumulative perpetual preferred stock, series A, of the Bank for an aggregate contract price of $16,392,266. The warrant may be exercised, in whole or in part, from May 17, 2012, until May 17, 2021.

 

14
 

 

 
Management’s Discussion and Analysis
 

 

ITEM 6 – SELECTED FINANCIAL DATA

 

Smaller reporting companies such as the Company are not required to provide the information required by this item.

 

ITEM 7 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

15
 

 

 
Management’s Discussion and Analysis
 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATION

 

The following presents management’s discussion and analysis of the financial condition and results of operation of the Company as of December 31, 2010 and 2009 and the years then ended. This discussion should be read in conjunction with the Company’s Financial Statements and the Notes thereto.

 

Significant Transaction

 

On September 30, 2010, the Bank entered into an agreement whereby the Bank would sell and Augusta Holdings, LLC (“Augusta”) would buy nonperforming real estate loans for the contractual pay-off amount (par value) of $11.2 million. The carrying value of these loans was $7.3 million as the carrying amounts had been reduced to reflect the fair value of the underlying collateral in measuring the impairment under the requirements of ASC 310-10-35. During the negotiations of this transaction, the Bank agreed to purchase from Augusta a home equity line of credit (HELOC) loan pool. The price of the pool was the amount of the aggregate principal balances (par value) of the loans in the pool, $110.1 million. The pool met the Bank’s credit quality and performance criteria. Under the terms of the HELOC pool purchase agreement, the Bank was able to exclude loans that did not meet the following criteria:

 

·A current FICO score of a least 660 as of the date of the transaction.
·Loans have not been past due more than 30 days in the twelve months preceding the closing of the transaction.
·The weighted average loan to value would not exceed 90 percent as of the time the loan was originated.

Management performed detailed due diligence procedures on approximately 20 percent of the pool and removed from the pool any loans that did not meet the criteria above. In addition, as part of the transaction, as a credit enhancement, Augusta indemnified the Bank against credit losses in the pool for a period of five years from the transaction date, up to a maximum amount of 10% of the pool or approximately $11.0 million. The sale of the nonperforming assets and the purchase of the HELOC pool closed on December 22, 2010.

 

On December 23, 2010, the Bank entered into an agreement to sell to Monterey I Holdings, LLC (Monterey) 546,375 shares of preferred stock for $16.4 million with a dividend yield of 9%. The noncumulative perpetual preferred stock was issued at the bank level and was required to be converted to preferred stock of the Company. The preferred stock may be converted to 819,564 shares of the Company’s common stock at the option of the buyer. In addition, the Company issued warrants to allow Monterey to purchase up to 300,000 shares of the Company’s common stock at 50% of the market value of the common stock on the date of exercise. The preferred stock contract settled on December 23, 2010.

 

Augusta and Monterey have elements of common ownership and are considered related parties. They are not related parties with respect to the Company or the Bank. Based on the relationship of the counterparties, timing, and other facts and circumstances surrounding the transactions, management has concluded that the transactions should be considered one transaction for financial reporting purposes.

 

Management determined that since there was significant noncash consideration transferred, the transactions should be properly recorded at fair value under the guidance at ASC 845-10. Also in accordance with ASC 845-10, the fair value of the assets received shall be used to measure the cost if that value is more clearly evident than the fair value of the asset surrendered. Management determined the fair value of a homogenous HELOC pool meeting specific credit quality criteria prepared by a qualified valuation professional with prior experience valuing similar loan pools is more clearly evident than the fair values of coastal residential real estate developments and other highly volatile real estate that secures the non-performing loans and preferred shares in a market with very few comparable equity transactions.

 

Accordingly, the Bank retained an outside valuation consulting firm to provide a valuation of the HELOC pool within the guidance at ASC 820-10. The Bank received the valuation on October 5, 2011. The report indicated the fair value of the $110.1 million HELOC pool to be approximately $100.0 million. The valuation was primarily based on discounted cash flows as projected based on the location of the underlying collateral and the current FICO score of the borrower. Based on the valuation report, credit losses on the pool are projected to be $3.1 million over the life of the pool.

 

16
 

 

 
Management’s Discussion and Analysis
 

 

A summary of assets received and consideration transferred at fair value and a description of how the item was valued is presented below (in thousands):

 

Fair Value received     
  HELOC pool, net of discount  $100,002 
  Credit enhancement                 - 
  Interest receivable   386 
     Total FV received  $100,388 
      
Fair Value of consideration paid     
  Non-performing loans  $(7,309)
  Cash   (82,833)
  Warrants                     (300)
  Preferred stock, net of discount   (9,604)
     Total FV received  $(100,046)
      
Back interest on non-performing loans recorded in operations  $342 

 

Due to uncertainty related to this transaction, the company has been unable to finalize the financial statements for 2010 until now.

 

Also, the Company has been unable to complete the filing of the 2010 Form 10-K or the March 31, June 30, or September 30, 2011, Forms 10-Q pending the resolution of this transaction. On June 24, 2011, the Company received notice of delisting by Nasdaq as a result of failure to timely file the 2010 Form 10-K.

 

Regulatory Actions

 

Effective June 14, 2010, the Company and the Bank entered into a Written Agreement (the “Agreement”) with the Federal Reserve Bank of Richmond (the “Reserve Bank”) and the North Carolina Commissioner of Banks (the “Commissioner”).

 

The Agreement is a formal corrective action pursuant to which the Bank has agreed to address specific issues set forth below, through the adoption and implementation of procedures, plans and policies designed to enhance the safety and soundness of the Bank.

 

Among other things, the Agreement requires the Bank to:

 

Retain an independent consultant acceptable to the Reserve Bank and the Commissioner to conduct a review of the effectiveness of the Bank’s corporate governance, board and management structure, to assess staffing needs and to prepare a written report of findings and recommendations;

 

Formulate a plan to strengthen board oversight of the management and operations of the Bank;

 

Formulate and implement a plan to strengthen credit risk management practices;

 

Formulate a plan for the ongoing review and grading of the Bank’s loan portfolio by a qualified independent party or by qualified staff that is independent of the Bank’s lending function;

 

Develop a plan to maintain sufficient capital at the Company, on a consolidated basis;

 

Not pay cash dividends without the prior written consent of the Reserve Bank and the Commissioner; and

 

Not accept any new brokered deposits (contractual renewals or rollovers of existing brokered deposits are permitted).

 

The Company must furnish periodic progress reports to the Reserve Bank and the Commissioner regarding its compliance with the Agreement. The Agreement will remain in effect until modified or terminated by the Reserve Bank and the Commissioner.

 

This is a type of formal supervisory agreement with our primary federal banking regulator. The written agreement could, among other things, inhibit our ability to grow and pay dividends. In addition, we expect that this written agreement will require us to implement plans to improve our risk management and compliance systems, oversight functions, operating and financial management and capital plans. While subject to the written agreement, our management and board of directors has been required to focus considerable time and attention on taking corrective actions to comply with its terms. We anticipate that this will remain the case going forward, as long as the Written Agreement remains in effect. We may also be required to hire third-party consultants and advisers to assist us in complying with the written agreement. This could increase our non-interest expense and reduce our earnings. If we do not comply with the written agreement, we could be subject to the assessment of civil money penalties, further regulatory sanctions, or other regulatory enforcement actions.

 

17
 

 

 
Management’s Discussion and Analysis
 

 

Effective November 29, 2011, the Company and the Bank entered into a Prompt Corrective Action Directive (the “Directive”) with the Board of Governors of the Federal Reserve System (the “Board of Governors”).

 

The Directive is a formal corrective action in which the Board of Governors has determined that, as of October 30, 2011, Waccamaw Bank is critically undercapitalized, as defined in section 208.43(b)(5) of Regulation H of the Board of Governors.

 

Among other things, the Directive requires the Bank no later than January 6, 2012 to:

 

Increase the Bank’s equity through the sale of shares or contributions to surplus in an amount sufficient to make the Bank adequately capitalized as defined in section 208.43(b)(2) of Regulation H of the Board of Governors;

 

Enter into and close a contract to be acquired by a depository institution holding company or combine with another insured depository institution, closing under which contract is conditioned only on the receipt of necessary regulatory approvals, the continued accuracy of customary representations and warranties and the performance of customary pre-closing covenants;

 

Take other necessary measures to make the Bank adequately capitalized;

 

Restrict the making of any capital distributions, including, but not limited to, the payment of dividends;

 

Restrict the payment of bonuses to senior executive officers and increases in compensation of such officers; and

 

Restrict certain activities, including, but not limited to, making any material change in accounting methods and engaging in any covered transaction, as defined in section 23A of the Federal Reserve Act without the prior written approval of the FDIC.

  

Due to the recent favorable ruling by the Federal Reserve Board of Governors allowing a portion of the preferred stock to be regulatory capital, the Bank’s capital status at September 30, 2011, changed from critically undercapitalized to significantly undercapitalized. Although the Directive has not been terminated, the Company continues to take measures to make the Bank adequately capitalized through the sale of branches and selling stock through a private stock offering.

 

Based on unaudited financial information, as of December 31, 2011, the resulting bank regulatory capital ratios of total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets are 4.96%, 3.08% and 2.08%, respectively. Based on these levels, the Bank is considered significantly undercapitalized.

 

Generally accepted accounting principles require that in the event of changes about the likelihood of realization of a deferred tax asset that results in the establishment of a deferred tax asset valuation allowance related to unrealized losses on available for sale investment securities, that valuation allowance be established through operation even thought the original deferred tax asset was established through other comprehensive income. The guidance on how to address this inconsistent treatment with respect to the calculation of regulatory capital is not well defined. Accordingly, the capital amounts and ratios in the table above include an adjustment related to establishment of such a deferred tax asset valuation. After this adjustment, regulatory capital as presented is the same amount as would be reported had the related deferred tax asset has not been recorded. Management has discussed this treatment with applicable bank regulators and management has not been informed that this treatment is incorrect. However, due to the lack of clear guidance, it is possible the regulators could conclude this adjustment is not appropriate. If that were the case, Tier 1 and total regulatory capital for December 31, 2011 would be reduced by $898,000 and the bank capital ratios would approximate the following:

 

    2011 
      
Total capital to risk weighted assets   1.93%
Tier 1 capital to risk weighted assets   2.85%
Tier 1 capital to average assets   4.73%

 

18
 

 

 
Management’s Discussion and Analysis
 

 

Going Concern Consideration

 

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. These consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern.

 

The substantial uncertainties throughout the economy and U.S. banking industry coupled with current market conditions have adversely affected the Company’s 2010 results and capital levels. The significant losses in 2010 and 2009, primarily related to credit losses and the valuation allowance on deferred tax assets, reduced the Company’s capital levels. In order to become well capitalized under federal banking agencies’ guidelines, management believes that the Company will need to raise additional capital to recapitalize the organization and to absorb the potential future credit losses associated with the disposition of its nonperforming assets. Accordingly, management is in the process of evaluating various alternatives to increase tangible common equity and regulatory capital through the issuance of additional equity in public or private offerings. Management is actively evaluating a number of capital sources, asset reductions, and other balance sheet management strategies to ensure that the projected level of regulatory capital can support its balance sheet long-term. Management is currently reducing and otherwise restructuring its balance sheet to improve capital ratios.

 

Current market conditions for banking institutions, the overall uncertainty in financial markets, and depressed stock price are significant barriers to the success of any plan to issue additional equity in public or private offerings.  An equity financing transaction would result in substantial dilution to the Company's current shareholders and could adversely affect the market price of the Company's common stock.  There can be no assurance as to whether these efforts will be successful, either on a short-term or long-term basis.  Should these efforts be unsuccessful, due to existing regulatory restrictions on cash payments between the Bank and the holding company, the Company may be unable to discharge its liabilities in the normal course of business. There can be no assurance that the Company will be successful in any efforts to raise additional capital during 2012.

 

Both the parent company and the banking subsidiary actively manage liquidity and cash flow needs. The Company has suspended all dividends to shareholders indefinitely. At December 31, 2010, the Company had $35 million of cash and cash equivalents. The Company has no long-term debt maturing in 2011 and $15 million maturing in 2012.

 

Liquidity at the bank level is dependent upon the deposit franchise which funds 81% of the Company’s assets (or 57% excluding brokered CDs). The FDIC’s temporary changes to increase the amount of deposit insurance to $250,000 per deposit relationship and to provide unlimited deposit insurance for certain transaction accounts have contributed to the stable deposit base. All banks that have elected to participate in the Transaction Account Guarantee Program (“TAGP”) have the same FDIC insurance coverage. Potential loss of deposits would be a primary funding need in a liquidity crisis. Deposit balances which are not covered by FDIC insurance total approximately $16.0 million currently, and would increase to approximately $22.5 million without the benefit of the FDIC’s TAGP, currently scheduled to expire at December 31, 2013. Thus, the primary deposit-related liquidity risk relates to balances which are not insured. As of December 31, 2011, the Company has liquid assets of approximately $128 million to address liquidity needs in a crisis scenario. If a liquidity issue presents itself, deposit promotions would be expected to yield significant in-flows of cash, but could be limited based on maximum interest rates that may be offered by banks that are not well capitalized.

 

In addition, certain borrowings, such as brokered CDs and FHLB advances, are dependent on various credit eligibility criteria which may be impacted by changes in the Company’s financial position and/or results of operations. Given the weakened economy and current market conditions, there is no assurance that the Company will be able to obtain new borrowings or issue additional equity on terms that are satisfactory.

 

During 2011, the Company continued to experience losses from operations primarily due to loan losses. Based on unaudited financial information, as of December 31, 2011 consolidated total assets are $561,120,907, equity is $(3,625,647), and net loss from operations is $18,725,248 for the year ended December 31, 2011. The resulting bank regulatory capital ratios of total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets are 4.96%, 3.08% and 2.08%, respectively. Based on these levels, the Bank is considered significantly undercapitalized.

 

Generally accepted accounting principles require that in the event of changes about the likelihood of realization of a deferred tax asset that results in the establishment of a deferred tax asset valuation allowance related to unrealized losses on available for sale investment securities, that valuation allowance be established through operation even thought the original deferred tax asset was established through other comprehensive income. The guidance on how to address this inconsistent treatment with respect to the calculation of regulatory capital is not well defined. Accordingly, the capital amounts and ratios in the table above include an adjustment related to establishment of such a deferred tax asset valuation. After this adjustment, regulatory capital as presented is the same amount as would be reported had the related deferred tax asset has not been recorded. Management has discussed this treatment with applicable bank regulators and management has not been informed that this treatment is incorrect. However, due to the lack of clear guidance, it is possible the regulators could conclude this adjustment is not appropriate. If that were the case, Tier 1 and total regulatory capital for December 31, 2011 would be reduced by $898,000 and the bank capital ratios would approximate the following:

 

    2011 
      
Total capital to risk weighted assets   1.93%
Tier 1 capital to risk weighted assets   2.85%
Tier 1 capital to average assets   4.73%

 

Based on current capital levels and continued operating losses into 2012, management believes the Company will require additional capital to be able to remain viable at least through December 31, 2012. Management has implemented various strategies including a private stock offering and selling branches to provide this needed capital. In spite of management’s best efforts, there is no guarantee management will be successful in raising the additional capital. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern.

  

19
 

 

 
Management’s Discussion and Analysis
 

   

Overview 

 

 

Waccamaw Bank (the “Bank”) began operations on September 2, 1997. The Bank operates by attracting deposits from the general public and using such deposit funds and other sources of funding, including borrowings, to make commercial and consumer loans as well as residential construction loans and permanent mortgage real estate loans and to make other permissible investments. Revenues are derived principally from interest on loans and investments. Changes in the volume and mix of these assets and liabilities, as well as changes in the yields earned and rates paid, determine changes in net interest income. Waccamaw Bankshares, Inc. (the “Company”) was formed during 2001 and acquired all the outstanding shares of the Bank on July 1, 2001.

 

The Company’s total assets were $548.2 million at December 31, 2010 as compared to $533.2 million at December 31, 2009. Total deposits at December 31, 2010 increased 4.9% from December 31, 2009, to $454.9 million. Total deposits were $433.5 million at December 31, 2009. The Bank’s net loans increased to $389.5 million at the end of 2010, an increase of $49.5 million over the 2009 amount of $340.0 million. The $49.5 million increase in loans was in part due to the purchase of a pool of residential mortgage home equity loans with a par value of $110 million, less discount of $10.1 million, or a fair value of $99.9 million. Investment securities were $67.5 million and $87.8 million at December 31, 2010 and 2009, respectively.

 

The Bank’s nonperforming loans increased significantly on a consecutive quarter basis in 2010 through lack of performance and the degradation of the portfolio has continued into 2011 and 2012. Unless the economy improves significantly, these asset quality issues and related costs are likely to continue to depress the Bank’s operating performance in 2011 and 2012. Continuing negative asset quality issues in 2010, 2011 and into 2012, could erode regulatory capital further.

 

Critical Accounting Policies

 

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The notes to the audited consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2010 contain a summary of significant accounting policies. Management believes the Company’s policies with respect to the methodology for the determination of the allowance for loan losses, investment impairment charges, goodwill impairment and asset impairment judgments, such as the recoverability of intangible assets, each involve a higher degree of complexity and require management to make difficult and subjective judgments that often require assumptions or estimates about highly uncertain matters. Accordingly, the Company considers the policies related to those areas to be critical. The allowance for loan losses is an estimate of the losses that may be sustained in the Company’s loan portfolio. The allowance is based on two basic principles of accounting: (i) Statement of Financial Accounting Standards ASC 420, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable, and (ii) ASC 310-10, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market, and the loan balance.

 

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating losses in the portfolio.

 

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Management’s Discussion and Analysis
 

 

The Company accounts for recognized intangible assets based on their estimated useful lives. Intangible assets with finite useful lives are amortized while intangible assets with an indefinite useful life are not amortized. Currently, the Company’s recognized intangible assets consist primarily of purchased core deposit intangible assets, having estimated useful lives of 10 years, which are being amortized. The useful life is the period over which the assets are expected to contribute directly or indirectly to future cash flows. Estimated useful lives of intangible assets are based on an analysis of pertinent factors, including (as applicable):

 

·the expected use of the asset;
·the expected useful life of another asset or group of assets to which the useful life of the intangible asset may relate;
·any legal, regulatory, or contractual provisions that may limit the useful life;
·any legal, regulatory, or contractual provisions that enable renewal and extension of the asset’s legal or contractual life without substantial cost;
·the effects of obsolescence, demand, competition, and other economic factors; and
·the level of maintenance expenditures required to obtain the expected future cash flows from the asset.

 

Straight-line amortization is used to expense recognized amortizable intangible assets since a method that more closely reflects the pattern in which the economic benefits of the intangible assets are consumed cannot readily be determined. Intangible assets are not written off in the period of acquisition unless they become impaired during that period.

 

The Company evaluates the remaining useful life of each intangible asset that is being amortized each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of the intangible asset’s remaining useful life is changed, the remaining carrying amount of the intangible asset is amortized prospectively over that revised remaining useful life.

 

If an intangible asset that is being amortized is subsequently determined to have an indefinite useful life, the asset will be tested for impairment. That intangible asset will no longer be amortized and will be accounted for in the same manner as intangible assets that are not subject to amortization.

 

FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (ASC Topic 820) discusses non-monetary exchanges in relation to the swap for the Company made for the sale non-performing loans and acquiring HELOC loans. Refer to Note 8 for additional accounting policies regarding this transaction.

 

Net Interest Income

 

Net interest income, the principal source of income for the Bank, is the amount of income generated by earning assets (primarily loans and investment securities) less the interest expense incurred on interest-bearing liabilities (primarily deposits used to fund earning assets). Changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. The following table presents the average balances of total interest-earning assets and total interest-bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities and stockholders’ equity, and the related income, expense, and corresponding weighted average yields and costs. The average balances used for the purposes of this table and other statistical disclosures were calculated by using the daily average balances.

 

21
 

 

 

 
Management’s Discussion and Analysis
 

 

Purchase Accounting

 

Loans

 

On September 30, 2010, the Bank entered into an agreement whereby the Bank would sell and Augusta Holdings, LLC (“Augusta”) would buy nonperforming real estate loans for the contractual pay-off amount (par value) of $11.2 million. The carrying value of these loans was $7.3 million as the carrying amounts had been reduced to reflect the fair value of the underlying collateral in measuring the impairment under the requirements of ASC 310-10-35. During the negotiations of this transaction, the Bank agreed to purchase from Augusta a home equity line of credit (HELOC) loan pool. The price of the pool was the amount of the aggregate principal balances (par value) of the loans in the pool, $110.1 million.

 

Preferred stock

 

On December 23, 2010, the Bank entered into an agreement to sell to Monterey I Holdings, LLC (Monterey) 546,375 shares of preferred stock for $16.4 million with a dividend yield of 9%. The noncumulative perpetual preferred stock was issued at the bank level and was required to be converted to preferred stock of the Company. The preferred stock may be converted to 819,564 shares of the Company’s common stock at the option of the buyer. In addition, the Company issued warrants to allow Monterey to purchase up to 300,000 shares of the Company’s common stock at 50% of the market value of the common stock on the date of exercise. The preferred stock contract settled on December 23, 2010.

 

Augusta and Monterey have elements of common ownership and are considered related parties. They are not related parties with respect to the Company or the Bank. Based on the relationship of the counterparties, timing, and other facts and circumstances surrounding the transactions, management has concluded that the transactions should be considered one transaction for financial reporting purposes.

 

Management determined that since there was significant noncash consideration transferred, the transactions should be properly recorded at fair value under the guidance at ASC 845-10. Also in accordance with ASC 845-10, the fair value of the assets received shall be used to measure the cost if that value is more clearly evident than the fair value of the asset surrendered. Management determined the fair value of a homogenous HELOC pool meeting specific credit quality criteria prepared by a qualified valuation professional with prior experience valuing similar loan pools is more clearly evident than the fair values of coastal residential real estate developments and other highly volatile real estate that secures the non-performing loans and preferred shares in a market with very few comparable equity transactions.

 

Accordingly, the Bank retained an outside valuation consulting firm to provide a valuation of the HELOC pool within the guidance at ASC 820-10. The Bank received the valuation on October 5, 2011. The report indicated the fair value of the $110.1 million HELOC pool to be approximately $100.0 million. The valuation was primarily based on discounted cash flows as projected based on the location of the underlying collateral and the current FICO score of the borrower. Based on the valuation report, credit losses on the pool are projected to be $3.1 million over the life of the pool.

 

Fair Value of the Transaction

 

A summary of assets received and consideration transferred at fair value and a description of how the item was valued is presented below (in thousands):

 

Fair Value received     
  HELOC pool, net of discount  $100,002 
  Credit enhancement                 - 
  Interest receivable   386 
     Total FV received  $100,388 
      
Fair Value of consideration paid     
  Non-performing loans  $(7,309)
  Cash   (82,833)
  Warrants                     (300)
  Preferred stock, net of discount   (9,604)
     Total FV received  $(100,046)
      
Back interest on non-performing loans recorded in operations  $342 

 

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Management’s Discussion and Analysis
 

 

HELOC Pool - Fair value as determined by a valuation report prepared by an independent third party.

 

Credit Enhancement – The credit enhancement is unsecured and contractually not due to be settled until two years after the close of the transaction and then annually thereafter for the remaining three years. Due to concerns about the counterparty’s ability to honor the obligation of the credit enhancement, management has determined there is not sufficient evidence to support any value related to the credit enhancement. Accordingly, the credit enhancement has been determined to have no fair value. The Company also believes that the credit enhancement may be considered continuing involvement in the loans sold and may raise questions about whether or not a sale of these assets may recorded under generally accepted accounting principles. We will address this issue in the future by obtaining a legal opinion that addresses the isolation of the assets sold if we determine in the future that there is sufficient evidence to support a value related to the credit enhancement.

 

Interest Receivable – This is the interest receivable from the HELOC pool borrowers at the time if the transfer, valued at the actual amount of the accrual as of the date of closing.

 

Non-performing Loans – Fair value determined based on the value of the collateral underlying the individual loans as determined by recent outside appraisals.

 

Cash – This is the actual amount of net cash paid by the Bank for the pool.

 

Warrants – Valued based on management’s estimate.

 

Preferred stock – Fair value is based on the excess of the fair value of the assets received over the fair value of the assets and other instruments transferred to Augusta as part of the transaction.

 

HELOC Pool Discount

 

The HELOC pool value as determined by the valuation report resulted as discount to par of approximately $10.1 million. Based on the valuation report, management expects to have credit losses on the portfolio of $3.1 million. Accordingly, that amount of the discount will be used as a credit reserve to cover those losses. The reminder of the discount ($7 million) will be accreted into income over the expected life of the pool using the level yield method. Because the last transaction closed on December 23, 2010, no accretion was recorded during 2010. Management began accreting the discount during 2011.

 

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Management’s Discussion and Analysis
 

 

   Net Interest Income and Average Balances (dollars in thousands) 
     
   Periods Ended December 31, 
   2010   2009   2008 
       Interest           Interest           Interest     
   Average   Income/   Yield/   Average   Income/   Yield/   Average   Income/   Yield/ 
   Balance   Expenses   Cost   Balance   Expenses   Cost   Balances   Expenses   Cost 
                                     
Interest-earning assets:                                             
Investment securities  $93,619   $3,424    3.66%  $92,344   $4,698    5.09%  $105,819   $6,327    5.98%
Federal funds sold   22,388    57    .26%   12,784    30    .24%   6,318    70    1.11%
Deposits with banks   62,236    124    .20%   8,323    47    .57%   1,999    32    1.60%
Loans, net1,2   322,255    17,076    5.30%   368,458    21,114    5.73%   376,747    24,056    6.39%
Total interest-earning assets   500,498    20,681         481,909    25,889         490,883    30,485      
                                              
Yield on average interest-earning assets             4.13%             5.37%             6.21%
                                              
Noninterest-earning assets:                                             
Cash   4,837              25,450              8,181           
Premises and equipment   16,737              17,346              17,093           
Interest receivable and other   42,494              33,913              23,311           
Total noninterest-earning assets   64,068              76,709              48,585           
Total assets  $564,566             $558,618             $539,468           
                                              
Interest-bearing liabilities:                                             
Demand deposits  $42,293    219    .52%  $35,775    175    .49%  $29,399    179    .61%
Savings deposits   113,244    1,216    1.07%   101,623    1,361    1.34%   76,580    1,843    2.41%
Time deposits   273,453    5,315    1.94%   270,669    7,726    2.85%   275,956    11,481    4.16%
Other short-term borrowings   6,739    128    1.89%   8,970    208    2.32%   22,644    764    3.37%
Long-term debt   70,714    2,881    4.07%   75,521    3,066    4.06%   65,250    2,667    4.09%
Total interest-bearing liabilities   506,443    9,759        492,558    12,536        469,829     16,934       
Cost of average interest-bearing liabilities             1.93%             2.55%             3.60%
                                              
Noninterest-bearing liabilities:                                             
Demand deposits   35,646              34,892              33,775           
Interest payable and other   2,850              2,282              2,404           
Total noninterest-bearing liabilities   38,496              37,174              36,179           
Total liabilities   544,939              529,732              506,008           
                                              
Stockholders' equity   19,627              28,886              33,460           
Total liabilities and stockholders' equity  $564,566             $558,618             $539,468           
                                              
Net interest income       $10,922             $13,353             $13,551      
                                              
Net yield on interest-earning assets             2.18%             2.77%             2.76%

 

 

 

 

1       Average loan balances include nonaccrual loans.

2       Deferred loan fees are included in interest income.

 

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Management’s Discussion and Analysis
 

 

Interest income during 2010 was $20.7 million, a decrease of 20.1% from the 2009 total of $25.9 million. Interest income for 2008 was $30.5 million. The decrease in net interest income can primarily be attributed to the decrease in loans and investments and the increase in interest bearings deposits with banks in 2010. Average earning assets were $500.5 million during 2010, a decrease of 3.9% from 2009. Average earning assets decreased 1.8% to $481.9 million during 2009 over the 2008 balance of $490.9 million. Yields on interest-earning assets during 2010, 2009, and 2008 were 4.1%, 5.4%, and 6.2%, respectively.

