FEDERAL DEPOSIT INSURANCE CORPORATION

WASHINGTON, D.C.

 
)
 
In the Matter of
)
   
)
 
SOUTHERN COMMUNITY BANK AND
)
CONSENT ORDER
TRUST
)
 
WINSTON-SALEM, NORTH CAROLINA
)
FDIC-10-823b
 
)
 
(Insured State Nonmember Bank)
)
   
)
 

The Federal Deposit Insurance Corporation (“FDIC”) is the appropriate Federal
banking agency for Southern Community Bank and Trust, Winston-Salem, North
Carolina (“Bank”) under 12 U.S.C. § 1813(q).
 
The Bank, by and through its duly elected and acting Board of Directors
(“Board”), has executed a “Stipulation to the Issuance of a Consent Order”
(“Stipulation”), dated February 16, 2011, that is accepted by the FDIC and the
North Carolina Commissioner of Banks (the “Commissioner”).  The Commissioner may
issue an order pursuant to the provisions of N.C. Gen. Stat. § 53-107.1 (2005).
 
With the Stipulation, the Bank has consented, without admitting or denying any
charges of unsafe or unsound banking practices or violations of law or
regulation relating to weaknesses in capital, asset quality, management,
earnings, and liquidity, to the issuance of this Consent Order (“ORDER”) by the
FDIC and the Commissioner.
 
Having determined that the requirements for issuance of an order under 12 U.S.C.
§ 1818(b) and section 53-107.1 of the North Carolina General Statutes have been
satisfied, the FDIC and the Commissioner hereby order that:

 
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BOARD OF DIRECTORS
 
1.            (a)          Beginning with the effective date of this ORDER, the
Board shall increase its participation in the affairs of the Bank, assuming full
responsibility for the approval of sound policies and objectives and for the
supervision of all of the Bank's activities, consistent with the role and
expertise commonly expected for directors of banks of comparable size.  This
participation shall include meetings to be held no less frequently than monthly
at which, at a minimum, the following areas shall be reviewed and
approved:  reports of income and expenses; new, overdue, renewal, insider,
charged-off, and recovered loans; investment activity; operating policies; and
individual committee actions.  Board minutes shall document these reviews and
approvals, including the names of any dissenting directors.
 
(b)         Within 30 days from the effective date of this ORDER, the Board
shall establish a Board committee (“Directors’ Committee”), consisting of at
least five members, to oversee the Bank’s compliance with the ORDER.  Three of
the members of the Directors’ Committee shall not be officers of the Bank.  The
Directors’ Committee shall receive from Bank management monthly reports
detailing the Bank’s actions with respect to compliance with the ORDER.  The
Directors’ Committee shall present a report detailing the Bank’s adherence to
the ORDER to the Board at each regularly scheduled Board meeting.  Such report
shall be recorded in the appropriate minutes of the Board’s meeting and shall be
retained in the Bank’s records.  Establishment of this committee does not in any
way diminish the responsibility of the entire Board to ensure compliance with
the provisions of this ORDER.

 
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MANAGEMENT
 
2.            Within 120 days from the effective date of this ORDER, the Bank
shall have and retain qualified management.
 
(a)          Each member of management shall have the qualifications and
experience commensurate with his or her assigned duties and responsibilities at
the Bank.  Management shall include the chief executive officer, chief credit
officer, and chief financial officer with supervisory experience levels for the
Bank’s risk profile.  Each member of management shall be provided appropriate
written authority from the Board to implement the provisions of this ORDER.
 
(b)          The qualifications of management shall be assessed on its ability
to:
 
(i)           Comply with the requirements of this ORDER;
 
(ii)          Operate the Bank in a safe and sound manner;
 
(iii)         Comply with applicable laws and regulations; and
 
(iv)         Restore all aspects of the Bank to a safe and sound condition,
including, but not limited to, asset quality, capital adequacy, earnings,
management effectiveness, risk management, liquidity, and sensitivity to market
risk.
 
(c)          Within 30 days from the effective date of this ORDER, the Board
shall engage an independent third party acceptable to the Regional Director of
the FDIC's Atlanta Regional Office ("Regional Director") and the Commissioner
(collectively, “Supervisory Authorities”) that possesses appropriate expertise
and qualifications to analyze and assess the Bank's Board, management, staffing
performance, and staffing needs.  The engagement shall require that the analysis
and assessment shall be summarized in a written report to the Board (“Management
Report”).  Within 30 days of receipt of the Management Report, the Board will
conduct a full and complete review of the Management Report, which review shall
be recorded in the minutes of the meeting of the Board.  The analysis and
assessment shall be developed by an outside consultant reporting to the Bank’s
Board.

