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EX-21 - SUBSIDIARIES OF THE COMPANY - GREER BANCSHARES INCdex21.htm
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EX-23 - CONSENT OF DIXON HUGHES PLLC - GREER BANCSHARES INCdex23.htm
EX-99.1 - EXHIBIT 99.1 - GREER BANCSHARES INCdex991.htm
EX-31.1 - SECTION 302 CEO AND CFO CERTIFICATION - GREER BANCSHARES INCdex311.htm
Table of Contents

 

 

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: 000-33021

 

 

GREER BANCSHARES INCORPORATED

(Exact name of registrant as specified in its charter)

 

South Carolina   57-1126200

State or other jurisdiction of

incorporation or organization

 

(I.R.S. Employer

Identification No.)

1111 W. Poinsett Street, Greer, South Carolina   29650
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (864) 877-2000

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

 

Title of each class

 

Name of each exchange on which registered

None   None

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

Common Stock, Par Value $5.00 per share

(Title of class)

 

 

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     ¨  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of 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.    ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
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 Act).     x  No    ¨  Yes

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant (2,029,557 shares) as of June 30, 2010 was approximately $12,177,342. For the purpose of this response, officers, directors and holders of 10% or more of the registrant’s common stock are considered affiliates of the registrant at that date.

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

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

 

Class

 

Outstanding at March 16, 2011

Common Stock, $5.00 par value per share   2,486,692 Shares

 

 

DOCUMENTS INCORPORATED BY REFERENCE

The Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on June 23, 2011 is incorporated by reference in this Form 10-K in Part III, Items 10 through 14.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I

     1   

Item 1. Business

     2   

Item 1A. Risk Factors

     14   

Item 1B. Unresolved Staff Comments

     23   

Item 2. Properties

     23   

Item 3. Legal Proceedings

     24   

PART II

     24   

Item  5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     24   

Item 6. Selected Financial Data

     25   

Item  7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     26   

Item 8. Financial Statements and Supplementary Data

     46   

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

     83   

Item 9A. Controls and Procedures

     83   

Item 9B. Other Information

     84   

PART III

     84   

Item 10. Directors, Executive Officers and Corporate Governance

     84   

Item 11. Executive Compensation

     84   

Item  12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     84   

Item 13. Certain Relationships and Related Transactions, and Director Independence

     85   

Item 14. Principal Accounting Fees and Services

     85   

PART IV

     85   

Item 15. Exhibits, Financial Statement Schedules

     85   


Table of Contents

PART I

Forward Looking Statements

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

market risk and inflation;

 

 

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

 

 

availability of wholesale funding;

 

 

adequacy of capital and future capital needs;

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

adequacy of the level of our allowance for loan losses;

 

 

the rate of delinquencies and amounts of charge-offs;

 

 

the rates of loan growth;

 

 

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

 

 

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

 

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changes occurring in business conditions and inflation;

 

 

changes in technology;

 

 

changes in monetary and tax policies;

 

 

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

 

 

changes in the securities markets;

 

 

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

 

 

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

 

 

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

For a description of factors which may cause actual results to differ materially from such forward-looking statements, see “Item 1A. Risk Factors.” Investors are cautioned not to place undue reliance on any forward-looking statements as these statements speak only as of the date when made. The Company undertakes no obligation to update any forward-looking statements made in this report.

Item 1. Business

General

Greer Bancshares Incorporated (the “Company”) was formed in July 2001 as a one-bank holding company for Greer State Bank (the “Bank”). All of the outstanding common shares of the Bank were exchanged for common stock of the new holding company at that time. The primary activity of the holding company is to hold its investment in its banking subsidiary. The common stock of Greer Bancshares Incorporated is traded in the over-the-counter market and quoted on the OTC Bulletin Board under the symbol GRBS. The Bank operates under a state charter and provides full banking services to its clients. The Bank is subject to regulation by the Federal Deposit Insurance Corporation (“FDIC”) and the South Carolina Board of Financial Institutions.

The Bank has been engaged in the commercial banking business since its inception in January 1989 and has three banking offices located in Greer, South Carolina and one banking office located in Taylors, South Carolina. The Company is headquartered at 1111 W. Poinsett Street, Greer, South Carolina 29650. The Bank’s first branch office, located at 601 North Main Street, Greer, South Carolina 29650, was opened in 1992 in an existing bank building that was purchased and renovated to be used as a branch office and operations center. The second branch office was built and opened in November 1998 and is located at 871 South Buncombe Road, Greer, South Carolina 29650. In August 2005, the Bank opened a third branch office at 3317 Wade Hampton Boulevard in Taylors, South Carolina 29687. In September 2007, the Bank opened a commercial and mortgage loan production office at 103 C-2 Regency Commons Drive in Greer, South Carolina 29650. The loan production office was closed in September 2009.

In 1997, the Bank began an “alternative investments” function with the formation of Greer Financial Services Corporation (“GFSC”), which allows customers to earn a higher rate of return on their money by investing in mutual funds, stock, annuities and similar securities. GFSC was formed as a subsidiary of the Bank, but was merged into the Bank in October 2007. Greer Financial Services is now a division of the Bank and offers securities exclusively through Raymond James Financial Services, Inc., a registered broker-dealer.

Trust, international and correspondent banking services are not currently offered by the Company, nor are they contemplated at this time.

 

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Location and Service Area

The Company’s banking subsidiary was organized for the primary purpose of serving local banking needs in Greer and in the surrounding communities and has been primarily engaged in the business of attracting deposits from the general public and using the deposits to make commercial, consumer and mortgage loans. In addition, deposits are also used to invest in acceptable investment securities as defined by Bank policy.

Greer is located approximately 13 miles east of Greenville, South Carolina and approximately 15 miles west of Spartanburg, South Carolina and has borders in both Greenville and Spartanburg counties of South Carolina. The population of Greer was 16,843 according to 2000 census data, which was an increase of 63.2% since the 1990 census.

Deposits

The Company offers a full range of banking services through its subsidiary, including checking, savings, brokered deposits and other time deposits of various types, loans for business, real estate, personal use, home improvements, automobiles and a variety of other types of loans and services. In addition, drive-up, safe deposit and night depository facilities are offered. The Bank solicits deposit accounts from individuals, businesses, associations and organizations and governmental authorities.

The Bank’s core deposits consist of retail checking accounts, NOW accounts, money market accounts, retail savings accounts and certificates of deposit. These deposits, along with short-term borrowings, long-term borrowings, and brokered deposits, are used to support our asset base. Retail deposits comprise approximately 96.0% of total deposits, with brokered certificates of deposits comprising approximately 4.0% of total deposits at December 31, 2010. Management continues to target the conversion of brokered certificates to retail deposits over time. Pursuant to the Consent Order between the Bank and regulators discussed under “-Greer State Bank” below, the Bank’s use of brokered deposits is now restricted. Generally, the Bank must obtain prior written determination of no supervisory objection from the Federal Deposit Insurance Corporation before accepting, renewing or rolling over brokered deposits. Given the fact that, historically, the Bank’s brokered certificates base has been less expensive than borrowing rates, it is likely that management will work to maintain the longstanding relationships the Bank has with its brokered certificate issuers and will use a reasonable amount of brokered deposits as it effectively manages the Bank’s cost of funds, subject to the concurrence of regulators. Prospectively, management anticipates that attraction of retail deposits will reduce the reliance on brokered certificates of deposit. See additional discussion in Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity.”

Lending Activities

General - The Bank makes and services both secured and unsecured loans to individuals and businesses in its market area. The Bank strives for a balanced mix of consumer lending, commercial lending to small and medium-sized businesses and mortgage lending, both consumer and commercial. The Bank’s portfolio consists of commercial, commercial real estate, real estate construction, residential mortgage, consumer installment loans and other consumer loans, as well as a small amount of lease financings and obligations of state and political subdivisions. The lease financings consist of loans made to finance the leasing of equipment. The obligations of state and political subdivisions consist of loans made to a municipality.

The Bank strives to diversify its loan portfolio and limit loan concentrations to any borrower or industry. Management has placed emphasis on the collateralization of loans with value-retaining assets. As of December 31, 2010, 97.7% of the Bank’s loan portfolio is secured and 79.6% of the total loan portfolio is secured by real estate. See additional discussion of credit concentrations related to lending activities at Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Loan Portfolio” in this report.

Commercial Loans - The commercial portion of the portfolio is diversified and includes loans to various types of small to mid-sized businesses secured by non-real estate collateral. The emphasis is on businesses with financial stability and local, well-known management located in Greer and the surrounding communities. Collateral for commercial loans includes, but is not limited to, inventory, equipment, vehicles and accounts receivable. Commercial loans generally have more risk than other types of loans made by the Bank since there are more factors that can cause a default. The Bank manages this risk by dealing with locally-owned and managed businesses, establishing an appropriate loan-to-value advance rate and by often requiring personal guarantees and collateral from owners and/or officers. The Bank must evaluate the quality of a company’s management, capitalization and profitability, as well as the industry trends.

Commercial Real Estate Loans - The commercial real estate loan portfolio consists largely of mortgage loans secured by commercial properties located in the communities served by the Bank. A significant portion of these loans are made to fund

 

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the acquisition of real estate for residential development, and/or buildings for commercial, industrial, office and retail use. The real estate construction portion of the loan portfolio consists primarily of loans made to finance the on-site construction of 1-4 family residences, commercial properties and medical or business offices.

While the Bank does not make it a practice of establishing an interest reserve account as part of the loan funding amount, it is a common practice in the industry to allow an interest reserve account during the initial construction phase of a real estate project. The Bank’s loan portfolio contained one construction and land development loan totaling approximately $1,179,000 with an interest reserve account at December 31, 2010. The nature of the interest reserve was analyzed along with the performance of the loan, underlying collateral value and the schedule of lot sales to determine if the loan should be placed on nonaccrual status. Management determined that this loan with an interest reserve was performing adequately. As such, it was not placed on nonaccrual as of December 31, 2010. The loan was, however, considered a potential problem loan.

Residential Real Estate Loans - The 1-to-4 family residential real estate portfolio is predominantly comprised of loans extended for owner-occupied residential properties. These loans are typically secured by first mortgages on the properties financed, and generally do not exceed fifteen years. These loans generally have a maximum loan-to-value ratio of 85% with the majority having fixed rates of interest. The Bank is currently not adding fixed rate residential mortgages to the loan portfolio, but instead originates these loans for investor mortgage companies and receives an origination fee. The 1-to-4 family residential real estate category includes home equity lines of credit which have an interest rate indexed to the prime lending rate. Home equity lines generally have a maximum loan-to-value ratio of 80%. The loan-to-value ratios on mortgages minimize the risk on these loans.

Consumer Loans - The consumer loan portfolio consists of loans to individuals for household, family and other personal expenditures such as automobile financing, home improvements, recreational and educational purposes. Consumer loans are typically structured with fixed rates of interest and full amortization of principal and interest within three to five years. The maximum loan-to-value ratio applicable to consumer loans is generally 85%. This category of loans also includes revolving credit products such as checking overdraft protection. Consumer loans are either unsecured or are secured with various forms of collateral, other than real estate. The Bank minimizes risk by dealing with local customers who have an existing banking relationship. Bank policy prohibits unsecured debt consolidation loans.

Loan Risk Management - The Bank has procedures and controls in place designed to analyze potential risks and to support the growth of a profitable and high quality loan portfolio. The Bank’s loan policies and portfolio monitoring guidelines give specific direction on the underwriting of all loan types, portfolio concentrations and regulatory requirements. A loan rating system is used by the Bank to monitor the loan portfolio and to determine the adequacy of the allowance for loan losses. The Bank invests in loans in Greer and the surrounding communities which allows for easier monitoring of credit risks. The majority of the loan portfolio consists of loans to consumers and loans to small and mid-sized businesses. A bank consulting firm is employed to perform a periodic review of selected credits to identify heightened risks and monitor collateral positions. Some of the factors that could contribute to increased risk in the loan portfolio are changes in economic conditions in the Bank’s market area, changes in interest rates and reduced collateral values. There are no loans to foreign countries in the loan portfolio. As of December 31, 2010, the legal lending limit amount for the Bank to lend to any one borrower was approximately $5,549,000. See additional discussion of risk management related to lending activities at Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Loan Portfolio” and “-Risk Elements” in this report.

Other Banking Services

Other banking services provided include travelers’ checks, safe deposit boxes, direct deposit of payroll and social security checks, as well as automatic drafts for various accounts. Automated Teller Machine (“ATM”) services are provided by the Fiserv EFT ATM Network, which allows access through ATMs nationwide. The Bank has three drive-up ATMs located at its offices at 1111 W. Poinsett Street, 3317 Wade Hampton Boulevard and 871 S. Buncombe Road. The Bank offers Mastercard and Visa credit cards to qualifying customers through a correspondent bank and has an automated telephone banking system (“TELEBANKER”). TELEBANKER allows the Bank’s customers to access information concerning their accounts, transfer funds and make payments by telephone.

The Bank also offers attractive, functional and user friendly internet online banking and cash management services accessed through its website, www.greerstatebank.com. Bank customers who have authorized access to the Bank’s website have the capability to make account inquiries, view account histories, transfer funds from one account to the other, make payments on outstanding loans and retrieve check images. The Bank also offers online bill payment services to its customers.

 

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Competition

The Bank competes with several major banks which dominate the commercial banking industry in their service areas and in South Carolina. In addition, the Bank competes with other community banks, savings institutions and credit unions. In Greer, there are thirteen competitor banks (none of which are headquartered in Greer) with eighteen total offices, one savings institution branch (headquartered in Greer), and one credit union branch (headquartered in nearby Greenville, South Carolina). As of December 31, 2010, the Bank held approximately 28.2% of the FDIC insured deposits in the Greer market

Employees

As of December 31, 2010, the Bank had 88 employees, 80 of whom are full-time. The Company does not have any employees other than its two executive officers.

Available Information

The Company files and furnishes reports with the Securities and Exchange Commission (the “SEC”), including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. These reports are provided on our website at www.greerstatebank.com as soon as reasonably practicable after they have been filed electronically with the SEC. These filings are also accessible on the SEC’s website at www.sec.gov. In addition, we make available on our website filings reporting stock ownership by directors, officers, and beneficial owners of more than 10% of our common stock pursuant to Section 16 of the Securities Exchange Act of 1934. The public may also read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

SUPERVISION AND REGULATION

Both the Company and the Bank are subject to extensive state and federal banking laws and regulations, which impose specific requirements or restrictions on and provide for general regulatory oversight of virtually all aspects of operations. These laws and regulations are generally intended to protect depositors, not shareholders. The following summary is qualified by reference to the statutory and regulatory provisions discussed. Changes in applicable laws or regulations may have a material effect on the Company’s business, prospects and operations. Congress and the executive branch are currently considering and are likely to adopt in the near future significant new regulatory reform initiatives, which could result in material changes to the current oversight structure. Management cannot predict the effect that new federal or state legislation may have on the Company’s business and earnings in the future.

The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on our operations. It is intended only to briefly summarize some material provisions.

Greer Bancshares Incorporated

The Company is registered as a bank holding company under the Bank Holding Company Act (the “Holding Company Act”) and, as such, is subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve Board (the “FRB”). The Company is also under the jurisdiction of the SEC and is subject to disclosure and regulatory requirements of the Securities Exchange Act of 1934, as amended, the Securities Act of 1933, as amended and the regulations promulgated thereunder.

Scope of Permissible Activities. Under the Holding Company Act, activities at the bank holding company level are limited to (i) banking and managing or controlling banks; (ii) furnishing services to or performing services for its subsidiaries; and (iii) engaging in other activities that the FRB determines to be so closely related to banking and managing or controlling banks as to be a proper incident thereto. The FRB’s regulations contain a list of permissible non-banking activities.

The Gramm-Leach-Bliley Act of 1999 (the “GLB”) greatly broadened the scope of activities permissible for bank holding companies. Among other things, GLB repealed the restrictions on banks affiliating with securities firms contained in Sections 20 and 32 of the Glass-Steagall Act. GLB also permits bank holding companies that become “financial holding companies” to engage in a broad variety of “financial” activities, including insurance and securities underwriting and agency activities, merchant banking and insurance company portfolio investment activities. The Company has not elected to become a financial holding company.

 

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Source of Strength. Under FRB policy, the Company is expected to act as a source of financial strength to its banking subsidiary and, where required, to commit resources to support it. Further, if the Bank’s capital levels were to fall below minimum regulatory guidelines, the Bank would need to develop a capital plan to increase its capital levels and the Company would be required to guarantee the Bank’s compliance with the capital plan in order for such plan to be accepted by the federal regulatory authority.

Under the “cross guarantee” provisions of the Federal Deposit Insurance Act (the “FDIA”), any FDIC-insured subsidiary of the Company such as the Bank could be liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of any other FDIC-insured subsidiary also controlled by the Company or (ii) any assistance provided by the FDIC to any FDIC-insured subsidiary of the Company in danger of default.

Acquisitions and Mergers. Under the Holding Company Act, a bank holding company must obtain the prior approval of the FRB before (1) acquiring direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, the bank holding company would directly or indirectly own or control more than 5% of such shares; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company. Also, any company must obtain approval of the FRB prior to acquiring control of the Company or the Bank. For purposes of the Holding Company Act, “control” is defined as ownership of more than 25% of any class of voting securities of a bank holding company or bank, the ability to control the election of a majority of the directors, or the exercise of a controlling influence over management or policies of a bank holding company or bank.

Capital Requirements. The FRB has promulgated capital adequacy guidelines for use in its examination and supervision of bank holding companies. If a bank holding company’s capital falls below minimum required levels, then the bank holding company must implement a plan to increase its capital, and its ability to pay dividends, make acquisitions of new banks or engage in certain other activities such as issuing brokered deposits may be restricted or prohibited.

The FRB guidelines include a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets. These requirements are described below under “-Greer State Bank – Capital Requirements.” Subject to our capital requirements and certain other restrictions, we are able to borrow money to make capital contributions to the Bank, and these loans may be repaid from dividends paid from the Bank to the Company. Without regulatory approval, we may also issue securities and contribute the proceeds to the Bank, subject to federal and state securities laws.

Dividends. The FRB has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The FRB has issued a policy statement expressing its view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality, and overall financial condition.

The Company is a legal entity separate and distinct from the Bank. Over time, the principal source of the Company’s cash flow, including cash flow to pay dividends to its holders of trust preferred securities, holders of the preferred stock the Company issued to the U.S. Treasury in connection with the Capital Purchase Program (the “CPP”) and to the Company’s common stock shareholders, will be dividends that the Bank pays to the Company as its sole shareholder.