 

Interest rates charged on loans vary with the degree of risk, maturity and amount of the loan. Competitive pressures, money market rates, availability of funds, and government regulation also influence interest rates. On average, loans yielded 5.3%, 5.7% and 6.4% during 2010, 2009, and 2008, respectively. Yields on loans decreased in 2010 primarily as a result of increases in non-accrual loans.

 

Interest expense was $9.8 million during 2010, a decrease of 22.0% over 2009. Interest expense in 2009 was $12.5 million, a decrease of 26.0% over 2008. The decrease in 2010 is a result of our deposits re-pricing in 2010 as average cost of funds decreased approximately 62 basis points from 2009. The decrease in 2009 over 2008 is due to average cost of funds decreasing approximately 100 basis points from 2008. The average rate paid on interest-bearing liabilities during 2010, 2009, and 2008 was 1.9%, 2.6%, and 3.6%, respectively.

 

Net interest income was $10.9 million during 2010, a decrease of 18.2% from 2009. During 2009 net interest income decreased to $13.4 million. Net interest income was $13.6 million in 2008. The decreases in net interest income in 2010 and 2009 can primarily be attributed to the decrease in loans and investments and the increase in interest bearing deposits with banks in 2010. Net interest margin during 2010, 2009, and 2008 was 2.2%, 2.8%, and 2.8%, respectively.

 

The effects of changes in volumes and rates on net interest income for 2010, 2009 and 2008 are shown in the table below.

 

Rate/Volume Variance Analysis (thousands)

 

   2010 Compared to 2009   2009 Compared to 2008 
   Interest           Interest         
   Income/   Variance   Income/   Variance 
   Expense   Attributable to   Expense   Attributable to 
   Variance   Rate   Volume   Variance   Rate   Volume 
Interest-earning assets:                              
Loans  $(4,038)  $(1,516)  $(2,522)  $(2,942)  $(2,424)  $(518)
Investment securities   (1,274)   (1,340)   66    (1,629)   (879)   (750)
Deposits with banks   77    (8)   85    15    (4)   19 
Federal funds sold   27    2    25    (40)   129    (169)
Total   (5,208)   (2,862)   (2,346)   (4,596)   (3,178)   (1,418)
                              
Interest-bearing liabilities:                               
Demand deposits   44    -    44    (4)   -    (4)
Savings deposits   (145)   4    (149)   (482)   16    (498)
Time deposits   (2,411)   (2,490)   79    (3,755)   (1,521)   (2,234)
Short-term borrowings   (80)   (1)   (79)   (556)   (10)   (546)
Long-term debt   (185)   -    (185)   399    (1)   400 
Total   (2,777)   (2,487)   (290)   (4,398)   (1,516)   (2,882)
Net interest income  $(2,431)  $(375)  $(2,056)  $(198)  $(1,662)  $1,464 

 

1.The variance in interest attributable to both volume and rate has been allocated to variance attributed to volume and variance attributed to rate in proportion to the absolute value of the change in each.
2.Balances of nonaccrual loans have been included for computational purposes.

 

25
 

 

 

 
Management’s Discussion and Analysis
 

 

Provision for Loan Losses

 

The provision for loan losses is charged to income in an amount necessary to maintain an allowance for loan losses at an appropriate level in light of the risk inherent in the Bank’s loan portfolio. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for certain qualitative factors. An unallocated component is maintained to address uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating losses in the portfolio.

 

The provision for loan loss expense was $12,205,554, $16,579,908, and $2,990,096 during 2010, 2009, and 2008 respectively. The Bank's allowance for loan losses as a percentage of gross loans was 3.84%, 2.90% and 1.86% at the end of 2010, 2009, and 2008, respectively. Additional information regarding loan loss provisions is discussed below under the heading “Nonperforming and Problem Assets.”

 

Noninterest Income

 

Noninterest income consists of revenues generated from a variety of financial services and activities. The majority of noninterest income is a result of service charges on deposit accounts including charges for insufficient funds and fees charged for non-deposit services. Noninterest income also includes fees charged for various bank services such as safe deposit box rental fees and letter of credit fees. A portion of noninterest income may also be realized from gain on the sale of investment securities. Although the Bank generally follows a buy and hold philosophy with respect to investment securities, occasionally the need to sell some investment securities is created by changes in market rate conditions or by efforts to restructure the portfolio to improve the Bank's liquidity or interest rate risk positions.

 

Noninterest income totaled $6.7 million, $3.9 million, and $966,000 for the years ended December 31, 2010, 2009, and 2008, respectively. Noninterest income increased in 2010 primarily due to increases in gains on sales of investment securities, an increase of $123,000 of ATM and check cashing fees and an increase of $25,000 in mortgage origination income. Service charges on deposit accounts were 41.3% of total noninterest income. Service charges tend to increase as the number of deposit accounts increases. The Bank's fee structure is reviewed annually to determine if adjustments to fees are warranted.

 

The Bank purchased life insurance for certain key employees in December 2004, March 2007, December 2007, June 2008, December 2008 and December 2010, providing $648,000, $741,000 and $548,000 of noninterest income for the years ended December 31, 2010, 2009 and 2008, respectively.

 

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Management’s Discussion and Analysis
 

 

The sources of noninterest income for the past three years are summarized in the following table.

 

Sources of Noninterest Income (thousands)

 

   2010   2009   2008 
             
Service charges on deposit accounts  $2,778   $3,023   $2,115 
ATM and check cashing fees   998    875    755 
Gain (loss) on sale of investment securities   1,593    (887)   98 
Mortgage origination   378    380    353 
Insurance commission   9    13    15 
Income from financial services   102    139    264 
Earnings on bank owned life insurance   648    741    548 
Impairment of investment securities   -    (419)   (3,348)
Other   218    44    166 
Total noninterest income  $6,724   $3,909   $966 

 

Noninterest Expense

 

Noninterest expense for 2010, 2009, and 2008 was $17.0 million, $18.5 million and $15.4 million, respectively. The majority of the increase in noninterest expense for 2010 can be attributed primarily to write-downs or losses on foreclosed assets of $1.7 million in 2010, $776,000 in 2009 and with no expense in 2008 and regulatory agency expense of $1.8 million in 2010, $1.3 million in 2009 and $389,000 in 2008.

 

Total personnel expenses, the largest component of noninterest expense, were $6.3 million, $7.1 million and $8.2 million during 2010, 2009 and 2008, respectively. Personnel expenses decreased 11.7% during 2010 and decreased 13.0% during 2009. Substantially all of the decrease in 2010 resulted from cost cutting initiatives in salaries and employee benefits.

 

Combined occupancy and furniture and equipment expense was $2.1 million, $2.1 million and $2.0 million, or 12.0%, 11.3% and 13.1% of noninterest expense during 2010, 2009 and 2008, respectively. Professional services expense, including fees paid to attorneys, independent auditors and consultants was $1.2 million, $853,000, and $490,000 in 2010, 2009 and 2008, respectively. The increase in 2010 can be mostly attributed to legal fees related to efforts to collect principal and interest from borrowers and guarantors on various outstanding loans.

 

Advertising and public relations expense decreased to $261,000 in 2010 from $311,000 in 2009 as these expenses were reduced as the result of cost cutting initiatives to marketing expenses in 2010. Data processing and credit card processing fees totaled $1.1 million, $1.2 million and $1.3 million during 2010, 2009 and 2008, respectively. These fees relate directly to the number of accounts serviced and transactions processed.

 

In 2010 and 2009, losses on other real estate owned were written down to fair value. There were no expenses in 2008 related to fair value write-downs of other real estate owned.

 

Total regulatory expense from FDIC deposit insurance assessments increased to $1.8 million in 2010 from $1.3 million in 2009 and $389,000 in 2008.

 

The overhead ratio of noninterest expense to adjusted total revenues (net interest income plus noninterest income excluding securities transactions) was 107%, 107% and 111% in 2010, 2009, and 2008, respectively. The primary elements of noninterest expense for the fiscal years ended December 31, 2010, 2009, and 2008 are summarized in the following table.

 

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Management’s Discussion and Analysis
 

 

Sources of Noninterest Expense (thousands)

 

   2010   2009   2008 
                
Salaries and wages  $5,722   $6,328   $6,838 
Employee benefits   570    802    1,359 
Total personnel expense   6,292    7,130    8,197 
                
Occupancy expense   1,473    1,513    1,435 
Furniture and equipment   585    584    577 
Printing and supplies   96    96    157 
Professional services   1,158    853    490 
Postage and office supplies   147    155    153 
Telephone   175    178    180 
Dues and subscriptions   87    77    61 
Education and seminars   34    32    92 
Franchise and local taxes   88    94    117 
Foreclosed assets, net   2,504    776    - 
Advertising and public relations   261    311    705 
Regulatory agency expense   1,643    1,293    389 
Director fees   -    -    133 
Data processing services   1,134    1,175    1,307 
Amortization of deposit premium   90    191    286 
Goodwill impairment charge   -    2,727    - 
Other operating expense   1,223    1,330    1,118 
Total noninterest expenses  $16,990   $18,515   $15,397 

  

Income Taxes

 

Income tax expense and benefit is based on amounts reported in the statements of income (after adjustments for non-taxable income and non-deductible expenses) and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. The deferred tax assets and liabilities represent the future federal and state income tax consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.

 

Income tax expense (benefit) was $3,688,212, $(3,628,000) and $(1,827,000) for 2010, 2009 and 2008, respectively. There were no net deferred income tax assets at December 31, 2010 and net deferred income tax assets of approximately $3,195,000 and $6,994,000 at December 31, 2009 and 2008, respectively which were included in other assets. At December 31, 2010 and 2009, $12,548,053 and $3,652,000 respectively, was placed in a valuation allowance established on net deferred tax assets as discussed in Note 18 of “Notes to Consolidated Financial Statements”. Accounting Standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using “a more likely than not” standard that the tax position will be realized or sustained upon examination. The Company’s management considers both positive and negative evidence and analyzes changes in near-term market conditions as well as other factors which may impact future operating results. At December 31, 2010, the Company’s management believes that it is not likely it will be able to realize its net deferred tax assets.

 

The Bank’s deferred income tax benefits and liabilities are the result of temporary differences in provisions for loan losses, depreciation, amortization of deposit premiums, deferred income, impairment of equity securities and investment security discount accretion.

 

28
 

 

 
Management’s Discussion and Analysis
 

 

The cumulative loss incurred by the Company in 2008, 2009 and 2010 was the primary negative factor considered by management. Additionally general economic conditions in the Company’s primary markets and the potential for ongoing weakening asset quality were also evaluated as potential negative factors.

 

Earning Assets

 

Average earning assets were $500.5 million during 2010, an increase of 2.0% from 2009. Average earning assets were $481.9 million in 2009, a decrease of 1.8% over the $490.9 million balance for 2008. Total average earning assets represented 88.7%, 86.3%, and 91.0% of total average assets during the years ended December 31, 2010, 2009 and 2008, respectively. A summary of average assets is shown in the following table.

 

Average Asset Mix (dollars in thousands)

 

   2010   2009   2008 
   Average       Average       Average     
   Balance   Percent   Balance   Percent   Balance   Percent 
Earning assets:                              
Loans, net  $322,255    57.08%  $368,458    65.96%  $376,747    69.84%
Investment securities   93,619    16.58%   92,344    16.53%   105,819    19.61%
Federal funds sold   22,388    3.97%   12,784    2.29%   6,318    1.17%
Deposits with banks   62,236    11.02%   8,323    1.49%   1,999    .37%
Total earning assets  $500,498    88.65%  $481,909    86.27%  $490,883    90.99%
                               
Nonearning assets:                              
Cash and due from banks   4,837    .86%   25,450    4.55%   8,181    1.52%
Premises and equipment   16,737    2.96%   17,346    3.11%   17,093    3.17%
Other assets   42,494    7.53%   33,913    6.07%   23,311    4.32%
Total nonearning assets   64,068    11.35%   76,709    13.73%   48,585    9.01%
Total assets  $564,566    100.00%  $558,618    100.00%  $539,468    100.00%

 

Loans

 

The Bank makes both consumer and commercial loans to borrowers within its market area, including low- and moderate-income areas. The Bank’s market area is generally defined to be all of Columbus, Brunswick, Bladen and New Hanover counties of North Carolina and Lancaster and Horry counties of South Carolina. The Bank emphasizes consumer based installment loans, commercial loans to small and medium sized businesses and real estate loans.

 

29
 

 

 
Management’s Discussion and Analysis
 

 

A significant portion of the loan portfolio is made up of loans secured by various types of real estate. Real estate loans represented 90.2%, 86.3%, and 83.6% of total loans at December 31, 2010, 2009, and 2008, respectively. Total loans secured by one-to-four family residential properties represented 45.5%, 22.8% and 21.7% of total loans at the end of 2010, 2009 and 2008, respectively. Loans for commercial and business purposes were $26.1 million, $32.5 million and $43.0 million, or 6.4%, 9.3% and 11.1% of total loans outstanding at December 31, 2010, 2009 and 2008, respectively.

 

The amounts of gross loans outstanding by type at December 31, 2010 through 2006 are shown in the following table.

 

Loan Portfolio Summary (thousands)

 

   2010   2009   2008   2007   2006 
                     
Construction and development  $81,087   $121,838   $125,878   $121,760   $109,036 
Farmland   2,494    2,473    3,343    3,806    2,412 
1-4 family residential   184,218    80,071    83,734    75,671    64,475 
Multifamily residential   8,946    9,879    11,802    3,670    3,650 
Nonfarm, nonresidential   88,912    88,197    98,438    93,222    73,529 
Total real estate   365,657    302,458    323,195    298,129    253,102 
                          
Agricultural   402    563    654    671    675 
Commercial and industrial   26,134    32,551    42,958    43,617    48,858 
Consumer   12,712    13,380    17,217    13,950    13,172 
Other   328    1,512    2,432    4,610    1,783 
Total  $405,233   $350,464   $386,456   $360,977   $317,590 

 

The maturity/re-pricing distributions of loans as of December 31, 2010 are set forth in the following table.

 

Maturity Schedule of Loans (dollars in thousands)

 

   Commercial   Construction             
   and   and       Total     
   Industrial   Development   Others   Amount   Percent 
                     
Three months or less  $8,115   $25,247   $71,165   $104,527    25.79%
Over three months to twelve months   3,436    10,690    16,651    30,777    7.60%
Over one year to five years   11,990    37,301    67,012    116,303    28.70%
Over five years   2,593    7,849    143,184    153,626    37.91%
Total loans  $26,134   $81,087   $298,012   $405,233    100.00%

 

Investment Securities

 

The Bank uses its investment portfolio to provide liquidity for unexpected deposit decreases, to fund loans, to meet the Bank's interest rate sensitivity goals and to generate income.

 

Securities are classified as securities held to maturity when management has the intent and the Bank has the ability at the time of purchase to hold the securities to maturity. Securities held to maturity are carried at cost adjusted for amortization of premiums and accretion of discounts. Securities to be held for indefinite periods of time are classified as securities available for sale. Unrealized gains and losses on securities available for sale are recognized as direct increases or decreases in stockholders’ equity. Securities available for sale include securities that may be sold in response to changes in market interest rates, changes in the security’s prepayment risk, increases in loan demand, general liquidity needs and other similar factors. The entire securities portfolio is classified as available for sale.

 

30
 

 

 
Management’s Discussion and Analysis
 

 

The Company attempts to manage the investment portfolio in a conservative manner with virtually all investments taking the form of purchases of government sponsored enterprises, corporate securities, municipal securities, and mortgage-backed securities. Management views the investment portfolio as a source of income, and purchases securities with that objective in mind.

 

However, adjustments are necessary in the portfolio to provide an adequate source of liquidity which can be used to meet funding requirements for loan demand and deposit fluctuations and to mitigate interest rate risk. Therefore, management may sell certain securities prior to their maturity.

 

The following table presents the investment portfolio by major types of investments and maturity ranges. Maturities may differ from scheduled maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid prior to the scheduled maturity date. Maturities on all other securities are based on the contractual maturity.

 

Investment Securities (dollars in thousands)

 

   December 31, 2010 
   Amortized Cost Due         
       After One   After Five             
   In One Yr.   Through   Through   After Ten       Fair 
   Or Less   Five Years   Ten Years   Years   Total   Value 
                         
Investment securities                              
Municipal securities   -    -    -    7,371    7,371    6,181 
Corporate securities   2,000    -    -    2,235    4,235    3,399 
Single issue trust preferred securities   -    1,002    -    5,476    6,478    5,067 
Mortgage-backed securities   -    -    30    53,153    53,183    52,840 
Total  $2,000   $1,002   $30   $68,235   $71,267   $67,487 
                               
Weighted average yields                              
Municipal securities   -   -   -   4.38%        4.38%
Corporate securities   1.83%   -   -   7.63%        4.89%
Single issue trust preferred securities   -   6.75%   -   4.61%        4.94%
Mortgage-backed securities   -   -   2.40%   2.46%        2.46%
Consolidated   1.83%   6.75%   2.40%   3.01%        3.03%

 

31
 

 

 
Management’s Discussion and Analysis
 

 

   2009 
   Book   Fair 
   Value   Value 
Investment securities          
Municipal securities   13,083    12,075 
Corporate securities   5,618    4,502 
Single issue trust preferred securities   12,090    10,552 
Pooled trust preferred securities   134    82 
Mortgage-backed securities   61,167    60,558 
Total  $92,092   $87,769 

 

The interest rate environment and the need for liquidity resulted in an annualized average yield on the investment portfolio of 3.5%, 5.1%, and 6.0% during 2010, 2009 and 2008, respectively. At December 31, 2010, 2009 and 2008, the market value of the investment portfolio was $67.5 million, $87.8 million, and $87.4 million, respectively. Amortized cost was $71.3 million, $92.1 million, and $96.7 million. The investment portfolio was restructured in 2010, as municipal securities, corporate securities and single issue trust preferred securities were replaced with mortgage-backed securities in an attempt to reduce risk on the balance sheet.

 

Federal Funds Sold

 

Federal funds represent the most liquid portion of the Bank's invested funds and generally the lowest yielding portion of earning assets. However, because of the flat yield curve and the need to maintain liquidity, management maintained a significant amount of federal funds during the past three years. At December 31, 2010 and December 31, 2009, federal funds sold were $2.2 million and $21.3 million, respectively.

 

Deposits

 

The Bank relies on deposits generated in its market area to provide the majority of funds needed to support lending activities and other investments. More specifically, core deposits (total deposits less time deposits in denominations of $100,000 or more) are the primary funding source.

 

The size of the Bank's balance sheet is largely determined by the availability of deposits in its market, the cost of attracting the deposits, and the prospects of profitably utilizing the available deposits by investing in loans or the investment portfolio. Market conditions have resulted in depositors shopping for better deposit rates more than in the past. An increased customer awareness of interest rates adds to the importance of rate management. The Bank's management must continuously monitor market pricing, competitors’ rates, and internal interest rate spreads to maintain the Bank’s growth and achieve profitability. The Bank attempts to structure rates so as to promote deposit and asset growth while at the same time increasing the overall profitability of the Bank.

 

Average total deposits were $464.6 million during 2010. This is an increase of 11.8% over 2009. Average total deposits were $443.0 million for the year ended December 31, 2009, an increase of 6.6% over 2008. The majority of those deposits were core deposits. The percentage of the Bank's average deposits that were interest bearing in 2010 was 92.3%, 92.1% in 2009 and 91.9% in 2008. Average demand deposits which earn no interest were $35.6 million, $34.9 million and $33.8 million for the periods ended December 31, 2010, 2009 and 2008, respectively.

 

32
 

 

 
Management’s Discussion and Analysis
 

 

Management’s strategy has been to support loan and investment growth with core deposits and not to aggressively solicit more volatile, large denomination certificates of deposit. Large denomination certificates of deposit can be particularly sensitive to changes in interest rates. Management considers these deposits to be volatile and, in order to minimize liquidity and interest rate risks, invests these funds in short-term investments.

 

Average deposits and related average rates paid for the periods ended December 31, 2010, 2009, and 2008 are summarized in the following table.

 

Average Deposit Mix (dollars in thousands)

 

   2010   2009   2008 
   Amount   Rate   Amount   Rate   Amount   Rate 
Interest bearing deposits:                              
Demand accounts  $42,293    .52%  $35,775    .49%  $29,399    .61%
Money market   100,688    1.14    91,071    1.42    67,749    2.57 
Savings   12,556    .55    10,552    .65    8,831    1.12 
Time deposit   273,453    1.94    270,669    4.16    275,956    4.16 
Total interest bearing deposits   428,990    1.57    408,067    2.27    381,935    3.54 
                               
Noninterest bearing demand deposits   35,646         34,892         33,775      
Total deposits  $464,636        $442,959        $415,710      

 

The following table provides maturity information relating to time deposits of $100,000 or more at December 31, 2010.

 

Large Time Deposit Maturities, (dollars in thousands)

 

Remaining maturity of three months or less  $42,803 
Remaining maturity over three through twelve months   80,539 
Remaining maturity over twelve months   63,820 
Total time deposits of $100,000 or more  $187,162 

 

Securities Sold Under Agreements to Repurchase

 

Other borrowed funds consisting of securities sold under agreements to repurchase and federal funds purchased were $19.8 million, $20.6 million and $23.8 million at December 31, 2010, 2009 and 2008, respectively. Average short-term debt was $6.7 million, $8.9 million and $22.6 million during 2010, 2009 and 2008, respectively. The related interest expense was $127,511, $208,032 and $763,493 during 2010, 2009 and 2008, respectively.

 

Other Short-term Borrowings

 

There was one fixed rate FHLB advance of $5,000,000 at December 31, 2010 and one fixed rate FHLB advance of $2,500,000 at December 31, 2009. Also included in other short-term borrowings was a $900,000 facility which is funded by AloStar Bank of Commerce that will mature on July 1, 2020 at a 5.00% lending rate.

 

33
 

 

 
Management’s Discussion and Analysis
 

 

Long-term Debt

 

As a member of the Federal Home Loan Bank of Atlanta, the Bank has the ability to borrow up to 10% of total assets in the form of FHLB advances. At December 31, 2010 and 2009, advances of $35.0 million and $40.0 million, respectively, were outstanding. The average amount outstanding during 2010 and 2009 was $40.2 million and $40.2 million, respectively. Approximately $19.0 million in 1-4 family residential loans, $12.2 million in commercial real estate loans, $7.2 million in home equity line of credit loans and $5.2 million in securities were pledged as collateral for the FHLB advances at December 31, 2010.

  

Maturity Date  Advance   Rate 
         
07/17/12   9,000,000    Fixed at 4.48% 
09/04/12   6,000,000    Fixed at 4.00% 
09/03/13   6,000,000    Fixed at 4.15% 
12/02/13   5,000,000    Fixed at 4.39% 
09/29/15   4,000,000    Fixed at 4.06% 
04/22/19   5,000,000    Fixed at 4.75% 
   $35,000,000      

 

On June 27, 2008, Waccamaw Bank, sold in a private placement to qualified institutional investors, an aggregate of $3,000,000 of subordinated notes that will mature on July 1, 2015 at 3 month LIBOR plus 350 basis points. 

 

Capital

 

Stockholders’ equity was $14.1 million at December 31, 2010. This was a 17.6% decrease from the $17.2 million at the end of 2009. Average stockholders' equity as a percentage of average total assets was 3.5%, 5.2% and 6.2% for 2010, 2009, and 2008, respectively.

 

On March 31, 2011, the Company issued 546,375 shares of fixed rate noncumulative perpetual preferred stock, series B (the “Series B Preferred Stock”), to Monterey I Holdings, LLC. The Series B Preferred Stock was issued in exchange for 546,375 outstanding shares of fixed rate noncumulative perpetual preferred stock, series A, of the Company’s wholly owned subsidiary, Waccamaw Bank (the “Bank”). The shares of the Bank’s series A preferred stock were held by Monterey Holdings prior to the exchange and were originally issued to Monterey Holdings by the Bank pursuant to a subscription offer agreement dated December 23, 2010, whereby Monterey Holdings purchased 546,375 shares of the Bank’s series A preferred stock and a warrant covering 300,000 shares of the Company’s common stock for an aggregate contract price of $16,392,266. A discount against the fixed rate noncumulative perpetual preferred stock, Series A was taken in the amount of $6,944,605 at December 31, 2010.

 

The Company completed a rights offering on August 3, 2010 of shares of the Company’s common stock at a price per share of $1.25. The shares of common stock were offered for sale to the holders of record of the Company’s common stock as of the close of business on May 14, 2010. The offering raised $2,394,000 less expenses of $540,000 of additional capital through the sale of 1,915,041 shares of common stock.

 

34
 

 

 
Management’s Discussion and Analysis
 

 

Regulatory guidelines relating to capital adequacy provide minimum risk-based ratios which assess capital adequacy while encompassing credit risks, including those related to off-balance sheet activities. Capital ratios under these guidelines are computed by weighing the relative risk of each asset category to derive risk-adjusted assets. For the Company, risk-based capital guidelines require minimum ratios of core (Tier 1) capital to risk-weighted assets of 4.0% and total regulatory capital (core capital plus allowance for loan losses up to 1.25% of risk-weighted assets) to risk-weighted assets of 8.0%. As of December 31, 2010, the Company’s Tier 1 risk-weighted capital ratio and total capital ratio were 6.7% and 7.5%, respectively.

 

The Bank also has capital ratio constraints with which to comply. These ratios are slightly different than those required at the parent company level. At December 31, 2010, the Bank’s capital ratios were as follows: Tier 1 leverage ratio, 5.4%, Tier 1 risk-based capital ratio, 6.9% and total risk-based ratio, 8.8%. At December 31, 2010, these capital ratios classified the Bank as “adequately capitalized” in accordance with the FDIC’s regulatory capital rules. The Company’s and Bank’s actual capital amounts and ratios are presented at December 31, 2010 in the following table.

 

Capital Requirements (dollars in thousands)

 

Waccamaw Bankshares, Inc.

           Risk-based Capital 
   Leverage Capital   Tier 1 Capital   Total Capital 
   Amount   Percentage(1)   Amount   Percentage(2)   Amount   Percentage(2) 
                         
Actual  $29,795    5.27%  $29,795    6.70%  $33,512    7.54%
Well Capitalized   28,222    5.00%   33,866    6.00%   44,443    10.00%

 

Waccamaw Bank

           Risk-based Capital 
   Leverage Capital   Tier 1 Capital   Total Capital 
   Amount   Percentage(1)   Amount   Percentage(2)   Amount   Percentage(2) 
                         
Actual  $30,578    5.42%  $30,578    6.89%  $39,153    8.82%
Well Capitalized   28,192    5.00%   33,830    6.00%   44,375    10.00%

 


(1)Percentage of total adjusted average assets. The Federal Reserve Board (“FRB”) minimum leverage ratio requirement is 4 percent to 5 percent, depending on the institution’s composite rating as determined by its regulators. The FRB has not advised the Company of any specific requirements applicable to it.
(2)Percentage of risk-weighted assets.

 

Based on unaudited financial information, as of December 31, 2011, the resulting bank regulatory capital ratios of total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets are 4.96%, 3.08% and 2.08%, respectively. Based on these levels, the Bank is considered significantly undercapitalized.  