The Company’s ability to pay dividends on its common stock is limited by the Company’s participation in the CPP and by certain statutory or regulatory limitations. Prior to January 30, 2012, unless the Company has redeemed the Series 2009-SP Preferred Stock and the Series 2009- WP Preferred Stock or the Treasury has transferred the Series 2009-SP Preferred Stock and Series 2009-WP Preferred Stock to a third party, the consent of the Treasury will be required for the Company to declare or pay any dividend or make any distribution on its common stock (other than regular quarterly cash dividends of not more than the amount of the last quarterly cash dividend per share declared or, if lower, announced to its holders of common stock an intention to declare, on the Company’s common stock prior to November 17, 2008). Subsequent to January 30, 2012 and prior to January 30, 2019, the foregoing restrictions will likewise be effective, except that generally the Company would be limited to a common stock dividend not in excess of 103% of the per share dividends in effect for the immediately prior fiscal year. Prior to January 30, 2019, unless the Company has redeemed the Series 2009-SP Preferred Stock and the Series 2009-WP Preferred Stock or the Treasury has transferred all of such stock to a third party, the consent of the Treasury will be required for us to redeem, purchase or acquire any shares of our common stock, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the purchase agreement with the Treasury. Furthermore, if the Company is not current in the payment of quarterly dividends on the Series 2009-SP Preferred Stock and the Series 2009-WP Preferred Stock, it cannot pay dividends on its common stock.

On January 6, 2011, the Company gave notice to the U.S. Treasury Department that the Company was suspending the payment of regular quarterly cash dividends on its preferred stock, beginning with the February 15, 2011 dividend.

 

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Accordingly, the Company may not pay a dividend to its common shareholders until all accrued and unpaid dividends have been paid to the U.S. Treasury Department.

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

As discussed under “-Greer State Bank” below and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Recent Developments-Consent Order,” on March 1, 2011, the Bank entered into the Consent Order with the FDIC and the South Carolina Board of Financial Institutions. Among other things, the Consent Order prohibits the Bank from declaring or paying any dividends without the prior written approval of the FDIC and the South Carolina Board of Financial Institutions. Also, as previously disclosed, the Company is under a Memorandum of Understanding with the Federal Reserve Bank of Richmond which requires that the Company seek permission from the Federal Reserve prior to paying any dividends.

Statutory and regulatory limitations also apply to the Bank’s payment of dividends to the Company. These are discussed below under “Greer State Bank – Dividends.”

South Carolina State Regulation. As a bank holding company registered under the South Carolina Banking and Branching Efficiency Act, the Company is subject to limitations on sale or merger and to regulation by the South Carolina Board of Financial Institutions. Periodic reports must be filed with the State Board with respect to Company’s financial condition and operations, management and intercompany relationships between the Company and its subsidiaries. Additionally, the holding company, with limited exceptions, must obtain approval from the State Board prior to engaging in acquisitions of banking or non-banking institutions or assets.

Participation in the Capital Purchase Program of the Troubled Asset Relief Program. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) became law. Under the Troubled Asset Relief Program (“TARP”) authorized by EESA, the U.S. Treasury established the CPP providing for the purchase of senior preferred shares of qualifying U.S. controlled banks, savings associations and certain bank and savings and loan holding companies. On January 30, 2009, the Company issued 9,993 shares of its Series 2009-SP cumulative perpetual preferred stock and warrants to purchase an additional 500 shares of cumulative perpetual preferred stock to the U.S. Treasury pursuant to the CPP for aggregate consideration of $9,993,000. As a result of the Company’s participation in the CPP, the Company agreed to certain limitations on executive compensation. On February 17, 2009, President Obama signed into law The American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as the economic stimulus or economic recovery package. ARRA, which amends EESA, includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. Under ARRA, the Company is subject to additional and more extensive executive compensation limitations and corporate governance requirements. ARRA also permits the Company to redeem the preferred shares it sold to the U.S. Treasury without penalty and without the need to raise new capital, subject to the U.S. Treasury’s consultation with the Company’s and the Bank’s appropriate regulatory agency.

For as long as the U.S. Treasury owns any debt or equity securities of the Company issued in connection with the CPP, the Company will be required to take all necessary action to ensure that its benefit plans with respect to its senior executive officers comply in all respects with Section 111(b) of the EESA, as amended by the ARRA, and the regulations issued and in effect thereunder, including the interim final rule related to executive compensation and corporate governance issued by the U.S. Treasury on June 15, 2009 (the “IFR”). These requirements include:

 

   

Prohibition on Certain Types of Compensation. EESA prohibits us from providing incentive compensation arrangements that encourage our Senior Executive Officers (“SEO”) to take unnecessary and excessive risks that threaten the value of the financial institution. It also prohibits us from implementing any compensation plan that would encourage manipulation of reported earnings in order to enhance the compensation of any of its employees.

 

   

Risk Review. EESA requires the compensation committee of our board of directors to meet with our senior risk officer at least semiannually to discuss and evaluate employee compensation plans in light of an assessment of any risk to us posed by such plans. The review is intended to better inform the committee of the risks posed by the plans, and ways to limit such risks.

 

   

Bonus Prohibition. EESA prohibits the payment of any “bonus, retention award, or incentive compensation” to our most highly-compensated employee. The prohibition includes several limited exceptions, including payments under enforceable agreements that were in existence as of February 11, 2009 and limited amounts of “long-term restricted stock,” discussed below.

 

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Limited Amount of Long Term Restricted Stock Excluded from Bonus Prohibition. EESA permits us to pay a limited amount of “long-term” restricted stock. The amount is limited to one-third of the total annual compensation of the employee. EESA requires such stock to have a minimum 2-year vesting requirement and to not “fully vest” until we have repaid all CPP-related obligations. The committee has not yet chosen to utilize this exception to the bonus prohibition.

 

   

Golden Parachutes. EESA prohibits any severance payment to a SEO or any of the next five most highly-compensated employees upon termination of employment for any reason. EESA provides an exception for amounts that were earned or accrued prior to termination, such as normal retirement benefits.

 

   

Clawback. EESA requires us to recover any bonus or other incentive payment paid to a senior executive officer on the basis of materially inaccurate financial or other performance criteria. This requirement applies to the five SEOs and the next 20 most highly compensated employees.

 

   

Shareholder “Say-on-Pay” Vote Required. EESA requires us to include a non-binding shareholder vote to approve the compensation of executives as disclosed in our proxy statement for our annual shareholders meeting.

 

   

Policy on Luxury Expenditures. EESA required us to implement a Company-wide policy regarding excessive or luxury expenditures, including excessive expenditures on entertainment or events, office and facility renovations, aviation or other transportation services.

 

   

Reporting and Certification. EESA requires our CEO and CFO to provide a written certification of compliance with the executive compensation restrictions in EESA in our Form 10-K report. EESA also requires certain disclosures and certifications by the committee to be made to the Federal Reserve, the primary regulator of Greer Bancshares.

Greer State Bank

Bank Regulation. As a South Carolina banking institution, the Bank is subject to regulation, supervision and regular examination by the State Board of Financial Institutions. South Carolina and federal banking laws and regulations control, among other things, required reserves, investments, loans, mergers and consolidations, issuance of securities, payment of dividends, and establishment of branches and other aspects of the Bank’s operations. Supervision, regulation and examination of the Company and the Bank by the bank regulatory agencies are intended primarily for the protection of depositors rather than for the Company’s security holders.

Dividends. Pursuant to S.C. banking law, all cash dividends must be paid out of the undivided profits then on hand, after deducting expenses, including reserves for losses and bad debts. The Bank is authorized to pay cash dividends up to 100% of net income in any calendar year without obtaining the prior approval of the South Carolina Board of Financial Institutions provided that the Bank received a composite rating of one or two at the last federal or state regulatory examination. The Bank must obtain approval from the South Carolina Board of Financial Institutions prior to the payment of any other cash dividends. In addition, under the FDIC Improvement Act, the Bank may not pay a dividend if, after paying the dividend, the Bank would be undercapitalized. See “Capital Requirements” below.

The payment of dividends by the Bank and the Company may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.

The Bank’s ability to pay dividends is also restricted by the Consent Order entered into by the Bank with the Federal Deposit Insurance Corporation and the South Carolina Board of Financial Institutions on March 1, 2011. The Consent Order is discussed under “-Consent Order” below. Pursuant to the Consent Order, the Bank may not pay any dividends without the prior written approval of the FDIC and the South Carolina Board of Financial Institutions.

 

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Federal Deposit Insurance. The deposits of the Bank are insured by the FDIC to the maximum extent provided by law. For this protection, the Bank pays FDIC deposit insurance assessments and is subject to the rules and regulations of the FDIC. The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities.

In early 2006, Congress passed the Federal Deposit Insurance Reform Act of 2005, which made certain changes to the Federal deposit insurance program. These changes included merging the Bank Insurance Fund and the Savings Association Insurance Fund, increasing retirement account coverage to $250,000 and providing for inflationary adjustments to general coverage beginning in 2010, providing the FDIC with authority to set the fund’s reserve ratio within a specified range, and requiring dividends to banks if the reserve ratio exceeds certain levels.

On December 16, 2008, the FDIC raised the deposit insurance assessment rates uniformly for all institutions by 7 cents for $100 of domestic deposits effective for the first quarter of 2009. Due to the large number of recent bank failures, in February 2009 the FDIC adopted a revised risk-based deposit insurance assessment schedule which raised deposit insurance premiums. The FDIC also implemented a 5 basis point special assessment of each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009, which special assessment amount was capped at 10 basis points times the institution’s assessment base for the second quarter of 2009.

The Bank expensed FDIC insurance premiums of $678,379 and $849,950, respectively, in 2010 and 2009. The 2009 expense also included the $212,000 special assessment by the FDIC. During 2009, the FDIC also required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. As a result, the Bank paid $2,174,110 in prepaid assessments to the FDIC in the fourth quarter of 2009, of which $141,207 was expensed in 2009, with the remaining $2,032,903 to be recognized over the next three years based on the FDIC assessment.

In October 2010, the FDIC adopted a new Restoration Plan for the DIF to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. Under the Restoration Plan, the FDIC did not institute the uniform three-basis point increase in assessment rates scheduled to take place on January 1, 2011 and maintained the current schedule of assessment rates for all depository institutions. At least semi-annually, the FDIC will update its loss and income projections for the DIF and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking, if required.

In February 2011, the FDIC announced changes to the deposit insurance program whereby FDIC deposit insurance assessments will be based on average total assets less average tangible equity instead of the previous methodology that was based on deposits. Also new assessment rates were adopted. The new assessment methodology and assessment rates will be effective April 1, 2011. We have not yet determined whether this new methodology will reduce our FDIC insurance expense.

Pursuant to EESA, in 2008 the maximum deposit insurance amount per depositor was temporarily increased from $100,000 to $250,000 until December 31, 2013. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act permanently raised the standard maximum deposit insurance amount to $250,000 per depositor. On November 9, 2010 the FDIC issued a final rule under the Dodd-Frank Act that provides unlimited insurance coverage of non-interest bearing transaction accounts from December 31, 2010 through December 31, 2012.

Additionally, in 2008, regulatory authorities enacted legislation that enabled the FDIC to establish its Temporary Liquidity Guarantee Program (“TLGP”). The TGLP had two primary components – 1) a transaction account guarantee program (“TAGP”), and 2) a debt guarantee program. Under the TAGP, the FDIC would fully guarantee, until June 30, 2010, all noninterest-bearing transaction accounts, including NOW accounts with interest rates of 0.50 percent or less and IOLTAs. On April 14, 2010, the FDIC extended the TAGP until December 31, 2010, with a revised interest rate of 0.25 percent or less. Under the debt guarantee program of the TLGP, the FDIC guaranteed certain senior unsecured debt of insured depository institutions, or their qualified holding companies, issued between October 14, 2008 and October 31, 2009. After an initial phase-in period, both programs became elective options for banks during 2009.

Safety and Soundness Standards. The FDICIA required the federal bank regulatory agencies to prescribe, by regulation, non-capital safety and soundness standards for all insured depository institutions and depository institution holding companies. The FDIC and the other federal banking agencies have adopted guidelines prescribing safety and soundness standards pursuant to FDICIA. The safety and soundness guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. Among other things, the guidelines require banks to maintain appropriate systems and

 

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practices to identify and manage risks and exposures identified in the guidelines. In addition, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of the FDIA. If an institution fails to comply with such an order, the agency may seek enforcement in judicial proceedings and seek to impose civil money penalties.

Capital Requirements. The FRB has established guidelines with respect to the maintenance of appropriate levels of capital by registered bank holding companies. The FDIC has established similar guidelines for state-chartered banks, such as the Bank, that are not members of the FRB. The regulations of the FRB and FDIC impose two sets of capital adequacy requirements: minimum leverage rules, which require the maintenance of a specified minimum ratio of capital to total assets, and risk-based capital rules, which require the maintenance of specified minimum ratios of capital to “risk-weighted” assets. At December 31, 2010, the Company and the Bank exceeded the minimum required regulatory capital requirements necessary to be well capitalized; however, due to the Consent Order recently entered into with the FDIC, new minimums have been established. See discussion below entitled “Consent Order” and chart below.

The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. 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 maintaining 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. Management believes, as of December 31, 2010, that all capital adequacy requirements were met to which the Company and Bank are subject.

The actual capital amounts (in thousands) and ratios and minimum regulatory amounts (in thousands) and ratios for the Bank are as follows:

 

                 

For Capital

    To Be Well
Capitalized Under
Formal Agreement
 
                  Adequacy Purposes     Dated March 1, 2010(1)  

Bank:

   Actual     Minimum     Minimum  
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

As of December 31, 2010

               

Total risk-based capital (to risk-weighted assets)

   $ 33,257         10.75   $ 24,758         8.0   $ 30,948         10.0

Tier 1 capital (to risk-weighted assets)

   $ 29,334         9.48   $ 12,380         4.0   $ 18,569         6.0

Tier 1 capital (to average assets)

   $ 29,334         6.45   $ 18,190         4.0   $ 36,380         8.0

As of December 31, 2009

               

Total risk-based capital (to risk-weighted assets)

   $ 39,985         11.5   $ 27,824         8.0   $ 34,780         10.0

Tier 1 capital (to risk-weighted assets)

   $ 35,614         10.2   $ 13,912         4.0   $ 20,867         6.0

Tier 1 capital (to average assets)

   $ 35,614         7.6   $ 18,809         4.0   $ 23,511         5.0

 

(1) See discussion below entitled “Consent Order.”

The Company is also subject to certain capital requirements. At December 31, 2010 the Tier 1 risk-based capital ratio, Tier 1 capital ratio and the total risk based capital ratio were 8.6%, 5.8% and 11.0%, respectively. At December 31, 2009 the Tier 1 risk-based capital ratio, Tier 1 capital ratio and the total risk based capital ratio were 10.3%, 7.7% and 12.1%, respectively.

 

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The Bank is required by the Federal Reserve Bank to maintain average cash reserve balances at the Federal Reserve Bank and in working funds based upon a percentage of deposits. The required amount of these reserve balances at December 31, 2010 was approximately $100,000.

The FDIC has issued regulations that classify insured depository institutions by capital levels and require the appropriate federal banking regulator to take prompt action to resolve the problems of any insured institution that fails to satisfy the capital standards. Under such regulations, a “well-capitalized” bank is one that is not subject to any regulatory order or directive to meet any specific capital level and that has or exceeds the following capital levels: a total risk-based capital ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a leverage ratio of 5%. As of December 31, 2010, the Bank was “well-capitalized” as defined by the regulations.

Consent Order. On March 1, 2011, the Bank entered into a Consent Order (the “Consent Order”) with the FDIC and the South Carolina Board of Financial Institutions (the “SC Banking Board”). The Consent Order is based on the findings of the FDIC during their on-site examination of the Bank as of June 30, 2010. The Consent Order seeks to enhance the Bank’s existing practices and procedures in the areas of credit risk management, liquidity and funds management, interest rate risk management, capital levels and Board oversight. Specifically, under the terms of the Consent Order, the Bank is required to (i) develop, implement and adhere to a written program to reduce the high level of credit risk; (ii) update and implement written policies and procedures addressing loan policy, allowance for loan losses and other real estate owned; (iii) continue to improve its liquidity position and maintain adequate sources of funding; (iv) obtain prior written determination of no supervisory objection from the FDIC before accepting, renewing or rolling over brokered deposits; (v) update and adhere to a strategic plan designed to improve the condition of the Bank; (vi) develop and submit a capital plan to achieve and maintain certain capital requirements; and (vii) submit periodic reports to the FDIC regarding various aspects of the foregoing actions. The minimum capital ratios established by the FDIC in the Consent Order are higher than the minimum and well-capitalized ratios applicable to all banks. Specifically, by August 1, 2011, the Bank must achieve and maintain a Tier 1 capital to average (leverage) ratio assets of at least 8% and a total risk-based capital to total risk-weighted assets ratio of at least 10%. The Consent Order results in the Bank being deemed “adequately capitalized” irrespective of the fact that ratios indicate “well-capitalized” status. If the Bank is unable to achieve the required capital ratios within the specified time frames, or otherwise fails to adhere to the Consent Order, further regulatory actions could be taken. Further, the ability to operate as a going concern could be negatively impacted. The Consent Order is discussed in more detail under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation-Recent Developments-Consent Order.”

Restrictions on Transactions with Affiliates and Insiders. Transactions between the Bank and its nonbanking subsidiaries and/or affiliates, including the Company, are subject to Section 23A of the Federal Reserve Act. In general, Section 23A imposes limits on the amount of such transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to third parties which are collateralized by the securities or obligations of the Company or its subsidiaries.

Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires that certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving other nonaffiliated persons. The FRB has issued Regulation W which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretive guidance with respect to affiliate transactions.

The restrictions on loans to directors, executive officers, principal shareholders and their related interests contained in the Federal Reserve Act and Regulation O apply to all insured institutions and their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to such persons. These loans cannot exceed the institution’s total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is appropriate.

Anti-Money Laundering Legislation. The Bank is subject to the Bank Secrecy Act and other anti-money laundering laws and regulations, including the USA Patriot Act of 2001. Among other things, these laws and regulations require the Bank to take steps to prevent the use of the Bank for facilitating the flow of illegal or illicit money, to report large currency transactions, and to file suspicious activity reports. The Bank is also required to carry out a comprehensive anti-money laundering compliance program. Violations can result in substantial civil and criminal sanctions. In addition, provisions of the USA Patriot Act require the federal financial institution regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.

Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, a financial institution’s primary federal regulator (FDIC for the Bank) shall

 

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evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate income neighborhoods. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Bank.