 

Generally accepted accounting principles require that in the event of changes about the likelihood of realization of a deferred tax asset that results in the establishment of a deferred tax asset valuation allowance related to unrealized losses on available for sale investment securities, that valuation allowance be established through operation even thought the original deferred tax asset was established through other comprehensive income. The guidance on how to address this inconsistent treatment with respect to the calculation of regulatory capital is not well defined. Accordingly, the capital amounts and ratios in the table above include an adjustment related to establishment of such a deferred tax asset valuation. After this adjustment, regulatory capital as presented is the same amount as would be reported had the related deferred tax asset has not been recorded. Management has discussed this treatment with applicable bank regulators and management has not been informed that this treatment is incorrect. However, due to the lack of clear guidance, it is possible the regulators could conclude this adjustment is not appropriate. If that were the case, Tier 1 and total regulatory capital for December 31, 2011 and December 31, 2010 would be reduced by $1,457,000 and $898,000, respectively and the bank capital ratios would approximate the following:

 

    2011    2010 
           
Total capital to risk weighted assets   1.93%   5.16%
Tier 1 capital to risk weighted assets   2.85%   6.56%
Tier 1 capital to average assets   4.73%   8.49%

 

Nonperforming and Problem Assets

 

Certain credit risks are inherent in making loans, particularly commercial and consumer loans. Management prudently assesses these risks and attempts to manage them effectively. The Bank also attempts to reduce repayment risks by adhering to internal credit policies and procedures. These policies and procedures include officer and customer limits, periodic loan documentation review and follow up on exceptions to credit policies.

 

The allowance for loan losses is maintained at a level adequate to absorb probable losses. Some of the factors which management considers in determining the appropriate level of the allowance for credit losses are: past loss experience, an evaluation of the current loan portfolio, identified loan problems, the loan volume outstanding, the present and expected economic conditions in general, regulatory policies, and in particular, how such conditions relate to the market areas that the Bank serves. Bank regulators also periodically review the Bank's loans and other assets to assess their quality. Loans deemed uncollectible are charged to the allowance. Provisions for loan losses and recoveries on loans previously charged off are added to the allowance.

 

The accrual of interest on loans is discontinued on a loan when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed.

 

35
 

 

 
Management’s Discussion and Analysis
 

 

The provision for loan losses, net charge-offs and the activity in the allowance for loan losses is detailed in the following table.

 

Allowance for Loan Losses (dollars in thousands)

 

   2010   2009   2008   2007   2006 
                     
Balance at beginning of period  $10,149   $7,188   $5,386   $4,886   $3,939 
Charge-offs:                         
Construction loans   (4,320)   (6,881)   (492)   (86)   - 
Commercial and industrial loans   (330)   (1,847)   (231)   (1)   (500)
Consumer and other   (2,224)   (4,983)   (476)   (201)   (85)
Total charge-offs   (6,874)   (13,711)   (1,199)   (288)   (585)
Recoveries:                         
Construction loans   40    (55)   -    379    - 
Commercial and industrial loans   8    4    4    -    - 
Consumer and other   12    143    7    23    36 
Total recoveries   60    92    11    402    36 
                          
Net charge-offs   (6,814)   (13,619)   (1,188)   114    (549)
                          
Allowance purchased from The Bank of Heath Springs   -    -    -    -    46 
                          
Provision for loan losses   12,206    16,580    2,990    386    1,450 
                          
Balance at the end of the year  $15,541   $10,149   $7,188   $5,386   $4,886 
                          
Total loans outstanding at year-end  $405,233   $350,464   $386,456   $360,977   $317,590 
                          
Average net loans outstanding for the year  $322,255   $368,458   $376,747   $332,451   $279,625 
                          
Allowance for loan losses to loans outstanding   3.84%   2.90%   1.86%   1.49%   1.54%
Ratio of net loan charge-offs to average loans outstanding   2.11%   3.70%   .32%   (0.03)%   0.20%

 

The following table sets forth information about the Bank’s allowance for loan losses by asset category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.

 

Allowance for Loan Losses by Category (dollars in thousands)

 

   2010   2009   2008   2007   2006 
   Amount   %(1)   Amount   %(1)   Amount   %(1)   Amount   %(1)   Amount   %(1)_ 
                                         
Construction and development  $7,665    49.32   $3,556    35.04   $2,341    32.57   $1,936    33.73   $1,766    34.33 
Farmland   66    .43    70    .69    62    .86    61    1.05    39    .76 
1-4 family residential   1,405    9.04    2,282    22.48    1,557    21.67    1,059    20.96    954    20.30 
Multifamily residential   1,676    10.78    327    3.22    220    3.05    42    1.02    42    1.15 
Nonfarm, nonresidential   2,911    18.73    2,533    24.96    1,831    25.47    1,399    25.82    1,176    23.15 
Total real estate   13,723    88.30    8,768    86.39    6,011    83.62    4,497    82.58    3,977    79.69 
                                                   
Agricultural   16    .10    16    .16    12    .17    10    .19    10    .22 
Commercial and industrial   1,563    10.06    943    9.29    800    11.13    593    12.09    664    15.38 
Consumer   105    .68    380    3.74    320    4.45    226    3.86    212    4.15 
Other   134    .86    42    .42    45    .63    60    1.28    23    .56 
Total  $15,541    100.00   $10,149    100.00   $7,188    100.00   $5,386    100.00   $4,886    100.00 

 

(1)Represents the percentage of loans in each category to total loans outstanding.

 

36
 

 

 
Management’s Discussion and Analysis
 

 

Real estate prices, general economic trends, and various other factors can greatly affect loan losses and no assurances can be made about future losses. It is management’s assessment that the allowance for loan losses as of December 31, 2010 was appropriate in light of the risk inherent within the Company’s loan portfolio.

 

The following table sets forth information about the Bank’s nonperforming assets.

 

Nonperforming Assets (dollars in thousands)

 

   2010   2009   2008   2007   2006 
                     
Nonaccrual loans  $39,841   $21,440   $15,633   $1,534   $1,181 
Loans past due 90 days or more and still accruing interest   2,924    1,409    1,451    2,608    340 
Total nonperforming loans   42,765    22,849    17,084    4,142    1,521 
                          
Other real estate and repossessed personal property   9,594    5,015    963    340    32 
Total nonperforming assets  $52,359   $27,864   $18,047   $4,482   $1,553 
                          
Nonperforming assets as a percentage of:                         
Total assets   9.55%   5.23%   3.36%   .88%   .39%
Total loans   12.93%   7.96%   4.67%   1.24%   .49%

 

Asset Quality

 

At December 31, 2010, the Company had approximately $11.0 million in loans that were 30-89 days past due. This represented 2.72% of gross loans outstanding on that date. This is a decrease from December 31, 2009 when there were approximately $26.3 million in loans that were 30-89 days past due, or 7.50% of gross loans outstanding. At December 31, 2008 there were approximately $8.0 million in loans that were 30-89 days past due, or 2.07% of gross loans outstanding. The increase in past dues is spread throughout each category of the loan portfolio and is due primarily to the continued weakening of economic conditions both locally and nationally. Non-accrual loans increased $18.4 million to $39.8 million at December 31, 2010 compared to $21.4 million at December 31, 2009, primarily as a result of 8 loan relationships of $1 million or more totaling $17.5 million that were reclassified from past due status to non-accrual. Non-accrual loans totaled $15.6 million at December 31, 2008. The Company had ten loans that were considered troubled debt restructured loans which totaled $3,576,818 at December 31, 2010.

 

The percentage of non-performing loans (non-accrual loans and loans that were 90 days or more past due but still in accruing status) to total loans increased 378 basis points from 6.78% at December 31, 2009 to 10.56% at December 31, 2010. The percentage of non-performing loans at December 31, 2008 was 4.02%.

 

At December 31, 2010, there were $52.7 million of loans that were reviewed for individual impairment under ASC 310-10. $28.4 million of these loans required a specific reserve of $6.2 million. At December 31, 2009, $41.6 million in loans were classified as impaired. None of these impaired loans required a specific reserve at December 31, 2009. At December 31, 2008, $25.2 million in loans were classified as impaired of which $22.8 million required a specific reserve of $3.6 million. The allowance for loan losses was $15.5 million at December 31, 2010, or 3.84% of gross loans outstanding. This is an increase of 94 basis points from the 2.90% of gross loans at December 31, 2009. The allowance for loans losses was $7.2 million at December 31, 2008. The allowance for loan losses at December 31, 2010 represented 29.51% of impaired loans compared to 24.41% at December 31, 2009. The allowance for loans losses at December 31, 2008 represented 28.49% of impaired loans. This increase in the allowance for 2010 resulted from provisions for loan losses of $12.2 million, offset by net charge-offs of $6.8 million. Most of the loans charged-off in 2010 were classified as impaired at December 31, 2010. It is management’s assessment that the allowance for loan losses as of December 31, 2010 was appropriate in light of the risk inherent within the Company’s loan portfolio. No assurances, however, can be made that further adjustments to the allowance for loan losses may not be deemed necessary.

 

37
 

 

 
Management’s Discussion and Analysis
 

 

At December 31, 2010 there were potential problem loans of $24.4 million classified as special mention loans. Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Company’s credit position at some future date.

 

The total non-performing assets, (non-accrual loans, loans greater than 90 days past due and still accruing and other real estate owned), at December 31, 2010, December 31, 2009 and December 31, 2008 were $52.4 million, $27.9 million and $18.0 million, respectively. The allowance for loan losses at December 31, 2010 represented 29.7% of non-performing assets compared to 36.4% at December 31, 2009.

 

Since 2007, the allowance for loan losses model had been modified and refined. The previous method included a ASC 450 component that incorporated a risk grade assessment that was primarily based on peer group averages. In response to changes in the economic environment, in early 2008, the Bank implemented a new allowance for loan losses model, developed by a vendor with expertise in credit risk monitoring. The new model incorporates a ASC 450 component that builds upon actual historical losses by call report code, adjusted for certain environmental changes in the lending environment.

Additional information is as follows:

 

   2010   2009   2008 
             
Impaired loans  $52,658,648   $41,575,130   $25,227,758 
Unimpaired loans   352,358,075    308,594,595    360,843,112 
Gross loans  $405,016,723   $350,169,725   $386,070,870 
                
Specific reserve on impaired loans  $6,191,765   $-   $3,586,786 
Reserve related to ASC 450   9,349,523    10,148,927    3,601,195 
Total allowance for loan losses  $15,541,288   $10,148,927   $7,187,981 
                
Allowance to gross loans   3.84%   2.90%   1.86%
Specific reserve to impaired loans   11.76%   -    14.22%
ASC 450 reserves to unimpaired loans   2.65%   3.29%   1.00%

 

The table on the following page presents certain information regarding the significant credit relationships that make up the majority of the non-accrual and impaired loans in our portfolio as of December 31, 2010.

 

38
 

 

 
Management’s Discussion and Analysis
 

 

Loan Customer Type   Loan Amount   Loan
Type
  Reserve $   As of Date   Previous
Charge-
off
  Regulatory
Classification
  Status   Initial
Impairment
  Valuation   Appraisal
Date
  Valuation
Basis
  Loan
Origination
  Past due
Counters
(30/60/90)
                                                         
Residential A&D   $ 4,639,903   1A2   268,903   1/16/2011   0   Substandard   NA*       $ 4,371,000   6/15/2009   FV   8/1/2006
12/20/2007
  4/1/1
2/1/1
                                                         
Residential A&D   $ 4,031,543   1A2   0   10/28/2010   0   Substandard   NA       $ 4,699,200   10/1/2010   FV   7/9/2007   4/1/1
                                                         
Residential A&D   $ 3,330,299   1A2   0   12/13/2010   347,266   Substandard   NA       $ 3,789,610   6/15/10
3/29/10
  FV   10/31/2008   1/0/0
                                                         
Hotels (3)   $ 2,994,264   1D   0   9/9/2010   0   Substandard   NA       $ 4,393,967   9/3/2008   FV   9/14/2005   16/1/1
                                                         
Hardwood flooring manufacturer   $ 2,548,375   1E1   0   9/13/2010   725,000   Substandard   NA       $ 2,548,375   4/24/2009   FV   8/9/2006
1/16/2007
  2/0/0
                                                         
Commercial income producing   $ 2,107,879   1E2   0   10/21/2010   0   Substandard   NA       $ 2,089,032   1/31/2009   FV   3/25/2003
2/18/2009
  7/2/1 4/2/2
                                                         
Residential A&D   $ 1,554,805   1E2   0   12/13/2010   8,555   Substandard           $ 1,564,375   7/15/2008   FV   6/28/2004   11/4/1
                                                         
Wrecker service   $ 1,354,944   1C2A   0   9/9/2010   0   Substandard   Accrual       $ 1,465,782   6/1/2005       3/1/2008   FV   3/11/2005   35/0/0
                                                         
Residential A&D   $ 1,235,684   1A2   610,884   12/27/2010   0   Substandard   NA       $ 624,800   4/29/2010   FV   1/17/2008   10/1/1
                                                         
Individual   $ 1,061,887   1C2A   6,765   10/20/2010   0   Special Mention   Accrual       $ 1,055,122   1/11/2010     12/7/2009   FV   11/8/2007   2/0/0
                                                         
Residential A&D   $ 1,029,628   1A2   0   1/16/2011   0   Substandard   Accrual       $ 1,333,679   1/11/10        12/7/09   FV   7/31/2009   11/1/00
                                                         
Residential A&D   $ 1,010,411   1A2   0   10/22/2010   0   Substandard   Accrual       $ 1,665,280   12/23/2010   FV   12/28/2008   0/0/0
                                                         
Residential A&D   $ 1,002,500   1A2   0   9/9/2010   0   Substandard   NA       $ 1,585,300   2/1/2008   FV   8/25/2003   9/2/1
                                                         
Commercial income producing   $ 963,330   1E2   0   9/9/2010   0   Substandard   Accrual       $ 1,315,250   1/10/2010   FV   7/9/2007   4/0/0
                                                         
Residential A&D   $ 938,846   1A2   283,063   10/19/2010   16,043   Substandard   NA       $ 655,783   3/29/2010   FV   8/15/2006
4/24/2007
  10/5/0
                                                         
Day Care   $ 904,170   1E1   25,320   10/20/2010   0   Substandard   Accrual       $ 878,850   12/28/2009   FV   4/7/2005   5/0/0
                                                         
Residential A&D   $ 887,980   1D   0   12/13/2010   324,000   Substandard   NA       $ 887,980   6/7/2010   FV   6/26/2010   0/0/0
                                                         
Residential A&D   $ 869,465   1A2   0   9/9/2010   0   Substandard   NA       $ 1,989,784   1/15/2009   FV   3/17/2006   7/2/1
                                                         
Tile flooring operation   $ 825,847   1E2   0   9/13/2010   126,527   Substandard   NA       $ 840,000   7/15/2009   FV   4/10/2007   3/5/3

 

* Nonaccrual.

 

39
 

 

 
Management’s Discussion and Analysis
 

 

The Bank’s allowance for loan and lease losses methodology involves the following: First, the Bank evaluates loans and relationships greater than $500,000 which are in non-performing status (non-accrual, greater than 90 days still accruing, etc.) or otherwise deemed to be impaired for individual impairment under ASC 310-10. Further, individual impairment is calculated for any loan, regardless of size, if classified as a Troubled Debt Restructure. Once the ASC 310-10 analysis is completed, the valuation is reviewed for required specific reserve adjustment at least quarterly. On large or complex credits (generally those in excess of $1,000,000), the Bank obtains a liquidation or quick-sale appraisal at the initial impairment determination and adjusts the specific reserve upon receipt and review of the appraisal. Generally, the Bank obtains an updated appraisal on such properties annually. On smaller credits, the decision to pay for an in-debt appraisal is made on a case-by-case basis. In cases where such an updated appraisal is not obtained, the Bank may elect to apply a discount to the most recent appraisal obtained for the property in question. This discount is based on changes in value observed from appraisals on similar properties and knowledge about recent sales of similar properties. Again, these evaluations are reviewed quarterly.

 

Loans evaluated under ASC 310-10 are removed from the ASC 450 general loan classifications, to avoid double reserving. Our ALLL model breaks ASC 450 down into two parts: reserves based upon historical losses (adjusted to account for current economic outlook or other factors), risk grade or past due status, years to impairment, and an “unallocated” section based on observations of general economic conditions, local unemployment figures, GDP trends, or other quantitative or qualitative factors.

 

Liquidity and Sensitivity

 

The principal goals of the Bank's asset and liability management strategy are the maintenance of adequate liquidity and the management of interest rate risk. Liquidity is the ability to convert assets to cash in order to fund depositors' withdrawals or borrowers' loans without significant loss. Interest rate risk management attempts to mitigate the effects of interest rate changes on assets that earn interest against liabilities on which interest is paid, to protect the Bank from wide fluctuations in its net interest income which could result from interest rate changes.

 

Management must ensure that adequate funds are available at all times to meet the needs of its customers. On the asset side of the balance sheet, maturing investments, loan payments, maturing loans, federal funds sold, and unpledged investment securities are principal sources of liquidity. On the liability side of the balance sheet, liquidity sources include core deposits, the ability to increase large denomination certificates of deposit, Federal funds lines from correspondent banks, borrowings from the Federal Home Loan Bank, as well as the ability to generate funds through the issuance of long-term debt and equity.

 

Interest rate risk is the effect that changes in interest rates would have on interest income and interest expense as interest-sensitive assets and interest-sensitive liabilities either re-price or mature. Management attempts to maintain the portfolios of earning assets and interest-bearing liabilities with maturities or re-pricing opportunities at levels that will afford protection from erosion of net interest margin, to the extent practical, from changes in interest rates.

 

At December 31, 2010, the Bank was cumulatively asset-sensitive (earning assets subject to interest rate changes exceeded interest-bearing liabilities subject to changes in interest rates). Demand, savings and money market accounts re-pricing within three months totaled $153.4 million. Historically, these short-term deposits are not as rate sensitive as other types of interest-bearing deposits. The Bank is asset sensitive in the three month or less time period, with the four to twelve months time period being liability-sensitive, the thirteen to sixty months time period being asset-sensitive and the over sixty months time period being asset-sensitive.

 

Time deposits in denominations of $100,000 or more and large municipal repurchase accounts are especially susceptible to interest rate changes. These deposits are matched with short-term investments. Matching sensitive positions alone does not ensure that the Bank has no interest rate risk. The re-pricing characteristics of assets are different from the re-pricing characteristics of funding sources. Thus, net interest income can be impacted by changes in interest rates even if the re-pricing opportunities of assets and liabilities are perfectly matched.

 

40
 

 

 
Management’s Discussion and Analysis
 

 

Mortgage backed securities are shown based on their contractual maturity but tend to be repaid earlier. Repurchase agreements with a put feature are shown in the re-pricing period in which the structure may be put back to the Bank.

 

The Company’s historical liquidity management process included anticipating operating cash requirements, evaluating time deposit maturities, monitoring loan to deposit ratios and correlating these activities to an overall periodic internal liquidity measure. In evaluating our asset mix, we have sought to maintain a securities portfolio sufficient to provide short-term liquidity in periods of unusual fluctuations.

 

The table below shows the sensitivity of the Bank's balance sheet at the dates indicated but is not necessarily indicative of the position on other dates.

 

Interest Rate Sensitivity (dollars in thousands)

 

   December 31, 2010 
   Maturities/Re-pricing 
   1-3   4-12   13-60   Over 60     
   Months   Months   Months   Months   Total 
Earning assets:                         
Loans  $104,527   $30,777   $116,303   $153,626   $405,233 
Investments   -    1,985    993    68,269    71,247 
Federal funds sold   2,210    -    -    -    2,210 
Deposits with banks   28,080    -    -    -    28,080 
Total   134,817    32,762    117,296    221,895    506,770 
                          
Interest-bearing liabilities:                         
Demand accounts   46,482    -    -    -    46,482 
Savings and money market   106,906    -    -    -    106,906 
Time deposits   63,803    127,255    75,146    -    266,204 
Repurchase agreements and purchased funds   2,776    -    10,000    7,000    19,776 
Other short-term borrowings   900    5,000    -    -    5,900 
Long-term debt   -    -    26,000    12,000    38,000 
Subordinated debentures   12,372    -    -    -    12,372 
Total   233,239    132,255    111,146    19,000    495,640 
Interest rate gap  $(98,422)  $(99,493)  $6,150   $202,895   $11,130 
                          
Cumulative interest sensitivity gap  $(98,422)  $(197,915)  $(191,765)  $11,130      
                          
Ratio of sensitivity gap to total earnings assets   (19.42)%   (19.63)%   1.21%   40.04%   2.20%
Cumulative ratio of sensitivity gap to total earnings assets   (19.42)%   (39.05)%   (37.84)%   2.20%     

 

Effects of Inflation

 

Interest rates are affected by inflation, but the timing and magnitude of the changes may not coincide with changes in the consumer price index. Management actively monitors the Bank’s interest rate sensitivity in order to minimize the effects of inflationary trends on the Bank’s operations. Other areas of non-interest expense may be more directly affected by inflation.

 

41
 

 

 
Management’s Discussion and Analysis
 

 

Commitments and Contingencies

 

Litigation

 

No legal proceedings are required to be disclosed pursuant to this item as of December 31, 2010.

 

Financial Instruments with Off-Balance-Sheet Risk

 

To meet the financing needs of its customers, the Bank is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheet.

 

The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Bank's commitments are as follows:

 

   2010   2009 
         
Commitments to extend credit  $65,392,000   $41,072,000 
Stand-by letters of credit   1,066,000    796,000 
   $66,458,000   $41,868,000 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties.

 

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Bank deems necessary.

 

Concentrations of Credit Risk

 

Substantially all of the Bank's loans and commitments to extend credit have been granted to customers in the Bank's market area and such customers are generally depositors of the Bank. The concentrations of credit by type of loan are set forth in Note 7. The distribution of commitments to extend credit approximates the distribution of loans outstanding.

 

The Bank's primary focus is commercial, consumer and small business transactions. The Bank endeavors to avoid significant credit exposure to any single borrower or group of related borrowers.

 

The Bank from time to time has cash and cash equivalents on deposit with financial institutions which exceed federally-insured limits.

 

42
 

 

Financial Ratios

 

The following table summarizes ratios considered to be significant indicators of the Bank’s operating results and financial condition for the fiscal years indicated.

 

Key Financial Ratios

 

   2010   2009   2008 
             
Average equity to average assets   3.48%   5.17%   6.20%
Return on average assets   (2.70)%   (2.54)%   (.38)%
Return on average equity   (77.64)%   (49.18)%   (6.11)%

 

43
 

 

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Smaller reporting companies such as the Company are not required to provide the information required by this item.

 

ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

44
 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders
Waccamaw Bankshares, Inc.

Whiteville, North Carolina

 

 

We have audited the accompanying consolidated balance sheets of Waccamaw Bankshares, Inc. and subsidiary (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An also audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Waccamaw Bankshares, Inc. and subsidiary as of December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring credit losses that have eroded regulatory capital ratios. As of December 31, 2011 the Company is considered substantially undercapitalized based on their regulatory capital level. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that would be necessary should the Company be unable to continue as a going concern.

 

 

 

/s/ Elliott Davis, PLLC

 

 

 

Galax, Virginia
February 29, 2012

 

45
 

 

 
Consolidated Balance Sheets
December 31, 2010 and 2009

 

   2010   2009 
Assets          
           
Cash and due from banks  $4,877,988   $13,973,474 
Interest-bearing deposits with banks   28,079,615    7,695,499 
Federal funds sold   2,210,000    21,315,000 
Total cash and cash equivalents   35,167,603    42,983,973 
           
Investment securities, available for sale   67,487,471    87,769,319 
Restricted equity securities   3,759,500    4,041,350 
Loans, net of allowance for loan losses of $15,541,288  in 2010 and $10,148,927  in 2009   389,475,435    340,020,798 
Property and equipment, net   16,410,961    17,035,644 
Intangible assets, net   160,000    237,270 
Accrued income   1,831,912    2,449,081 
Bank owned life insurance   18,330,003    18,576,015 
Foreclosed assets   9,588,710    4,994,241 
Other assets   6,010,023    15,113,381 
Total assets  $548,221,618   $533,221,072 
           
Liabilities and Stockholders' Equity          
           
Liabilities          
Noninterest-bearing deposits  $35,354,965   $32,940,811 
Interest-bearing deposits   419,591,979    400,597,148 
Total deposits   454,946,944    433,537,959 
           
Securities sold under agreements to repurchase   19,776,000    20,615,000 
Other short-term borrowings   5,900,000    3,500,000 
Long-term debt   38,000,000    43,000,000 
Junior subordinated debentures   12,372,000    12,372,000 
Accrued interest payable   1,275,231    942,689 
Other liabilities   1,812,132    2,098,993 
Total liabilities   534,082,307    516,066,641 
           
Commitments and contingencies (Note 13,16, 19)   -    - 
           
Stockholders’ equity          
Preferred stock, Series A, convertible, non-cumulative, non-voting, no par value; 1,000,000 shares authorized; 550 shares issued and outstanding at December 31, 2010 and 2009, respectively   9,064    9,064 
Preferred stock, Series B, convertible, non-cumulative, non-voting, no par value; 1,000,000 shares authorized; 546,375 and 0 shares issued and outstanding at December 31, 2010 and 2009, respectively, less discount of $6,488,497   9,603,769    - 
Common stock, no par value; 50,000,000 shares authorized; 7,466,224 and 5,551,183 shares issued and outstanding at December 31, 2010 and 2009, respectively   27,084,927    25,099,770 
Common stock warrants   300,000    - 
Retained deficit   (20,535,626)   (5,129,490)
Accumulated other comprehensive loss   (2,322,823)   (2,824,913)
Total stockholders’ equity   14,139,311    17,154,431 
Total liabilities and stockholders’ equity  $548,221,618   $533,221,072 

 

See Notes to Consolidated Financial Statements

 

46
 

 

 
Consolidated Statements of Operations
Years ended December 31, 2010 and 2009

 

   2010   2009 
         
Interest income          
Loans and fees on loans  $17,076,159   $21,113,676 
Investment securities, taxable   2,932,446    4,110,706 
Investment securities, nontaxable   367,633    586,998 
Federal funds sold   180,789    30,502 
Deposits with banks   123,693    47,429 
Total interest income   20,680,720    25,889,311 
           
Interest expense          
Deposits   6,750,280    9,262,674 
Federal funds purchased and securities sold under agreements to repurchase   675,395    747,349 
Other borrowed funds   2,332,992    2,526,195 
Total interest expense   9,758,667    12,536,218 
Net interest income   10,922,053    13,353,093 
           
Provision for loan losses   12,205,554    16,579,908 
Net interest loss after provision for loan losses   (1,283,501)   (3,226,815)
           
Noninterest income (expense)          
Service charges on deposit accounts   2,778,195    3,022,511 
ATM and check cashing fees   997,844    875,361 
Mortgage origination income   377,665    380,263 
Income from financial services   101,601    139,275 
Earnings on bank owned life insurance   647,649    741,252 
Net realized (losses) gains on sale of investment securities   1,593,388    (886,653)
Impairment on investment securities available for sale   -    (418,710)
Other operating income   227,700    55,311 
Total noninterest income   6,724,042    3,908,610 
           
Noninterest expense          
Salaries and employee benefits   6,291,938    7,129,531 
Occupancy and equipment   2,057,780    2,096,787 
Data processing   1,134,293    1,175,402 
Advertising   260,755    310,577 
Regulatory agency expense   1,643,459    1,292,849 
Professional services   1,157,843    852,530 
Foreclosed assets, net   2,503,628    775,692 
Goodwill impairment charge   -    2,727,152 
Other expense   1,940,318    2,154,695 
Total noninterest expense   16,990,014    18,515,215 
Loss before income taxes   (11,549,473)   (17,833,420)
           
Income tax expense (benefit)   3,688,212    (3,627,888)
Net loss  $(15,237,685)  $(14,205,532)
           
Basic loss per share  $(2.45)  $(2.57)
Diluted loss per share  $(2.45)  $(2.57)
Weighted average common shares outstanding   6,217,512    5,534,458 
Weighted average dilutive common shares outstanding   6,217,512    5,534,458 

 

See Notes to Consolidated Financial Statements

 

47
 

 

 
Consolidated Statements of Changes in Stockholders’ Equity
Years ended December 31, 2010 and 2009

 

                       Accumulated     
       Common           Other      
   Preferred Stock   Stock   Preferred   Common   Retained   Comprehensive     
   Stock, Series B   Warrants   Stock, Series A   Stock   Earnings   Income (Loss)   Total 
                             
December 31, 2008  $-   $-   $464,476   $24,591,884   $8,907,591   $(6,119,796)  $27,844,155 
                                    
Comprehensive income                                   
Net loss   -    -    -    -    (14,205,532)   -    (14,205,532)
Net change in unrealized gain on investment securities available for sale, net of income taxes of $1,669,468   -    -    -    -    -    2,661,189    2,661,189 
Reclassification adjustment of impairment in investments securities available for sale, net of income taxes of $161,413   -    -    -    -    -    257,297    257,297 
Reclassification adjustment of loss recognized on sale net of income taxes of $341,805   -    -    -    -    -    544,848    544,848 
Total comprehensive loss                                (10,742,198) 
                                    
Reversal of non-credit related impairment   -    -    -    -    168,451    (168,451)   - 
Stock based compensation   -    -    -    122,378    -    -    122,378 
Stock issuance costs   -    -    -    (69,904)   -    -    (69,904)
Conversion of preferred stock to common stock   -    -    (455,512)   455,412    -    -    - 
December 31, 2009   -    -    9,064    25,099,770    (5,129,490)   (2,824,913)   17,154,431 
                                    
Comprehensive loss                                   
Net loss   -    -    -    -    (15,237,685)   -    (15,237,685)
Net change in unrealized gain on investment securities available for sale, net of income taxes of $823,516   -    -    -    -    -    1,312,712    1,312,712 
Reclassification adjustment of gain recognized on sale net of income taxes of $(614,315)   -    -    -    -    -    (979,073)   (979,073)
Total comprehensive loss                                (14,904,046
                                    
Issuance of preferred stock, Series B   16,092,266    -    -    -    -    16,092,266      
Issuance of common stock-warrants   -    300,000    -    -    -    -    300,000 
Discount on preferred stock, Series B   (6,488,497)   -    -    -    -    -    (6,488,497)
Issuance of common stock   -    -    -    2,393,801    -    2,393,801      
Reversal of non-credit related impairment   -    -    -    -    (168,451)   168,451    - 
Stock based compensation   -    -    -    85,335    -    -    85,335 
Stock issuance costs   -    -    -    (493,979)   -    -    (493,979)
December 31, 2010  $9,603,769   $300,000   $9,064   $27,084,927   $(20,535,626)  $(2,322,823)  $14,139,311 

 

See Notes to Consolidated Financial Statements

 

48
 

 

 
Consolidated Statements of Changes in Cash Flows
For the years ended December 31, 2010 and 2009

 

   2010   2009 
Cash flows from operating activities        
Net loss  $(15,237,685)  $(14,205,532)
Adjustments to reconcile net loss to net cash provided  by operations:          
Depreciation and amortization   920,088    942,966 
Impairment of goodwill   -    2,727,152 
Stock-based compensation   85,335    122,378 
Provision for loan losses   12,205,554    16,579,908 
Accretion of discount on securities, net of amortization of  premiums   729,207    209,020 
Write-down of foreclosed assets   2.357,318    469,411 
(Gain) loss on sale of investment securities   (1,593,388)   886,653 
Impairment of investment securities   -    418,710 
Income from bank owned life insurance   (647,649)   (741,252)
Deferred taxes   (3,666,532)   (1,403,202)
Changes in assets and liabilities:          
Accrued income   617,169    (604)
Other assets   13,883,522    (6,397,438)
Accrued interest payable   332,542    (386,287)
Other liabilities   (286,861)   1,103,579 
Net cash provided by operating activities   9,698,620    325,462 
           
Cash flows from investing activities          
Sales (purchases) of restricted equity securities   281,850    (62,100)
Purchases of investment securities   (115,823,040)   (93,133,979)
Maturities of investment securities   8,940,943    13,787,672 
Net decrease in loans   21,847,641    17,182,817 
Purchase of HELOC loans   (82,833,207)   - 
Proceeds from sales of investment securities   127,248,131    82,870,608 
Surrender (investment) in bank owned life insurance   893,660    - 
Purchases of property and equipment   (218,134)   (165,712)
Proceeds from sale of foreclosed assets   2,277,358    592,546 
Net cash provided by (used in) investing activities   (37,384,798)   21,071,852 
           
Cash flows from financing activities          
Net increase (decrease) in noninterest-bearing deposits   2,414,155    (3,218,998)
Net increase in interest-bearing deposits   18,994,831    18,177,068 
Net decrease in securities sold under agreements to repurchase   (839,000)   (3,215,000)
Net (decrease) in short-term borrowings   2,400,000    (3,500,000)
Net repayment of long-term debt   (5,000,000)   (2,500,000)
Proceeds from issuance of common stock   2,393,801    - 
Proceeds from acquisition of preferred stock, Series B, net   2,393,801    - 
Proceeds from issuance of common stock warrants   9,603,769    - 
Stock issuance costs and redemption of fractional shares   (493,979)   (69,904)
Net cash provided by financing activities   19,869,808    5,673,166 
Increase (decrease) in cash and cash equivalents   (7,816,370)   27,070,480 
           
Cash and cash equivalents, beginning   42,983,973    15,913,493 
Cash and cash equivalents, ending  $35,167,603   $42,983,973 
           
Supplemental disclosure of cash flow information          
Interest paid  $9,426,125   $12,922,505 
Taxes paid  $-   $52,647 
           
Supplemental disclosure of noncash activities          
Real estate acquired in settlement of loans  $9,229,145   $5,099,366 

 

See Notes to Consolidated Financial Statements

 

49
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 1. Organization and Summary of Significant Accounting Policies

 

Waccamaw Bank (Bank) was organized and incorporated under the laws of the State of North Carolina on August 28, 1997 and commenced operations on September 2, 1997. The Bank currently serves Columbus, Brunswick, Bladen and New Hanover counties in North Carolina and Lancaster and Horry counties in South Carolina and surrounding areas through sixteen full service banking branches. As a state chartered bank which is a member of the Federal Reserve, the Bank is subject to regulation by the North Carolina Commissioner of Banks and the Federal Reserve.

 

During 2001, Waccamaw Bankshares, Inc. (Company), a bank holding company chartered in North Carolina was formed. On July 1, 2001, Waccamaw Bankshares, Inc. acquired all the outstanding shares of Waccamaw Bank in a tax-free reorganization.

 

The accounting and reporting policies of the Company and the Bank follow generally accepted accounting principles and general practices within the financial services industry. Following is a summary of the more significant policies.

 

Going Concern Considerations

 

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. These consolidated financial statements do not include any adjustments relating to the recoverability or classification of assets or the amounts and classification of liabilities that may be necessary should we be unable to continue as a going concern.

 

The substantial uncertainties throughout the economy and U.S. banking industry coupled with current market conditions have adversely affected the Company’s 2010 results and capital levels. The significant losses in 2010 and 2009, primarily related to credit losses and the valuation allowance on deferred tax assets, reduced the Company’s capital levels. In order to again become well capitalized under federal banking agencies’ guidelines, management believes that the Company will need to raise additional capital to recapitalize the Bank and to absorb the potential future credit losses associated with the disposition of its nonperforming assets. Accordingly, management is in the process of evaluating various alternatives to increase tangible common equity and regulatory capital through the issuance of additional equity in public or private offerings. Management is actively evaluating a number of potential capital sources, asset reductions, and other balance sheet management strategies with the goal of increasing its level of regulatory capital to support its balance sheet long-term. Management is currently reducing and otherwise restructuring its balance sheet to improve capital ratios.

 

Current market conditions for banking institutions, the overall uncertainty in financial markets, and a depressed stock price are significant barriers to the success of any plan to issue additional equity in public or private offerings.  An equity financing transaction would result in substantial dilution to the Company's current shareholders and could adversely affect the market price of the Company's common stock.  There can be no assurance as to whether these efforts will be successful, either on a short-term or long-term basis.  Should these efforts be unsuccessful, due to existing regulatory restrictions on cash payments and dividends between the Bank and the holding company, the Company may be unable to discharge its liabilities in the normal course of business. There can be no assurance that the Company will be successful in any efforts to raise additional capital during 2012.

 

Both the parent company and the banking subsidiary actively manage liquidity and cash flow needs. The Company is prohibited from declaring or paying dividends without prior approval of its federal and state banking regulators. Even if this requirement were not in place, the Company does not intend to declare or pay dividends to shareholders at any time in the foreseeable future. At December 31, 2010, the Company had $35 million of cash and cash equivalents. The Company has no long-term debt maturing in 2011 and $15 million maturing in 2012.

 

The Company’s loan agreement, for the $1,000,000 line of credit debt obligation, includes financial covenants requiring the Bank to maintain a minimum weighted average return on assets of greater than 0.50% on an annualized basis, maintain total equity capital of $43,499,000, and that at all times the percentage of non-performing loans to gross loans shall not exceed 4.00%. The Company did not meet these covenants in 2010 and has not obtained a waiver through December 31, 2011. The obligation is collateralized by a pledge of all shares of common stock in Waccamaw Bank. The lender could demand the common stock from the Company unless and until the covenants are in compliance or a waiver has been issued.

 

50
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Going Concern Considerations, continued

 

Liquidity at the bank level is dependent upon the deposit franchise which funds 81% of the Company’s assets (or 57% excluding brokered CDs). The FDIC’s changes to permanently increase the amount of deposit insurance to $250,000 per deposit relationship and to provide unlimited deposit insurance for certain transaction accounts until December 31, 2012, have contributed to the stability of the deposit base. All banks that have elected to participate in the Transaction Account Guarantee Program (“TAGP”) have the same FDIC insurance coverage. Potential loss of deposits would be a primary funding need in a liquidity crisis. Deposit balances which are not covered by FDIC insurance total approximately $16.0 million currently, and would increase to approximately $22.5 million without the benefit of the FDIC’s TAGP, currently scheduled to expire at December 31, 2012. Thus, the primary deposit-related liquidity risk relates to balances which are not insured. As of December 31, 2011 the Company has liquid assets of approximately $128 million to address liquidity needs. If a liquidity issue presents itself, deposit promotions would be expected to yield significant in-flows of cash, but could be limited based on limitations on maximum interest rates that may be offered by banks that are not well capitalized.

 

In addition, certain borrowings, such as brokered CDs and FHLB advances, are dependent on various credit eligibility criteria which may be impacted by changes in the Company’s financial position and/or results of operations. Given the weakened economy, and current market conditions, there is no assurance that the Company will, if it chooses to do so, be able to obtain new borrowings or issue additional equity on terms that are satisfactory.

  

Effective November 29, 2011, the Company and the Bank entered into a Prompt Corrective Action Directive (the “Directive”) with the Board of Governors of the Federal Reserve System (the “Board of Governors”).

 

The Directive is a formal corrective action in which the Board of Governors has determined that, as of October 30, 2011, Waccamaw Bank is critically undercapitalized, as defined in section 208.43(b)(5) of Regulation H of the Board of Governors.

 

Among other things, the Directive requires the Bank no later than January 6, 2012 to:

 

Increase the Bank’s equity through the sale of shares or contributions to surplus in an amount sufficient to make the Bank adequately capitalized as defined in section 208.43(b)(2) of Regulation H of the Board of Governors;

 

Enter into and close a contract to be acquired by a depository institution holding company or combine with another insured depository institution, closing under which contract is conditioned only on the receipt of necessary regulatory approvals, the continued accuracy of customary representations and warranties and the performance of customary pre-closing covenants;

 

Take other necessary measures to make the Bank adequately capitalized;

 

Restrict the making of any capital distributions, including, but not limited to, the payment of dividends;

 

Restrict the payment of bonuses to senior executive officers and increases in compensation of such officers; and

 

Restrict certain activities, including, but not limited to, making any material change in accounting methods and engaging in any covered transaction, as defined in section 23A of the Federal Reserve Act, without the prior written approval of the FDIC.

 

51
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Going Concern Considerations,  continued

  

Due to the recent favorable ruling by the Federal Reserve Board of Governors allowing a portion of the preferred stock to be regulatory capital, the Bank’s capital status at September 30, 2011, changed from critically undercapitalized to significantly undercapitalized. Although the Directive has not been terminated, the Company continues to take measures to make the Bank adequately capitalized through the sale of branches and selling stock through a private stock offering.

  

During 2011, the Company continued to experience losses from operations primarily due to loan losses. Based on unaudited financial information, as of December 31, 2011, consolidated total assets are $561,120,907, equity is $(3,625,647) and net loss from operations is $18,725,248 for the year ended December 31, 2011. The resulting bank regulatory capital ratios of total capital to risk weighted assets, Tier 1 capital to risk weighted assets and Tier 1 capital to average assets are 4.96%, 3.08% and 2.08%, respectively. Based on these levels, the Bank is considered significantly undercapitalized.

 

Generally accepted accounting principles require that in the event of changes about the likelihood of realization of a deferred tax asset that results in the establishment of a deferred tax asset valuation allowance related to unrealized losses on available for sale investment securities, that valuation allowance be established through operation even thought the original deferred tax asset was established through other comprehensive income. The guidance on how to address this inconsistent treatment with respect to the calculation of regulatory capital is not well defined. Accordingly, the capital amounts and ratios in the table above include an adjustment related to establishment of such a deferred tax asset valuation. After this adjustment, regulatory capital as presented is the same amount as would be reported had the related deferred tax asset has not been recorded. Management has discussed this treatment with applicable bank regulators and management has not been informed that this treatment is incorrect. However, due to the lack of clear guidance, it is possible the regulators could conclude this adjustment is not appropriate. If that were the case, Tier 1 and total regulatory capital for December 31, 2011 would be reduced by $898,000 and the bank capital ratios would approximate the following:

 

    2011 
      
Total capital to risk weighted assets   1.93%
Tier 1 capital to risk weighted assets   2.85%
Tier 1 capital to average assets   4.73

 

 

Based on current capital levels and continued operating losses management believes the Company will require additional capital to be able to remain viable. Management has implemented various strategies including a private stock offering and selling branches to provide this needed capital. In spite of Management’s best efforts, there is no guarantee management will be successful in raising the additional capital. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern.

 

Critical Accounting Policies

 

We believe our policies with respect to the methodology for our determination of the allowance for loan losses, investment impairment charges, goodwill impairment and asset impairment judgments, including the recoverability of intangible assets, involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. These critical policies and their application are periodically reviewed with the Audit Committee and our Board of Directors.

 

Principles of Consolidation

 

Our consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

 

Business Segments

 

The Company reports its activities as a single business segment. In determining the appropriateness of segment definition, the Company considers components of the business about which financial information is available and regularly evaluated relative to resource allocation and performance assessment.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and (“GAAP”) disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

52
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Use of Estimates, continued

 

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the determination of other than temporary impairment on investment securities, the valuation of deferred tax assets and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan and foreclosed real estate losses, management obtains independent appraisals for significant properties.

 

While management uses available information to recognize loan and foreclosed real estate losses, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as a part of their routine examination process, periodically review the Bank's allowances for loan and foreclosed real estate losses. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examinations. Because of these factors, it is reasonably possible that the allowances for loan and foreclosed real estate losses may change materially in the near term.

 

Cash and Cash Equivalents

 

For the purpose of presentation in the statement of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption "cash and due from banks" and "interest-bearing deposits with banks", and “federal funds sold.” Generally, federal funds are purchased and sold for one-day periods.

 

Interest-Bearing Deposits with Banks

 

Interest-bearing deposits mature in one year or less and are carried at cost.

 

Trading Securities

 

The Bank does not hold securities for short-term resale and therefore does not maintain a trading securities portfolio.

 

Investment Securities

 

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

 

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In determining whether other-than-temporary impairment exists, management considers many factors including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

 

53
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Loans

 

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal amount adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

 

Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment of the yield of the related loan. Discounts and premiums on any purchased residential real estate loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Discounts and premiums on any purchased consumer loans are recognized over the expected lives of the loans using methods that approximate the interest method.

 

Interest is accrued and credited to income based on the principal amount outstanding. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower may be unable to make payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized on the cash-basis or cost-recovery method, as appropriate. When facts and circumstances indicate the borrower has regained the ability to make required payments, the loan is returned to accrual status. Past due status of loans is determined based on contractual terms.

 

Allowance for Loan Losses

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical 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 prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For such loans, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating losses in the portfolio.

 

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 or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

 

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

 

54
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Property and Equipment

 

Land is carried at cost. Buildings, furniture and equipment, automobiles, and leasehold improvements are carried at cost, less accumulated depreciation and amortization computed principally by the straight-line method over the following estimated useful lives:

 

    Years
Leasehold improvements   5-30  
Automobile   5  
Furniture and equipment   3-10  
Buildings   10-40  

 

Intangible Assets

 

Intangible assets consist of purchased core deposit intangible assets and are accounted for in accordance with generally accepted accounting principles. The Company evaluates the remaining useful life of each intangible asset that is being amortized to determine whether events and circumstances warrant a revision to the remaining period of amortization. Intangible assets are currently being amortized over estimated useful lives of 10 years.

 

Foreclosed Assets

 

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.

 

Transfers of Financial Assets

 

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

 

Stock Compensation Plans

 

The Company recognizes compensation cost relating to share-based payment transactions. Generally accepted accounting principles require entities to measure the cost of employee services received in exchange for stock options based on the grant-date fair value of the award, and to recognize the cost over the period the employee is required to provide services for the award. Compensation cost has been measured using the fair value of an award on the grant date and is recognized over the service period, which is usually the vesting period.

 

55
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Advertising Expense

 

The Company expenses advertising costs as they are incurred. Advertising expense for the years ended December 31, 2010 and 2009 was approximately $261,000 and $311,000, respectively.

 

Income Taxes

 

Provision for income taxes is based on amounts reported in the statements of income (after exclusion of non-taxable income such as interest on state and municipal securities) and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Deferred tax assets, net of a valuation allowance if appropriate, and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. Due to uncertainty regarding the realization of the entire deferred tax asset, management has recorded a deferred tax asset valuation allowance as of December 31, 2010. Details are included in Note 18. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

 

Deferred income tax liability relating to unrealized appreciation (or the deferred tax asset in the case of unrealized depreciation) on investment securities available for sale is recorded in other liabilities (assets). Such unrealized appreciation or depreciation is recorded as an adjustment to equity in the financial statements and not included in income determination until realized. Accordingly, the resulting deferred income tax liability or asset is also recorded as an adjustment to equity.

 

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax position taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Management is not aware of any material uncertain tax positions and no liability has been recognized at December 31, 2010. Interest and penalties associated with unrecognized tax benefits would be classified as additional interest expense or other expense, respectively, in the statement of income.

 

Comprehensive Income

 

Annual comprehensive income reflects the change in the Company’s equity during the year arising from transactions and events other than investments by and distributions to stockholders. It consists of net income plus certain other changes in assets and liabilities that are currently reported as separate components of stockholders’ equity rather than as income or expense. The company’s sole component of accumulated other comprehensive income is unrealized losses on investment securities available for sale.

 

Basic Earnings per Share

 

Basic earnings (loss) per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends.

 

56
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Diluted Earnings per Share

 

The computation of diluted earnings (loss) per share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common stock equivalents. Potential common stock equivalents include the Company’s Series A convertible preferred stock and related outstanding warrants and shares associated with stock-based compensation. Due to the net losses in 2010 and 2009, dilutive common stock equivalents have been excluded from the computation of dilutive earnings per share as the result would be anti-dilutive.

 

Financial Instruments

 

Derivatives that are used as part of the asset/liability management process are linked to specific assets or liabilities and have high correlation between the contract and the underlying item being hedged, both at inception and throughout the hedge period. In addition, forwards and option contracts must reduce the risk attributed to a particular exposure, and for hedges of anticipatory transactions, the significant terms and characteristics of the transaction must be identified and the transactions must be probable of occurring. All derivative financial instruments held or issued by the Company are held or issued for purposes other than trading. The Bank has entered into a structured repo obligation with Barclays Capital, Inc., see note 13. Within the structured repo are embedded derivatives which will not have a material effect on the results of operations.

 

In the ordinary course of business the Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit and commercial and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.

 

Fair Value of Financial Instruments

 

Generally accepted accounting principles (“GAAP”) define fair value 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. The Company determines the fair value of its financial instruments based on the fair value hierarchy established per GAAP which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Investment securities available for sale, loans held for sale and servicing assets are recorded at fair value on a recurring basis. Certain impaired loans and foreclosed assets are carried at fair value on a nonrecurring basis.

 

Reclassification

 

Certain reclassifications have been made to the prior years' financial statements to place them on a comparable basis with the current year. Net income and stockholders' equity previously reported were not affected by these reclassifications.

 

Subsequent Events

 

In accordance with accounting guidance, the Company evaluated events and transactions for potential recognition or disclosure in the financial statements through the date the financial statements were issued.

 

57
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Recent Accounting Pronouncements

 

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of financial information by the Company.

 

In March 2010, guidance related to derivatives and hedging was amended to exempt embedded credit derivative features related to the transfer of credit risk from potential bifurcation and separate accounting. Embedded features related to other types of risk and other embedded credit derivative features are not exempt from potential bifurcation and separate accounting. The amendments were effective for the Company on July 1, 2010. These amendments will have no impact on the financial statements.

  

Stock compensation guidance was updated in April 2010 to address the classification of employee share-based payment awards with exercise prices denominated in the currency of a market in which a substantial portion of the entity’s equity securities trade. The guidance states that these awards should not be considered to contain a condition that is not a market, performance, or service condition. Share based payments that contain conditions related to market performance and service must be recorded as liabilities. These awards should not be classified as liabilities if they otherwise qualify to be classified as equity. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company does not expect the update to have an impact on the financial statements.

 

In April 2010, guidance was issued related to accounting for acquired troubled loans that are subsequently modified. The guidance provides that if these loans meet the criteria to be accounted for within a pool, modifications to one or more of these loans does not result in the removal of the modified loan from the pool even if the modification would otherwise be considered a troubled debt restructuring. The pool of assets in which the loan is included will continue to be considered for impairment. The amendments do not apply to loans not meeting the criteria to be accounted for within a pool. These amendments are effective for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15, 2010. These amendments had no impact on the financial statements.

 

In July 2010, the Receivables topic of the ASC was amended to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments will require the allowance disclosures to be provided on a disaggregated basis. The Company included the disclosures in its financial statements for the year ended December 31, 2010.

 

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly changes the regulation of financial institutions and the financial services industry.  The Dodd-Frank Act includes several provisions that will affect how community banks, thrifts, and small bank and thrift holding companies will be regulated in the future.  Among other things, these provisions abolish the Office of Thrift Supervision and transfer its functions to the other federal banking agencies, relax rules regarding interstate branching, allow financial institutions to pay interest on business checking accounts, change the scope of federal deposit insurance coverage, and impose new capital requirements on bank and thrift holding companies.  The Dodd-Frank Act also establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including banks.  Additionally, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting originator compensation, minimum repayment standards, and pre-payments.  Management is actively reviewing the provisions of the Dodd-Frank Act and assessing its probable impact on our business, financial condition, and results of operations.

 

58
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Recent Accounting Pronouncements, continued

  

Disclosures about Troubled Debt Restructurings (“TDRs”) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (“FASB”) in ASU 2011-01 issued in January 2011. In April 2011 the FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR. The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present. This standard is expected to have no impact on the Company.

 

In December 2010, the Intangibles topic of the ASC was amended to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings upon adoption. Impairments occurring subsequent to adoption should be included in earnings. The amendment was effective for the Company on January 1, 2011.

 

In September 2011, the Intangibles topic was again amended to permit an entity to consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. These amendments were effective for the Company on January 1, 2012.

  

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

 

59
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Recent Accounting Pronouncements, continued

 

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

 

The Comprehensive Income topic of the ASC was amended in June 2011. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and requires consecutive presentation of the statement of net income and other comprehensive income. The amendments will be applicable to the Company on January 1, 2012 and will be applied retrospectively. In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements. Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates future requirements.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

Note 2. Loan Swap and Preferred Stock Transaction

 

Loans

 

On September 30, 2010, the Bank entered into an agreement whereby the Bank would sell and Augusta Holdings, LLC (“Augusta”) would buy nonperforming real estate loans for the contractual pay-off amount (par value) of $11.2 million. The carrying value of these loans was $7.3 million as the carrying amounts had been reduced to reflect the fair value of the underlying collateral in measuring the impairment under the requirements of ASC 310-10-35. During the negotiations of this transaction, the Bank agreed to purchase from Augusta, a home equity line of credit (HELOC) loan pool. The price of the pool was the amount of the aggregate principal balances (par value) of the loans in the pool, effectively the pool par value of $110.1 million. The pool met certain credit quality and performance criteria. Under the terms of the HELOC pool purchase agreement, the Bank was able to exclude loans that did not meet the following criteria:

 

·A current FICO score of a least 660 as of the date of the transaction.
·Loans have not been past due more than 30 days in the twelve months preceding the closing of the transaction.
·The weighted average loan to value would not exceed 90 percent as of the time the loan was originated.

 

60
 

 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

  

Note 2. Loan Swap and Preferred Stock Transaction, continued

  

Management performed detailed due diligence procedures on approximately 20 percent of the pool and removed from the pool any loans that did not meet the criteria above. In addition, as part of the transaction, as a credit enhancement, Augusta indemnified the Bank against credit losses in the pool for a period of five years from the transaction date, up to a maximum amount of 10% of the pool or approximately $11.0 million. The sale of the nonperforming assets and the purchase of the HELOC pool closed on December 22, 2010.

 

Preferred stock

 

On December 23, 2010, the Bank entered into an agreement to sell to Monterey I Holdings, LLC (Monterey) 546,375 shares of series A preferred stock for $16.4 million with a dividend yield of 9%. The noncumulative perpetual preferred stock was issued at the bank level and was exchangeable for preferred stock of the Company. The series B preferred stock may be converted to 819,564 shares of the Company’s common stock at the option of the buyer. In addition, the Company issued warrants to allow Monterey to purchase up to 300,000 shares of the Company’s common stock at 50% of the market value of the common stock on the date of issue. The preferred stock contract settled on December 23, 2010.

 

Augusta and Monterey have elements of common ownership and are considered related parties with respect to each other. They are not related parties with respect to the Company or the Bank. Based on the relationship of the counterparties, timing and other facts and circumstances surrounding the transactions, management has concluded that the transactions should be considered one transaction for financial reporting purposes.

 

Management determined that since there was significant noncash consideration transferred, the transactions should be properly recorded at fair value under the guidance at ASC 845-10. Also in accordance with ASC 845-10, the fair value of the assets received shall be used to measure the cost if that value is more clearly evident than the fair value of the asset surrendered. Management determined the fair value of a homogenous HELOC pool meeting specific credit quality criteria prepared by a qualified valuation professional with prior experience valuing similar loan pools is more clearly evident than the fair values of coastal residential real estate developments and other highly volatile real estate that secures the non-performing loans and preferred shares in a market with very few comparable equity transactions.