Effect of Governmental Monetary Policies. The Bank’s earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The FRB’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the FRB have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities, through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. On July 21, 2010, the Dodd-Frank Act became law. The Dodd-Frank Act will have a broad impact on the financial services industry, including significant regulatory and compliance changes including, among other things:

 

   

enhanced authority over troubled and failing banks and their holding companies;

 

   

increased capital and liquidity requirements;

 

   

increased regulatory examination fees; and

 

   

specific provisions designed to improve supervision and safety and soundness by imposing restrictions and limitations on the scope and type of banking and financial activities.

In addition, the Dodd-Frank Act establishes a new framework for systematic risk oversight within the financial system that will be enforced by new and existing federal agencies, including the Financial Stability Oversight Counsel (“FSOC”), the FRB, the Office of Comptroller of the Currency, the FDIC, and the Consumer Financial Protection Bureau (“CFPB”). The following description briefly summarizes aspects of the Dodd-Frank Act that could impact the Company, both currently and prospectively.

Deposit Insurance. The Dodd-Frank Act makes permanent the $250,000 deposit insurance limit for insured deposits. Amendments to the Federal Deposit Insurance Act also revise the assessment base against which an insured depository institution’s deposit insurance premiums paid to the FDIC’s Deposit Insurance Fund (“DIF”) will be calculated. Under the amendments, the FDIC assessment base will no longer be the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity. The Dodd-Frank Act also changes the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds by September 30, 2020.

Interest on Demand Deposits. The Dodd-Frank Act also provides that, effective one year after the date of its enactment, depository institutions may pay interest on demand deposits. Although we have not determined the ultimate impact of this aspect of the legislation, we expect interest costs associated with demand deposits to increase.

Trust Preferred Securities. The Dodd-Frank Act prohibits bank holding companies from including in their regulatory Tier 1 capital hybrid debt and equity securities issued on or after May 19, 2010. Among the hybrid debt and equity securities included in this prohibition are trust preferred securities, which we have issued in the past in order to raise additional Tier 1 capital and otherwise improve our regulatory capital ratios. Although we may continue to include our existing trust preferred securities as Tier 1 capital, the prohibition on the use of these securities as Tier 1 capital may limit our ability to raise capital in the future.

The Consumer Financial Protection Bureau. The Dodd-Frank Act creates a new, independent Consumer Financial Protection Bureau (“CFPB”) within the FRB. The CFPB’s responsibility is to establish, implement and enforce rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The CFPB has rulemaking authority over many of the statutes that govern products and services banks offer to consumers. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent than those regulations the CFPB will promulgate and state attorney generals will have the authority to enforce consumer protection rules the CFPB adopts against state-chartered institutions and national banks. Compliance with any such new regulations established by the CFPB and/or states could reduce our revenue, increase our cost of operations, and could limit our ability to expand into certain products and services.

 

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Debit Card Interchange Fees. The Dodd-Frank Act gives the FRB 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. While we are not directly subject to these rules for so long as our assets do not exceed $10 billion, our activities as a debit card issuer may nevertheless be indirectly impacted by the change in the applicable debit card market caused by these regulations, which may require us to match any new lower fee structure implemented by larger financial institutions in order to remain competitive. Such lower fees could impact the revenue we earn from debit interchange fees.

Increased Capital Standards and Enhanced Supervision. The Dodd-Frank Act requires the federal banking agencies to establish minimum leverage and risk-based capital requirements for banks and bank holding companies. These new standards will be no less strict than existing regulatory capital and leverage standards applicable to insured depository institutions and may, in fact, become higher once the agencies promulgate the new standards. Compliance with heightened capital standards may reduce our ability to generate or originate revenue-producing assets and thereby restrict revenue generation from banking and non-banking operations.

Transactions with Affiliates. The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions,” and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.

Transactions with Insiders. The Dodd-Frank Act expands insider transaction limitations through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending and borrowing transactions. The Dodd-Frank Act also places restrictions on certain asset sales to and from an insider of an institution, including requirements that such sales be on market terms and, in certain circumstances, receive the approval of the institution’s board of directors.

Enhanced Lending Limits. The Dodd-Frank Act strengthens the existing limits on a depository institution’s credit exposure to one borrower. Federal banking law currently limits a national bank’s ability to extend credit to one person or group of related persons to an amount that does not exceed certain thresholds. The Dodd-Frank Act expands the scope of these restrictions to include credit exposure arising from derivative transactions, repurchase agreements and securities lending and borrowing transactions. It also will eventually prohibit state-chartered banks from engaging in derivative transactions unless the state lending limit laws take into account credit exposure to such transactions.

Corporate Governance. The Dodd-Frank Act addresses many corporate governance and executive compensation matters that will affect most U.S. publicly traded companies, including the Company. The Dodd-Frank Act:

 

   

grants shareholders of U.S. publicly traded companies an advisory vote on executive compensation;

 

   

enhances independence requirements for compensation committee members;

 

   

requires companies listed on national securities exchanges to adopt clawback policies for incentive-based compensation plans applicable to executive officers; and

 

   

provides the SEC with authority to adopt proxy access rules that would allow shareholders of publicly traded companies to nominate candidates for election as directors and require such companies to include such nominees in its proxy materials.

Many of the requirements of the Dodd-Frank Act will be subject to implementation over the course of several years. While we do not currently expect the final requirements of the Dodd-Frank Act to have a material adverse impact on the Company, we do expect them to negatively impact our profitability, require changes to certain of our business practices, including limitations on fee income opportunities, and impose more stringent capital, liquidity and leverage requirements upon the Company. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements.

 

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Automated Overdraft Payment Regulation. The Federal Reserve and FDIC have recently enacted consumer protection regulations related to automated overdraft payment programs offered by financial institutions. In November 2009, the Federal Reserve amended its Regulation E to prohibit financial institutions, including the Company, from charging consumers fees for paying overdrafts on automated teller machine and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. The Regulation E amendments also require financial institutions to provide consumers with a notice that explains the financial institution’s overdraft services, including the fees associated with the service and the consumer’s choices. We have completed implementation of the changes as required by the Regulation E amendments, which resulted in a reduction of overdraft fees that we were able to collect during the second half of 2010.

In November 2010, the FDIC supplemented the Regulation E amendments by requiring FDIC-supervised institutions, including the Company, to implement additional changes relating to automated overdraft payment programs by July 1, 2011. The most significant of these changes require financial institutions to monitor overdraft payment programs for “excessive or chronic” customer use and undertake “meaningful and effective” follow-up action with customers that overdraw their accounts more than six times during a rolling 12-month period. The additional guidance also imposes daily limits on overdraft charges, requires institutions to review and modify check-clearing procedures, prominently distinguish account balances from available overdraft coverage amounts and requires increased board and management oversight regarding overdraft payment programs. We have already begun to implement many of the changes required by the FDIC guidance, and we are working to implement the remaining changes in advance of the July 1, 2011 effective date.

We can not predict what other legislation might be enacted or what other regulations or assessments might be adopted.

Legislative, Legal and Regulatory Developments. The banking industry is generally subject to extensive regulatory oversight. The Company, as a publicly held bank holding company, and the Bank, as a state-chartered bank with deposits insured by the FDIC, are subject to a number of laws and regulations. Many of these laws and regulations have undergone significant change in recent years. These laws and regulations impose restrictions on activities, minimum capital requirements, lending and deposit restrictions and numerous other requirements. Future changes to these laws and regulations, and other new financial services laws and regulations, are likely and cannot be predicted with certainty. The United States Congress and the President have proposed a number of new regulatory initiatives. Future legislative or regulatory change, or changes in enforcement practices or court rulings, may have a dramatic and potentially adverse impact on the Company and the Bank and other subsidiaries.

Item 1A. Risk Factors

If we fail to comply with regulatory orders effectively, it could adversely affect our financial condition and results of operations.

We intend to promptly address the issues raised by our regulators in connection with the Consent Order. Our prospects must be considered in light of the risks, expenses and difficulties of promptly addressing these issues. In order to appropriately address the issues identified in the Consent Order, we must, among other things:

 

   

improve our credit quality;

 

   

return to sustained profitability;

 

   

build our customer base focusing on profitable customer relationships;

 

   

attract sufficient core deposits to reduce our reliance on brokered deposits and borrowed funds to fund our loan growth;

 

   

attract and retain qualified bank management; and

 

   

build sufficient regulatory capital.

Our ability to achieve these goals will depend on a variety of factors including the continued availability of desirable and profitable business opportunities, the competitive responses from other financial institutions in our market areas and our ability to manage our responses to these issues. Failure to comply with the requirements of the Consent Order— particularly capital requirements— could result in further adverse regulatory action and restrictions on our activities which could have a material adverse effect on our business, future prospects, financial condition or results of operations. Further, the ability to operate as a going concern could be negatively impacted.

 

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Our bank may become subject to federal conservatorship or receivership if it cannot comply with the Consent Order or its condition continues to deteriorate.

The Consent Order requires the Bank to, among other things, implement a plan to achieve and maintain minimum capital requirements. The condition of our loan portfolio may continue to deteriorate in the current economic environment and continue to deplete our capital and other financial resources. If we fail to comply with the capital and liquidity funding requirements in the Consent Order, or suffer continued deterioration in our financial condition, we may be subject to being placed in federal conservatorship or receivership by the FDIC, with the FDIC appointed as conservator or receiver. If this were to occur, the Company would probably suffer a complete loss of the value of its ownership in the Bank and we may subsequently be exposed to significant claims by the FDIC. Federal conservatorship or receivership would also result in the complete loss of your investment as a shareholder.

Given the current depressed market value of our common stock, if we were required to raise additional capital, it could have a severe dilutive effect on the existing holders of our common stock and adversely affect the market price of our common stock.

As of December 31, 2010, we had 7,513,308 shares of additional authorized common stock available for issuance, and 189,507 of additional authorized preferred shares available for issuance. We are not restricted from issuing additional authorized shares of common stock or securities that are convertible into or exchangeable for, or that represent the right to receive, our common stock. We, as well as our banking regulators, continue to regularly perform a variety of capital analyses on the Company and the Bank, in particular taking into account our regulatory capital ratios, financial condition and other relevant factors. If it becomes appropriate in order to maintain or increase our capital levels, we may feel compelled to issue in public or private transactions additional shares of common stock or other securities that are convertible into, or exchangeable for, or that represent the right to receive, our common stock. Shareholders of our common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series. Therefore, the issuance of any additional shares of common stock or securities convertible into or exchangeable for common stock or that represent the right to receive common stock, or the exercise of such securities, could substantially dilute the holdings of existing common shareholders. The market price of our common stock could also decline as a result of sales or anticipation of such sales.

The current economic environment poses significant challenges for the Company and could adversely affect its financial condition and results of operations.

There has been significant disruption and volatility in the financial and capital markets since 2007. The financial markets and the financial services industry in particular suffered unprecedented disruption, causing a number of institutions to fail or require government intervention to avoid failure. These conditions were largely the result of the erosion of the U.S. and global credit markets, including a significant and rapid deterioration in the mortgage lending and related real estate markets. Dramatic declines in the housing markets over the past three years, with falling home prices and increasing foreclosures and unemployment, have resulted in significant writedowns of asset values by financial institutions. As a consequence, in 2008 the Company experienced losses resulting primarily from substantial impairment charges on investment securities. More recently, the Company’s losses are mainly attributed to increased loan loss provisions and FDIC assessments. Continued declines in real estate values, home sales volumes, and financial stress on borrowers as a result of the uncertain economic environment could have an adverse effect on the Company’s borrowers or their customers, which could adversely affect the Company’s financial condition and results of operations. A worsening of these conditions would likely exacerbate the adverse effects on the Company and others in the financial institutions industry. There can be no assurance that the economic conditions that have adversely affected the financial services industry, and the capital, credit and real estate markets generally, will improve significantly, in which case the Company could continue to experience losses, writedowns of assets, further impairment charges of investment securities and capital and liquidity constraints or other business challenges. A further deterioration in local economic conditions, particularly within the Company’s geographic regions and markets, could drive losses beyond that which is provided for in its allowance for loan losses. The Company may also face the following risks in connection with these events:

 

   

Economic conditions that negatively affect housing prices and the job market have resulted, and may continue to result, in deterioration in credit quality of the Company’s loan portfolios, and such deterioration in credit quality has had, and could continue to have, a negative impact on the Company’s business.

 

   

Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates on loans and other credit facilities.

 

   

The processes the Company uses to estimate allowance for loan losses and reserves may no longer be reliable because they rely on complex judgments, including forecasts of economic conditions, which may no longer be capable of accurate estimation.

 

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The Company’s ability to assess the creditworthiness of its customers may be impaired if the models and approaches it uses to select, manage, and underwrite its customers become less predictive of future charge-offs.

 

   

The Company expects to face increased regulation of its industry, and compliance with such regulation may increase its costs, limit its ability to pursue business opportunities, and increase compliance challenges.

As the above conditions or similar ones continue to exist or worsen, the Company could experience continuing or increased adverse effects on its financial condition and results of operations.

Our business is subject to the success of the local economies where we operate.

Our success significantly depends upon the growth in population, income levels, deposits, residential real estate stability and housing starts in our market areas. If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally are unfavorable, our business may not succeed. Adverse economic conditions in our specific market areas could cause us to continue to experience negative, or limited, growth, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.

Continued adverse market or economic conditions in the state of South Carolina may increase the risk that our borrowers will be unable to timely make their loan payments. In addition, the market value of the real estate securing loans as collateral has been and may continue to be adversely affected by continued unfavorable changes in market and economic conditions. As of December 31, 2010, approximately 79.6% of our loans held for investment were secured by real estate. Of this amount, 18.7% were commercial construction and land development loans, 28.3% were residential loans, 19.8% were owner occupied commercial real estate loans and 33.2% were non-owner occupied commercial real estate loans. We experienced increased payment delinquencies with respect to these loans throughout 2009 and 2010 which negatively impacted our results of operations. A sustained period of increased payment delinquencies, foreclosures or losses caused by continuing adverse market or economic conditions in the state of South Carolina could adversely affect the value of our assets, revenues, results of operations and financial condition.

We are exposed to credit risk in our lending activities.

There are inherent risks associated with our lending and trading activities. Repayment of loans to individuals and business entities, our largest asset group, depend on the willingness and ability of borrowers to perform as contracted. A material adverse change in the ability of a significant portion of our borrowers to meet their obligations, due to changes in economic conditions, interest rates, natural disasters, acts of war or other causes over which we have no control, could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans, resulting in a material adverse impact on our earnings and financial condition. We are subject to various laws and regulations that affect our lending activities. Failure to comply with applicable laws and regulations could subject us to regulatory enforcement action that could result in the assessment against us of civil money or other penalties.

Our allowance for loan losses may not be adequate to cover actual losses.

In accordance with accounting principles generally accepted in the United States, we maintain an allowance for loan losses to provide for loan defaults and non-performance. Our allowance for loan losses may not be adequate to cover actual credit losses. Future provisions for credit losses could materially and adversely affect our operating results. Our allowance for loan losses is based on prior experience, as well as an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be beyond our control. These losses may exceed current estimates. Federal regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan losses. While we believe that our allowance for loan losses is adequate to cover current losses, we cannot assure you that we will not further increase the allowance for loan losses. Either of these occurrences could materially adversely affect our earnings.

We could sustain losses if our asset quality declines further.

Our earnings are affected by our ability to properly originate, underwrite and service loans. We could sustain losses if we incorrectly assess the creditworthiness of our borrowers or fail to detect or respond to deterioration in asset quality in a timely manner. Recent problems with asset quality have caused, and could continue to cause, our interest income and net interest margin to decrease and our provisions for loan losses to increase, which could adversely affect our results of operations and financial condition. Further increases in non-performing loans would reduce net interest income below levels that would exist if such loans were performing.

 

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Our loan portfolio includes an elevated, although shrinking level, of residential construction and land development loans, which loans have a greater credit risk than residential mortgage loans.

The Company engages in both traditional single-family residential lending and residential construction and land development loans to developers. The percentage of construction and land development loans to developers in the Bank’s portfolio was approximately 14.9% at December 31, 2010 compared to 24.57% of total loans at December 31, 2009. This type of lending is generally considered to have more complex credit risks than traditional single-family residential lending because the principal is concentrated in a limited number of loans with repayment dependent on the successful operation of the related real estate project. Consequently, these loans are more sensitive to the current adverse conditions in the real estate market and the general economy. These loans are generally less predictable and more difficult to evaluate and monitor and collateral may be difficult to dispose of in a market decline. Furthermore, during adverse general economic conditions, such as we believe are now being experienced in residential real estate construction nationwide, borrowers involved in the residential real estate construction and development business may suffer above normal financial strain. Throughout 2010, the number of newly constructed homes or lots sold in our market areas has continued to decline, negatively affecting collateral values. As the residential real estate development and construction market in our markets has deteriorated, our borrowers in this segment have begun to experience difficulty repaying their obligations to us. As a result, our loans to these borrowers have deteriorated and may deteriorate further and may result in additional charge-offs negatively impacting our results of operations. Additionally, to the extent repayment is dependent upon the sale of newly constructed homes or of lots, such sales are likely to be at lower prices or at a slower rate than as expected when the loan was made, which may result in such loans being placed on non-accrual status and subject to higher loss estimates even if the borrower keeps interest payments current. These adverse economic and real estate market conditions may lead to further increases in non-performing loans and other real estate owned, increased charge-offs from the disposition of non-performing assets, and increases in provision for loan losses, all of which would negatively impact our financial condition and results of operations.

We have increased levels of other real estate, primarily as a result of foreclosures, and we anticipate higher levels of foreclosed real estate expense.

As we have begun to resolve non-performing real estate loans, we have increased the level of foreclosed properties, primarily those acquired from builders and from residential land developers. Foreclosed real estate expense consists of three types of charges: maintenance costs, valuation adjustments due to new appraisal values and gains or losses on disposition. As levels of other real estate increase and also as local real estate values decline these charges will likely increase, negatively affecting our results of operations.

Changes in prevailing interest rates may reduce our profitability.

Changes in the interest rate environment may reduce our profits. It is expected that we will continue to realize income from the differential or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans; rising interest rates generally are associated with a lower volume of loan originations. We cannot assure you that we can minimize our interest rate risk. While an increase in the general level of interest rates may increase our net interest margin and loan yield, it may adversely affect the ability of certain borrowers with variable rate loans to pay the interest on and principal of their obligations. Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, loan origination volume and overall profitability.

Changes in the cost and availability of funding due to changes in the deposit market and credit market, or the way in which we are perceived in such markets, may adversely affect financial results.

In general, the amount, type and cost of our funding (whether from other financial institutions, the capital markets or deposits), directly impacts our cost of operating our business and growing our assets which can positively or negatively affect our financial results. A number of factors could make funding more difficult, more expensive or unavailable on any terms, including, but not limited to, financial results and losses, changes within our organization, specific events that adversely impact our reputation, disruptions in the capital markets, specific events that adversely impact the financial services industry, counter party availability, changes affecting our assets, the corporate and regulatory structure, interest rate fluctuations,

 

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general economic conditions, and the legal, regulatory, accounting and tax environments governing our funding transactions. Also, we compete for funding with other banks and similar companies, many of which are substantially larger and have more capital and other resources than we do. In addition, as some of the competitors consolidate with other financial institutions, these advantages may increase. Competition from these institutions may increase the cost of funds.

If we continue to experience losses at levels that we experienced during 2009 and 2010 we may need to raise additional capital in the future. We may also need to raise capital to support our growth. However, that capital may not be available when it is needed.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. While we believe our capital resources will satisfy our capital requirements for the foreseeable future, we may at some point, if we continue to experience losses, need to raise additional capital to support or strengthen our capital position. We also may need additional capital to grow the Bank, particularly if regulators were to raise capital requirements.

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure our shareholders that we will be able to raise additional capital if needed on terms acceptable to us. If we cannot raise additional capital when needed, we may be subject to increased regulatory restrictions, including restrictions on our ability to expand our operations.

Our ability to maintain required capital levels and adequate sources of funding and liquidity could be impacted by changes in the capital markets and deteriorating economic and market conditions.

The Company, and the Bank, are required to maintain certain capital levels established by banking regulations or specified by bank regulators. We must also maintain adequate funding sources in the normal course of business to support our operations and fund outstanding liabilities. Our ability to maintain capital levels, sources of funding and liquidity could be impacted by changes in the capital markets and deteriorating economic and market conditions. Failure by the Bank to meet applicable capital guidelines or to satisfy certain other regulatory requirements could subject the Bank to a variety of enforcement remedies available to the federal regulatory authorities, including the termination of deposit insurance by the FDIC.

Liquidity needs could adversely affect our results of operations and financial condition.

We rely on dividends from the Bank as our primary source of funds. The primary source of funds of the Bank, are customer deposits, mortgage backed investment repayments and loan repayments. While scheduled mortgage backed repayments and loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans which may be more difficult in economically challenging environments like those currently being experienced. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments, our financial condition and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include FHLB advances and federal funds lines of credit from correspondent banks. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands. We may be required to continue to reduce our asset size, slow or discontinue capital expenditures or other investments or liquidate assets should such sources not be adequate.

We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.

We currently depend heavily on the services of our key management personnel. These key officers have important client relationships or are otherwise instrumental to our operations. The loss of key personnel could materially and adversely affect our results of operations and financial condition. Our success also depends in part on our ability to attract and retain additional qualified management personnel. Competition for such personnel is strong in the banking industry and in our particular market. We may not be successful in attracting or retaining the personnel we require.

 

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The limitations on bonuses, retention awards, severance payments and incentive compensation contained in ARRA may adversely affect our ability to retain our highest performing employees.

For so long as any equity securities that we issued to the U.S. Treasury under the CPP remain outstanding, ARRA and regulations issued thereunder, including the IFR, severely restrict bonuses, retention awards, severance and change in control payments and other incentive compensation payable to our most highly compensated employees. It is possible that we may be unable to create a compensation structure that permits us to retain such officers or other key employees or recruit additional employees, especially if we are competing against institutions that are not subject to the same restrictions. Failure to retain our key employees could materially adversely affect our business and results of operations.

The passage of the Dodd-Frank Act may result in lower revenues and higher costs.

On July 21, 2010, President Obama signed into law the Dodd-Frank Act. The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial services industry, addressing, among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, interchange fees, derivatives, lending limits, and changes among the bank regulatory agencies. Many of these provisions are subject to further study, rule making, and the discretion of regulatory bodies, such as the Financial Stability Oversight Council, which will regulate the systemic risk of the financial system. While we do not currently expect the final requirements of the Dodd-Frank Act to have a material adverse impact on the Company, we do expect them to negatively impact our profitability, require changes to certain of our business practices, including limitations on fee income opportunities, and impose more stringent capital, liquidity and leverage requirements upon the Company. These changes may also require us to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements.

The provisions of the Dodd-Frank Act restricting bank interchange fees, and any rules promulgated thereunder, may negatively impact our revenues and earnings.

Under the Dodd-Frank Act, the Federal Reserve must adopt rules regarding the interchange fees that may be charged with respect to electronic debit transactions in 2011. The limits to be placed on debit interchange fees may significantly reduce our debit card interchange revenues. Interchange fees, or “swipe” fees, are charges that merchants pay to us and other credit card companies and card-issuing banks for processing electronic payment transactions. The Dodd-Frank Act provides the Federal Reserve with authority over interchange fees received or charged by a card issuer, and requires that fees must be “reasonable and proportional” to the costs of processing such transactions. While we are not directly subject to these rules for so long as our assets do not exceed $10 billion, our activities as a debit card issuer may nevertheless be indirectly impacted by changes in the applicable debit card market caused by these regulations, which may require us to match any new lower fee structures implemented by larger financial institutions in order to remain competitive. Such lower fees could impact the revenue we earn from debit interchange fees.

Recently enacted consumer protection regulations related to automated overdraft payment programs could adversely affect our business operations, net income and profitability.

The Federal Reserve and FDIC recently enacted consumer protection regulations related to automated overdraft payment programs offered by financial institutions. We have implemented, and are in the process of further implementing, changes to our business practices relating to overdraft payment programs in order to comply with these regulations.

Implementing the changes required by these regulations will decrease the amount of fees we receive for automated overdraft payment services and adversely impact our noninterest income. Complying with these regulations has resulted in increased operational costs, which may continue to rise. The actual impact of these regulations in future periods could vary due to a variety of factors, including changes in customer behavior, economic conditions and other factors, which could adversely affect our business operations and profitability.

The Company and its subsidiaries are subject to extensive regulation which could adversely affect them.

The Company and its subsidiaries’ operations are subject to extensive regulation and supervision by federal and state governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of the Company’s operations. Banking regulations governing the Company’s operations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not security holders. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products the Company may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or

 

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reputation damage, which could have a material adverse effect on the Company’s business, financial condition and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. These laws, rules and regulations, or any other laws, rules or regulations, that may be adopted in the future, could make compliance more difficult or expensive, restrict the Company’s ability to originate, broker or sell loans, further limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold by the Bank and otherwise adversely affect the Company’s business, financial condition or prospects.

Higher FDIC deposit insurance premiums and assessments could adversely affect the Company’s financial condition.

The Bank’s FDIC insurance premiums increased substantially in 2009, and the Company expects to pay significantly higher premiums in the future. A large number of depository institution failures have significantly depleted the deposit insurance fund (the “DIF”) and reduced the ratio of reserves to insured deposits. In order to restore the DIF to its statutorily mandated minimum of 1.15 percent over a period of several years, the FDIC increased deposit insurance premium rates at the beginning of 2009 and imposed a special assessment on June 30, 2009, which amounted to $212,000 for the Bank. The FDIC may impose additional special assessments in the future.

National or state legislation or regulation may increase our expenses and reduce earnings.

Federal bank regulators are increasing regulatory scrutiny, and additional restrictions on financial institutions have been proposed by the President, regulators and Congress. Changes in federal legislation, regulation or policies, such as bankruptcy laws, deposit insurance, consumer protection laws, and capital requirements, among others, can result in significant increases in our expenses and/or charge-offs, which may adversely affect our earnings. Changes in state or federal tax laws or regulations can have a similar impact. Furthermore, financial institution regulatory agencies are expected to continue to be very aggressive in responding to concerns and trends identified in examinations, including the continued issuance of additional formal or informal enforcement or supervisory actions. If we were required to enter into such actions with our regulators, we could be required to agree to limitations or take actions that limit our operational flexibility, restrict our growth or increase our capital or liquidity levels. Failure to comply with any formal or informal regulatory restrictions, including informal supervisory actions, could lead to further regulatory enforcement actions. Negative developments in the financial services industry and the impact of recently enacted or new legislation in response to those developments could negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance. In addition, industry, legislative or regulatory developments may cause us to materially change our existing strategic direction, capital strategies, compensation or operating plans.

Changes in accounting policies and practices, as may be adopted by regulatory agencies, the Financial Accounting Standards Board, or other authoritative bodies, could materially impact our financial statements.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the regulatory agencies, the Financial Accounting Standards Board, and other authoritative bodies change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations.

Our controls and procedures may fail or be circumvented, which could negatively affect our business.

Controls and procedures are particularly important for financial institutions. Management regularly reviews and updates our internal controls, disclosure controls procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse affect on our business, results of operations and financial condition.

Our directors and executive officers own a significant portion of our common stock.

Our directors and executive officers, as a group, beneficially owned approximately 21.36% of our outstanding common stock as of March 17, 2011. As a result of their ownership, the directors and executive officers have the ability, by voting their shares in concert, to influence the outcome of matters submitted to our shareholders for approval, including the election of directors.

 

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Our ability to pay cash dividends is limited, and we may be unable to pay future dividends even if we desire to do so.

Our ability to pay cash dividends may be limited by regulatory restrictions, by our bank’s ability to pay cash dividends to our holding company and by our need to maintain sufficient capital to support our operations. The ability of the Bank to pay cash dividends to our holding company is limited by its obligation to maintain sufficient capital and by other restrictions on its cash dividends that are applicable to South Carolina state banks and banks that are regulated by the FDIC. If the Bank is not permitted to pay cash dividends to our holding company, it is unlikely that we would be able to pay cash dividends on our common stock.

The Company’s ability to pay dividends on its common stock is limited by the Company’s participation in the CPP and by certain statutory or regulatory limitations. Prior to January 30, 2012, unless the Company has redeemed the Series 2009-SP Preferred Stock and the Series 2009- WP Preferred Stock or the Treasury has transferred the Series 2009-SP Preferred Stock and Series 2009-WP Preferred Stock to a third party, the consent of the Treasury will be required for the Company to declare or pay any dividend or make any distribution on its common stock (other than regular quarterly cash dividends of not more than the amount of the last quarterly cash dividend per share declared or, if lower, announced to its holders of common stock an intention to declare, on the Company’s common stock prior to November 17, 2008). Subsequent to January 30, 2012 and prior to January 30, 2019, the foregoing restrictions will likewise be effective, except that generally the Company would be limited to a common stock dividend not in excess of 103% of the per share dividends in effect for the immediately prior fiscal year. Prior to January 30, 2019, unless the Company has redeemed the Series 2009-SP Preferred Stock and the Series 2009-WP Preferred Stock or the Treasury has transferred all of such stock to a third party, the consent of the Treasury will be required for us to redeem, purchase or acquire any shares of our common stock, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the purchase agreement with the Treasury. Furthermore, if the Company is not current in the payment of quarterly dividends on the Series 2009-SP Preferred Stock and the Series 2009-WP Preferred Stock, it cannot pay dividends on its common stock.

On January 6, 2011, the Company gave notice to the U.S. Treasury Department that the Company was suspending the payment of regular quarterly cash dividends on its preferred stock, beginning with the February 15, 2011 dividend. Accordingly, the Company may not pay a dividend to its common shareholders until all accrued and unpaid dividends have been paid to the U.S. Treasury Department.

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

On March 1, 2011, the Bank entered into the Consent Order with the FDIC and the South Carolina Board of Financial Institutions. Among other things, the Consent Order prohibits the Bank from declaring or paying any dividends without the prior written approval of the FDIC and the South Carolina Board of Financial Institutions. Also, as previously disclosed, the Company is under a Memorandum of Understanding with the Federal Reserve Bank of Richmond which requires that the Company seek permission from the Federal Reserve prior to paying any dividends.

A limited trading market exists for our common stock which could lead to price volatility.

Our common stock trades in the over the counter market and is reported on the OTC Bulletin Board. The limited trading market for our common stock may cause fluctuations in the market value of our common stock to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading market of our common stock. In addition, even if a more active market in our common stock develops, we cannot assure you that such a market will continue or that shareholders will be able to sell their shares.

The Series 2009-SP and Series 2009 WP preferred stock impacts net income available to our common shareholders and our earnings per share.

As long as shares of our Series 2009-SP and Series 2009-WP preferred stock are outstanding, no dividends may be paid on our common stock unless all dividends on the Series 2009-SP and Series 2009-WP preferred stock have been paid in full. The dividends declared on shares of our Series 2009-SP and Series 2009-WP preferred stock will reduce the net income available to common shareholders and our earnings per common share.

 

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Holders of the Series 2009-SP and Series 2009-WP preferred stock have rights that are senior to those of our common shareholders.

The Series 2009-SP and Series 2009-WP preferred stock that we have issued to the U.S. Treasury is senior to our shares of common stock, and holders of the Series 2009-SP and Series 2009-WP preferred stock have certain rights and preferences that are senior to holders of our common stock. So long as any shares of the Series 2009-SP and Series 2009-WP preferred stock remain outstanding, unless all accrued and unpaid dividends on shares of the Series 2009-SP and Series 2009-WP preferred stock for all prior dividend periods have been paid or are contemporaneously declared and paid in full, no dividend whatsoever shall be paid or declared on our common stock, other than a dividend payable solely in common stock. On January 6, 2011, the Company gave notice to the U.S. Treasury Department that the Company was suspending the payment of regular quarterly cash dividends on its preferred stock, beginning with the February 15, 2011 dividend. Accordingly, the Company may not pay a dividend to its common shareholders until all accrued and unpaid dividends have been paid to the U.S. Treasury Department.

The Series 2009-SP and Series 2009-WP preferred stock is entitled to a liquidation preference over shares of our common stock in the event of our liquidation, dissolution or winding up. Furthermore, in the event that we fail to pay dividends on the Series 2009-SP and Series 2009-WP preferred stock for an aggregate of six quarterly dividend periods or more (whether or not consecutive), the authorized number of directors then constituting our board of directors will be increased by two. Holders of the Series 2009-SP and Series 2009-WP preferred stock, together with the holders of any outstanding parity stock with like voting rights, referred to as voting parity stock, voting as a single class, will be entitled to elect the two additional members of our board of directors, referred to as the preferred stock directors, at the next annual meeting (or at a special meeting called for the purpose of electing the preferred stock directors prior to the next annual meeting) and at each subsequent annual meeting until all accrued and unpaid dividends for all past dividend periods have been paid in full.

We face strong competition from financial services companies and other companies that offer banking services which could negatively affect our business.

We conduct our banking operations primarily in the counties of Greenville and Spartanburg located in upstate South Carolina. Increased competition in the market may result in reduced loans and deposits. Ultimately, we may not be able to compete successfully against current and future competitors. Many competitors offer the same banking services that we offer in our service area. These competitors include national banks, regional banks and other community banks. We also face competition from many other types of financial institutions, including without limitation, savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In particular, our competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and ATMs and conduct extensive promotional and advertising campaigns.

Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain deposits, and range and quality of products and services provided, including new technology-driven products and services. Technological innovation continues to contribute to greater competition in domestic and international financial services markets as technological advances enable more companies to provide financial services. We also face competition from out-of-state financial intermediaries that have opened low-end production offices or that solicit deposits in our market areas. If we are unable to attract and retain banking customers, we may be unable to continue to grow our loan and deposit portfolios and our results of operations and financial condition may otherwise be adversely affected.

Our information systems may experience an interruption or breach in security, which could materially negatively impact our operations and the confidence and good will of our customers.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of those systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. The occurrence of any failures, interruptions or security breaches or of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse affect on our financial condition and results of operations.

Maintaining or increasing market share depends on the timely development and acceptance of new products and services and perceived overall value of these products and services by users.

Our success depends, in part, on our ability to adapt our products and services to evolving industry standards. There is increasing pressure to provide products and services at lower prices. This can reduce our net interest margin revenues from

 

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our fee-based products and services. In addition, our success depends, in part, on our ability to generate significant levels of new business in our existing markets and in identifying and penetrating new markets. Further, the widespread adoption of new technologies, including internet services, could require us to make substantial expenditures to modify or adapt our existing products and services. We may not be successful in introducing new products and services, achieving market acceptance of products and services and developing and maintaining loyal customers and/or breaking into targeted markets.

We must respond to rapid technological changes and these changes may be more difficult or expensive to effectuate than anticipated.

If competitors introduce new products and services embodying new technologies, or if new industry standards and practices emerge, our existing product and service offerings, technology and systems may become obsolete. Further, if we fail to adopt or develop new technologies or to adapt our products and services to emerging industry standards, we may lose current and future customers, which could have a material adverse effect on our business, financial condition and results of operations. The financial services industry is changing rapidly and in order to remain competitive, we must continue to enhance and improve the functionality and features of our products, services and technologies. These changes may require significant capital expenditures and prove to be more difficult or expensive to implement than we anticipate.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties

As of December 31, 2010 the Bank had four banking facilities. The corporate headquarters and main office is located on a two-acre tract of land at the corner of West Poinsett Street and Pennsylvania Avenue, in the city limits of Greer. The address is 1111 West Poinsett Street, Greer, South Carolina 29650. The building contains approximately 15,500 square feet. On the first floor in the present facility, there are four teller stations, two customer service offices, twelve additional private offices, and three drive-in teller windows. The vault contains 555 safe deposit boxes. The second floor consists of twelve private offices, the Board of Directors’ room, a storage vault, a training facility and a large work area which houses eight modular work stations. A large basement, previously used as storage for supplies and other items, was renovated in 2005 and now contains four private offices, ten modular work stations and a fire resistant storage area. There are 101 parking spaces on the premises.

The operations functions (including data processing) are located at 601 North Main Street, Greer, South Carolina 29650, where a branch banking office is also located. The property was obtained from another financial institution in 1992. The banking office consists of two private offices, two customer service stations, four teller stations and two drive-in teller windows. The cash vault contains 232 safe deposit boxes. The basement of the North Main Street building is used as the operations area of the Bank. It consists of 10 modular workstations, two private offices and a large storage vault.

On November 2, 1998, the Bank opened a full-service branch banking facility located on 2.27 acres at 871 South Buncombe Road, Greer, South Carolina 29650. The banking facility consists of three private offices, one customer service desk, three teller stations, two drive-in teller windows, four drive-through lanes, and a drive-up ATM. The cash vault contains 138 safe deposit boxes.

On August 20, 2005 the Bank opened a full-service branch office located on 1.12 acres at 3317 Wade Hampton Boulevard, Taylors, South Carolina 29687. This facility contains five private offices, one customer service desk, four teller stations, two drive-in teller stations, four drive-through lanes, and a drive-up ATM. The cash vault contains 162 safe deposit boxes.

On September 1, 2007, the Bank entered into an eighteen month lease of 1,456 square feet located at 103 C-2 Regency Commons Drive, Greer, SC 29650 to open a commercial and mortgage loan production office. The lease, which contained two six month renewal options, was terminated and the premises vacated September 1, 2009.