 

61
 

 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 2. Loan Swap and Preferred Stock Transaction, continued

 

Preferred stock, continued

 

Accordingly, the Bank retained an outside valuation consulting firm to provide a valuation of the HELOC pool within the guidance at ASC 820-10. The Bank received the valuation on October 5, 2011. The report indicated the fair value of the $110.1 million HELOC pool to be approximately $100.0 million. The valuation was primarily based on discounted cash flows as projected based on the location of the underlying collateral and the current FICO score of the borrower. Based on the valuation report, credit losses on the pool are projected to be $3.1 million over the life of the pool.

 

Fair Value of the Transaction

 

As summary of assets received and consideration transferred at fair value and a description of how the item was valued is presented below (in thousands):

 

Fair Value received     
  HELOC pool, net of discount  $100,002 
  Credit enhancement                 - 
  Interest receivable   386 
     Total FV received  $100,388 
      
Fair Value of consideration paid     
  Non-performing loans  $(7,309)
  Cash   (82,833)
  Warrants                     (300)
  Preferred stock, net of discount   (9,604)
     Total FV received  $(100,046)
      
Back interest on non-performing loans recorded in operations  $342 

 

HELOC Pool - Fair value as determined by a valuation report prepared by an independent third party.

 

Credit Enhancement – The credit enhancement is unsecured and contractually not due to be settled until two years after the close of the transaction and then annually thereafter for the remaining three years. Due to concerns about the counterparty’s ability to honor the obligation of the credit enhancement, management has determined there is not sufficient evidence to support any value related to the credit enhancement. Accordingly, the credit enhancement has been determined to have no fair value. The Company also believes that the credit enhancement may be considered continuing involvement in the loans sold and may raise questions about whether or not a sale of these assets may recorded under generally accepted accounting principles. We will address this issue in the future by obtaining a legal opinion that addresses the isolation of the assets sold if we determine in the future that there is sufficient evidence to support a value related to the credit enhancement.

 

Interest Receivable – This is the interest receivable from the HELOC pool borrowers at the time if the transfer, valued at the actual amount of the accrual as of the date of closing.

 

Non-performing Loans – Fair value determined based on the value of the collateral underlying the individual loans as determined by recent outside appraisals.

 

Cash – This is the actual amount of net cash paid by the Bank for the pool.

 

Warrants – Valued based on management’s estimate.

 

Preferred stock – Fair value is based on the excess of the fair value of the assets received over the fair value of the assets and other instruments transferred to Augusta as part of the transaction.

 

62
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 2. Loan Swap and Preferred Stock Transaction, continued

 

HELOC Pool Discount

 

The HELOC pool value as determined by the valuation report resulted as discount to par of approximately $10.1 million. Based on the valuation report, management expects to have credit losses on the portfolio of $3.1 million. Accordingly, that amount of the discount will be used as a credit reserve to cover those losses. The reminder of the discount ($7 million) will be accreted into income over the expected life of the pool using the level yield method. Because the last transaction closed on December 23, 2010, no accretion was recorded during 2010. Management began accreting the discount during 2011.

 

Current Status

 

As of January 31, 2012 the HELOC pool had paid down $15.8 million and the outstanding balance was $93.9 million. Loans totaling $291 thousand were charged off during 2011.

  

Note 3. Subsequent Events

 

Series B Preferred Stock Offering

 

In December 2010, the Bank offered 546,375 shares of its fixed-rate noncumulative perpetual preferred stock, series A (the “Series A Preferred Stock”). The Series A Preferred Stock has a liquidation amount of $30.00 per share and pays interest at a per annum rate of 9.0% on the liquidation amount per share. Each share of Series A Preferred Stock is convertible into 1.5 shares of the Company’s common stock at the election of the holder. Each share of Series A Preferred Stock is also exchangeable for one share of the Company’s fixed-rate noncumulative perpetual preferred stock, series B (the “Series B Preferred Stock”) at the election of the Company. The Company also issued a warrant giving the holder the right to purchase 300,000 shares of the Company’s common stock at an exercise price equal to 50% of the market price on the date of issue. At March 31, 2011, the Company exercised its right to exchange one share of the Company's series B preferred stock for each outstanding share of the Bank's series A preferred stock. At March 31, 2011, 546,375 shares of the Company's series B preferred stock were outstanding. The Company elected to consolidate the preferred stock at the Bank level for reporting purposes at the Company level due to the expected filing of the March 31, 2011 10-Q which, based on the conversion would show the preferred as equity. The preferred stock was to be reported as a minority interest prior to the concurrent filing of the March 31, 2011 10-Q, but due to the exchange from the Bank to the Company, the Company elected to report the minority interest as preferred stock, as that would be the classification as of the date of filing of the December 31, 2010 financial statements. This election had no impact on total consolidated assets, equity or results of operations.

   

Note 4. Business Combinations

 

On April 28, 2006, the Company acquired The Bank of Heath Springs, paying $8,000,000 in exchange for all the outstanding shares of common stock of The Bank of Heath Springs. In conjunction with the acquisition, The Bank of Heath Springs was merged with and into the Company’s subsidiary, Waccamaw Bank.

 

63
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 4. Business Combinations, continued

 

The acquisition was accounted for as a purchase transaction and accordingly the results of operations attributable to the acquired company are included in our consolidated financial statements only from the date of acquisition. The excess of purchase price over fair value of net tangible and identified intangible assets acquired will be evaluated annually for impairment and written down as those values become impaired. Identified intangible assets will be amortized over their expected useful life. The Company recorded a goodwill impairment charge of $2.7 million in 2009 as referenced in Note 1 on Goodwill.

 

Note 5. Restrictions on Cash

 

To comply with banking regulation, the Bank is required to maintain certain average cash reserve balances. The daily average cash reserve requirement was approximately $4,235,000 and $2,740,000 for the period including December 31, 2010 and 2009, respectively.

 

Note 6. Investment Securities

 

Debt and equity securities have been classified in the balance sheet according to management’s intent. The amortized cost of securities (all available for sale) and their approximate fair values follow:

 

   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
                 
2010                    
Mortgage backed securities   53,183,549    185,418    (528,685)   52,840,282 
Corporate securities   4,235,298    -    (835,910)   3,399,389 
Single issue trust preferred securities   6,477,417    105,118    (1,515,855)   5,066,679 
Municipal securities   7,371,228    2,311    (1,192,418)   6,181,121 
   $71,267,492   $292,847   $(4,072,868)  $67,487,471 
                     
2009                    
Mortgage backed securities   61,167,200    159,880    (768,810)   60,558,270 
Corporate securities   5,617,961    -    (1,116,151)   4,501,810 
Single issue trust preferred securities   12,089,781    148,661    (1,686,293)   10,552,149 
Pooled trust preferred securities   133,935    -    (51,680)   82,255 
Municipal securities   13,083,406    29,210    (1,037,781)   12,074,835 
   $92,092,283   $337,751   $(4,660,715)  $87,769,319 

 

Restricted equity securities are carried at cost and consist of investments in stock of the Federal Home Loan Bank of Atlanta (FHLB) and The Federal Reserve Bank of Richmond (Federal Reserve). Both of those entities are correspondents of the Bank. The FHLB requires financial institutions to make equity investments in the FHLB in order to borrow from it. The Bank is required to hold that stock so long as it borrows from the FHLB. The FHLB has indefinitely suspended redemptions of their stock. The Federal Reserve requires banks to purchase stock as a condition of membership in the Federal Reserve system.

 

Investment securities with market values of $44,237,670 and $43,507,833 at December 31, 2010 and 2009, respectively were pledged as collateral on public deposits and for other banking purposes as required or permitted by law. Gross realized gains and losses resulting from the sale of securities for the years ended December 31, 2010 and 2009 are as follows:

 

   2010   2009 
         
Realized gains  $1,736,328   $1,556,768 
Realized losses   (142,940)   (2,443,421)
   $1,593,388   $(886,653)

 

64
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 6. Investment Securities, continued

 

The scheduled contractual maturities of securities (all available for sale) at December 31, 2010 are as follows:

 

   Amortized   Fair 
   Cost   Value 
         
Due in one year or less  $2,000,000   $1,985,000 
Due in one through five years   1,001,768    992,529 
Due in five through ten years   30,115    30,426 
Due after ten years   68,235,609    64,479,516 
   $71,267,492   $67,487,471 

 

The following tables detail unrealized losses and related fair values in the Bank’s held to maturity and available for sale investment securities portfolios. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2010 and December 31, 2009.

 

   Less Than 12 Months   12 Months or More   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
                         
December 31, 2010                              
Mortgage backed securities  $26,224,692   $(528,685)  $-   $-   $26,224,692   $(528,685)
Corporate securities   -    -    3,399,389    (835,910)   3,399,389    (835,910)
Single issue trust preferred securities   1,951,479    (80,092)   2,565,200    (1,435,763)   4,516,679    (1,515,855)
Municipal securities   459,066    (55,934)   5,184,745    (1,136,484)   5,643,811    (1,192,418)
Total temporarily impaired securities  $28,635,237   $(664,711)  $11,149,334   $(3,408,157)  $39,784,571   $(4,072,868)
                               
December 31, 2009                              
Mortgage backed securities  $42,983,307   $(768,810)  $-   $-   $42,983,307   $(768,810)
Corporate securities   1,398,872    (896,151)   1,780,000    (220,000)   3,178,872    (1,116,151)
Single issue trust preferred securities   1,994,732    (925,992)   3,967,017    (760,301)   5,961,749    (1,686,293)
Pooled trust preferred securities   33,118    (51,680)   49,138    -    82,256    (51,680)
Municipal securities   1,356,260    (43,738)   6,714,609    (994,043)   8,070,869    (1,037,781)
Total temporarily impaired securities  $47,766,289   $(2,686,371)  $12,510,764   $(1,974,344)  $60,277,053   $(4,660,715)

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow any anticipated recovery in fair value. The changes in fair value in our available for sale portfolio reflect normal market conditions and vary; either positively or negatively, based primarily on changes in general levels of market interest rates relative to the yields of the portfolio. Additionally, changes in the fair value of securities available for sale do not affect our income nor does it affect the Bank’s regulatory capital requirements. The Bank has invested in trust preferred securities and management is closely monitoring these securities. There was no other than temporary impairment charges for December 31, 2010.

 

Other than temporary impairment charges for December 31, 2009 consisted of a pooled trust preferred security of $418,710.

 

Unrealized losses associated with the investment securities total $4.1 million. Of that amount, $3.4 million has existed for a period of twelve consecutive months or longer. Unrealized losses that are related to the prevailing interest rate environment will decline over time and recover as these securities approach maturity. The unrealized losses in the municipal securities portfolio are due to widening credit spreads in the municipal securities market and are the result of concerns about the bond insurers associated with these securities. At December 31, 2010, the Company believes that all contractual cash flows will be received on this portfolio.

 

65
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 6. Investment Securities, continued

 

The single-issue securities are trust-preferred issuances from other bank holding companies and had a total market value of approximately $5.1 million as of December 31, 2010, compared with their adjusted cost basis of approximately $6.5 million. Management does not believe any individual unrealized loss as of December 31, 2010, represents other-than-temporary impairment. The Company has the ability and believes it is more likely than not that it will hold these securities until such time as the value recovers or the securities mature. Furthermore, the Company believes that portions of the change in value are attributable to changes in market interest rates and the current state of illiquidity within the market for securitized assets.

 

Note 7. Loans Receivable

 

The major components of loans in the balance sheets at December 31 are as follows:

 

   2010   2009 
   In thousands 
         
Commercial  $26,134   $32,551 
Real estate:          
Construction and land development   81,087    121,838 
Residential, 1-4 families   184,218    80,071 
Residential, 5 or more families   8,946    9,879 
Farmland   2,494    2,473 
Nonfarm, nonresidential   88,912    88,197 
Agricultural   402    563 
Consumer   12,712    13,380 
Other   328    1,512 
    405,233    350,464 
           
Deferred loan fees, net of costs   (217)   (294)
Allowance for loan losses   (15,541)   (10,149)
   $389,475   $340,021 

 

Approximately $19.0 million in 1-4 family residential loans, $12.2 million in commercial real estate loans, $7.2 million in home equity line of credit loans and $5.2 million of securities were pledged as collateral securing Federal Home Loan Bank advances included in long-term debt at December 31, 2010.

 

66
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 7. Loans Receivable, continued

 

The age analysis of past due loans as of December 31, 2010 is set forth in the following table.

 

Past Due Loans (dollars in thousands)

 

       90 Days or                 
   30-89   More and   Non             
   Days   accruing   Accrual   Total       Total 
   Past Due   Past Due   Loans   Past Due   Current   Loans 
                         
Construction and development  $4,199   $1,158   $21,768   $27,125   $53,962   $81,087 
Farmland   134    267    15    416    2,078    2,494 
1-4 family residential   3,538    521    4,057    8,116    176,102    184,218 
Multifamily residential   -    -    4,032    4,032    4,914    8,946 
Nonfarm, nonresidential   1,560    414    8,169    10,143    78,769    88,912 
Total real estate   9,431    2,360    38,041    49,832    315,825    365,657 
                               
Agricultural   -    -    -    -    402    402 
Commercial and industrial   1,534    503    1,617    3,651    22,483    26,134 
Consumer   32    61    183    276    12,436    12,712 
Other   -    -    -    -    328    328 
Total  $10,997   $2,924   $39,841   $53,759   $351,474   $405,233 

 

The Company categorizes loans receivable into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases individually by classifying the loans receivable as to credit risk. The Company uses the following definitions for risk ratings:

 

Pass – Loans in this category are considered to have a low likelihood of loss based on relevant information analyzed about the ability of the borrowers to service their debt and other factors.

 

Special Mention – Loans in this category are currently protected but are potentially weak, including adverse trends in borrower’s operations, credit quality or financial strength. Those loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances. Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Company’s credit position at some future date.

 

Substandard – A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful – Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.

 

67
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 7. Loans Receivable, continued

 

As of December 31, 2010, and based on the most recent analysis performed, the risk category of loans receivable was as follows:

 

Loans by risk category (dollars in thousands)

 

       Special             
   Pass   Mention   Substandard   Doubtful   Total 
                     
Construction and development  $37,909   $4,001   $37,898   $1,279   $81,087 
Farmland   1,987    90    402    15    2,494 
1-4 family residential   160,967    6,932    14,483    1,836    184,218 
Multifamily residential   4,341    60    4,545    -    8,946 
Nonfarm, nonresidential   56,337    10,675    21,266    634    88,912 
Total real estate   261,541    21,758    78,594    3,764    365,657 
                          
Agricultural   393    4    5    -    402 
Commercial and industrial   20,028    2,158    2,887    1,061    26,134 
Consumer   11,886    469    236    121    12,712 
Other   328    -    -    -    328 
Total  $294,176   $24,389   $81,722   $4,946   $405,233 

 

Note 8. Allowance for Loan Losses

 

Information related to the allowance for loan losses is as follows:

 

   2010   2009 
         
Balance, beginning  $10,148,927   $7,187,981 
Provision charged to expense   12,205,554    16,579,908 
Recoveries of amounts charged off   60,142    91,965 
Amounts charged off   (6,873,335)   (13,710,927)
Balance, ending  $15,541,288   $10,148,927 

 

The average annual recorded investment in impaired loans and interest income recognized on impaired loans for the last two years (all approximate) is summarized below:

 

   2010   2009 
         
Average investment in impaired loans  $56,591,000   $13,701,261 
Interest income recognized on impaired loans  $2,274,000   $1,172,061 
Interest income recognized on a cash basis on impaired loans  $2,274,000   $1,172,061 

 

No additional funds are committed to be advanced in connection with impaired loans.

 

The following table presents information concerning the Company’s investment in loans considered impaired as of December 31, 2010:

 

               Average     
       Unpaid       Recorded   Interest 
   Recorded   Principal   Related   Investment   Income 
   Investment   Balance   Allowance   Recognized     
Impaired loans without a valuation allowance:                         
Construction and development  $13,238    16,684    -   $15,087   $809 
Farmland   -    -    -    -    - 
1-4 family residential   2,563    2,563    -    2,585    36 
Multifamily residential   1,109    1,433    -    1,328    2 
Nonfarm, nonresidential   7,303    8,504    -    8,432    83 
Agricultural   -    -    -    -    - 
Commercial and industrial   -    -    -    -    - 
Consumer   -    -    -    -    - 
Other   -    -    -    -    - 
                          
Impaired loans with a valuation allowance:                         
Construction and development   11,714    13,003    2,278    12,434    929 
Farmland   -    -    -    -    - 
1-4 family residential   2,761    2,761    617    2,787    17 
Multifamily residential   2,994    2,994    1,226    2,921    330 
Nonfarm, nonresidential   10,554    10,563    1,646    10,593    57 
Agricultural   -    -    -    -    - 
Commercial and industrial   424    424    424    424    - 
Consumer   -    -    -    -    - 
Other   -    -    -    -    - 
Total  $52,660    58,929   $6,191    56,591   $2,274 

 

 

68
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 8. Allowance for Loan Losses, continued

 

Allowance for Loan Losses and Recorded Investment in Loan Receivables (in thousands)

 

   Construction               Commercial                 
   and   1-4 Family   Multifamily   Nonfarm,   and       All Other         
December 31, 2010  Development   Residential   Residential   Nonresidential   Industrial   Consumer   FAS 5   Unallocated   Total 
                                     
Allowance for Loan Losses:                                             
Ending balance  $7,281   $1,163   $1,676   $2,892   $1,563   $106   $137   $724   $15,542 
                                              
Individually evaluated   2,278    617    1,226    1,646    424    -    -    -    6,191 
                                              
Collectively evaluated   5,003    546    450    1,246    1,139    106    137    724    9,351 
                                              
Loans Receivable:                                             
Ending balance   81,156    84,421    8,946    88,848    25,972    10,851    4,125    -    304,319 
                                              
Loans individually evaluated   24,951    5,323    4,103    17,857    424    -    -    -    52,658 
                                              
Loans collectively evaluated   56,205    79,098    4,843    70,991    25,548    10,851    4,125    -    251,661 

   

Note 9. Property and Equipment

 

Components of Property and Equipment

 

Property and equipment and total accumulated depreciation consisted of the following at December 31:

 

   2010   2009 
         
Land  $5,613,089   $5,593,639 
Buildings   9,999,267    9,992,900 
Construction in progress   -    - 
Leasehold improvements   1,097,606    1,070,135 
Automobiles   55,818    55,818 
Furniture and equipment   4,001,204    4,034,932 
    20,766,984    20,747,424 
           
Less accumulated depreciation   4,365,023    3,711,780 
   $16,410,961   $17,035,644 

 

Depreciation expense reported in net income was approximately $760,000 and $764,000 for the years ended December 31, 2010 and 2009, respectively.

 

69
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 9. Property and Equipment

 

Leases

 

The Bank leases several banking facilities and its operations center under agreements accounted for as operating leases. Rent expense was approximately $407,000 and $401,000 in 2010 and 2009, respectively. Future minimum lease payments under non-cancelable commitments are as follows.

 

2011  $348,855 
2012   315,737 
2013   284,564 
2014   198,407 
2015   115,090 
Thereafter   51,450 
   $1,314,103 

 

Note 10. Intangible Assets

 

The book value of intangible assets at December 31, 2010 and 2009 are $160,000 and $237,270, respectively and are determined as follow:

 

   As of December 31, 2010   As of December 31, 2009 
   Gross Carrying   Accumulated   Gross Carrying   Accumulated 
   Amount   Amortization   Amount   Amortization 
                 
Amortized intangible assets                    
Deposit premium  $2,439,918   $2,279,918   $2,439,919   $2,209,315 
Other   200,000    200,000    200,000    193,334 
Total  $2,639,918   $2,479,918   $2,639,919   $2,402,649 

 

Amortization expense is calculated on a straight-line basis over a period of ten years and was approximately $90,000 and $179,000 in 2010 and 2009, respectively. Management expects amortization expense to be approximately $30,000 over the remaining five years.

 

Note 11. Deposits

 

Time deposits in denominations of $100,000 or more were $187.2 million and $176.8 million at December 31, 2010 and 2009, respectively. Interest expense on such deposits aggregated approximately $2.9 million and $4.2 million in 2010 and 2009, respectively. Time deposits in denominations of $100,000 or more, maturing subsequent to December 31, 2010 are as follows (amounts in thousands):

 

Large Time Deposit Maturities, (thousands)

 

2011  $123,342 
2012   35,142 
2013   36,623 
2014   324 
2015   1,731 
Total time deposits of $100,000 or more  $187,162 

 

The Bank has brokered deposits totaling $117.6 million with terms of no greater than 3 years as of December 31, 2010. Effective November 29, 2011, the Company and the Bank entered into a Prompt Corrective Action Directive with the Board of Governors of the Federal Reserve System which restricts the Bank from accepting any new brokered deposits or renewing any existing brokered deposits.

 

70
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 12. Borrowed Funds

 

Other short-term borrowings

 

Securities sold under agreements to repurchase and federal funds purchased generally mature within one day to 12 months from the transaction date. Also included in other short-term borrowings is one fixed rate FHLB advance of $5,000,000 at December 31, 2010. There was one fixed rate FHLB advance of $2,500,000 at December 31, 2009. Also included in other short-term borrowings was a $900,000 line of credit at a 5.00% lending rate that will mature on July 1, 2020.

 

The Company’s loan agreement, for the $900,000 line of credit debt obligation noted above, includes financial covenants requiring the Bank to maintain a minimum weighted average return on assets of greater than 0.50% on an annualized basis, maintain total equity capital of $43,499,000 at all times and the percentage of non-performing loans to gross loans shall not exceed 4.00%. The Company did not meet these covenants in 2010 and has not obtained a waiver through December 31, 2011. This loan is secured by the common stock of Waccamaw Bank. As such, the debt obligation has been classified in other short-term borrowings due to the covenant violations.

  

Additional information is summarized below:

 

   2010   2009 
         
Outstanding balance at December 31  $5,900,000   $3,500,000 
Year-end weighted average rate   3.95%   5.61%
Daily average outstanding during the period  $2,881,507   $5,945,833 
Average rate for the year   4.43%   3.36%
Maximum outstanding at any month-end during the period  $5,900,000   $9,500,000 

 

Securities sold under agreements to repurchase

 

Securities sold under agreements to repurchase (“repos”) consist of overnight and term agreements. Additional information is summarized below:

 

   2010   2009 
         
Outstanding balance at December 31  $19,776,000   $20,615,000 
Year-end weighted average rate   3.37%   3.00%
Daily average outstanding during the period  $20,857,370   $22,933,882 
Average rate for the year   3.24%   3.25%
Maximum outstanding at any month-end during the period  $23,325,000   $23,563,000 

 

Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities.

 

Overnight securities sold under agreements to repurchase are collateralized financing transactions and are primarily executed with local Bank customers. Overnight repos totaled $2.8 million and $3.6 million at December 31, 2010 and 2009, respectively.

 

Our term repos totaled $17.0 million at December 31, 2010 and December 31, 2009 and include embedded derivatives. These structured repos consist of $10.0 million with an interest rate of 3.80% that matures on November 21, 2018 and can be called at the counterparty’s option quarterly beginning on November 21, 2009 and can be called at the counterparty’s or the Bank’s option annually beginning on November 21, 2012, $3.5 million with an interest rate of 3.92% that matures on December 19, 2017 and $3.5 million with an interest rate of 3.82% that matures on December 19, 2017.

 

71
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 12. Borrowed Funds, continued

 

Unused lines of credit

 

The Bank has established a credit facility to provide additional liquidity if and as needed. This consists of a secured line of credit with a correspondent bank for $4,300,000, which can be canceled at any time. In addition, the Bank has the ability to borrow up to ten percent of total bank assets from the Federal Home Loan Bank of Atlanta, subject to the pledging of specific bank assets as collateral. The Federal Home Loan Bank of Atlanta has the ability to cancel this line at any time. At December 31, 2010 and December 31, 2009 there were no amounts outstanding under these credit facilities.

 

Long-term debt

 

At December 31, 2010 and 2009, $35,000,000 and $40,000,000, respectively were outstanding under Federal Home Loan Bank advances. Approximately $19.0 million in 1-4 family residential loans, $12.2 million in commercial real estate loans, $7.2 million in home equity line of credit loans and $5.2 million in securities were pledged as collateral for the FHLB advances at December 31, 2010. Also included in long-term debt is $3,000,000 of subordinated notes bearing interest at 3-month LIBOR plus 350 basis points that will mature on July 1, 2015.

 

Maturity Date  Advance   Rate 
         
07/17/12   9,000,000    Fixed at 4.48% 
09/04/12   6,000,000    Fixed at 4.00% 
09/03/13   6,000,000    Fixed at 4.15% 
12/02/13   5,000,000    Fixed at 4.39% 
09/29/15   4,000,000    Fixed at 4.06% 
04/22/19   5,000,000    Fixed at 4.75% 
   $35,000,000      

  

Due to the Bank’s current capital position and adverse rating from the Federal Home Loan Bank, the Bank is unable to obtain any new advances, but is able to renew existing advances as they mature with similar maturities and structures.

  

Note 13. Guaranteed Preferred Beneficial Interests in the Company’s Junior Subordinated Debentures

 

The Company has issued $12.4 million of Junior Subordinated debentures to unconsolidated subsidiary trusts, Waccamaw Statutory Trust I and Waccamaw Statutory Trust II, to fully and unconditionally guarantee the preferred securities issued by the Trusts. These long term obligations, which currently qualify as Tier 1 capital for the Company, constitute a full and unconditional guarantee by the Company of the Trusts’ obligations under the Capital Trust Securities. In accordance with generally accepted accounting principles, the trusts are not consolidated in the Company’s financial statements.

 

Waccamaw Statutory Trust I, a statutory business trust (the Trust), was created by the Company on December 17, 2003, at which time the Trust issued $8,000,000 in aggregate liquidation amount of preferred capital trust securities which mature December 17, 2033. Distributions are payable on the securities at a floating rate indexed to the 3-month London Interbank Offered Rate (“LIBOR”), and the securities may be prepaid at par by the Trust at any time after December 17, 2008. The principal assets of the Trust are $8.2 million of the Company’s junior subordinated debentures which mature on December 17, 2033, and bear interest at a floating rate indexed to the 3-month LIBOR, and which are callable by the Company after December 17, 2008. All $248 thousand in aggregate liquidation amount of the Trust’s common securities are held by the Company.

 

Waccamaw Statutory Trust II, a statutory business trust (the Trust), was created by the Company on July 18, 2008, at which time the Trust issued $4,000,000 in aggregate liquidation amount of preferred capital trust securities which mature October 1, 2038. Distributions are payable on the securities at a floating rate indexed to the 3-month London Interbank Offered Rate (“LIBOR”), and the securities may be prepaid at par by the Trust at any time after July 18, 2013. The principal assets of the Trust are $4.1 million of the Company’s junior subordinated debentures which mature on October 1, 2038, and bear interest at a floating rate indexed to the 3-month LIBOR, and which are callable by the Company after July 18, 2013. All $124 thousand in aggregate liquidation amount of the Trust’s common securities are held by the Company.

 

72
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 13. Guaranteed Preferred Beneficial Interests in the Company’s Junior Subordinated Debentures, continued

 

The Trust’s preferred securities may be included in the Company’s Tier 1 capital for regulatory capital adequacy purposes to the extent that they do not exceed 33.3% of the Company’s total Tier 1 capital excluding these securities. Amounts in excess of this ratio will not be considered Tier 1 capital but may be included in the calculation of the Company’s total risk-based capital ratio. The Company’s obligations with respect to the issuance of the Trust’s preferred securities and common securities constitute a full and unconditional guarantee by the Company of the Trust’s obligations with respect to the preferred securities and common securities. Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments on its junior subordinated debentures, which would result in a deferral of distribution payments on the Trust’s preferred trust securities and common securities. On December 17, 2009 the Company began to defer interest payments on the junior subordinated debentures issued to Waccamaw Statutory Trust II. The Company has also elected to defer payments on the junior subordinated debentures issued to Waccamaw Statutory Trust I. In the absence of an additional funding source, the ability of the Company to service these obligations is dependent of the ability of the Bank to pay dividends to the holding company. Currently, the Bank does not have the ability to pay dividends.

 

Note 14. Fair Value of Financial Instruments

 

GAAP provides a framework for measuring and disclosing fair value which requires disclosures about the fair value of assets and liabilities recognized in the balance sheet, whether the measurements are made on a recurring basis (for example, available for sale investment securities) or on a nonrecurring basis (for example, impaired loans).

 

Fair value is defined as the exchange 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 Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

 

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value. These levels are:

 

  Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
     
  Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
     
  Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

 

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

 

73
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 14. Fair Value of Financial Instruments, continued

 

Fair Value Hierarchy

 

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, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

 

Loans

 

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan 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 as impaired. Once a loan is identified as individually impaired, management measures the impairment. 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, and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. As of December 31, 2010, the Bank identified $52.7 million in impaired loans. Of these impaired loans, $28.4 million were identified to have impairment of $6.2 million. The determination of impairment was based on the fair market value of collateral for each loan. In situations where management discounts appraised values in determining fair value of appraisals, these levels will be considered to be a Level 3 input.

 

Foreclosed Assets

 

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charges to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company recorded the foreclosed asset as nonrecurring.

 

Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

 

Assets and Liabilities Recorded as Fair Value on a Recurring Basis

 

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis (in thousands).

 

December 31, 2010  Total   Level 1   Level 2   Level 3 
                 
Investment securities available for sale  $67,487   $-   $64,501   $2,986 
Total assets at fair value  $64,487   $-   $64,501   $2,986 

 

December 31, 2009  Total   Level 1   Level 2   Level 3 
                 
Investment securities available for sale  $87,769   $3,890   $81,009   $2,870 
Total assets at fair value  $87,769   $3,890   $81,009   $2,870 

 

74
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 14. Fair Value of Financial Instruments, continued

 

Fair Value Hierarchy, continued

 

There were no liabilities measured at fair value on a recurring basis at December 31, 2010 and 2009.

 

The following table presents additional information about financial assets and liabilities measured at fair value at December 31, 2010 and 2009, on a recurring basis and for which Level 3 inputs are utilized to determine fair value:

 

   Available 
   for Sale 
   Securities 
   (In thousands) 
     
Balance, January 1, 2009  $3,939 
Total gains or losses (realized/unrealized)     
Included in earnings (or changes in net assets)   - 
Included in other comprehensive income   (1,069)
Purchases, issuances, and settlements   - 
Transfers in and/or out of Level 3   - 
Balance, December 31, 2009   2,870 
      
Total gains or losses (realized/unrealized)     
Included in earnings (or changes in net assets)   - 
Included in other comprehensive income   116 
Purchases, issuances, and settlements   - 
Transfers in and/or out of Level 3   - 
Balance, December 31, 2010  $2,986 

 

The Company may be required from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. 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 tables below (in thousands).

 

December 31, 2010  Total   Level 1   Level 2   Level 3 
                 
Impaired loans  $22,255   $-   $-   $22,255 
Foreclosed assets   9,589    -    -    9,589 
                     
Total assets at fair value  $31,844   $-   $-   $31,844 

 

December 31, 2009  Total   Level 1   Level 2   Level 3 
                 
Impaired loans  $-   $-   $-   $- 
Foreclosed assets   4,994    -    -    4,994 
                     
Total assets at fair value  $4,994   $-   $-   $4,994 

 

There were no liabilities measured at fair value on a nonrecurring basis at December 31, 2010 and 2009.

 

75
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 14. Fair Value of Financial Instruments, continued

 

Assets and Liabilities Recorded as Fair Value on a Nonrecurring Basis, continued

 

Generally accepted accounting principles requires disclosure of fair value information about financial instruments, whether or not recognized in the Statement of Condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Also, the fair value estimates presented herein are based on pertinent information available to management as of December 31, 2010 and 2009. Such amounts have not been comprehensively revalued for purposes of these financial statements since those dates, and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

 

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

 

CASH, DUE FROM BANKS AND FEDERAL FUNDS SOLD — For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

 

SECURITIES AVAILABLE FOR SALE — Fair values for securities available for sale are primarily based on quoted market prices. If a quoted market price is not available, fair value is estimated using market prices for similar securities.

 

RESTRICTED EQUITY SECURITIES — The carrying values of restricted equity securities approximate fair values.

 

LOANS — For equity lines and other loans with short-term or variable rate characteristics, the carrying value reduced by an estimate for credit losses inherent in the portfolio is a reasonable estimate of fair value. The fair value of all other loans is estimated by discounting their future cash flows using interest rates currently being offered for loans with similar terms, reduced by an estimate of credit losses inherent in the portfolio. The discount rates used are commensurate with the interest rate and prepayment risks involved for the various types of loans.

 

DEPOSITS — The fair value disclosed for demand deposits (i.e., interest- and non-interest-bearing demand, savings and money market savings) is equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of deposit to a schedule of aggregated monthly maturities.

 

SHORT-TERM BORROWINGS — For these short-term liabilities, the carrying amount is a reasonable estimate of fair value.

 

FHLB ADVANCES AND LONG-TERM DEBT — The fair value of the Company’s fixed rate borrowings are estimated using discounted cash flows, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The carrying amount of the Company’s variable rate borrowings approximates their fair values.

 

COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT — The value of these unrecognized financial instruments is estimated based on the fee income associated with the commitments which, in the absence of credit exposure, is considered to approximate their settlement value. As no significant credit exposure exists, and because such fee income is not material to the Company’s financial statements at December 31, 2010 and 2009, the fair value of these commitments is not presented.

 

76
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 14. Fair Value of Financial Instruments, continued

 

Assets and Liabilities Recorded as Fair Value on a Nonrecurring Basis, continued

 

The estimated fair values of the Company’s financial instruments are as follows (dollars in thousands):

 

   December 31, 2010   December 31, 2009 
   Carrying   Fair   Carrying   Fair 
   Amount   Value   Amount   Value 
                 
Financial Assets                    
Cash and due from banks  $4,878   $4,878   $13,973   $13,973 
Interest-bearing deposits with banks   28,080    28,080    7,695    7,695 
Federal funds sold   2,210    2,210    21,315    21,315 
Investment securities   67,487    67,487    87,769    87,769 
Restricted equity securities   3,760    3,760    4,041    4,041 
Loans, net of allowance for loan losses   389,475    384,051    340,021    333,368 
                     
Financial Liabilities                    
Deposits   454,947    457,112    433,538    431,370 
Securities sold under agreements to repurchase and federal funds purchased   19,776    19,776    20,615    20,615 
Other short-term borrowings   5,900    5,900    3,500    3,484 
Long-term debt   38,000    36,054    43,000    41,450 
Junior subordinated debentures   12,372    8,138    12,372    8,234 

 

Note 15. Loss per Share

 

The following table details the computation of basic and diluted loss per share:

 

   2010   2009 
         
Net loss  $(15,237,685)  $(14,205,532)
           
Weighted average common shares outstanding   6,217,512    5,534,458 
Effect of dilutive securities, options   -    - 
Effect of dilutive securities, preferred stock   -    - 
Weighted average common shares outstanding, diluted   6,217,512    5,534,458 
           
Basic loss per share  $(2.45)  $(2.57)
Diluted loss per share  $(2.45)  $(2.57)

 

At December 31, 2010, 296,899 warrants were outstanding with a $21.82 per share exercise price. These warrants could be used to purchase one share of the Company’s common stock at any time until September 30, 2014. An additional 300,000 warrants to purchase one share of common stock at a price of 50% of market price at time of issuance were outstanding at December 31, 2010. At December 31, 2010, 550 shares of the Company’s Series A convertible preferred stock were outstanding. At December 31, 2010, 546,375 shares of the Company’s Series B convertible preferred stock were outstanding. The Series A convertible preferred stock can be converted to one share of the Company’s common stock at an exercise price of $16.48. The Series B convertible preferred stock is convertible into 1.5 shares of the Company’s common stock. Exercise of these warrants, the Company’s convertible preferred stock and 275,049 options are not assumed in computing 2010 diluted earnings per share due to the net loss of for the year ended December 31, 2010. The Company’s Series A convertible preferred stock, Series B convertible preferred stock and shares associated with stock-based compensation have been excluded from the computation of dilutive EPS as the result would be anti-dilutive.

 

77
 

 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 16. Change in Control Agreements

 

The Company has entered into change in control agreements with certain key officers. In the event of a change in control of the Company, as defined in the agreements, the acquirer will be bound to the terms of the agreements.

 

Note 17. Benefit Plans

 

Defined Contribution Plan

 

The Bank maintains a profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees at least 21 years of age who have completed at least one month of service. Participants may contribute a percentage of compensation, subject to a maximum allowed under the Code. The bank contributed up to 3% of an employee’s compensation who have completed at least twelve months of service which vests over a five-year period. However, this contribution was eliminated in February, 2009. The Bank’s aggregate contribution was $21,000 for the year ended December 31, 2009.

 

Supplemental benefits have been approved by the Board of Directors for the directors and certain executive officers of Waccamaw Bank. Certain funding is provided informally and indirectly by life insurance policies. The cash surrender value of the life insurance policies are recorded as a separate line item in the accompanying balance sheets of $18,330,003 and $18,576,015 at December 31, 2010 and 2009, respectively. Income earned on these policies is reflected as a separate line item in the Consolidated Statements of Operations. The Company recorded no expenses due to suspending additional contributions in 2010 and expenses of $241,004 in 2009 and a liability of $483,448 in 2010 and 2009.

 

The Company’s Board of Directors has adopted the Waccamaw Bankshares, Inc. 2008 Omnibus Stock Ownership and Long-Term Incentive Plan. In accordance with the Company’s plan, the Company may grant Incentive Stock Options, Non-Qualified Stock Options, Restricted Stock, Stock Appreciation Rights and/or Units and up to 705,973 shares of common stock may be issued (adjusted for stock dividends). Options granted under the plan expire no more than 10 years from date of grant. Option exercise price under the plan must be set by the Board of Directors at the date of grant and cannot be less than 100% of fair market value of the related stock at the date of the grant. Under the plan, vesting is determined by the specific option agreements. It is the Company’s policy to issue new shares to satisfy option exercises. Both the 1998 Incentive Stock Option Plan (Incentive Plan) and the 1998 Nonstatutory Stock Option Plan (Nonstatutory Plan) expired in 2008; as the options not granted under these plans were terminated and the remaining options under these plans have a maximum term of ten years from the original grant date.

 

As described in Note 1, the Company is required to record compensation expense for all rewards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Compensation cost charged to income was approximately $85,000 and $122,000 for the years ended December 31, 2010 and 2009, respectively.

 

The weighted average fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average estimated fair values of stock options grants and the assumptions that were used in calculating such fair values were based on estimates at the date of grant as follows:

 

78
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 17. Benefit Plans, continued

 

Stock Option Plans

 

   2010   2009 
           
Weighted average fair value of options granted during the year  $2.12   $3.07 
           
Assumptions:          
Average risk free interest rate   3.64%   2.18%
Average expected volatility   86.45%   75.80%
Expected dividend rate   -%   -%
Expected life in years   10    10 

 

There was no cash received from option exercises under the plans for the years ended December 31, 2010 and December 31, 2009. There was no total intrinsic value of options outstanding for the years ended December 31, 2010 December 31, 2009.

 

After the approval of the Omnibus Plan, no further options have been or will be issued under the Previous Plans. The term of the Omnibus Plan is indefinite, except that no incentive stock option award can be granted after the tenth anniversary of the plan. The Omnibus Plan provides that shares of common stock may be granted to certain key employees and outside directors through non-qualified stock options, incentive stock options, stock available for rights, restricted stock, performance awards or any other award made under the terms of the plan. The Board of Directors determines the exercise price and all other terms of all grants.

 

Activity under the Omnibus Plan during the years ended December 31, 2010 and 2009 is summarized below:

 

   2008 Omnibus Stock Ownership 
   and Long Term Incentive Plan 
   Available     
   for Grant   Granted 
         
Balance December 31, 2008   679,473    26,500 
           
Forfeited   5,500    -
Granted   (4,000)   4,000 
Exercised   -    - 
Balance December 31, 2009   680,973    30,500 
           
Forfeited   49,240    -
Granted   (10,000)   10,000 
Exercised   -    - 
Balance December 31, 2010   720,213    40,500

 

79
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 17. Benefit Plans, continued

 

Stock Option Plans, continued

 

A summary of option activity under the plans as of and changes during the year ended December 31, 2010 is presented below:

 

       Weighted   Average     
       Average   Remaining   Aggregate 
   Options   Exercise   Contractual   Intrinsic 
   Outstanding   Price   Term   Value 
                 
Outstanding at December 31, 2009   314,289   $14.69           
Granted   10,000    2.95           
Forfeited   (49,240)   13.46           
Exercised   -    -           
Expired   -    -           
Outstanding at December 31, 2010   275,049   $14.48    4.9 years   $- 
Exercisable at December 31, 2010   243,608   $15.39    4.5 years   $- 

 

The total fair value of options that were contractually vested during 2010 and 2009 was $70,431 and $103,973, respectively.

 

As of December 31, 2010 the Company had unamortized compensation expense related to unvested stock options of $135,653 which is expected to be amortized over 5 years.  Total unrecognized compensation cost related to outstanding non-vested stock options will be recognized over the following periods:

 

2011  $67,481 
2012   46,307 
2013   17,105 
2014   4,760 
Total  $135,653 

 

Note 18. Income Taxes

 

Current and Deferred Income Tax Components

 

The components of income tax expense are as follows:

 

   2010   2009 
         
Current  $21,680   $(5,031,090)
Deferred   3,666,532    1,403,202 
Income tax expense (benefit)  $3,688,212   $(3,627,888)

 

80
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 18. Income Taxes, continued

 

Deferred Income Tax Analysis, continued

 

A reconciliation of income tax benefit computed at the statutory federal income tax rate of 34% included in the statement of income follows:

 

   2010   2009 
         
Tax at statutory federal rate  $(3,926,821)  $(6,063,363)
Tax exempt interest   (118,014)   (203,357)
Tax exempt income from bank owned life insurance   (220,201)   (252,026)
State income tax, net of federal benefit   (528,817)   (812,134)
Valuation allowance   8,895,612    3,652,441 
Other   (413,547)   50,551 
Income tax expense (benefit)  $3,688,212   $(3,627,888)

 

The components of net deferred federal and state tax assets (included in other assets on the balance sheet) are summarized as follows:

 

   2010   2009 
           
Deferred tax assets          
Allowance for loan losses  $5,896,747   $3,746,495 
Employment benefit liability   186,388    186,388 
Deposit premium amortization   298,442    329,615 
Deferred loan fees   83,557    113,299 
Tax amortization of goodwill   702,259    770,772 
Allowance for other real estate owned   770,947    269,511 
Net operating loss carryover   2,640,362    763,958 
NC net economic loss carryover   922,259    - 
Alternative minimum tax credit carryover   220,037    550,852 
Unrealized loss on securities available for sale   1,457,349    1,666,503 
Charitable contribution carryover   11,690    - 
Total gross deferred tax assets   13,190,037    8,397,393 
           
Less: Valuation allowance   (12,548,053)   (3,652,441)
Total deferred tax assets, net of valuation allowance   641,984    4,744,952 

 

Deferred tax liabilities          
Depreciation   (559,404)   (559,849)
Accretion of bond discount   (82,580)   (80,586)
           
Deferred tax liabilities   (641,984)   (640,435)
Net deferred tax asset  $-   $4,104,517 

 

At December 31, 2010, the Company had a net deferred tax asset before any valuation allowance of $12,548,053, consisting of items noted in the table above. The Company has established a valuation allowance of $12,548,053 against the above benefits. Based on historical and budgeted earnings and tax planning strategies, management has determined the amount of deferred tax asset it is more likely than not that will be utilized over the next year. Due to uncertainty related to long-term projections, any remaining deferred tax asset is off-set with a valuation allowance.

 

The Company had analyzed the tax positions taken or expected to be taken in and its tax returns and concluded it has no liability related to uncertain tax positions. The Company’s federal and state income tax returns are open and subject to examination from the 2007 tax return year and forward.

 

81
 

  

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

  

Note 19. Commitments and Contingencies

 

Litigation

 

No legal proceedings are required to be disclosed pursuant to this item as of December 31, 2010.

 

Financial Instruments with Off-Balance-Sheet Risk

 

To meet the financing needs of its customers, the Bank is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheet.

 

The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Bank's commitments are as follows:

 

   2010   2009 
         
Commitments to extend credit  $65,392,000   $41,072,000 
Stand-by letters of credit   1,066,000    796,000 
   $66,458,000   $41,868,000 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties.

 

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Bank deems necessary.

 

Substantially all of the Bank's loans and commitments to extend credit have been granted to customers in the Bank's market area and such customers are generally depositors of the Bank. The concentrations of credit by type of loan are set forth in Note 7. The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Bank's primary focus is toward commercial, consumer and small business transactions, and accordingly, it does not have a significant number of credits to any single borrower or group of related borrowers in excess of $4,000,000.

 

The Bank from time to time has cash and cash equivalents on deposit with financial institutions which exceed federally-insured limits.

 

82
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 20. Regulatory Restrictions

 

Written Agreement

 

Effective June 14, 2010, the Company and the Bank entered into a Written Agreement (the “Agreement”) with the Federal Reserve Bank of Richmond (the “Reserve Bank”) and the North Carolina Commissioner of Banks (“The Commissioner”).

 

The Agreement is a formal corrective action pursuant to which the Bank has agreed to address specific issues set forth below, through the adoption and implementation of procedures, plans and policies designed to enhance the safety and soundness of the Bank.

 

Among other things, the Agreement requires the Bank to:

 

Retain an independent consultant acceptable to the Reserve Bank and the Commissioner to conduct a review of the effectiveness of the Bank’s corporate governance, board and management structure, to assess staffing needs and to prepare a written report of findings and recommendations;

 

Formulate a plan to strengthen board oversight of the management and operations of the Bank;

 

Formulate and implement a plan to strengthen credit risk management practices;

 

Formulate a plan for the ongoing review and grading of the Bank’s loan portfolio by a qualified independent party or by qualified staff that is independent of the Bank’s lending function;

 

Develop a plan to maintain sufficient capital at the Company, on a consolidated basis;

 

Not pay cash dividends without the prior written consent of the Reserve Bank and the Commissioner;

 

Not accept any new brokered deposits (contractual renewals or rollovers of existing brokered deposits are permitted).

 

The Company must furnish periodic progress reports to the Reserve Bank and the Commissioner regarding its compliance with the Agreement. The Agreement will remain in effect until modified or terminated by the Reserve Bank and the Commissioner. The Bank reports regularly to its regulators on matters of compliance with the Agreement, and the progress made to comply with the Agreement.

 

Prompt Corrective Action

 

Effective November 29, 2011, the Company and the Bank entered into a Prompt Corrective Action Directive (the “Directive”) with the Board of Governors of the Federal Reserve System (the “Board of Governors”).

 

The Directive is a formal corrective action in which the Board of Governors has determined that, as of October 30, 2011, Waccamaw Bank is critically undercapitalized, as defined in section 208.43(b)(5) of Regulation H of the Board of Governors:

 

Among other things, the Directive requires the Bank no later than January 6, 2012 to:

 

Increase the Bank’s equity through the sale of shares or contributions to surplus in an amount sufficient to make the Bank adequately capitalized as defined in section 208.43(b)(2) of Regulation H of the Board of Governors;

 

Enter into and close a contract to be acquired by a depository institution holding company or combine with another insured depository institution, closing under which contract is conditioned only on the receipt of necessary regulatory approvals, the continued accuracy of customary representations and warranties and the performance of customary pre-closing covenants;

 

Take other necessary measures to make the Bank adequately capitalized;

 

Restrict the making of any capital distributions, including, but not limited to, the payment of dividends.

 

Solicit and accept new deposit accounts or renew any time deposits bearing an interest rate that exceeds the prevailing effective rates on deposits of comparable amounts and maturities in the Bank’s market area without the prior written approval of the Federal Reserve Bank of Richmond (the “Reserve” Bank”);

 

Restrict the payment of bonuses to senior executive officers and increases in compensation of such officers;

 

Restrict certain activities, including, but not limited to, making any material change in accounting methods and engaging in any covered transaction, as defined in section 23A of the Federal Reserve Act without the prior written approval of the FDIC.

 

The Company must furnish periodic progress reports to the Reserve Bank and the Commissioner regarding its compliance with the Agreement. The Agreement will remain in effect until modified or terminated by the Reserve Bank and the Commissioner. The Bank reports regularly to its regulators on matters of compliance with the Agreement, and the progress made to comply with the Agreement.

 

83
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

  

Note 20. Regulatory Restrictions, continued

 

Capital Requirements, continued

 

Due to the recent favorable ruling by the Federal Reserve Board of Governors reducing the amount of the deduction to regulatory capital associated with the preferred stock to be regulatory capital, the Bank’s capital status at September 30, 2011 changed from critically undercapitalized to significantly undercapitalized. Although the Directive has not been terminated, the Company continues to take measures to make the Bank adequately capitalized through the sale of branches and selling stock through a private stock offering.

  

Dividends

 

The Company’s dividend payments will be made from dividends received from the Bank. The Bank, as a North Carolina banking corporation, may pay dividends only out of undivided profits (retained earnings) as determined pursuant to North Carolina General Statutes Section 53-87. As of December 31, 2010, there are no retained earnings from which to pay dividends. Regulatory authorities may also limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the Bank.

 

Capital Requirements

 

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

  

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets, as all those terms are defined in the regulations. Management believes, as of December 31, 2010 that the Company and the Bank did not meet all capital adequacy requirements to which they are subject and are therefore classified as “undercapitalized”.

 

The Company’s and Bank’s actual capital amounts and ratios are also presented in the table (dollars in thousands).

 

                   Minimum 
                   To Be Well 
           Minimum   Capitalized Under 
           Capital   Prompt Corrective 
   Actual   Required   Action Provisions 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
                         
December 31, 2010                              
Total capital to risk- weighted assets                              
Consolidated  $33,512    7.54%  $35,547    8.00%  $n/a    n/a 
Bank  $39,153    8.82%  $35,500    8.00%  $44,375    10.00%
                               
Tier 1 capital to risk- weighted assets                              
Consolidated  $29,759    6.70%  $17,774    4.00%  $n/a    n/a 
Bank  $30,578    6.89%  $17,750    4.00%  $26,625    6.00%
                               
Tier 1 capital to average assets                              
Consolidated  $29,759    5.27%  $22,577    4.00%  $n/a    n/a 
Bank  $30,578    5.42%  $22,553    4.00%  $28,192    5.00%

 

84
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 20. Regulatory Restrictions, continued

 

Capital Requirements, continued

 

                   Minimum 
                   To Be Well 
           Minimum   Capitalized Under 
           Capital   Prompt Corrective 
   Actual   Required   Action Provisions 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
                         
December 31, 2009                              
Total capital to risk- weighted assets                              
Consolidated  $35,848    8.95%  $32,029    8.00%  $ n/a    n/a 
Bank  $40,401    10.11%  $31,972    8.00%  $39,965    10.00%
                               
Tier 1 capital to risk- weighted assets                              
Consolidated  $31,742    7.93%  $16,014    4.00%  $ n/a    n/a 
Bank  $32,332    8.09%  $15,986    4.00%  $23,979    6.00%
                               
Tier 1 capital to average assets                              
Consolidated  $31,742    5.88%  $21,596    4.00%  $ n/a    n/a 
Bank  $32,332    6.00%  $21,565    4.00%  $26,956    5.00%

 

 

Based on unaudited financial information, as of December 31, 2011, the resulting bank regulatory capital ratios of total capital to risk weighted assets, tier 1 capital to risk weighted assets and tier 1 capital to average assets are 4.96%, 3.08% and 2.08%, respectively. Based on these levels, the Bank is considered significantly undercapitalized.

 

Generally accepted accounting principles require that in the event of changes about the likelihood of realization of a deferred tax asset that results in the establishment of a deferred tax asset valuation allowance related to unrealized losses on available for sale investment securities, that valuation allowance be established through operation even thought the original deferred tax asset was established through other comprehensive income. The guidance on how to address this inconsistent treatment with respect to the calculation of regulatory capital is not well defined. Accordingly, the capital amounts and ratios in the table above include an adjustment related to establishment of such a deferred tax asset valuation. After this adjustment, regulatory capital as presented is the same amount as would be reported had the related deferred tax asset has not been recorded. Management has discussed this treatment with applicable bank regulators and management has not been informed that this treatment is incorrect. However, due to the lack of clear guidance, it is possible the regulators could conclude this adjustment is not appropriate. If that were the case, Tier 1 and total regulatory capital for December 31, 2011 and December 31, 2010 would be reduced by $1,457,000 and $898,000, respectively and the bank capital ratios would approximate the following:

 

    2011    2010 
           
Total capital to risk weighted assets   1.93%   5.16%
Tier 1 capital to risk weighted assets   2.85%   6.56%
Tier 1 capital to average assets   4.73%   8.49%

  

Intercompany transactions

 

Restrictions on loans by the Bank to the Company are imposed by Federal Reserve Act Sections 23A and 23B, and differ from legal lending limits on loans to external customers. Generally, a bank may lend up to 10% of its capital and surplus to its parent or other affiliate, if the loan is secured and so long as certain safety and soundness requirements and market terms requirements are met. If collateral is in the form of stocks, bonds, debentures or similar obligations, it must have a market value when the loan is made of at least 20% more than the amount of the loan, and if obligations of a state or political subdivision or agency thereof, it must have a market value of at least 10% more than the amount of the loan. If such loans are secured by obligations of the United States or agencies thereof, or by notes, drafts, bills of exchange or bankers' acceptances eligible for rediscount or purchase by a Federal Reserve Bank, requirements for collateral in excess of loan amount do not apply. Under this definition, the legal lending limit for the Bank on loans to the Company was approximately $2,800,000 at December 31, 2010. No 23A transactions existed at December 31, 2010 or 2009.