In February 2006, the Company purchased 4.1 acres of land on Pennsylvania Avenue in Greer, South Carolina near the Company’s headquarters on which to build an operations center. The land was sold on March 16, 2010 for $590,000 resulting in an immaterial loss and will help meet the Company’s short term liquidity needs.

 

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All buildings and properties, except the land at the Taylors location and the new operations facility land, are owned by the Bank without encumbrances. The land at the Taylors location and the operations facility land are both owned by Greer Bancshares Incorporated. The Taylors location land is leased by the Bank.

Item 3. Legal Proceedings

Neither the Company nor the Bank is a party to, nor is any of their property the subject of, any material pending legal proceedings incidental to the business of the Company or the Bank.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Stock Information and Dividend History

The common stock of Greer Bancshares Incorporated is traded in the over-the-counter market and quoted on the OTC Bulletin Board (symbol: GRBS). As of March 16, 2011 there were 1,141 record holders of our common stock, $5.00 par value per share.

The following table sets forth the high and low “bid” prices per share of the common stock for each quarterly period during the past two fiscal years, as reported on NASDAQ.com. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

     2010      2009  

Quarter

     High         Low         High         Low   

First

   $ 5.00       $ 4.50       $ 11.99       $ 5.50   

Second

   $ 8.50       $ 4.50       $ 10.00       $ 6.75   

Third

   $ 6.00       $ 1.55       $ 8.50       $ 6.05   

Fourth

   $ 3.50       $ 2.05       $ 7.90       $ 4.00   

Holders of the Company’s common stock are entitled to receive dividends when, as and if declared by the Company’s board of directors out of funds legally available for dividends. Due to the uncertain nature of the current economic environment, no cash dividends were declared on common stock in 2010 in order to prudently preserve capital levels. The Company’s ability to pay dividends to its shareholders in the future will depend on its earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, the Company’s ability to service any equity or debt obligations senior to its common stock, including its outstanding trust preferred securities and accompanying junior subordinated debentures and preferred stock and other factors deemed relevant by the Company’s Board of Directors. In addition, in order to fund dividends payable to shareholders, the Company generally must receive cash dividends from the Bank. The payment of dividends by the Bank is subject to regulations of the South Carolina Board of Financial Institutions. These regulations are discussed under “Item 1. Business-Supervision and Regulation-Greer State Bank.” Accordingly, the payment of dividends in the future is subject to earnings, capital requirements, financial condition and such other factors as the Board of Directors of Greer Bancshares Incorporated, the Commissioner of Banking for South Carolina and the FDIC may deem relevant.

The preferred stock issued to the U.S. Treasury in January 2009 also contains general restrictions on the Company’s payment of dividends. These restrictions are discussed more fully under “Item 1. Business-Supervision and Regulation-Greer Bancshares Incorporated.” The preferred stock also prohibits the Company from paying any dividends on its common stock if it is not current in the payment of quarterly dividends on the two series of preferred stock held by the U.S. Treasury Department. On January 6, 2011, the Company gave notice to the U.S. Treasury Department that the Company was suspending the payment of regular quarterly cash dividends on the cumulative perpetual preferred stock issued as part of the Troubled Assets Relief Program (“TARP”), beginning with the February 15, 2011 dividend. Accordingly, the Company may not pay a dividend to its common shareholders until all accrued and unpaid dividends have been paid to the U.S. Treasury Department. The Company’s failure to pay a total of six such dividends, whether or not consecutive, also gives the U.S. Treasury Department the right to elect two directors to the Company’s Board of Directors. That right would continue until the Company pays all due but unpaid dividends.

 

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

As discussed under “Item 1. Business-Supervision and Regulation-Greer State Bank” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Recent Developments-Consent Order,” on March 1, 2011, the Bank entered into the Consent Order with the FDIC and the South Carolina Board of Financial Institutions. Among other things, the Consent Order prohibits the Bank from declaring or paying any dividends without the prior written approval of the FDIC and the South Carolina State banking regulator. Also, as previously disclosed, the Company is under a Memorandum of Understanding with the Federal Reserve Bank of Richmond which requires that the Company seek permission from the Federal Reserve prior to paying any dividends.

The Equity Plan Compensation information required by Item 201(d) of Regulation S-K is incorporated by reference to Item 12 of this Annual Report on Form 10-K.

Item 6. Selected Financial Data

The following table sets forth certain selected financial data concerning Greer Bancshares Incorporated. This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operation and the consolidated financial statements.

 

December 31,   2010     2009     2008     2007     2006  

(Dollars in thousands, except per share data)

         

SUMMARY OF OPERATIONS

         

Interest and fee income

  $ 20,043      $ 21,880      $ 23,924      $ 24,836      $ 22,216   

Interest expense

    8,622        10,546        12,790        12,741        10,592   
                                       

Net interest income

    11,421        11,334        11,134        12,095        11,624   

Provision for loan losses

    6,675        5,185        4,230        1,811        597   
                                       

Net interest income after provision for loan losses

    4,746        6,149        6,904        10,284        11,027   

Noninterest income (loss)

    5,073        3,227        (5,322     2,499        2,340   

Noninterest expense

    12,797        10,523        10,443        9,229        8,922   

Income tax expense (benefit)

    4,318        (636     (3,421     948        1,292   
                                       

Net income (loss)

  $ (7,296   $ (511   $ (5,440   $ 2,606      $ 3,153   
                                       

Dividends and accretion on preferred stock

    642        581        —          —          —     

Net income (loss) available to common shareholders

  $ (7,938   $ (1,092   $ (5,440   $ 2,606      $ 3,153   
                                       

PER COMMON SHARE DATA

         

Earnings (Loss):

         

Basic

  $ (3.19   $ (.44   $ (2.19   $ 1.05      $ 1.28   

Diluted

    (3.19     (.44     (2.19     1.04        1.25   

Cash dividends declared per common share

    —          —          0.51        0.51        0.85   

Book value

    3.27        7.21        6.93        9.85        9.12   

Weighted average common shares outstanding:

         

Basic

    2,486,692        2,486,692        2,485,096        2,479,051        2,462,688   

Diluted

    2,486,692        2,486,692        2,485,096        2,509,270        2,517,549   

SELECTED ACTUAL YEAR END BALANCES

         

Total assets

  $ 456,767      $ 476,791      $ 437,037      $ 389,705      $ 359,662   

Loans

    270,001        307,393        311,414        263,011        245,858   

Allowance for loan losses

    7,495        6,315        5,127        2,233        1,801   

Available for sale securities

    132,813        124,984        79,874        79,565        60,185   

Held to maturity securities

    —          —          15,977        19,586        23,581   

Deposits

    321,385        298,646        282,125        244,593        240,288   

Borrowings

    102,500        135,493        122,000        105,104        80,685   

Subordinated debt

    11,341        11,341        11,341        11,341        11,341   

Stockholders’ equity

    18,261        27,953        17,826        24,436        22,542   

SELECTED AVERAGE BALANCES

         

Assets

  $ 447,640      $ 465,532      $ 417,491      $ 359,683      $ 330,984   

Deposits

    311,656        291,892        266,231        239,327        227,269   

Stockholders’ equity

    26,178        26,992        21,526        23,419        21,153   

FINANCIAL RATIOS

         

Return on average assets

    (1.77 )%      (.23 )%      (1.30 )%      .72     .95

Return on average equity

    (30.32 )%      (4.05 )%      (25.27 )%      11.13     14.90

Average equity to average assets

    5.85     5.80     5.16     6.51     6.40

Dividend payout ratio

    N.M.        N.M.        N.M.        48.57     66.41

N.M. – Not meaningful

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Description of the Company’s Business

Greer State Bank (the “Bank”) was organized under a state banking charter in August 1988, and commenced operations on January 3, 1989. Greer Bancshares Incorporated is a South Carolina corporation formed in July 2001, primarily to hold all of the capital stock of Greer State Bank. Greer Bancshares Incorporated and the Bank, its wholly-owned subsidiary, are herein referred to as the “Company.” In October 2004 and December 2006, Greer Capital Trust I and Greer Capital Trust II (the “Trusts”) were formed, respectively. The Trusts were formed as part of the process of the issuance of trust preferred securities. The Bank engages in commercial and retail banking, emphasizing the needs of small to medium businesses, professional concerns and individuals, primarily in Greer and surrounding areas in the upstate of South Carolina. The Company currently engages in no business other than owning and managing the Bank. Greer Financial Services, a division of the Bank, provides financial management services and non-deposit product sales.

Critical Accounting Policies

General

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

Income Taxes and Deferred Tax Asset

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

 

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

Deferred Tax AssetAt December 31, 2010, the net federal deferred tax asset totaled $456,589 after a valuation allowance of $5,810,730. The need for a valuation allowance is considered when it is determined more likely than not that a deferred tax asset will not be realized. In making this determination, management considers all available evidence, including the existence of available reversing temporary differences, the ability to generate future taxable income and available tax planning strategies. In deciding whether a valuation allowance was required, management considered recent pretax losses as significant negative evidence over its ability to realize its net deferred tax assets.

Allowance for Loan Losses

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

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

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

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impairment is measured on a loan by loan basis for commercial and 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, individual consumer and residential loans are not separately identified for impairment.

Other Real Estate Owned

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

Recent Developments

Consent Order

Effective March 1, 2011, the Bank entered into a Stipulation to the Issuance of a Consent Order (the “Stipulation”) agreeing to the issuance of a Consent Order (the “Consent Order”) with the FDIC and the Commissioner of Banking on behalf of the South Carolina Board of Financial Institutions (the “Commissioner”). The Consent Order replaces the previously disclosed Memorandum of Understanding effective September 8, 2010 with the FDIC and the Commissioner.

 

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The Consent Order is based on findings of the FDIC and the Commissioner during their joint examination in August 2010 (the “Examination”). Since the completion of the Examination, the Board of Directors has aggressively taken an active role in working to address the findings contained in the Examination and to improve the condition of the Bank. The Board and management proactively took steps to comply with the requirements of the Consent Order prior to its effectiveness, including the formation of a special Compliance Committee of nonemployee directors to assist the Board in overseeing compliance efforts. The initiatives put in place by the Board and management are expected to achieve compliance with the majority of the requirements contained in the Consent Order.

The Consent Order requires the Bank to undertake a number of actions:

 

   

The Board must enhance its supervision of the Bank’s activities, and oversee the efforts of the Bank’s management in complying with the Consent Order.

 

   

The Bank must develop and approve a written analysis and independent assessment of the Bank’s management and staffing needs in order to assure that the Bank has and will retain qualified management.

 

   

The Bank must notify the FDIC and the Commissioner (collectively, the “Regulators”) of the resignation or termination of any of the Bank’s directors or senior executive officers and notify the Regulators and receive their approval prior to appointing any new such officer.

 

   

Within 150 days, the Bank must achieve and maintain Tier 1 capital at least equal to 8% of total assets and Total Risk-Based capital at least equal to 10% of total risk-weighted assets.

 

   

The Bank must submit to the Regulators a written capital plan detailing the steps it will take to achieve the capital requirements. Such capital plan must include a contingency plan to sell or merge the Bank in the event it fails to meet the capital requirements.

 

   

The Bank must adopt and implement a written plan addressing liquidity, contingency funding and asset liability management.

 

   

The Bank must charge off certain classified assets identified in the Examination.

 

   

The Bank must formulate a written plan to reduce the Bank’s risk exposure in relationships with certain classified assets in excess of $500,000. Such plan must progressively effect the reduction of such classified assets over 180, 360, 540 and 720 days.

 

   

The Bank must generally refrain from extending additional credit to troubled borrowers.

 

   

The Bank must prepare a written strategic plan.

 

   

The Bank must revise and fully implement its written lending and collection policies.

 

   

The Bank must perform a risk segmentation analysis, and the Board must develop a plan to reduce any segment of the loan portfolio which the Regulators deem to be an undue concentration of credit.

 

   

The Board must review the adequacy of the Banks’ allowance for loan losses and establish a comprehensive policy for determining its adequacy.

 

   

The Bank must formulate and implement a written plan to improve and sustain Bank earnings, and annually revise such plan.

 

   

The Bank must develop and implement a written policy for managing interest rate risk, in compliance with regulatory requirements.

 

   

The Bank must correct all violations of regulations described in the Examination.

 

   

While the Consent Order is in effect, the Bank may not declare or pay dividends or bonuses without the prior written approval of the Regulators, nor make any distributions of interest, principal or other sums on subordinated debentures.

 

   

While the Order is in effect, the Bank generally may not accept, renew or roll over any brokered deposits. The Bank must submit to the Regulators a written plan for eliminating its reliance on brokered deposits.

 

   

While the Order is in effect, the Bank must limit asset growth to no more than 5% per calendar year.

 

   

The Bank must provide quarterly progress reports to the Regulators.

The plans, policies and procedures which the Bank is required to prepare under the Consent Order are generally subject to approval by the Regulators before implementation.

The Consent Order will remain in effect until modified or terminated by the FDIC and the Commissioner. The Board and management are striving to cause the Bank to comply with the Consent Order. However, meeting some requirements may be difficult, and there can be no assurance that the Bank will be able to comply fully with all of the Consent Order’s provisions. Failure to meet these requirements could result in additional regulatory action, which could lead to the Bank being taken into receivership by the FDIC.

 

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A copy of the Stipulation and the Consent Order are attached collectively as Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on March 7, 2011. The brief description of the material terms of the Stipulation and the Consent Order set forth above does not purport to be complete and is qualified by reference to the full text of the Stipulation and the Consent Order.

Deferral of Preferred Dividends and Trust Preferred Interest

On January 3, 2011, the Company gave notice of its election pursuant to the terms of its two issues of trust preferred securities, to defer payments of interest on such securities beginning in January 2011. The outstanding trust preferred securities total approximately $11.3 million, and the January 2011 quarterly interest payments total approximately $66,000. The Company is permitted to defer paying such interest for up to twenty consecutive quarters. As a condition to deferring payments of interest, the Company is generally prohibited from paying any dividends on its capital stock until deferred interest has been paid. Accordingly, so long as trust preferred interest is deferred, the Company is prohibited from paying dividends on its common stock or the Company’s preferred stock issued to the U.S. Treasury Department as part of the Troubled Assets Relief Program (the “TARP Preferred”).

On January 6, 2011, the Company also gave notice to the U.S. Treasury Department that the Company is suspending the payment of regular quarterly cash dividends on the TARP Preferred. The next quarterly dividend of the TARP Preferred was due on February 15, 2011 in the amount of $136,162. Dividends under the TARP Preferred cumulate and compound when not paid. The TARP Preferred totals approximately $10 million. The Company’s failure to pay a total of six such dividends, whether or not consecutive, gives the U.S. Treasury Department the right to elect two directors to the Company’s Board of Directors. That right would continue until the Company pays all due but unpaid dividends. Also, the terms of the TARP Preferred prohibit the Company from paying any dividends on its common stock while payments on the TARP Preferred are in arrears.

The decision to elect deferral of interest payments under the Company’s trust preferred securities and to suspend dividend payments on the TARP Preferred was made in consultation with the Federal Reserve Bank of Richmond.

Results of Operations

This discussion and analysis is intended to assist the reader in understanding the financial condition and results of operations of Greer Bancshares Incorporated and its wholly-owned subsidiary, Greer State Bank. The commentary should be read in conjunction with the consolidated financial statements and the related notes and the other statistical information in this report.

The following discussion describes our results of operations for 2010 as compared to 2009 and 2009 compared to 2008. The Company’s financial condition as of December 31, 2010 as compared to December 31, 2009 is also analyzed. Like most community banks, the Bank derives most of its income from interest received on loans and investments. The primary source of funds for making these loans and investments is deposits, on which interest is paid on approximately 89 percent of the accounts. The Bank also utilizes Federal Home Loan Bank advances, the Federal Reserve discount window, federal funds purchased and repurchase agreements for funding loans and investments. One of the key measures of success is net interest income, or the difference between the income on interest-earning assets, such as loans and investments, and the expense on interest-bearing liabilities, such as deposits and other borrowings. Another key measure is the spread between the yield earned on interest-earning assets and the rate paid on interest-bearing liabilities.

A number of tables have been included to assist in the description of these measures. For example, the “Average Balances” table shows the average balances during 2010, 2009 and 2008 of each category of assets and liabilities, as well as the yield earned or the rate paid with respect to each category. A review of this table shows that loans typically provide higher interest yields than do other types of interest earning assets, resulting in management’s intent to channel a substantial percentage of funding sources into the loan portfolio. Similarly, the “Analysis of Changes in Net Interest Income” table demonstrates the impact of changing interest rates and the changing volume of assets and liabilities during the years shown. Finally, a number of tables have been included that provide detail about the Company’s investment securities, loans, deposits and other borrowings.

There are risks inherent in all loans. Therefore, an allowance for loan losses is maintained to absorb inherent probable losses on existing loans that may become uncollectible. The allowance is established and maintained by charging a provision for loan losses against operating earnings. A detailed discussion of this process is included, as well as tables, describing the allowance for loan losses.

 

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In addition to earning interest on loans and investments, income is earned through fees and other charges collected for services provided to customers. Various components of this noninterest income, as well as noninterest expense, are described in the following discussion.

The following discussion and analysis also identifies significant factors that have affected the financial position and operating results during the periods included in the accompanying financial statements. Therefore, this discussion and analysis should be read in conjunction with the consolidated financial statements and the related notes and the other statistical information also included in this report.

Year ended December 31, 2010 compared with year ended December 31, 2009

The Company recorded a net loss attributable to common shareholders of $7,937,502 for the year ended December 31, 2010, compared to a net loss attributable to common shareholders of $1,091,952 for the year ended December 31, 2009. The loss per diluted common share for the year ended December 31, 2010 was $3.19, compared to loss per diluted common share of $.44 for the year ended December 31, 2009. The net loss in 2010 is due primarily to the loan loss provision, real estate owned expenses, FDIC deposit insurance assessments and a valuation allowance recorded on the deferred tax asset, partially offset by gain on sale of investment securities. Net interest income increased slightly to $11,420,731 for the year ended December 31, 2010. Noninterest income increased $1,381,584, or 37.4%, in 2010 compared to 2009 before the impairment charges of $464,179 primarily as a result of the aforementioned gain on sale of investments of $2,208,606. Noninterest expenses increased $2,273,699, or 21.6%, in 2010 compared to 2009 primarily as the result of an increase in OREO and foreclosure expenses partially offset by the results of budget reductions in all other noninterest expenses categories. In addition, there was a special assessment of FDIC insurance premiums in 2009 that did not recur in 2010.