   

Note 21. Transactions with Related Parties

 

Loans

 

The Bank has entered into transactions with its directors, significant shareholders and their affiliates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. Aggregate loan transactions with related parties were as follows:

 

85
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 21. Transactions with Related Parties, continued

 

Loans, continued

 

   2010   2009 
         
Balance, beginning  $3,707,807   $4,682,184 
Change in relationships   23    1,099 
New loans and advances   469,023    923,208 
Repayments   (1,025,615)   (1,898,684)
Balance, ending  $3,151,238   $3,707,807 

 

Note 22. Parent Company Financial Information

 

Condensed financial information of Waccamaw Bankshares, Inc. is presented as follows:

 

Balance Sheets

December 31, 2010 and 2009

 

   2010   2009 
Assets          
Cash and due from banks  $461,065   $130,175 
Investment in subsidiary bank at equity   26,958,012    29,743,740 
Other assets   485,773    708,392 
Total assets  $27,904,850   $30,582,307 
           
Liabilities          
Short-term debt  $900,000   $1,000,000 
Junior Subordinated debt   12,372,000    12,372,000 
Other liabilities   493,539    55,876 
Total liabilities   13,765,539    13,427,876 

 

Balance Sheets (continued)

December 31, 2010 and 2009

 

   2010   2009 
Stockholders' equity          
Preferred stock, Series A   9,064    9,064 
Preferred stock, Series B, less discount of $6,488,497   9,603,769    - 
Common stock warrants   300,000    - 
Common stock   27,084,927    25,099,770 
Retained (deficit)   (20,535,626)   (5,129,490)
Accumulated other comprehensive loss   (2,322,823)   (2,824,913)
Total stockholders' equity   14,139,311    17,154,431 
Total liabilities and stockholders' equity  $27,904,849   $30,582,307 

 

86
 

 

 
Notes to Consolidated Financial Statements
For the years ended December 31, 2010 and 2009

 

Note 22. Parent Company Financial Information, continued

 

Statements of Operations

Years ended December 31, 2010 and 2009

 

   2010   2009 
         
Income          
Investment securities, taxable  $20,949   $41,463 
Total income   20,949    41,463 
           
Expenses          
Salaries and employee benefits   85,335    122,378 
Franchise tax   26,025    17,188 
Interest expense   493,253    580,203 
Other expenses   750    810 
Total expenses   605,363    720,579 
Loss before tax expense and equity in undistributed income of subsidiary   (584,414)   (679,114)
           
Federal income tax benefit   169,687    189,290 
State income tax expense   -    (25)
Total income tax benefit   169,687    189,265 
Loss before equity in undistributed income of subsidiary   (414,727)   (489,849)
           
Equity in undistributed income (loss) of subsidiary   (14,822,958)   (13,715,683)
Net loss  $(15,237,685)  $(14,205,532)

 

Statements of Cash Flows

Years ended December 31, 2010 and 2009

 

   2010   2009 
         
Cash flows from operating activities          
Net loss  $(15,237,685)  $(14,205,532)
Adjustments:          
Amortization   7,167    7,166 
Stock-based compensation   85,335    122,378 
Decrease in equity in undistributed loss of subsidiary   14,822,958    13,715,683 
(Increase) decrease in other assets   215,453    385,572 
Increase (decrease) in other liabilities   437,662    (42,522)
Net cash used by operating activities   330,890    (17,255)
           
Cash flows from investing activities          
Proceeds from advances from subsidiaries   100,000    - 
Net cash used by investing activities   100,000    - 
           
Cash flows from financing activities          
Net proceeds from (repayment of) short-term debt   (100,000)   - 
Issuance of stock and redemption of fractional shares   -    - 
Net cash provided  by financing activities   (100,000)   - 
Increase (decrease) in cash and due from banks   330,890    (17,255)
           
Cash and cash equivalents, beginning   130,175    147,430 
Cash and cash equivalents, ending  $461,065   $130,175 

 

87
 

 

Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

ITEM 9A – CONTROLS AND PROCEDURES

 

Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures in accordance with Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Our management, including our principal executive officer and principal financial officer concluded that, as of December 31, 2010, our disclosure controls and procedures were not effective in ensuring that the information we are required to disclose in the reports we file or submit under the Act is (i) accumulated and communicated to our management (including the principal executive officer and principal financial officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. This conclusion is based on the fact that the Company had a material weakness with respect to its process for identifying and reviewing non-routine transactions, as described below.

 

As of December 31, 2010, management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control - Integrated Framework,” issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. This assessment included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C) to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act. During its assessment, management concluded that the Company had a material weakness with respect to its process for identifying and reviewing non-routine transactions, as described below.

  

Due to uncertainty related to a complex transaction involving the sale of non-performing assets, the purchase of a home equity line of credit (HELOC) pool, and the sale of preferred stock referenced in Note 2 of the consolidated financial statements, the Company was unable to finalize the financial statements for 2010 in a timely manner.

 

The Company was unable to complete the filing of the 2010 Form 10-K or the March 31, 2011, June 30, 2011 or September 30, 2011 Forms 10-Q in a timely manner pending the resolution of this transaction.

 

In connection with the above evaluation of our disclosure controls and procedures, a change in our internal control over financial reporting was identified that occurred during the quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. The Company is taking steps to remediate the material weaknesses, including designing and implementing additional control procedures, and implementing additional review processes over these controls.

 

Management identified the steps necessary to remediate the material weakness and is in the process implementing a number of actions, including the following:

 

document to standards established by senior accounting personnel and the chief financial officer the review, analysis and related conclusions with respect to non-routine transactions;

 

interview outside accounting consultants to assist on an ongoing basis with the accounting of non-routine transactions;

 

involve both internal personnel and outside accounting consultants, as needed, early in a non-routine transaction to obtain additional guidance as to the application of generally accepted accounting principles to such a proposed transaction; and

 

Require senior accounting personnel and the Chief Financial Officer to review non-routine transactions to evaluate and approve the accounting treatment for such transactions.

 

88
 

 

ANNUAL REPORT

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The management of Waccamaw Bankshares, Inc. and Subsidiary (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a – 15(f) of the Exchange Act. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements in accordance with generally accepted accounting principles.

 

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may be inadequate due to changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

 

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on this assessment and as more fully described above, the Company’s management has concluded that, as of December 31, 2010, the Company’s internal control over financial reporting was not effective based on that framework.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to an exemption from that requirement provide to smaller reporting companies such as the Company.

 

ITEM 9B – OTHER INFORMATION

 

There was no information required to be disclosed by the Company in a report on form 8-K during the fourth quarter of 2010 that was not so disclosed.

 

Part III

 

Item 10 – Directors, Executive Officers AND CORPORATE GOVERNANCE

 

Directors

 

The following table lists information about each of the Company’s current directors, including a description of his or her principal occupation and business experience. There are no family relationships among directors and executive officers of the Company. No director is a director of any other company with a class of securities registered pursuant to section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”) or subject to the requirements of section 15(d) of the Exchange Act, or any company registered as an investment company under the Investment Company Act of 1940.

 

89
 

 

Name and Age   Position(s)
Held
  Director
Since(1)
  Principal Occupation and
Business Experience
             
Murchison B. Biggs (57)   Director   1997  

Certified Public Accountant; Chief Financial Officer, Comptroller/Secretary-Treasurer and Director, K.M. Biggs, Inc. (farming and commercial real estate management), Lumberton, NC; Chief Financial Officer, Secretary-Treasurer and Director, Biggs Park, Inc. (shopping center), Lumberton, NC

 

Brian D. Campbell (43)   Director   2007  

Chief Operating Officer, Campbell Oil Company, Elizabethtown, NC; Chief Operating Officer, Cape Fear Transport, Inc., Elizabethtown, NC; Chairman, Bladen County Economic Development Corporation

 

Dr. Maudie M. Davis (59)   Director   1997  

Assistant Principal, Green Sea Floyds High School, Green Sea, SC (Horry County), 2007–Present; Principal, South Columbus High School, Tabor City, NC, 1990–2007

 

Crawford Monroe Enzor III (47)

 

  Director   1997  

Real Estate Broker with Coldwell Banker Sea Coast Realty, 2010–Present; Sunset Properties, Ocean Isle Beach, NC, 2009–2010; Prudential Laney Real Estate, Ocean Isle Beach, NC, 2009; and Coldwell Banker, 2005–2008; Owner, The Salt Aire Group, Holden Beach, NC

 

Alan W. Thompson (48)

 

  Director, Chairman of the Board of Directors, Interim Chief Executive Officer   1997  

Interim Chief Executive Officer, Waccamaw Bankshares, Inc., and Waccamaw Bank, Whiteville, NC; President, Thompson, Price, Scott, Adams & Co., P.A. (certified public accountants), Whiteville, NC; President, Medical Billing Organization, Inc. (medical billing company), Whiteville, NC; Manager, TSA Rentals, LLC (rental real estate), Whiteville, NC; A & M Investments, LLC (real estate), Whiteville, NC; Manager, Dominion Wealth Management, LLC, Whiteville, NC

 

R. Dale Ward (61)

 

  Director   1997  

President, J. D. Wright Roofing Co., Inc., Tabor City, NC; Partner, Crown Investments, LLC (real estate), Tabor City, NC; Owner, Ward Farms (farming operation), Tabor City, NC

 

J. Densil Worthington

(57)

  Director   1997   President, Worthington Funeral Home, Inc., Chadbourn, NC; Secretary/Treasurer, Independent Medical Supplies, Inc., Chadbourn, NC; Member, Worthington Enterprises, LLC, Chadbourn, NC; Member, EWT, LLC, Chadbourn, NC

 

 

 

(1)Includes service as a director of Waccamaw Bank, which reorganized into the bank holding company form of organization in 2001. Each director also serves as a director of Waccamaw Bank.

 

Qualifications of Directors

 

A description of the specific experience, qualifications, attributes, or skills that led to the conclusion that each of the directors should serve as a director of the Company is presented below. Each of these directors brings a unique perspective and set of qualifications to the board. Many of the Company’s directors have either attended or are planning to attend the North Carolina Bank Directors’ College, a program initiated by the North Carolina Office of the Commissioner of Banks to keep bank directors current on key banking issues.

 

90
 

 

Murchison B. Biggs. Mr. Biggs is a certified public accountant and serves as the chief financial officer/secretary-treasurer as well as a director of K. M. Biggs, Inc., a farming and commercial real estate management company in Lumberton, North Carolina. Mr. Biggs also serves as chief financial officer/secretary-treasurer and director of Biggs Park, Inc., a shopping mall in Lumberton, North Carolina. He graduated from North Carolina State University with a degree in business and accounting. Prior to his involvement in the family business, he worked as a public accountant with a local firm in Lumberton for several years before becoming a member-in-industry CPA as the CFO of his family’s businesses. He has extensive accounting experience in the retail and agricultural businesses and has served as treasurer for several civic and related trade associations. Mr. Biggs has been a director of the Bank since 1997 and of the Company since 2001.

 

Brian D. Campbell. Mr. Campbell has been chief operating officer of Campbell Oil Company and chief operating officer of Cape Fear Transport, Inc., since 1990. Mr. Campbell serves as a director of his family entities including BWC Investments, LLC; Campbell Brothers Investments, LLC; Campbell Brothers, Inc.; Campbell Investments, Inc.; Campbell Oil Company of Clinton, Inc.; Campbell Oil of Raleigh, Inc.; Campbell Oil of Whiteville, Inc.; Campbell Oil Company, Inc.; Campbell Rentals, LLC; Executive Aircraft Services, Inc.; Lindsey Campbell Oil Company, Inc.; The Gas Mart, Inc.; and C3 Enterprises, LLC. He also owns Cape Fear Transport, Inc. (transportation of petroleum products), and Cape Fear Mini Storage & Rentals, Inc. (mini storage and portable storage buildings) and is part owner/co-founder of First Capital Ventures (investment property). Mr. Campbell acts as chairman of the Bladen County Economic Development Corporation and serves on the advisory boards of Methodist College and the North Carolina Department of Transportation Division of Aviation. He has a financial background and experience in the management of multiple related companies. Mr. Campbell has been a director of the Company since 2007 and has attended the North Carolina Bank Directors’ College.

 

Dr. Maudie M. Davis. Dr. Davis has been an assistant principal at Green Sea Floyds High School since 2007 in Green Sea, South Carolina. Prior to that Dr. Davis was principal at South Columbus High School from 1990 to 2007 in Tabor City, North Carolina. Dr. Davis has been a director of the Bank since 1997 and of the Company since 2001 and has attended the North Carolina Bank Directors’ College.

 

Crawford Monroe Enzor III. Mr. Enzor is a real estate broker with Coldwell Banker Sea Coast Realty and owner of The Salt Aire Group (real estate brokerage). He worked as a real estate broker with Sunset Properties, Ocean Isle Beach, North Carolina, during 2010 and with Prudential Laney Real Estate during 2009 and with Coldwell Banker from 2005 to 2008. Mr. Enzor was the owner of Monroe Enzor III Farms and president of Enzor Farms, Inc., from 1986 to 2005. He has experience in real estate and agriculture. Mr. Enzor has been a director of the Bank since 1997 and of the Company since 2001 and has attended the North Carolina Bank Directors’ College.

 

Alan W. Thompson. Mr. Thompson currently serves as interim chief executive officer of the Company and the Bank and has been president of Thompson, Price, Scott, Adams & Co., P.A. (CPA firm) in Whiteville, North Carolina, since 1993. Mr. Thompson has also served as president of Medical Billing Organization, Inc. (medical billing company) since 2002, manager of Dominion Wealth Management, LLC (financial services), since 2002, manager of TSA Rentals, LLC (rental real estate), since 2002, and manager of A & M Investments, LLC (real estate), all in Whiteville, North Carolina. He has extensive accounting experience. Mr. Thompson has been a director of the Bank since 1997 and of the Company since 2001 and has attended the North Carolina Bank Directors’ College.

 

R. Dale Ward. Mr. Ward is president of J. D. Wright Roofing Co., Inc., in Tabor City, North Carolina. He is also a partner in Crown Investments, LLC (real estate), and owns Ward Farms (farming operation) in Tabor City, North Carolina. He has experience in business management and real estate. Mr. Ward has been a director of the Bank since 1997 and of the Company since 2001 and has attended the North Carolina Bank Directors’ College.

 

J. Densil Worthington. Mr. Worthington is president of Worthington Funeral Home in Chadbourn, North Carolina. He serves as secretary/treasurer of Independent Medical Supplies (medical supply provider of oxygen and other equipment for homebound patients) in Chadbourn, North Carolina, and is a member of Worthington Enterprises, LLC in Chadbourn, North Carolina. Mr. Worthington has been a director of the Bank since 1997 and of the Company since 2001 and has attended the North Carolina Bank Directors’ College.

 

91
 

 

Executive Officers

 

Set forth below is certain information regarding the Company’s executive officers.

 

Name

  Age   Position with Company   Business Experience
             
Alan W. Thompson   48   Interim Chief Executive Officer of the Company and Waccamaw Bank   Interim Chief Executive Officer, Waccamaw Bankshares, Inc., Whiteville, NC, and Waccamaw Bank, Whiteville, NC, March 2011–present; President, Thompson, Price, Scott, Adams & Co., P.A. (certified public accountants), Whiteville, NC; President, Medical Billing Organization, Inc. (medical billing company), Whiteville, NC; Manager, TSA Rentals, LLC (rental real estate), Whiteville, NC; A & M Investments, LLC (real estate), Whiteville, NC; Manager, Dominion Wealth Management, LLC, Whiteville, NC
             
Geoffrey R. Hopkins   38   President of the Company and Waccamaw Bank   President, Waccamaw Bankshares, Inc., Whiteville, NC, and Waccamaw Bank, Whiteville, NC, January 2011–present; Senior Vice President and Senior Commercial Lender, Waccamaw Bankshares, Inc., Whiteville, NC, and Waccamaw Bank, Whiteville, NC, May 2008–December 2010; prior to that, Vice President and Area Executive for Columbus and Bladen counties supervising the commercial lending function for that area; joined Waccamaw Bank in January 2003; prior to that, commercial banker, BB&T, March 2000January 2003; prior to that, Market Manager, Anchor Bank, Little River, SC, June 1996March 2000.
             
Freda H. Gore   50    Senior Vice President and  Chief Operations Officer of  the Company and  Waccamaw Bank   Senior Vice President and Chief Operations Officer, Waccamaw Bankshares, Inc., Whiteville, NC, 2001–present and Waccamaw Bank, Whiteville, NC, 1997–present.
             
David A. Godwin   54   Senior Vice President and  Chief Financial Officer of  the Company and Waccamaw Bank   Senior Vice President and Chief Financial Officer of Waccamaw Bankshares, Inc., Whiteville, NC, 2001–present and Waccamaw Bank, Whiteville, NC, 2001–present; prior to that, Comptroller, Four Seasons Screen Printing Co., Conway, SC, February 2001–July 2001; prior to that Chief Financial Officer/Comptroller, Jones Stores, Inc., Tabor City, NC, 1995–2001 (retail variety stores).

 

92
 

 

Name

  Age   Position with Company   Business Experience
             
Richard C. Norris   46  

Senior Vice President and

Chief Credit Officer

of the Company and

Waccamaw Bank

 

Senior Vice President and Chief Credit Officer, Waccamaw Bankshares, Inc., Whiteville, NC, 2003–present and Waccamaw Bank, Whiteville, NC, 2003–present; prior to that, Senior Business Underwriter, First Citizens Bank, Raleigh, NC, 1996–2003.

 

             
Kim T. Hutchens   56  

Senior Vice President and

Human Resources Officer of the Company and Waccamaw Bank

 

Senior Vice President and Human Resources Officer, Waccamaw Bankshares, Inc., Whiteville, NC, 2010–present and Waccamaw Bank, Whiteville, NC, 2010–present; prior to that, Senior Vice President and Chief Administrative Officer, Waccamaw Bankshares, Inc., Whiteville, NC, 2005–2010 and Waccamaw Bank, Whiteville, 2005–2010; prior to that, Campaign Director/Advisor for various congressional campaigns; prior to that, Senior Vice President of Human Resources, Bank of Granite, Granite Falls, NC, 1987–2003.

             
Lynn T. Murray   56  

Senior Vice President,

Retail Banking and Marketing, of the Company and Waccamaw Bank

 

 

Senior Vice President, Retail Banking and Marketing, Waccamaw Bankshares, Inc., Whiteville, NC and Waccamaw Bank, Whiteville, NC, November 2010present; prior to that Executive Vice President, Retail Banking and Marketing, Woodlands Bank, Bluffton, SC, March 2007August 2010; prior to that Senior Vice President, Deposit Marketing, Coastal Federal Bank , Myrtle Beach, SC, March 2007October 2003. 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Directors and executive officers of the Company are required by federal law to file reports with the Securities and Exchange Commission regarding the amount of and changes in their beneficial ownership of the Company’s common stock. Management of the Company is not currently aware of any directors or executive officers who, during 2010, failed to report shares beneficially owned or failed to timely file a required report.

 

Code of Ethics

 

The Company’s board of directors has adopted a code of ethics that applies to its directors and to all of its executive officers, including without limitation its principal executive officer and principal financial officer. A copy of the Company’s code of ethics is provided at the Company’s website: www.waccamawbank.com.

 

93
 

 

Audit Committee

 

The Company’s board of directors has a standing audit committee. The audit committee of the Company is responsible for receiving and reviewing the annual audit report of the Company’s independent auditors and reports of examinations by bank regulatory agencies, and helps formulate, implement, and review the Company’s internal audit program. The audit committee assesses the performance and independence of the Company’s independent auditors and recommends their appointment and retention. The audit committee has in place policies and procedures that involve an assessment of the performance and independence of the Company’s independent auditors, an evaluation of any conflicts of interest that may impair the independence of the independent auditors and pre-approval of an engagement letter that outlines all services to be rendered by the independent auditors.

 

The current members of the audit committee are Murchison B. Biggs, Brian D. Campbell, Maudie M. Davis, and J. Densil Worthington. The board of directors has determined that Murchison B. Biggs meets the requirements adopted by the SEC for qualification as an “audit committee financial expert.” Mr. Biggs is a certified public accountant and serves as treasurer of several closely held family businesses. An audit committee financial expert is defined as a person who has the following attributes: (i) an understanding of generally accepted accounting principles (“GAAP”) and financial statements; (ii) the ability to assess the general application of GAAP in connection with the accounting for estimates, accruals and reserves; (iii) experience preparing, auditing, analyzing or evaluating financial statements that are of the same level of complexity that can be expected in the Company’s financial statements, or experience supervising people engaged in such activities; (iv) an understanding of internal controls and procedures for financial reporting; and (v) an understanding of audit committee functions.

 

Item 11 – Executive Compensation

 

The following table shows all cash and non-cash compensation paid to or received or deferred by James G. Graham, Geoffrey R. Hopkins, Freda H. Gore, David A. Godwin, and Kim T. Hutchens, (the “Named Executive Officers”) for services rendered in all capacities during the fiscal years ended December 31, 2010 and 2009. Cash consideration consisted of base salary. Equity-based incentive compensation typically consists of incentive stock option awards, however, no such awards were granted to the Named Executive Officers during the fiscal years ended December 31, 2010 and 2009.

 

SUMMARY COMPENSATION TABLE

 

Name and
Principal Position
  Year   Salary   Bonus   Option
Awards
   Nonequity
Incentive Plan
Compensation
   Nonqualified 
Deferred 
Compensation
Earnings(1)
   All Other 
Compensation(2)
   Total 
James G. Graham,  2010   $232,368                   $7,289   $239,657 
Former Director, President  2009    243,000               $143,565    3,929    390,494 
and Chief Executive Officer(3)                                        
                                        
Geoffrey R. Hopkins,  2010   $130,500                   $2,913   $133,413 
President(4)  2009    130,500               $3,207    1,759    135,466 
                                        
Freda H. Gore,  2010   $124,265                   $2,832   $127,097 
Senior Vice President and Chief Operations Officer  2009    117,486               $15,883    1,683    135,052 
                                        
David A. Godwin,  2010   $117,486                   $2,828   $120,314 
Senior Vice President and Chief Financial Officer  2009    117,486               $28,169    2,565    148,220 
                                        
Kim T. Hutchens,  2010   $117,486                   $2,828   $120,314 
Senior Vice President  2009    117,486               $35,909    1,683    155,078 
and Human Resources                                       
Officer                                       

 

94
 

 

 

 

(1)Amounts reported for 2009 include change in pension value, which is no longer required to be reported in this column.

 

(2)Includes the dollar value of insurance premiums paid on behalf of the named officers for group term life, health, dental, and disability insurance and, for 2009, 401(k) matching contributions.

 

(3)Mr. Graham retired from his position as president of the Company and the Bank effective January 1, 2011. He retired from his position as chief executive officer of the Company and the Bank effective March 1, 2011, and retired from as a director of the Company and the Bank effective April 13, 2011. Amounts included for 2010 and 2009 reflect compensation paid to Mr. Graham in his former capacity as president and chief executive officer.

 

(4)Mr. Hopkins was appointed president of the Company and the Bank effective January 1, 2011. Amounts included for 2010 and 2009 reflect compensation paid to Mr. Hopkins in his former capacity as senior vice president and senior commercial lender.

 

Employment Agreement. The Company and Bank entered into an employment agreement with the president and chief executive officer of the Company and the Bank, James G. Graham. This agreement was in effect during the year ended December 31, 2010. As described below, the Company has since announced Mr. Graham’s retirement and entered into an independent contractor service agreement and a retirement agreement with Mr. Graham. Mr. Graham’s employment agreement provided for a three-year term, which renewed automatically for an additional year on each anniversary of the agreement, except that the agreement was set to terminate upon his attainment of age 65. The agreement provided for a base salary of $250,000 and perquisites customary for his title and position including the payment of country club dues and a car allowance. If Mr. Graham’s employment terminated due to disability, he was entitled to receive his then-current salary for a period of 12 months plus the other perquisites granted under the agreement, including a pro rata portion of any bonus accrued for Mr. Graham as of the date his employment was terminated for such disability. In the event he was terminated without cause, Mr. Graham was entitled to receive his salary and benefits for the balance of the remaining term left under his employment agreement at the time of his termination. Mr. Graham was entitled to a Change in Control benefit equal to 299% of his “base amount,” as that term is defined in section 280G of the Internal Revenue Code. Mr. Graham was also entitled to receive a tax gross-up on this Change in Control benefit to compensate him for any excise taxes owing under section 280G of the Internal Revenue Code. In the event benefits under Mr. Graham’s employment agreement were contested following a Change in Control, Mr. Graham was entitled to receive legal fee reimbursements up to $500,000. As of December 31, 2010, the value of the lump sum payment that would have been payable to Mr. Graham upon the occurrence of a Change in Control followed by a termination event would have been approximately $743,034.

 

Mr. Graham is subject to a confidentiality provision as well as a non-competition provision both of which survive termination of the agreement. The non-compete provision requires that Mr. Graham not compete with the Bank within Bladen, Brunswick, Columbus and New Hanover Counties, North Carolina and within Horry and Lancaster Counties, South Carolina or within a 25-mile radius of any full-service office of the Bank for (i) the balance of the remaining term of the agreement if Mr. Graham’s employment is terminated without cause or (ii) for 12 months if the agreement is terminated by Mr. Graham for any reason.

 

Retirement of James G. Graham. On January 6, 2011, the Company announced the retirement of James G. Graham from his positions as president and chief executive officer of the Company and the Bank. Mr. Graham also retired as a director of the Company and the Bank effective April 13, 2011. The Company entered into two agreements with Mr. Graham in connection with his retirement—an independent contractor service agreement and a retirement agreement. The term of the independent contractor service agreement began following Mr. Graham’s retirement from his position as chief executive officer on March 1, 2011, and will run for four months unless sooner terminated. Under the terms of the independent contractor agreement, Mr. Graham will assist with management transition, strategic initiatives, and investor relations, as required by the Company. In consideration of the performance of these services, the Company will pay Mr. Graham $125.00 per hour worked.

 

95
 

 

Under the terms of the retirement agreement, Mr. Graham is entitled to all rights under his existing employment agreement, executive supplemental retirement plan agreement, and director supplemental retirement plan agreement. He is also entitled to reimbursement for the cost of his continuing health insurance in an amount equal to $1,450.00 per month during the four months following his retirement. Mr. Graham will retain any vested but unexercised stock options as of his retirement date. Mr. Graham, the Company, and the Bank mutually released one another from any claims as of Mr. Graham’s retirement date.

 

Change in Control Agreements. The Company and the Bank have entered into Change in Control agreements with each of Geoffrey R. Hopkins, president, David A. Godwin, senior vice president and chief financial officer, Freda H. Gore, senior vice president and chief operations officer, and Kim T. Hutchens, senior vice president and human resources officer. Each agreement provides that, if the officer’s employment is terminated without cause or voluntarily after suffering a “termination event,” such as a reduction in salary, diminution in title, duties or responsibilities, or an office relocation, within 12 months of a Change in Control, he or she will be entitled to a Change in Control payment equal to 299% of his or her “base amount” as defined by section 280G of the Internal Revenue Code. At December 31, 2010, the approximate value of the lump sum payment that would have been payable to each of these officers upon the occurrence of a Change in Control followed by a termination event would have been as follows:

 

Geoffrey R. Hopkins  $353,591 
David A. Godwin   351,379 
Freda H. Gore   352,676 
Kim T. Hutchens   346,765 

 

Federal banking regulations prohibit certain payments to bank and bank holding company officers in the event of the termination of the officer’s employment. In the event these regulations are applicable to the agreements discussed above, the Company and the Bank may be prohibited from paying these benefits.

 

Supplemental Executive Retirement Plan Agreements.

 

General. The Bank entered into Supplemental Executive Retirement Plan (“SERP”) Agreements with each of Messrs. Graham, Hopkins, Godwin, and Hutchens and Ms. Gore in 2007. The purpose of the SERP Agreements is to provide selected key employees with a supplemental retirement income. Effective September 30, 2010, the Bank and each of the executives agreed to amend and modify the terms of their SERP Agreements. Under these amendments, the balance accrued for each executive’s retirement benefit has been indefinitely frozen. No further liability accruals will be made unless the Bank and the executives agree otherwise in the future. Additional details of the September 2010 amendments are described below.

 

Normal Retirement Age Benefits. The agreements previously provided that executives serving until age sixty-five would receive an annual retirement benefit in cash for life commencing upon their attainment of age sixty-five. The annual retirement benefit was equal to $130,000 per year (less applicable social security payments) in the case of Mr. Graham and $80,000 per year (less applicable social security payments), in the case of Ms. Gore and Messrs. Godwin, Hutchens and Hopkins. Under the terms of the September 2010 amendments, the executives who remain employed by the Bank until age sixty-five will not receive an annual retirement benefit, but will instead receive a single lump sum payment following their attainment of age sixty-five. This lump sum payment will be equal to the balance accrued for their normal retirement benefit. As noted above, the accrual balance has been indefinitely frozen and no further accruals will be made.

 

Termination Before Age Sixty-Five. Under the original agreements, if the executive voluntarily resigned or was discharged by the Bank without cause before reaching age sixty-five, the executive was entitled to receive an annual benefit equal to the balance accrued for his retirement as of the date of termination. If the executive had not yet been employed by the Bank for ten years prior to the effective date of the original agreement, then the executive would only be entitled to receive a percentage of his accrual balance amount. Rather than providing an ongoing annual benefit, the 2010 amendments entitle the executives to a single lump sum equal to the accrual balance amount as of the date of termination. The amendments retain the feature that the executive is only entitled to a percentage of the accrual balance amount if he had not been employed by the Bank for ten years prior to the date of the original agreement.

 

96
 

 

Death. Originally, if the executive died while there was a balance accrued for his retirement benefit, his designated beneficiaries were entitled to receive a single lump sum equal to the executive’s age sixty-five accrual balance or the net at risk, whichever amount was lower. The 2010 amendments provide that if the executive dies while employed by the Bank and while there is a balance accrued for his retirement benefits, his beneficiaries will be entitled to a single lump sum equal to the balance accrued for the executive’s retirement benefit as of the date of death.

 

Change in Control. Under the terms of the original agreements, Ms. Gore and Messrs. Hutchens, and Hopkins would each be entitled to receive, in a single lump sum payment, an amount equal to the their normal retirement age benefit, $80,000 per year for life, without discount for the time value of money, if they resigned for “good reason” within two years following a “change in control,” as those terms are defined in the original agreements. For Messrs. Graham and Godwin, they would be entitled to receive, in a single lump sum payment, an amount equal to their normal retirement age benefit, $130,000 per year for life for Mr. Graham and $80,000 per year for life for Mr. Godwin, without discount for the time value of money, upon the occurrence of a change in control. The 2010 amendments entitle all of the executives to receive a single lump sum payment equal to the balance accrued for their retirement benefit upon a change in control that occurs while the executive remains employed by the Bank but before the executive reaches age sixty-five. Under the 2010 amendments, Ms. Gore and Messrs. Hutchens, and Hopkins are no longer required to resign for good reason following a change in control in order to become entitled to the change in control benefit. At December 31, 2010, the approximate value of the lump sum payment that would have been payable to each of these executives upon the occurrence of a change in control would have been as follows:

 

James G. Graham  $266,461 
Geoffrey R. Hopkins   3,207 
David A. Godwin   52,771 
Freda H. Gore   31,404 
Kim T. Hutchens   66,654 

 

Federal banking regulations prohibit certain payments to bank and bank holding company officers in the event of the termination of the officer’s employment. In the event these regulations are applicable to the agreements discussed above, the Company and the Bank may be prohibited from paying these benefits.

 

The aggregate Change in Control benefit that could be payable to each of these officers under all scenarios described above, would be approximately as follows:

 

James G. Graham  $1,009,495 
Geoffrey R. Hopkins   356,798 
David A. Godwin   404,150 
Freda H. Gore   384,080 
Kim T. Hutchens   413,419 

 

Federal banking regulations prohibit certain payments to bank and bank holding company officers in the event of the termination of the officer’s employment. In the event these regulations are applicable to the agreements discussed above, the Company and the Bank may be prohibited from paying these benefits.

 

97
 

 

Bank-Owned Life Insurance. In 2004, the Bank purchased life insurance policies on certain of its directors and key employees, including Mr. Graham, Ms. Gore, Mr. Godwin and certain of the Company’s directors. The policies were purchased with one-time premiums paid during the fiscal year ended December 31, 2004. The Bank purchased additional policies on certain directors and key employees during 2007, with one-time premiums paid during the fiscal year ended December 31, 2007. Benefits under the policies are governed by split-dollar arrangements, which provide that the majority of the death benefit will be paid to the Bank with the remaining percentage paid to the insured (typically 30-40% of the total benefit). The policies were purchased primarily as a Bank asset, with the secondary purpose of providing benefits to the insured directors and key employees. The Bank purchased additional policies during 2008, with one-time premiums paid during the fiscal year ended December 31, 2008. Benefits under these policies are payable only to the Bank and are not governed by split-dollar arrangements. No bank-owned life insurance was purchased on directors or Named Executive Officers during 2009 or 2010.

 

1998 Incentive Stock Option Plan. The shareholders previously approved the 1998 Incentive Stock Option Plan (the “Incentive Option Plan”) pursuant to which options are available for issuance to officers and key employees of the Company and any of its subsidiaries. In connection with the reorganization of the Bank into the holding company form of organization, which resulted in the creation of the Company, the Incentive Option Plan was adopted by the Company and options under such plan are now options of the Company. At the 2005 annual meeting of shareholders, the shareholders approved an amendment to the Incentive Stock Option Plan authorizing stock options covering an additional 138,136 shares of the Company’s common stock.

 

All stock options under the Incentive Option Plan have been granted with a per share exercise price equal to 100% of the fair market value of the Company’s common stock. The per share exercise price is adjusted in response to certain corporate actions, such as stock dividends and stock splits. For example, the option exercise prices in the table below have been adjusted for the effect of 6-for-5 stock splits effected in 2004 and 2003, a 2-for-1 stock split effected in 2004 and an 11-for-10 stock split effected in 2007. No additional options may be granted under the 1998 Incentive Stock Option Plan.

 

2008 Omnibus Stock Ownership and Long-Term Incentive Plan. The shareholders of the Company approved the 2008 Omnibus Stock Ownership and Long-Term Incentive Plan (the “2008 Omnibus Plan”) at the 2008 annual meeting of shareholders to replace the previously approved stock option plans of the Company. The 2008 Omnibus Plan authorizes the issuance of awards covering 705,973 shares of the Company’s common stock. The awards may be issued in the form of incentive stock option grants, non-qualified stock option grants, restricted stock grants, long-term incentive compensation units, or stock appreciation rights. No such awards were granted to our executive officers in 2010.

 

98
 

 

The following table sets forth information regarding vested and unvested incentive stock options as of December 31, 2010. The options set forth in the table below were granted under the Company’s 1998 Incentive Stock Option Plan or the Company’s 2008 Omnibus Stock Ownership and Long-Term Incentive Plan. There were no option awards or exercises in 2010.

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

Name  No. of
Securities
Underlying
Unexercised
Options
Exercisable
   No. of Securities
Underlying 
Unexercised
Options
Unexercisable
   Equity
Incentive
Plan
Awards: No.
of Securities
Underlying
Unexercised
Unearned
Options
   Option
Exercise
Price
   Option
Expiration
Date
   No. of
Shares or
Units of
Stock That
Have Not
Vested
   Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
   Equity
Incentive
Plan
Awards:
No. of
Unearned
Shares,
Units or
Other
Rights
That Have 
Not 
Vested
   Equity
Incentive
Plan
Awards;
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights 
That Have
Not Vested
 
                                             
James G. Graham   1,650    -0-    -0-   $17.95   Dec. 17, 2014                 
    38,500    -0-    -0-    16.00   June 16, 2015                     
    9,900    -0-    -0-    16.00   June 16, 2015                     
                                             
Geoffrey R. Hopkins   4,000    6,000(2)   -0-    10.60   June 19, 2018                 
    8,250    -0-    -0-    16.00   June 16, 2005                     
    1,267    -0-    -0-    5.68   Dec. 31, 2012                     
                                             
Freda H. Gore   11,000    -0-    -0-    16.00   June 16, 2015                 
                                             
David A. Godwin   11,000    -0-    -0-    16.00   June 16, 2015                 
                                             
Kim T. Hutchens   5,500    -0-    -0-    16.36   Nov. 17, 2015                 
    4,000    6,000(1)   -0-    10.00   Feb. 22, 2018                     

 

 

 

(1)Two thousand of the unexercisable options are scheduled to become exercisable on each of February 22, 2011, 2012 and 2013.

 

(2)Two thousand of the remaining unexercisable options are scheduled to become exercisable on each of June 19, 2011, 2012, and 2013.

 

Director Compensation

 

Board Fees. Beginning in the fourth quarter of 2008, the Company indefinitely suspended payment of cash fees to directors for their service on the board and its committees.

 

Director Supplemental Retirement Plan. On October 30, 2007, the Company entered into a supplemental retirement plan with its directors. The plan provides that directors serving until their normal retirement age, 70, shall receive a retirement benefit of $10,000 per year for ten years following their retirement from the board of directors. In the event they retire from the board before age 70, or retire due to a disability, they are entitled to receive reduced retirement benefits, based on years served, for ten years following their early retirement. Also, the balance accrued on behalf of a participating director will be paid in a single lump sum (i) to the director upon the occurrence of a Change in Control of the Company or (ii) to the participating director’s beneficiaries upon the director’s death.

 

99
 

 

1998 Nonstatutory Stock Option Plan. The shareholders of the Bank previously approved the 1998 Nonstatutory Stock Option Plan pursuant to which options are available for issuance to members of the Company’s board of directors and the board of any subsidiary of the Company. In connection with the reorganization of the Bank into the holding company form of organization, which resulted in the creation of the Company, the Nonstatutory Stock Option Plan was adopted by the Company and options under such plan are now options of the Company. During the fiscal year ended December 31, 2004, each director of the Company was granted 1,500 options under the Nonstatutory Stock Option Plan, which options were granted at fair market value. At the 2005 annual meeting of shareholders, the shareholders approved an amendment to the Nonstatutory Stock Option Plan authorizing stock options covering an additional 138,136 shares of the Company’s common stock. Following this approval by the shareholders, each director of the Company was granted an option, effective as of June 16, 2005, to purchase 9,000 shares of the Company’s common stock at an exercise price of $17.60 per share, which price represented the fair market value of the Company’s common stock at the time of grant.

 

All stock options under the Nonstatutory Stock Option Plan have been granted with a per share exercise price equal to 100% of the fair market value of the Company’s common stock. The per share exercise price and the number of shares of the Company’s common stock subject to the plan and each option granted under the plan is adjusted in response to certain corporate actions, such as stock dividends and stock splits. For example, the option exercise prices for options outstanding under the Nonstatutory Stock Option Plan have been adjusted for the effect of 6-for-5 stock splits effected in 2004 and 2003, a 2-for-1 stock split effected in 2004 and an 11-for-10 stock split effected in 2007. No additional options may be granted under the 1998 Nonstatutory Stock Option Plan.

 

2008 Omnibus Stock Ownership and Long-Term Incentive Plan. The shareholders of the Company approved the 2008 Omnibus Stock Ownership and Long-Term Incentive Plan (the “2008 Omnibus Plan”) at the 2008 annual meeting of shareholders to replace the previously approved stock option plans of the Company, which expired in 2008. The 2008 Omnibus Plan authorizes the issuance of awards covering 705,973 shares of the Company’s common stock. The awards may be issued in the form of incentive stock option grants, non-qualified stock option grants, restricted stock grants, long-term incentive compensation units, or stock appreciation rights. In 2010, no awards were granted to the Company’s Named Executive Officers under the 2008 Omnibus Plan.

 

Since the Company’s directors did not receive any cash compensation or awards of stock options in 2010, no director compensation table has been presented.

 

Item 12 – Security Ownership of Certain Beneficial Owners and Management AND RELATED STOCKHOLDER MATTERS

 

Beneficial Ownership of Voting Securities

 

As of June 30, 2011, no shareholder known to management owned more than 5% of the Company’s common stock, except as listed below.

 

Name and Address of 
Beneficial Owner
  Amount and
Nature of
Beneficial 
Ownership(1)(2)(3)
   Percent 
of Class(4)
 
           
James G. Graham
1114 Pinckney Street
Whiteville, NC  28472
   400,881    5.33 

 

100
 

 

As of December 31, 2011, the beneficial ownership of the Company’s common stock by directors and executive officers individually, and by directors and executive officers as a group, is set forth in the following table.

 

Name and Address of
Beneficial Owner
  Amount and
Nature of
Beneficial
Ownership(1)(2)(3)
   Percent
of Class(4)
 
         
Murchison B. Biggs
Lumberton, NC
   53,869    *
           
Brian D. Campbell
Elizabethtown, NC
   43,738     *
           
Dr. Maudie M. Davis
Tabor City, NC
   54,693    *
           
Crawford Monroe Enzor III
Shallotte, NC
   61,516    *
           
David A. Godwin
Whiteville, NC
   11,000    *
           
Freda H. Gore
Whiteville, NC
   30,034(5)    *
           
Geoffrey R. Hopkins
Chadbourn, NC
   20,129(6)    *
           
Kim T. Hutchens
Whiteville, NC
   13,591    *
           
Alan W. Thompson
Whiteville, NC
   249,875(7)   3.34 
           
R. Dale Ward
Whiteville, NC
   120,009    1.60 
           
J. Densil Worthington
Chadbourn, NC
   216,837(8)   2.90 
           
All Nominees, Directors and Executive Officers as a group
(11 persons)
   954,136(9)   12.56 

 

 

 

* Less than 1 % of the total shares outstanding

 

(1)Except as otherwise noted, to the best knowledge of the Company’s management, the above individuals and group exercise sole voting and investment power with respect to all shares shown as beneficially owned other than the following shares as to which such powers are shared with the individual’s spouse: Ms. Gore – 18,726 shares; Mr. Graham – 6,924 shares; and Mr. Ward – 832 shares.

 

101
 

 

(2)Included in the beneficial ownership tabulations are the following options to purchase shares of common stock of the Company exercisable within 60 days of June 30, 2011: Mr. Biggs – 11,550 shares; Dr. Davis – 11,550 shares; Mr. Enzor – 11,550 shares; Mr. Godwin – 11,000 shares; Ms. Gore – 11,000 shares; Mr. Graham – 50,050 shares; Mr. Hopkins – 15,517 shares; Mr. Hutchens – 9,500 shares; Mr. Thompson – 11,550 shares; Mr. Ward – 11,550 shares; and Mr. Worthington – 11,550 shares.

 

(3)Included in the beneficial ownership tabulations are the following warrants to purchase shares of common stock of the Company exercisable within 60 days of June 30, 2011: Mr. Biggs – 2,750 shares; Mr. Enzor – 2,750 shares; Ms. Gore – 19 shares (held as custodian); Mr. Thompson – 550 shares; and Mr. Worthington – 6,600 shares.

 

(4)The calculation of the percentage of class beneficially owned by each individual and the group is based, in each case, on the sum of (1) 7,466,224 outstanding shares of common stock; and (2) options and warrants to purchase common stock capable of being exercised by the individual or group within 60 days of June 30, 2011.

 

(5)Includes 289 shares and 19 warrants held by Ms. Gore as custodian.

 

(6)Includes 266 shares owned by Mr. Hopkins’s spouse individually.

 

(7)Includes 7,150 shares held by Mr. Thompson as custodian and 32,746 shares owned by Mr. Thompson’s spouse individually.

 

(8)Includes 12,513 shares held by Mr. Worthington as custodian.

 

(9)Includes 78,845 shares held in the Company’s 401(k) plan with respect to which the Company’s chief financial officer exercises voting power.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

Set forth below is certain information regarding the Company’s various stock option plans as of December 31, 2010.

 

Plan Category  Number of securities to
be issued upon exercise
of outstanding options,
warrants, and rights
(a)
   Weighted-average
exercise price of
outstanding options,
warrants, and rights
(b)
   Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
 
             
Equity compensation plans approved by security holders
   571,938   $18.29    720,213 
Equity compensation plans not approved by security holders   None    None    None 
Total   571,938   $18.29    720,213 

 

102
 

 

Item 13 – Certain Relationships and Related Transactions, AND DIRECTOR INDEPENDENCE

 

Related Person Transactions

 

The Company has had, and expects to have in the future, banking transactions in the ordinary course of business with certain of its current directors, nominees for director, executive officers and their associates. All loans included in such transactions will be made on substantially the same terms, including interest rates, repayment terms and collateral, as those prevailing at the time such loans were made for comparable transactions with other persons, and will not involve more than the normal risk of collectibility or present other unfavorable features.

 

Loans made by the Bank to directors and executive officers are subject to the requirements of Regulation O of the Board of Governors of the Federal Reserve System. Regulation O requires, among other things, prior approval of the board of directors with any “interested director” not participating, dollar limitations on amounts of certain loans, and prohibits any favorable treatment being extended to any director or executive officer in any of the Bank’s lending matters.

 

Director Independence

 

With the exception of Mr. Thompson, each member of the Company’s board of directors is “independent” as defined by Nasdaq listing standards and the regulations promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”). In addition to the specific Nasdaq criteria, in determining the independence of each director, the board considers whether it believes transactions that are disclosable in our proxy statements as “related person transactions” or any other transactions, relationships, arrangements, or factors could impair a director’s ability to exercise independent judgment. In its determination of director independence, those other factors considered by the board of directors included the Bank’s lending relationships with directors who are loan customers.

 

ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Elliott Davis LLC has served as the Company’s principal accountant for each of the last two fiscal years. In 2010, the Company paid Elliott Davis fees in connection with its assistance with the Company’s annual audit and review of the Company’s financial statements. From time to time, the Company also engages Elliott Davis to assist in other areas of financial planning. During 2009, the Company also engaged Elliott Davis to assist with the preparation of SEC registration statements and prospectuses in connection with a contemplated rights offering to existing shareholders and public offering of the Company’s securities. The following table sets forth the fees billed to the Company in various categories by Elliott Davis in 2010 and 2009.

 

Category  2010
Amount Billed
   2009
Amount Billed
 
         
Audit Fees:  $125,000   $87,300 
Audit-Related Fees:   23,000(1)   8,312(1)
Tax Fees:   14,196(2)   24,898(2)
All Other Fees:   98,870(3)   52,000(3)
Total Fees Paid:  $261,066   $172,510 

 

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(1)2010 and 2009 Audit-Related Fees. Audit-related fees for 2010 and 2009 consisted primarily of services relating to regulatory issues and other accounting issues.

 

(2)2010 and 2009 Tax Fees. Tax fees for 2010 and 2009 consisted primarily of the preparation of the 2010 and 2009 tax returns for the Company, Waccamaw Statutory Trust I, and Waccamaw Statutory Trust II. The statutory trusts were formed for the sole purpose of issuing trust preferred securities. General tax consultations are also included in tax fees for 2010 and 2009.

 

(3)2010 and 2009 All Other Fees. All other fees for 2010 and 2009 consisted of services related to the issuance of comfort letters and review of offering documents in connection with a contemplated rights offering to existing shareholders and public offering of the Company’s securities.

 

All services rendered by Elliott Davis in 2010 and 2009 were subject to pre-approval by the audit committee.

 

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PART IV

 

ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)List of Documents Filed as Part of this Report

 

(1)Financial Statements. The following financial statements are filed as a part of this report:

 

Consolidated balance sheets at December 31, 2010 and 2009

 

Consolidated statements of operations for the years ended December 31, 2010 and 2009

 

Consolidated statements of changes in stockholders’ equity for the years ended December 31, 2010 and 2009

 

Consolidated statements of cash flows for the years ended December 31, 2010 and 2009

 

Notes to consolidated financial statements

 

Report of independent registered public accounting firm

 

(2)Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements and related notes thereto.

 

(3)Exhibits. The following exhibits are filed as part of this report:

 

3.1Articles of Incorporation of Registrant (incorporated by reference from Exhibit 3.1 of Registrant’s Registration Statement on Form S-1, Registration No. 333-160435, as filed with the Commission on July 2, 2009)

 

3.2Articles of Amendment dated May 28, 2010, increasing the amount of authorized common stock (incorporated by reference from Exhibit 3.2 of Pre-effective Amendment No. 4 to Registrant’s Registration Statement on Form S-1, Registration No. 333-160435, as filed with the Commission on June 16, 2010)

 

3.3Articles of Amendment dated March 11, 2011, designating the Registrant’s series B preferred stock (incorporated by reference from Exhibit 3.1 of Registrant’s Current Report on Form 8-K, as filed with the Commission on March 17, 2011)

 

3.4Bylaws of Registrant (incorporated by reference from Exhibit 3.02 of Registrant’s Current Report on Form 8-K, as filed with the Commission on May 3, 2011)

 

4.1Form of Common Stock Certificate (incorporated by reference from Exhibit 4 to Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2001, as filed with the Commission on March 29, 2002)

 

4.2Form of certificate for series B preferred stock (incorporated by reference from Exhibit 4.1 to Registrant’s Current Report on Form 8-K, as filed with the Commission on July 14, 2011)

 

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4.3Warrant to purchase common stock of Registrant, dated May 17, 2011 (incorporated by reference from Exhibit 4.2 to Registrant’s Current Report on Form 8-K, as filed with the Commission on July 14, 2011)

 

4.4Form of warrant certificate (2006 warrants) (incorporated by reference from Exhibit 4.1 to Registrant’s Current Report on Form 8-K, as filed with the Commission on September 25, 2006)

 

4.5Form of warrant agreement (2006 warrants) (incorporated by reference from Exhibit 4.2 to Registrant’s Current Report on Form 8-K, as filed with the Commission on September 25, 2006)

 

4.6Form of addendum to warrant certificate (incorporated by reference from Exhibit 4.1 to Registrant’s Current Report on Form 8-K, as filed with the Commission on September 25, 2009)

 

4.7Form of addendum to warrant agreement (incorporated by reference from Exhibit 10.1 to Registrant’s Current Report on Form 8-K, as filed with the Commission on September 25, 2009)

 

10.1Employment Agreement with James G. Graham (incorporated by reference from Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Commission on August 14, 2008)*

 

10.2Independent Contractor Service Agreement with Bank Solutions, LLC (incorporated by reference from Exhibit 10.1 to Registrant’s Current Report on Form 8-K, as filed with the Commission on January 6, 2011)

 

10.3Retirement Agreement with James G. Graham (incorporated by reference from Exhibit 10.2 to Registrant’s Current Report on Form 8-K, as filed with the Commission on January 6, 2011)

 

10.4Change of Control Agreement (incorporated by reference from Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Commission on August 14, 2008)*

 

10.5Executive Supplemental Retirement Plan Agreement (incorporated by reference from Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Commission on August 14, 2008)*

 

10.6Amendment to Executive Supplemental Retirement Plan (incorporated by reference from Exhibit 99.1 to Registrant’s Current Report on Form 8-K, as filed with the Commission on November 4, 2010)

 

10.7Director Supplemental Retirement Plan (incorporated by reference from Exhibit 10.6 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Commission on August 14, 2008)*

 

10.8Director Supplemental Retirement Plan Agreement (incorporated by reference from Exhibit 10.7 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Commission on August 14, 2008)*

 

106
 

 

10.92008 Omnibus Stock Ownership and Long Term Incentive Plan (incorporated by reference from Exhibit 99.1 to Registrant’s Registration Statement on Form S-8, Registration No. 333-153327, as filed with the Commission on September 4, 2008)

 

10.10Amended and Restated Declaration of Trust of Waccamaw Statutory Trust I (incorporated by reference from Exhibit 99 to Registrant’s Current Report on Form 8-K, as filed with the Commission on January 29, 2009)

 

10.11Amended and Restated Trust Agreement of Waccamaw Statutory Trust II (incorporated by reference from Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Commission on August 14, 2008)

 

10.12Guarantee Agreement (incorporated by reference from Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Commission on August 14, 2008)

 

10.13Indenture (incorporated by reference from Exhibit 4.1 to Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, as filed with the Commission on August 14, 2008)

 

10.14Written agreement by and among Waccamaw Bankshares, Inc., Waccamaw Bank, the Federal Reserve Bank of Richmond, and the State of North Carolina Office of the Commissioner of Banks, dated June 14, 2010 (incorporated by reference from Exhibit 10 to Registrant’s Quarterly Report on Form 10-Q, as filed with the Commission on August 16, 2010)

 

21Subsidiaries of Registrant (filed herewith)

 

23Consent of Elliott Davis, PLLC (filed herewith)

 

31.1Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes- Oxley Act (filed herewith)

 

31.2Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act (filed herewith)

 

32Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith)

 

_________________________

 

*Management contract or compensatory plan or arrangement

 

107
 

 

(b)Exhibits. The exhibits required by Item 601 of Regulation S-K are either filed as part of this report or incorporated by reference herein.

 

(c)Financial Statements and Schedules Excluded from Annual Report. There are no other financial statements and financial statement schedules which were excluded from the annual report to shareholders pursuant to Rule 14a-3(b) which are required to be included herein.

 

108
 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) 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

 

  WACCAMAW BANKSHARES, INC.  
     
February 29, 2012 /s/ Geoffrey R. Hopkins  
Date Geoffrey R. Hopkins  
  President   

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ Geoffrey R. Hopkins   President   February 29, 2012
Geoffrey R. Hopkins        
         
/s/ M. B. “Bo” Biggs   Director   February 29, 2012
M. B. “Bo” Biggs        
         
/s/ Dr. Maudie M. Davis   Director   February 29, 2012
Dr. Maudie M. Davis        
         
/s/ Monroe Enzor, III   Director   February 29, 2012
Monroe Enzor, III        
         
/s/ Alan W. Thompson   Interim Chief Executive Officer,   February 29, 2012
Alan W. Thompson   Director and Chairman of the Board    
         
/s/ Dale Ward   Director   February 29, 2012
Dale Ward        

 

109
 

 

/s/ J. Densil Worthington   Director   February 29, 2012
J. Densil Worthington        
         
/s/ Brian Campbell   Director   February 29, 2012
Brian Campbell        
         
/s/ David A. Godwin   Chief Financial and Principal   February 29, 2012
David A. Godwin   Accounting Officer    

 

110
 

 

EXHIBIT INDEX

 

Exhibit No.   Description of Exhibit
       
  3.1   Articles of Incorporation of Registrant*
       
  3.2   Articles of Amendment dated May 28, 2010, increasing the amount of authorized common stock*
       
  3.3   Articles of Amendment dated March 11, 2011, designating the Registrant’s series B preferred stock*
       
  3.4   Bylaws of Registrant*
       
  4.1   Form of Common Stock Certificate*
       
  4.2   Form of certificate for series B preferred stock*
       
  4.3   Warrant to purchase common stock of Registrant, dated May 17, 2011*
       
  4.4   Form of warrant certificate (2006 warrants)*
       
  4.5   Form of warrant agreement (2006 warrants)*
       
  4.6   Form of addendum to warrant certificate*
       
  4.7   Form of addendum to warrant agreement*
       
  10.1   Employment Agreement with James G. Graham*
       
  10.2   Independent Contractor Service Agreement with Bank Solutions, LLC*
       
  10.3   Retirement Agreement with James G. Graham*
       
  10.4   Change of Control Agreement*
       
  10.5   Executive Supplemental Retirement Plan Agreement*
       
  10.6   Amendment to Executive Supplemental Retirement Plan*
       
  10.7   Director Supplemental Retirement Plan*
       
  10.8   Director Supplemental Retirement Plan Agreement*
       
  10.9   2008 Omnibus Stock Ownership and Long Term Incentive Plan*
       
  10.10   Amended and Restated Declaration of Trust of Waccamaw Statutory Trust I*
       
  10.11   Amended and Restated Trust Agreement of Waccamaw Statutory Trust II*
       
  10.12   Guarantee Agreement*
       
  10.13   Indenture*

 

111
 

 

  10.14   Written agreement by and among Waccamaw Bankshares, Inc., Waccamaw Bank, the Federal Reserve Bank of Richmond, and the State of North Carolina Office of the Commissioner of Banks, dated June 14, 2010*
       
  21   Subsidiaries of Registrant (filed herewith)
       
  23   Consent of Elliott Davis, PLLC (filed herewith)
       
  31.1   Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes- Oxley Act (filed herewith)
       
  31.2   Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes- Oxley Act (filed herewith)
       
  32   Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith)

 


*Incorporated by reference

 

112