Year ended December 31, 2009 compared with year ended December 31, 2008

The Company recorded a net loss attributable to common shareholders of $1,091,952 for the year ended December 31, 2009, compared to a net loss attributable to common shareholders of $5,440,104 for the year ended December 31, 2008. The loss per diluted common share for the year ended December 31, 2009 was $.44, compared to loss per diluted common share of $2.19 for the year ended December 31, 2008. The net loss in 2009 is due primarily to the increases in the loan loss provision, real estate owned expenses and FDIC deposit insurance assessments partially offset by gain on sale of investment securities and non-interest expense reductions. Net interest income increased slightly to $11,334,585 for the year ended December 31, 2009. Noninterest income increased $646,700, or 21.2%, in 2009 compared to 2008 before the impairment charges of $464,719 and $8,366,630 primarily as a result of the aforementioned gain on sale of investments of $1,093,840. See Note 2 in the accompanying consolidated financial statements for more details on the securities transactions. Noninterest expenses increased slightly in 2009 compared to 2008 primarily as the result of increased FDIC insurance premiums and an increase in OREO and foreclosure expenses partially offset by the results of budget reductions in almost all other noninterest expenses categories.

 

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Net Interest Income

Net interest income, the difference between interest earned and interest paid, is the largest component of the Company’s earnings. Therefore, changes in that area have a significant impact on net income. Variations in the volume and mix of assets and liabilities and their relative sensitivity to interest rate movements determine changes in net interest income. Interest rate spread and net interest margin are two significant elements in analyzing net interest income. Interest rate spread is the difference between the yield on average earning assets and the rate on average interest bearing liabilities. Net interest margin is calculated as net interest income divided by average earning assets.

Net interest income increased slightly to $11,420,731 for the year ended December 31, 2010 primarily as the result of increases in the interest rate spread and the net interest margin. The Bank’s average earning assets decreased by approximately $16.8 million, or 3.8%, during 2010. Interest income on earning assets decreased by $1,836,876, or 8.4%. Interest income was also negatively impacted by foregone interest on nonaccrual loans. As the result of an increase in nonaccrual loans in 2010, interest income was negatively impacted by approximately $753,000 in foregone interest income in 2010 compared to approximately $253,000 in foregone interest income in 2009. While average interest bearing liabilities decreased slightly, interest expense declined by $1,923,022, or 18.2% compared to 2009. The yield on average interest earning assets declined by 22 basis points in 2010. However, the yield paid on interest bearing liabilities decreased by 45 basis points. The decline in interest expense, while slightly offset by a decline in interest income, resulted in a higher net interest spread and net interest yield, and was primarily the result of lower market interest rates in 2010.

Net interest income increased slightly to $11,334,585 for the year ended December 31, 2009 because of the decline in the average rate paid on interest earning assets. While the Bank’s average earning assets increased by approximately $43.2 million, or 10.9%, during 2009, interest income on earning assets decreased by $2,043,725, or 8.5%, compared to 2008. Average interest bearing liabilities increased 11.9%; however, interest expense declined by $2,244,224, or 17.5% compared to 2008. The yield on average interest earning assets declined by 107 basis points in 2009, and the average rate paid on interest bearing liabilities decreased by 93 basis points. The decline in interest income and interest expense resulted in a lower net interest spread and net interest yield, and was primarily the result of lower market interest rates in 2009.

The following table sets forth for the periods indicated, the weighted-average yields earned, the weighted-average yields paid, the net interest spread and the net interest margin on earning assets. The table also indicates the average monthly balance and the interest income or expense by specific categories.

Average Balances, Income, Expenses and Rates

 

Year Ended December 31,    2010     2009     2008  
(Dollars in Thousands)    Average
Balance
     Income/
Expense
     Yield/
Rate (1)
    Average
Balance
     Income/
Expense
     Yield/
Rate (1)
    Average
Balance
     Income/
Expense
     Yield/
Rate (1)
 
Assets:                         

Interest Earning Assets:

                        

Taxable Investments

   $ 101,237       $ 3,026         2.99   $ 104,672       $ 4,229         4.04   $ 86,048       $ 4,461         5.18

Non-Taxable Investments

     25,507         1,630         6.39     22,438         1,492         6.65     21,297         1,423         6.68

Int. Bearing Deposits in other banks

     7,134         12         .17     859         12         1.40     465         14         3.01

Federal Funds Sold

     5,455         30         .55     1,170         4         .34     1,459         38         2.60

Loans (2)

     282,136         15,923         5.64     309,162         16,668         5.39     285,818         18,490         6.47
                                                            

Total Interest Earning Assets

     421,469         20,621         4.89     438,301         22,405         5.11     395,087         24,426         6.18
                                                            

Other noninterest-earning assets

     26,171              27,231              22,404         
                                          

Total Assets

   $ 447,640            $ 465,532            $ 417,491         
                                          
Liabilities and Stockholder’s Equity                         

Interest Bearing Liabilities:

                        

NOW Accounts

   $ 45,991         97         0.21   $ 41,703         104         0.25   $ 38,075         181         0.48

Money Market and Savings

     58,702         1,166         1.99     43,384         880         2.03     43,756         1,185         2.71

Time Deposits

     175,740         3,527         2.01     177,604         4,887         2.75     155,220         6,356         4.09

Federal Funds Purchased

     1,977         1         .05     11,901         38         .32     2,987         83         2.78

Repurchase Agreements

     15,000         548         3.65     15,000         548         3.65     15,000         549         3.66

FHLB Borrowings

     92,278         3,020         3.27     104,737         3,762         3.59     96,066         3,836         3.99

Other Long Term Debt

     11,341         264         2.33     11,341         327         2.88     11,341         600         5.29
                                                            

Total Interest Bearing Liabilities

     401,029         8,623         2.15     405,670         10,546         2.60     362,445         12,790         3.53
                                                            

Noninterest-Bearing Liabilities:

                        

Demand Deposits

     31,223              29,193              29,180         

Other Liabilities

     1,925              3,677              4,348         
                                          

Total Noninterest-Bearing Liabilities

     33,148              32,870              33,528         
                                          

Total Liabilities

     434,177              438,540              395,973         
                                          

Stockholders’ Equity

     26,178              26,992              21,526         
                                    

Total Liabilities and Stockholders’ Equity

   $ 460,355            $ 465,532            $ 417,491         
                                          

Net Interest Spread

           2.74           2.51           2.65

Net Interest Income

      $ 11,998            $ 11,859            $ 11,636      
                                          

Net Interest Yield

           2.85           2.71           2.95

 

(1) All yields/rates are computed on a tax equivalent basis at a federal tax rate of 34%.
(2) Average loan balances include nonaccrual loans. All loans and deposits are domestic.

 

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The following table sets forth the effect that the varying levels of earning assets and interest-bearing liabilities and the changes in applicable rates have had on changes in net interest income during the periods indicated. The net changes in net interest income in this table expand the differences in net interest income in the previous table, “Average Balances, Income, Expenses and Rates.”

Analysis of Changes in Net Interest Income

 

Year Ended December 31,    2010 Compared with 2009     2009 Compared with 2008  
     Variance Due to     Variance Due to  
(Dollars in Thousands)    Volume     Rate     Total     Volume     Rate     Total  

Interest Income:

            

Taxable Investments

   $ (139   $ (1,065   $ (1,204   $ 966      $ (1,198   $ (232

Non-Taxable Investments

     132        (47     85        49        (3     46   

Interest-Bearing Deposits in other banks

     88        (88     —          11        (13     (2

Federal Funds Sold

     15        11        26        (8     (26     (34

Loans

     (1,457     713        (744     1,510        (3,332     (1,822
                                                

Total

     (1,361     (476     (1,837     2,528        (4,572     (2,044

Interest Expense:

            

NOW Accounts

     11        (18     (7     17        (94     (77

Money Market and Savings

     311        (25     286        (10     (295     (305

Time Deposits

     (51     (1,309     (1,360     917        (2,386     (1,469

Federal Funds Purchased

     (32     (5     (37     248        (293     (45

Repurchase Agreements

     —          —          —          —          (1     (1

FHLB Borrowings

     (448     (294     (742     346        (420     (74

Other Long Term Debt

     —          (63     (63     —          (273     (273
                                                

Total

     (209     (1,714     (1,923     1,518        (3,762     (2,244
                                                

Net Interest Income

   $ (1,152   $ 1,238      $ 86      $ 1,010      $ (810   $ 200   
                                                

 

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The rate/volume variances (change in volume times change in rate) have been allocated to the change attributable to rate.

The Company monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on net interest income. The principal monitoring technique employed by the Company is the use of an interest rate risk management model which measures the effects that movements in interest rates will have on net interest income and the present value of equity. Included in the interest rate risk management reports generated by the model is a report that measures interest sensitivity “gap,” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. The Company was asset sensitive in the up to three months gap analysis and slightly liability sensitive from three to twelve months as of December 31, 2010. Interest rate sensitivity can be managed by repricing assets or liabilities, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates.

The table included above shows the changes in interest income and expense during 2010 and 2009, and allocates the appropriate amount of income or expense to changes in rate or changes in volume. In 2010 interest income decreased by approximately $1,837,000 and interest expense decreased by approximately $1,923,000, resulting in a slight increase of approximately $86,000 in net interest income. The decline in interest income was primarily the result of the decline in loan balances from principal paydowns. The increase in net interest income is largely attributable to decreases in market interest rates as term interest bearing deposits reprice.

In 2009 interest income decreased by approximately $2,044,000 and interest expense decreased by approximately $2,244,000, resulting in a slight increase of approximately $200,000 in net interest income. The decline in interest income was primarily the result of the decline in the prime lending rate in 2008, which affected approximately $165 million of loans indexed to prime. The increase in net interest income is largely attributable to decreases in market interest rates as term interest bearing deposits reprice. The increase was partially offset by increased volume in interest bearing deposits.

Provision for Loan Losses

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

Additions to the allowance for loan losses, which are expensed as the provision for loan losses on the income statement, are made as needed to maintain the allowance at an appropriate level based on management’s analysis of the inherent probable losses in the loan portfolio. Loan losses and recoveries are charged or credited directly to the allowance. The amount of the provision is a function of the level of loans outstanding, the level of nonperforming loans, historical loan loss experience, the amount of loan losses actually charged against the reserve during the period and current economic conditions. During 2010, the Bank provided $6,674,533 for loan losses, raising the balance of the allowance for loan losses to $7,495,405 at December 31, 2010 after considering net charge-offs of $5,494,406. The reserve for loan losses was approximately 2.78% and 2.05% of total loans for the years ended December 31, 2010 and 2009, respectively. Non-performing loans (i.e., loans ninety days or more past due and loans on non-accrual status) as a percentage of average assets increased from 1.23% to 4.18% from December 31, 2009 to December 31, 2010. Management continues to carefully analyze the loan portfolio to ensure the timely identification of problem loans and believes the current reserve level is adequate as indicated by the Bank’s loan loss reserve model at December 31, 2010.

Potential problem loans, which are not included in non-performing loans, amounted to approximately $27,562,000, or 10.2% of total loans outstanding at December 31, 2010. This is an increase of $8,062,000, or 41,3%, from potential problems loans totaling $19,500,000 at December 31, 2009. Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers or the performance of construction or development projects has caused management to have concerns about the borrower’s ability to comply with present repayment terms. Eleven residential construction and land development loan relationships totaling approximately $9,760,000 were included in potential problem loans at December 31, 2010. While these loans are currently performing under the contract terms, the construction or development projects are not performing as originally projected, due to a decline in the sale of lots. These loans have current appraisals indicating the collateral values exceed the loan balances.

 

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

Based on present information and ongoing evaluation, management considers the allowance for loan losses to be adequate to meet presently known and inherent risks in the loan portfolio. Management’s judgment as to the adequacy of the allowance is based upon a number of assumptions about future events that it believes to be reasonable, but which may or may not prove to be accurate. Actual losses will undoubtedly vary from the estimates. Also, there is a possibility that charge-offs in future periods will exceed the allowance for loan losses as estimated at any point in time. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required. The Company does not allocate the allowance for loan losses to specific categories of loans but evaluates the adequacy on an overall portfolio basis utilizing a risk grading system.

Noninterest Income

Noninterest income increased $1,381,584, or 37.4%, in 2010 compared to 2009 before the impairment charges in investment securities and restricted stock of $464,719. The increase was primarily due to a gain on sale of investment securities of $2,208,606 in 2010. In addition, other noninterest income increased $336,646, or 19.5%, for the year ended December 31, 2010 mainly as the result of death benefits received related to the July 2010 death of one of the directors. Visa debit and credit card fee income increased approximately $132,000 from 2009 to 2010 due to increased volume. This increase was partially offset by decreases of approximately $61,000 and $33,000 in secondary marketing income and income from the financial services division, respectively.

Noninterest income increased $646,700, or 21.2%, in 2009 compared to 2008 before the impairment charges in investment securities and restricted stock of $464,719 and $8,366,630, respectively. See Note 2 in the accompanying consolidated financial statements for more details regarding the impairment charges. The increase was primarily due to a gain on sale of investment securities of $1,093,840 in 2009. In addition, other noninterest income decreased $258,553, or 13%, for the year ended December 31, 2009 mainly as the result of a $152,878 gain on the sale of an interest rate floor in 2008 and decreased fees of $238,386 from the Bank’s financial services division. These declines were partially offset by increased earnings on Bank owned life insurance of $38,335, increased service charges and customer service fees relating to Visa debit and credit cards of $37,289 and increases in mortgage banking fees of $67,454 in 2009.

Noninterest Expenses

Noninterest expenses increased $2,273,699, or 21.6%, in 2010 compared to 2009 primarily as the result of an increase in OREO and foreclosure expenses partially offset by the results of budget reductions in all other noninterest expenses categories. In addition, there was a special assessment of FDIC insurance premiums of $212,000 in 2009 that did not recur in 2010. Other real estate owned expenses and foreclosure expenses increased $2,741,033, or 332.7%, in 2010 compared to 2009 due to increases in Bank owned real estate, net realizable valuation adjustments needed as updated appraisals were received during the holding period, payment of property taxes and repairs needed to maintain the real estate in sellable condition. As we work to manage our levels of foreclosed assets, it is likely that we will continue to see elevated levels of related expenses for managing the properties. In addition, to the extent that updated appraisals reflect reductions of values of the property, we will be required to record additional charges to our earnings. Updated appraisals are generally required every nine to twelve months. Directors fees declined $98,114, or 51.2%, in 2010 compared to 2009 as the result of a Board effort to further reduce expenses.

Noninterest expenses increased slightly in 2009 compared to 2008 due to an increase in FDIC deposit insurance assessments and an increase in expenses relating to foreclosed properties. Without these increases, noninterest expenses declined by approximately $1,207,000 as a result of management’s efforts to reduce overhead expenses. FDIC deposit insurance assessments increased $614,351, or 260.8%, in 2009 compared to 2008 due to efforts by the Federal government to replenish the FDIC insurance fund after increased bank failures across the nation. The FDIC increased assessment rates in 2009 and imposed a special assessment equating to $212,000 for the Bank in 2009 to further boost the FDIC’s deposit insurance reserve. Other real estate owned expenses and foreclosure expenses increased $673,387, or 447.2%, in 2009 compared to 2008 due to increases in Bank owned real estate, net realizable valuation adjustments needed as updated appraisals were received during the holding period, payment of property taxes and repairs needed to maintain the real estate in sellable condition. In January 2009, management identified certain expenses that could be reduced in an effort to operate more efficiently in the adverse economic environment being experienced. As a result of management’s actions, salaries and

 

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employees benefits expense declined 6.8% due to the elimination of seven staff positions. In addition, the loan production office was closed in September 2009, which is reflected in the 10.1% decline in occupancy and equipment expense, postage and supplies expense decreased 17.2%, marketing expenses were cut drastically as seen in the 71.4% decline from 2008 to 2009 and directors fees were reduced 23.4%. Professional fees declined 11.7% in 2009 compared to 2008 as a result of regulatory postponement of Sarbanes-Oxley internal control testing.

Income Taxes

The Company recorded income tax expense in the amount of $4,317,748 for the year ended December 31, 2010, compared to income tax benefit for the year ended December 31, 2009 of $636,159. The increase in the income tax expense is solely the result of a valuation allowance on temporary tax differences and net operating loss carryforwards.

The Company recorded an income tax benefit in the amount of $636,159 for the year ended December 31, 2009, compared to income tax benefit for the year ended December 31, 2008 of $3,420,808. The effective tax rate for the benefit recorded in 2009 was 55.4% compared to 38.6% for 2008. The increase in the effective tax rate for the benefit recorded is attributable to having lower loss before income taxes in 2009, which resulted in nontaxable income having a greater impact on the income tax provision. Also impacting the effective tax rate in 2009 was the impact of impairment charges of approximately $311,000 on certain securities which required a valuation allowance of $106,000.

At December 31, 2010, the Company had net deferred tax assets of $456,589. The net deferred tax asset was approximately $6,267,000 at December 31, 2010 prior to the valuation allowance. In evaluating whether the full benefit of the net deferred tax asset will be realized, both positive and negative evidence was considered including recent earnings trends, projected earnings and asset quality. As of December 31, 2010, management concluded that the negative evidence outweighed any positive evidence in determining realization of any deferred tax temporary differences and recorded a valuation allowance on all temporary differences other than those related to unrealized gains or losses within the investment securities portfolio.

Capital Resources

Total capital of the Company decreased $9,691,319 from December 31, 2009 compared to December 31, 2010 primarily as a result of the net loss attributable to common shareholders of $7,937,502. In addition, accumulated other comprehensive loss decreased by $1,942,192 and the Company declared cash dividends on preferred stock totaling $544,649 in 2010.

Total capital of the Company increased $10,126,616 from December 31, 2008 compared to December 31, 2009. In January 2009, the Company issued $9,993,000 in preferred stock to the U.S. Department of the Treasury (see Note 19 in the accompanying consolidated financial statements for more details). In addition, accumulated other comprehensive income increased by $1,062,352 which partially offset a net loss attributable to common shareholders of $1,091,952. The Company declared cash dividends on preferred stock totaling $500,776 in 2009.

The Federal Reserve Board and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the risk-based standard, capital is classified into two tiers. Tier 1 capital of the Company consists of equity minus unrealized gains plus unrealized losses on securities available for sale and less any disallowed portion of deferred tax assets. In addition to Tier 1 capital requirements, Tier 2 capital consists of the allowance for loan losses subject to certain limitations. A bank holding company’s qualifying capital base for purposes of its risk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital. The regulatory minimum requirements for banks that are not under prompt correction action are 4% for Tier 1 and 8% for total risk-based capital. The holding company and banking subsidiary are also required to maintain capital at a minimum level based on average assets, which is known as the leverage ratio. Only the strongest bank holding companies and banks are allowed to maintain capital at the minimum requirement. All others are subject to maintaining ratios 100 to 200 basis points above the minimum.

As discussed above under “Recent Developments,” on March 1, 2011, the Bank entered into the Consent Order with its primary Federal regulator, the FDIC, and the S.C. Board of Financial Institutions. The Consent Order seeks to enhance the Bank’s existing practices and procedures in the areas of credit risk management, credit underwriting, liquidity and interest rate risk. In addition, the FDIC has established minimum capital ratio levels of Tier 1 and total capital for the Bank that are higher than the minimum and well-capitalized ratios applicable to all banks. Specifically, by August 1, 2011, the Bank must achieve and maintain a Tier 1 capital to average assets (leverage) ratio of at least 8% and a total risk-based capital to total risk-weighted assets ratio of at least 10%. As disclosed under “Risk-Based Capital Ratios” below, the Bank at December 31, 2010 would have met the total risk-based capital ratio but would not have met the leverage ratio. The Consent Order results in the Bank being deemed “adequately capitalized” irrespective of the fact that ratios indicate “well capitalized.” If the Bank is unable to achieve the required capital ratios within the specific timeframes, further regulatory actions could be taken. Further, the ability to operate as a going concern could be negatively impacted.

 

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

In October 2004 and December 2006, the Company issued $6.186 million and $5.155 million of junior subordinated debentures to its wholly-owned capital Trusts, Greer Capital Trust I and Greer Capital Trust II, respectively, to fully and unconditionally guarantee the trust preferred securities issued by the Trusts. These long term obligations qualify as total risk based capital for the Company. In addition, all proceeds received from the issuance were invested in the Bank as additional capital.

Greer State Bank and the holding company exceeded minimum regulatory capital requirements at December 31, 2010, 2009 and 2008 as set forth in the following table. As previously mentioned, the Bank is currently classified as “adequately capitalized” by the FDIC. See Note 17 of the accompanying consolidated financial statements for minimum and well capitalized regulatory requirements.

Risk-Based Capital Ratios

(Dollars in thousands)

 

Bank    2010     2009     2008  

Tier 1 Capital

   $ 29,334      $ 35,614      $ 25,955   

Tier 2 Capital

     3,923        4,371        4,363   
                        

Total Qualifying Capital

   $ 33,257      $ 39,985      $ 30,318   
                        

Risk-adjusted total assets

   $ 309,480      $ 347,753      $ 347,502   
                        

(including off-balance-sheet exposures)

      

Tier 1 risk-based capital ratio

     9.48     10.02     7.47

Total risk-based capital ratio

     10.75     11.28     8.72

Tier 1 leverage ratio

     6.45     7.43     6.05

Greer Bancshares

      

Tier 1 risk-based capital ratio

     8.6     10.4     7.1

Total risk-based capital ratio

     11.0     12.2     9.8

Tier 1 leverage ratio

     5.8     7.7     5.8

The Company’s ability to pay dividends depends on its earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, the Company’s ability to service any equity or debt obligations senior to its common stock, including its outstanding trust preferred securities and accompanying junior subordinated debentures and preferred stock and other factors deemed relevant by the Company’s Board of Directors. In addition, in order to fund dividends payable to shareholders, the Company generally must receive cash dividends from the Bank. The payment of dividends by the Bank is subject to regulations of the South Carolina Board of Financial Institutions. These regulations are

 

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discussed under “Item 1. Business-Supervision and Regulation-Greer State Bank.” Accordingly, the payment of dividends in the future is subject to earnings, capital requirements, financial condition and such other factors as the Board of Directors of Greer Bancshares Incorporated, the Commissioner of Banking for South Carolina and the FDIC may deem relevant.

The preferred stock issued to the U.S. Treasury in January 2009 also contains general restrictions on the Company’s payment of dividends. These restrictions are discussed more fully under “Item 1. Business-Supervision and Regulation-Greer Bancshares Incorporated.” The preferred stock prohibits the Company from paying any dividends on its common stock if it is not current in the payment of quarterly dividends on the two series of preferred stock held by the U.S. Treasury Department. On January 6, 2011, the Company gave notice to the U.S. Treasury Department that the Company was suspending the payment of regular quarterly cash dividends on the cumulative perpetual preferred stock issued as part of the Troubled Assets Relief Program (“TARP”), beginning with the February 15, 2011 dividend. Accordingly, the Company may not pay a dividend to its common shareholders until all accrued and unpaid dividends have been paid to the U.S. Treasury Department. The Company’s failure to pay a total of six such dividends, whether or not consecutive, also gives the U.S. Treasury Department the right to elect two directors to the Company’s Board of Directors. That right would continue until the Company pays all due but unpaid dividends.

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

As discussed under “Item 1. Business-Supervision and Regulations-Greer State Bank” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Recent Developments-Consent Order,” on March 1, 2011, the Bank entered into the Consent Order with the FDIC and the South Carolina Board of Financial Institutions. Among other things, the Consent Order prohibits the Bank from declaring or paying any dividends without the prior written approval of the FDIC and the South Carolina State banking regulator. Also, as previously disclosed, the Company is under a Memorandum of Understanding with the Federal Reserve Bank of Richmond which requires that the Company seek permission from the Federal Reserve prior to paying any dividends.

Liquidity

The Company manages its liquidity for both the asset and liability side of the balance sheet through coordinating the relative maturities of its assets and liabilities. Short-term liquidity needs are generally met from cash, due from banks, federal funds purchased and sold and deposit levels. The Company has federal funds lines in place totaling $12 million, the ability to borrow additional funds from the Federal Reserve Discount Window of up to 75% of the Bank’s qualifying non-real estate consumer and commercial loans, the ability to borrow additional funds from the Federal Home Loan Bank of up to 30% of the Bank’s assets and also has a repurchase agreement line, currently fully drawn, with Deutsche Bank Securities, Inc., totaling $15 million. Use of the Federal Reserve, FHLB and repurchase lines is subject to the availability of acceptable collateral. As of December 31, 2010, the Company had approximately $67,231,000 in available collateral for all lines. Management has established policies and procedures governing the length of time to maturity on loans and investments and has established policies regarding the use of alternative funding sources. In the opinion of management, the deposit base and lines of credit can adequately support short-term liquidity needs. Management has a contingency liquidity plan in place in the event lines of credit are reduced and/or collateral availability diminishes.

Impact of Off-Balance Sheet Financial Instruments

The Company has certain off-balance-sheet instruments in the form of contractual commitments to extend credit to customers. These legally binding commitments have set expiration dates and are at predetermined interest rates. The underwriting criteria for these commitments are the same as for loans in the loan portfolio. Collateral is also obtained, if necessary, based on the credit evaluation of each borrower. Although many of the commitments will expire unused, management believes there are adequate resources to fund these commitments. At December 31, 2010 and 2009, the Company’s commitments to extend credit totaled approximately $38,425,000 and $53,160,000, respectively.

Investment Portfolio

The following tables summarize the carrying value and estimated market value of investment securities and weighted-average yields of those securities at December 31, 2010. The yields are based upon amortized cost. The yield on securities of state and political subdivisions is presented on a tax equivalent basis using a federal income tax rate of 34%.

 

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Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Investment Securities Portfolio Composition

 

(Dollars in Thousands)

December 31, 2010

   Due
One Year
or Less
    One Year
Through
Five Years
    Five Years
through
Ten Years
    After
Ten Years
    Total     Estimated
Market
Value
     Average
Maturity
in Years
 

Available-for-sale

               

Mortgage-backed securities

   $ —        $ 300      $ 521      $ 100,972      $ 101,793      $ 101,793         14.73   

Municipal securities

     —          737        9,196        20,705        30,638        30,638         10.70   

Collateralized debt obligation

     —          —          —          382        382        382         23.55   
                                                   

Total

   $ —        $ 1,037      $ 9,717      $ 122,059      $ 132,813      $ 132,813      
                                                   

Available-For-Sale

               

Weighted Average Yields:

               

Mortgage-backed securities

     0.0     4.3     5.0     2.9     3.3     

Municipal securities

     0.0     4.6     4.2     3.9     4.0     

Collateralized debt obligation

     0.0     0.0     0.0     0.0     0.0     

Investment securities in an unrealized loss position as of December 31, 2010 continue to perform as scheduled. Investment securities are evaluated monthly for indicators of other-than-temporary impairment (“OTTI”). Impairment is considered to have occurred when the fair value of a debt security is less than the amortized cost basis at the balance sheet date. Under these circumstances, OTTI is considered to have occurred 1) if there is intent to sell the security 2) if it is more likely than not we will be required to sell the security before recovery of its amortized cost basis; or 3) the present value of the expected cash flows is not sufficient to recover the entire amortized cost basis. For securities that we do not expect to sell or it is not more likely than not we will be required to sell, the OTTI is separated into credit and noncredit components The credit-related OTTI, represented by the expected loss in principal, is recognized in noninterest income, while the noncredit-related OTTI is recognized in the other comprehensive income (loss) (“OCI”). For securities which we do expect to sell, all OTTI is recognized in earnings. Presentation of OTTI is made in the income statement on a gross basis with a reduction for the amount of OTTI recognized in OCI. Our securities may further decline in value in future periods, which may require additional charges for other than temporary impairment of securities.

Loan Portfolio

Credit Risk Management

Credit risk entails both general risk, which is inherent in the process of lending, and risk that is specific to individual borrowers. The management of credit risk involves both the process of loan underwriting and loan administration. The Company manages credit risk through a strategy of making loans within its primary marketplace and within its limits of expertise. Although management seeks to avoid concentrations of credit by loan type or industry through diversification, a substantial portion of the borrowers’ ability to honor the terms of their loans is dependent on the business and economic conditions in Greenville and Spartanburg counties and the surrounding areas comprising the Company’s marketplace. Additionally, since real estate is considered by the Company as the most desirable non-monetary collateral, a significant portion of loans are collateralized by real estate; however, the cash flow of the borrower or the business enterprise is generally considered as the primary source of repayment. Generally, the value of real estate is not considered by the Company as the primary source of repayment for performing loans. Management also seeks to limit total exposure to individual and affiliated borrowers. Risk specific to individual borrowers is managed through the loan underwriting process and through an ongoing analysis of the borrower’s ability to service the debt as well as the value of the pledged collateral.

The Bank’s loan officers and loan administration staff are charged with monitoring the loan portfolio and identifying changes in the economy or in a borrower’s circumstances which may affect the ability to repay the debt or the value of the pledged collateral. In order to assess and monitor the degree of risk in the loan portfolio, several credit risk identification and monitoring processes are utilized.

 

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Lending Activities

The Company extends credit primarily to consumers and small to medium businesses in Greenville and Spartanburg counties and, to a limited extent, customers in surrounding areas.

While the Company’s corporate office is located in Greer, South Carolina, its service area is mixed in nature. The Greenville-Spartanburg area is a regional business center whose economy contains elements of manufacturing, higher education, regional health care and distribution facilities. Outside the incorporated city limits of Greer, the economy includes manufacturing, agriculture and industry. No particular category or segment of the economy previously described is expected to grow or contract disproportionately in 2010.

Total loans outstanding were $270,000,730 and $307,393,476 at December 31, 2010 and 2009, respectively. See Loan Portfolio Composition table below for concentration by credit type. Substantially all 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 Company’s ratio of loans to deposits was 84.0% and 102.9% at December 31, 2010 and 2009, respectively. The loan to deposit ratio is used to monitor a financial institution’s potential profitability and efficiency of asset distribution and utilization. Generally, a higher loan to deposit ratio is indicative of higher interest income since loans yield a higher return than alternative investment vehicles. Management has concentrated on maintaining quality in the loan portfolio while continuing to increase the deposit base. The decrease in the loans to deposits ratio is due primarily to investing a portion of the deposits in investment securities.

The following table summarizes the composition of the loan portfolio by category at the dates indicated.

Loan Portfolio

Year-end loans consisted of the following:

 

     2010     2009  

Commercial and industrial:

    

Commercial

   $ 49,467,265      $ 60,326,687   

Leases & other

     342,323        597,731   
                

Total Commercial and industrial:

     49,809,588        60,924,418   

Commercial real estate:

    

Construction/land

     40,243,049        68,098,644   

Commercial mortgages - owner occupied

     42,568,339        45,543,633   

Other commercial mortgages

     71,213,329        55,975,915   
                

Total commercial real estate

     154,024,717        169,618,191   

Consumer real estate:

    

1-4 residential

     35,027,156        41,232,212   

Home equity loans and lines of credit

     25,846,143        27,361,235   
                

Total Consumer real estate

     60,873,299        68,593,447   

Consumer installment:

    

Consumer installment

     5,293,126        8,257,420   
                

Total loans

     270,000,730        307,393,476   

Allowance for loan losses

     (7,495,405     (6,315,278
                

Net loans

   $ 262,505,325      $ 301,078,198   
                

 

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The Company’s loan portfolio contains a significant percentage of real estate mortgage loans. Real estate loans decreased by approximately $23,314,000 to approximately $214,898,000 during the twelve months ended December 31, 2010. At December 31, 2010 real estate loans represented 79.59% of the total loan portfolio compared to 77.33% at December 31, 2009. The slight increase in real estate mortgage loans as a percentage of total loans can be attributed to the slowing demand in the Company’s market area for commercial and consumer installment loans, which is a result of a softening local economy and tightened underwriting standards. In an effort to effectively manage its interest rate risk, over the past several years the Company has not offered in-house long-term fixed rate mortgage loans; however, the Company has offered five-year and seven-year balloon mortgage loan products at competitive rates. The Company continues to offer fixed rate long term mortgages through secondary market investor loan programs. Commercial and industrial loans decreased to approximately $49,810,000 during 2010 as a result of a softening local economy. Commercial and industrial loans comprised 18.45% and 19.15% of the total loan portfolio at December 31, 2010 and 2009, respectively. See Lending Activities under the Company’s December 31, 2010 Form-10-K for further discussion.

Maturities and Sensitivity of Loans to Changes in Interest Rates

The following table summarizes the loan maturity distribution for the selected categories as of December 31, 2010. The Company has a total of approximately $131,245,000 in variable rate loans indexed to the Wall Street Journal Prime rate.

 

December 31, 2010    Commercial     Real Estate-
Construction/Lane
    Total  
(Dollars in Thousands)    Amount      Percent     Amount      Percent     Amount      Percent  

Due One Year or Less

   $ 21,806         43.78   $ 26,528         65.92   $ 48,334         53.67

Due One Year through Five Years

     24,413         49.01     12,663         31.47     37,076         41.17

Due After Five Years

     3,591         7.21     1,052         2.61     4,644         5.16
                                                   

Total

   $ 49,810         100.00   $ 40,243         100.00   $ 90,054         100.00
                                                   

Risk Elements

The accrual of interest on loans is discontinued when, in management’s judgment, the interest will not be collectible in the normal course of business. Accrual of interest of such loans is typically discontinued when the loan is 90 days past due or impaired. All interest accrued, but not collected for loans that are placed on nonaccrual or charged off, is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following table states the approximate aggregate amount of problem assets in each of the following categories at December 31:

 

(dollars in thousands)    2010     2009     2008     2007     2006  

Nonperforming loans:

          

Nonaccrual-real estate mortgage

   $ 16,052      $ 6,426      $ 4,727      $ 2,488      $ 718   

Nonaccrual-commercial and industrial

     2,457        273        338        213        122   

Nonaccrual-consumer

     196        26        3        1        3   

90 days or more past due and still accruing interest

     —          561        86        100        1   
                                        

Total nonperforming loans

     18,705        7,286        5,154        2,802        844   
                                        

Foreclosed properties:

          

Foreclosed properties-residential real estate

     7,380        5,068        675        42        —     

Foreclosed properties-commercial real estate

     1,658        3,426        1,167        —          —     
                                        

Total foreclosed properties

     9,038        8,494        1,842        42        —     
                                        

Total nonperforming assets

   $ 27,743      $ 15,780      $ 6,996      $ 2,844      $ 844   
                                        

Nonperforming assets to total loans and foreclosed properties at period end

     9.94     5.00     2.23     1.08     .34

Nonperforming assets to total assets at period end

     6.07     3.31     1.60     .70     .23

Allowance for loan losses to nonperforming loans at period end

     40.06     86.67     99.48     79.69     213.39

 

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Nonperforming loans and impaired loans are defined differently. Nonperforming loans are loans that are 90 days past due and still accruing interest and nonaccrual loans. Impaired loans are loans that based upon current information and events it is considered probable that the Company will be unable to collect all amounts of contractual interest and principal as scheduled in the loan agreement. Some loans may be included in both categories, whereas other loans may only be included in one category. There was also $11,112,513 in troubled debt restructurings, which we included in the impaired loan total.

The loan portfolio is regularly reviewed to determine whether any loans require classification in accordance with applicable regulations. When loans are classified as either substandard or doubtful, collateral and future cash flow projections are reviewed to determine if a specific reserve is necessary. The allowance for loan losses represents amounts that have been established to recognize incurred losses in the loan portfolio that are both probable and reasonably estimable. Loans are charged off when classified as loss. The determination as to risk classification of loans and the amount of the loss allowances are subject to review by the Bank’s regulatory agencies.

The following table sets forth certain information with respect to the allowance for loan losses and the composition of charge-offs and recoveries for each of the last five years.

Summary of Loan Loss Experience

 

(Dollars in Thousands)    2010     2009     2008     2007     2006  

Total loans outstanding at end of year

   $ 270,001      $ 307,393      $ 311,414      $ 263,011      $ 245,858   
                                        

Average loans outstanding

   $ 288,697      $ 309,162      $ 285,818      $ 249,583      $ 229,467   
                                        

Balance, beginning of year

   $ 6,315      $ 5,127      $ 2,233      $ 1,801      $ 1,416   

Loans charged-off

          

Commercial and industrial

     991        702        494        1,338        177   

Real estate - mortgage

     4,076        3,137        613        107        —     

Consumer

     561        218        278        77        77   
                                        

Total loans charged-off

     5,628        4,057        1,358        1,552        254   
                                        

Recoveries of previous loan losses

          

Commercial and industrial

     67        17        11        128        1   

Real estate - mortgage

     14        7        —          —          —     

Consumer

     53        36        38        15        41   
                                        

Total loan recoveries

     134        60        49        143        42   
                                        

Net charge-offs

     5,494        3,997        1,336        1,379        212   
                                        

Provision charged to operations

     6,675        5,185        4,230        1,811        597   
                                        

Balance, end of year

   $ 7,495      $ 6,315      $ 5,127      $ 2,233      $ 1,801   
                                        

Ratios:

          

Allowance for loan losses to average loans

     2.60     2.04     1.79     0.89     0.78

Allowance for loan losses to period end loans

     2.78     2.05     1.65     0.85     0.73

Net charge offs to average loans

     1.90     1.29     0.47     0.55     0.09

 

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The allowance for loan losses is maintained at a level determined by management to be adequate to provide for probable losses inherent in the loan portfolio. The allowance is maintained through the provision for loan losses which is a charge to operations. The potential for loss in the portfolio reflects the risks and uncertainties inherent in the extension of credit.

The Bank’s provision and allowance for loan losses is subjective in nature and relies on judgments and assumptions about economic conditions and other factors affecting borrowers. These assumptions are based on the evaluation of several factors, including levels of, and trends in, past due and classified loans; levels of, and trends in, charge-offs and recoveries; trends in volume of loans, including any credit concentrations in the loan portfolio; experience, ability and depth of relevant lending staff; and national and local economic trends and conditions. No assurances can be made that future charges to the allowance for loan losses or provisions for loan losses may not be significant to a particular accounting period.

Interest is discontinued on impaired loans when management determines that a borrower may be unable to meet payments as they become due. As of December 31, 2010 the Bank had forty impaired commercial real estate loans and twenty-two impaired commercial and industrial loans with outstanding balances of $16,562,909 and $3,417,336, respectively. The average amount of impaired loans outstanding during 2010 was $13,480,790. There was no interest income recognized on the impaired loans. Large groups of smaller balance homogenous loans that may meet these criteria are not evaluated individually for impairment, so they are not included in the impaired loan totals.

Deposits

Average deposits were approximately $311,656,000 and 291,892,000 during 2010 and 2009, respectively. NOW accounts increased approximately $4,288,000, or 10.3%, from December 31, 2009 compared to December 31, 2010. Money market and savings deposits increased approximately $15,318,000, or 35.3%, from December 31, 2009 compared to December 31, 2010 as a result of focus on core deposit growth in 2010. Time deposits decreased slightly over the same period.

Contractual maturities of all time deposits at December 31, 2010 were as follows: twelve months or less - $133,252,277, over twelve months through thirty-six months - $36,520,861, and over thirty-six months - $90,000.

The following table summarizes the Bank’s average deposits by categories at the dates indicated.

 

Year Ended December 31,    2010     2009     2008  
     Average
Balance
     Percent     Average
Balance
     Percent     Average
Balance
     Percent  

(Dollars in thousands)

               

Noninterest-Bearing Deposits

               

Demand Deposits

   $ 31,223         10.02   $ 29,193         10.00   $ 29,180         14.03

Interest Bearing Liabilities

               

NOW Accounts

     45,991         14.76     41,711         14.29     38,075         12.90

Money Market and Savings

     58,702         18.83     43,384         14.86     43,756         17.21

Time Deposits

     175,740         56.39     177,604         60.85     155,220         55.86
                                                   

Total Deposits

   $ 311,656         100.00   $ 291,892         100.00   $ 266,231         100.00
                                                   

Core deposits, which exclude time deposits of $100,000 or more and brokered deposits, provide a relatively stable funding source for the loan portfolio and other earning assets. Core deposits were approximately $242,981,000, $202,717,000 and $170,426,000 at December 31, 2010, 2009 and 2008, respectively.

 

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Time deposits over $100,000, including brokered deposits of approximately $13,000,000, $30,000,000 and $49,000,000, totaled approximately $77,040,000, $94,108,000 and $109,647,000 at December 31, 2010, 2009 and 2008, respectively. Scheduled maturities were as follows:

 

Year Ended December 31,    2010      2009      2008  

(Dollars in thousands)

        

Maturing in 3 months or less

   $ 18,931       $ 29,997       $ 29,765   

Maturing after 3 months but less than 6 months

     18,035         12,857         38,425   

Maturing after 6 months but less than 12 months

     25,685         21,749         36,211   

Maturing after 12 months

     14,389         29,505         5,246   
                          

Total

   $ 77,040       $ 94,108       $ 109,647   
                          

Short Term Borrowings

The Company had no short term borrowings at December 31, 2010. At December 31, 2009, the Company had purchased federal funds totaling $3,992,931 and Federal Reserve borrowings of $10,000,000. At December 31, 2008 the Company had purchased federal funds totaling $4,000,000.

The related information for these borrowings during 2010 is summarized as follows:

 

     Federal
Funds
Purchased
    Federal
Reserve
Borrowings
 

Average balance outstanding during the year

   $ 85,000      $ 1,935.000   

Average rate paid during the year

     .52     .25

Long Term Borrowings

At December 31, 2010 and December 31, 2009, the Company had fixed rate notes payable totaling $61,500,000 and $90,500,000, respectively, to Federal Home Loan Bank (“FHLB”). Interest rates on the advances ranged from .29% to 5.25% and .68% to 5.92% at December 31, 2010 and 2009, respectively. At December 31, 2010, the Company had fixed rate repurchase agreements totaling $15,000,000 with a stated interest rate of 3.60%. At December 31, 2010, the Company had variable rate notes payable totaling $26,000,000 to FHLB. Notes for $20,000,000 were indexed to the three month LIBOR rate for a weighted average rate of 1.86% on December 31, 2010. The Company has pledged its 1 to 4 family residential mortgages, commercial real estate mortgages, home equity lines of credit and certain mortgage-backed securities as collateral against the FHLB borrowings.

In October 2004 and December 2006, the Company issued $6,186,000 and $5,155,000 of junior subordinated debentures to its wholly-owned capital Trusts, Greer Capital Trust I and Greer Capital Trust II, respectively, and fully and unconditionally guaranteed the trust preferred securities issued by the Trusts. These long-term obligations currently qualify as total risk based capital for the Company.

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

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

Both junior subordinated debentures allow deferral of interest payments for up to five years. Due to the financial condition of the Company, quarterly interest payments related to these debentures were deferred starting with the January 2011 payments.

 

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Accounting and Financial Reporting Issues

In July 2010, Financial Accounting Standards Board (“FASB”) issued new guidance regarding disclosures about the credit quality of financing receivables and the allowance for credit losses ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This guidance requires additional disclosures about the credit quality of financing receivables, such as aging information and credit quality indicators. In addition, disclosures must be disaggregated by portfolio segment or class based on how a company develops its allowance for credit losses and how it manages its credit exposure. Most of the requirements are effective for the fourth quarter of 2010 with certain additional disclosures required for the first quarter of 2011. The adoption of this standard did not have a material impact on the Company’s financial position and results of operations, but did increase the amount and quality of the credit quality disclosures in the notes to the consolidated financial statements.

In January 2010, the FASB issued an update to the previously issued accounting standards for fair value measurement and disclosures. The update is referred to as ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures About Fair Value Measurements.” ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) companies should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be required for the Company beginning January 1, 2011. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for the Corporation on January 1, 2010 and have been reflected in the accompanying consolidated financial statements and related notes.

Forward Looking Information

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

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

 

 

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

 

 

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

 

 

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

 

 

market risk and inflation;

 

 

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

 

 

availability of wholesale funding;

 

 

adequacy of capital and future capital needs;

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

adequacy of the level of our allowance for loan losses;

 

 

the rate of delinquencies and amounts of charge-offs;

 

 

the rates of loan growth;

 

 

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

 

 

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

 

 

changes occurring in business conditions and inflation;

 

 

changes in technology;

 

 

changes in monetary and tax policies;

 

 

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

 

 

changes in the securities markets;

 

 

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

 

 

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

 

 

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

For a description of factors which may cause actual results to differ materially from such forward-looking statements, see “Item 1A. Risk Factors.” Investors are cautioned not to place undue reliance on any forward-looking statements as these statements speak only as of the date when made. The Company undertakes no obligation to update any forward-looking statements made in this report.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

 

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Item 8. Financial Statements and Supplementary Data

LOGO

Report of Independent Registered Public Accounting Firm

To the Board of Directors

Greer Bancshares Incorporated and Subsidiary

Greer, South Carolina

We have audited the accompanying consolidated balance sheets of Greer Bancshares Incorporated and Subsidiary (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of loss, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2010. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated 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 the Company’s internal control over financial reporting. Our audit included 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 audit also 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 Greer Bancshares Incorporated and Subsidiary as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

LOGO

Dixon Hughes PLLC

Charlotte, North Carolina

March 31, 2011

 

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GREER BANCSHARES INCORPORATED AND SUBSIDIARY

Consolidated Balance Sheets

 

     December 31,  
     2010     2009  
Assets     

Cash and due from banks

   $ 23,700,628      $ 12,222,440   

Interest-bearing deposits in banks

     512,080        441,538   

Federal funds sold

     3,753,673        —     
                

Cash and cash equivalents

     27,966,381        12,663,978   

Investment securities:

    

Available for sale

     132,812,944        124,984,008   

Loans, net of allowance for loan losses of $7,495,405 and $6,315,278, respectively

     262,505,325        301,078,198   

Loans held for sale

     1,082,000        —     

Premises and equipment, net

     5,253,231        5,951,672   

Accrued interest receivable

     1,828,615        2,054,466   

Restricted stock

     5,309,100        5,936,900   

Other real estate owned

     9,037,961        8,493,968   

Deferred tax asset

     456,589        3,441,052   

Other assets

     10,515,205        12,186,323   
                

Total Assets

   $ 456,767,351      $ 476,790,565   
                
Liabilities and Stockholders’ Equity     

Liabilities:

    

Deposits:

    

Noninterest bearing

   $ 36,433,936      $ 33,655,746   

Interest bearing

     284,950,991        264,989,786   
                

Total deposits

     321,384,927        298,645,532   

Short term borrowings

     —          13,992,931   

Long term borrowings

     113,841,000        132,841,000   

Other liabilities

     3,280,072        3,358,431   
                

Total Liabilities

     438,505,999        448,837,894   
                

Commitments and contingencies - Note 10

    

Stockholders’ Equity:

    

Preferred stock—no par value 200,000 shares authorized;

    

Preferred stock, Series 2009-SP, no par value, 9,993 shares issued and outstanding at December 31, 2010 and 2009

     9,570,838        9,451,058   

Preferred stock, Series 2009-WP, no par value, 500 shares issued and outstanding at December 31, 2010 and 2009

     555,328        578,139   

Common stock—par value $5 per share, 10,000,000 shares authorized; 2,486,692 shares issued and outstanding at December 31, 2010 and 2009

     12,433,460        12,433,460   

Additional paid in capital

     3,633,607        3,542,201   

Retained earnings (accumulated deficit)

     (7,202,524     734,978   

Accumulated other comprehensive income (loss)

     (729,357     1,212,835   
                

Total Stockholders’ Equity

     18,261,352        27,952,671   
                

Total Liabilities and Stockholders’ Equity

   $ 456,767,351      $ 476,790,565   
                

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

 

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GREER BANCSHARES INCORPORATED AND SUBSIDIARY

Consolidated Statements of Loss

 

     For the Years Ended December 31,  
     2010     2009     2008  

Interest income:

      

Loans, including fees

   $ 15,923,506      $ 16,667,757      $ 18,490,118   

Investment securities:

      

Taxable

     3,025,964        4,229,272        4,460,793   

Tax-exempt

     1,052,293        967,266        921,115   

Federal funds sold

     29,951        4,172        38,258   

Other

     11,624        11,747        13,655   
                        

Total interest income

     20,043,338        21,880,214        23,923,939   

Interest expense:

      

Interest on deposit accounts

     4,790,243        5,871,323        7,721,112   

Interest on short term borrowings

     5,203        38,201        82,825   

Interest on long term borrowings

     3,827,161        4,636,105        4,985,916   
                        

Total interest expense

     8,622,607        10,545,629        12,789,853   
                        

Net interest income

     11,420,731        11,334,585        11,134,086   

Provision for loan losses

     6,674,533        5,185,195        4,230,227   
                        

Net interest income after provision for loan losses

     4,746,198        6,149,390        6,903,859   

Noninterest income:

      

Customer service fees

     804,499        874,327        862,463   

Gain on sale of investment securities

     2,208,606        1,093,840        200,451   

Impairment loss on investment securities and restricted stock

      

Impairment loss on investment securities and restricted stock

     —          (464,719     (8,366,630

Noncredit-related losses on securities not expected to be sold (recognized in other comprehensive income)

     —          —          —     
                        

Net impairment loss on investment securities and restricted stock

     —          (464,719     (8,366,630

Other

     2,059,981        1,723,335        1,981,888   
                        

Total noninterest income (loss)

     5,073,086        3,226,783        (5,321,828

Noninterest expenses:

      

Salaries and employee benefits

     5,554,201        5,676,889        6,092,666   

Occupancy and equipment

     748,774        829,023        922,265   

Postage and supplies

     263,689        255,764        308,948   

Marketing expenses

     105,876        110,517        386,096   

Directors fees

     93,664        191,778        250,419   

Professional fees

     384,193        391,057        442,841   

FDIC insurance assessment

     678,379        849,950        235,599   

Other real estate owned and foreclosure expense

     3,565,007        823,974        150,587   

Other

     1,403,637        1,394,769        1,653,522   
                        

Total noninterest expenses

     12,797,420        10,523,721        10,442,943   
                        

Loss before income taxes

     (2,978,136     (1,147,548     (8,860,912

Provision (benefit) for income taxes:

     4,317,748        (636,159     (3,420,808
                        

Net loss

     (7,295,884     (511,389     (5,440,104

Preferred stock dividends and net discount accretion

     (641,618     (580,563     —     
                        

Net loss attributed to common shareholders

   $ (7,937,502   $ (1,091,952   $ (5,440,104
                        

Basic net loss per share of common stock

   $ (3.19   $ (.44   $ (2.19
                        

Diluted net loss per share of common stock

   $ (3.19   $ (.44   $ (2.19
                        

Weighted average common shares outstanding:

      

Basic

     2,486,692        2,486,692        2,485,096   
                        

Diluted

     2,486,692        2,486,692        2,485,096   
                        

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

 

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GREER BANCSHARES INCORPORATED AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

For the Years Ended December 31, 2010, 2009 and 2008

 

    

Preferred

Stock Series

   

Preferred

Stock Series

    Common Stock     

Additional

Paid In

    

Retained
Earnings

(Accumulated

   

Accumulated

Other

Comprehensive

   

Total

Stockholders’

 
   2009-SP     2009-WP     Shares      Amount      Capital      Deficit)     Income (Loss)     Equity  

Balance at December 31, 2007

   $ —        $ —          2,481,836       $ 12,409,180       $ 3,259,895       $ 8,609,670      $ 156,777      $ 24,435,522   

Cumulative effect of a change in accounting principal

     —          —          —           —           —           (75,031     —          (75,031

Net loss

     —          —          —           —           —           (5,440,104     —          (5,440,104

Other comprehensive loss, net of tax:

                   

Unrealized holding loss on investment securities, net of income taxes of approximately $3,143,000

     —          —          —           —           —           —          (5,044,826     (5,044,826

Less reclassification adjustments for losses included in net loss, net of income tax benefit of approximately $3,128,000

     —          —          —           —           —           —          5,038,532        5,038,532   
                         

Comprehensive loss

                      (5,446,398

Stock option exercises pursuant to stock option plan

       —          4,856         24,280         22,680         —          —          46,960   

Stock based compensation

       —          —           —           132,607         —          —          132,607   

Dividends declared ($.51 per share)

     —          —          —           —           —           (1,267,605     —          (1,267,605
                                                                   

Balance at December 31, 2008

     —          —          2,486,692         12,433,460         3,415,182         1,826,930        150,483        17,826,055   

Net loss

     —          —          —           —           —           (511,389     —          (511,389

Other comprehensive income (loss), net of tax:

                   

Unrealized holding gain on held to maturity investment securities transferred to available for sale, net of income tax expense of approximately $102,000

     —          —          —           —           —           —          166,164        166,164   

Unrealized holding gain on available for sale investment Securities, net of income tax liability of approximately $723,000

     —          —          —           —           —           —          1,180,244        1,180,244   

Less reclassification adjustments for gains included in net loss, net of income tax liability of approximately $345,000

     —          —          —           —           —           —          (284,056     (284,056
                         

Comprehensive income

                      550,963   

Issuance of Preferred Stock

     9,993,000        500,000           —           —           —          —          10,493,000   

Discount associated with preferred stock series 2009-SP

     (645,185     —             —           —           —          —          (645,185

Premium associated with preferred stock series 2009-WP

     —          101,595           —           —           —          —          101,595   

Amortization of premium and discount on preferred stock

     103,243        (23,456        —           —           (79,787     —          —     

Stock based compensation

     —          —          —           —           127,019         —          —          127,019   

Preferred stock dividend declared

     —          —          —           —           —           (500,776     —          (500,776
                                                                   

Balance at December 31, 2009

     9,451,058        578,139        2,486,692         12,433,460         3,542,201         734,978        1,212,835        27,952,671   

(continued)

 

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GREER BANCSHARES INCORPORATED AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity

For the Years Ended December 31, 2010, 2009 and 2008, Continued

 

    

Preferred

Stock Series

    

Preferred

Stock Series

    Common Stock     

Additional

Paid In

    

Retained
Earnings

(Accumulated

   

Accumulated

Other

Comprehensive

Income

   

Total

Stockholders’

 
   2009-SP      2009-WP     Shares      Amount      Capital      Deficit)     (Loss)     Equity  

Balance at December 31, 2009

     9,451,058         578,139        2,486,692       $ 12,433,460            734,978        1,212,835        27,952,671   

Net loss

     —           —          —           —           —           (7,295,884     —          (7,295,884

Other comprehensive loss, net of tax:

                    

Unrealized holding loss on available for sale securities, net of income tax benefit of approximately $351,000

     —           —          —           —           —           —          (572,856     (572,856

Less reclassification adjustments for gains included in net loss, net of income tax benefit of approximately $839,000

     —           —          —           —           —           —          (1,369,336     (1,369,336
                          

Comprehensive loss

                       (9,238,076

Amortization of premium and discount on preferred stock

     119,780         (22,811     —           —           —           (96,969     —          —     

Stock based compensation

     —           —          —           —           91,406         —          —          91,406   

Preferred stock dividend declared

     —           —          —           —           —           (544,649     —          (544,649
                                                                    

Balance at December 31, 2010

   $ 9,570,838       $ 555,328        2,486,692       $ 12,433,460       $ 3,633,607       $ (7,202,524   $ (729,357   $ 18,261,352   
                                                                    

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

 

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GREER BANCSHARES INCORPORATED AND SUBSIDIARY

Consolidated Statements of Cash Flows

 

     For the Years Ended December 31,  
     2010     2009     2008  

Operating activities:

      

Net loss

   $ (7,295,884   $ (511,389   $ (5,440,104

Adjustments to reconcile net loss to net cash provided by operating activities:

      

Depreciation

     385,078        435,521        487,428   

Amortization of premiums on mortgage-backed securities

     1,583,721        1,005,479        264,078   

Loss (gain) on sale of other real estate owned

     (65,712     86,397        —     

Loss on sale of land

     3,616        —          —     

Gain on sale of investment securities

     (2,208,606     (1,093,840