 
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(d)          The Bank shall provide the Supervisory Authorities with a copy of
the proposed engagement letter or contract with the third party for review
before it is executed.  The contract or engagement letter, at a minimum, shall
include:
 
(i)           a description of the work to be performed under the contract or
engagement letter, the fees for each significant element of the engagement, and
the aggregate fee;
 
(ii)          the responsibilities of the firm or individual;
 
(iii)         an identification of the professional standards covering the work
to be performed;
 
(iv)         identification of the specific procedures to be used when carrying
out the work to be performed;
 
(v)          the qualifications of the employee(s) who are to perform the work;
 
(vi)         the time frame for completion of the work;
 
(vii)        any restrictions on the use of the reported findings;
 
(viii)       a provision for unrestricted examiner access to workpapers; and
 
(ix)         a certification that the firm or individual is not affiliated in
any manner with the Bank.

 
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(e)          Within 60 days of receipt of the Management Report, the Board will
develop a written Management Plan that incorporates the findings of the report,
a plan of action in response to each recommendation contained in the Management
Report, and a time frame for completing each action. At a minimum, the
Management Plan shall:
 
(i)           contain a recitation of the recommendations included in the
Management Report or otherwise communicated to the Bank, along with a copy of
any other report(s) prepared for the Board by the outside consultant(s);
 
(ii)          identify the type and number of officer positions needed to manage
and supervise the affairs of the Bank, detailing any vacancies or additional
needs and giving appropriate consideration to the size and complexity of the
Bank;
 
(iii)         identify the type and number of key staff positions needed to
carry out the Bank’s strategic plan, detailing any vacancies or additional
needs;
 
(iv)         identify the authorities, responsibilities, and accountabilities
attributable to each position, as well as the appropriateness of the
authorities, responsibilities, and accountabilities, giving due consideration to
the relevant knowledge, skills, abilities, and experience of the incumbent (if
any) and the existing or proposed compensation;
 
(v)          present a clear and concise description of the relevant knowledge,
skills, abilities, and experience necessary for each position, including
delegations of authority and performance objectives;
 
(vi)         identify the appropriate level of current and deferred compensation
to each officer and key staff position, including executive officer positions;

 
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(vii)        evaluate the current and past performance of all existing Bank
officers, including directors, executive officers, and key staff members,
indicating whether the individuals are competent and qualified to perform
present and anticipated duties, adhere to the Bank’s established policies and
practices, and operate the Bank in a safe and sound manner;
 
(viii)       establish requirements and methodologies to periodically evaluate
each individual's job performance;
 
(ix)          identify and establish Bank committees needed to provide guidance
and oversight to management;
 
(x)           establish a plan to terminate, rotate, or reassign officers and
key staff as necessary, as well as recruit and retain qualified personnel
consistent with the Board's analysis and assessment of the Bank's staffing
needs;
 
(xi)          identify training and development needs, and incorporate a plan to
provide such training and development;
 
(xii)         establish procedures to periodically review and update the
Management Plan, as well as periodically review and assess the performance of
each officer and key staff member;
 
(xiii)        contain a current organizational chart that identifies all
existing and proposed key staff and officer positions, delineates related lines
of authority and accountability, and establishes a written plan for addressing
any identified needs; and
 
(xiv)       contain a current management succession plan.

 
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(f)           A copy of the Management Report and Management Plan and any
subsequent modification thereto shall be submitted to the Supervisory
Authorities for review and comment.  Within 30 days from receipt of any comment,
and after consideration of such comment, the Board shall approve the Management
Plan and the approval shall be recorded in the minutes of the meeting of the
Board.  Thereafter, the Bank and its directors, officers and employees shall
implement and follow the Management Plan and any modifications thereto.  It
shall remain the responsibility of the Board to fully implement the plan within
the specified time frames.  In the event the plan, or any portion thereof, is
not implemented, the Board shall immediately advise the Supervisory Authorities,
in writing, of specific reasons for deviating from the Management Plan.
 
(g)         Within 30 days from the effective date of this ORDER, the Bank's
Board shall develop and adopt an educational program for periodic training for
each member of the Board.  The educational program shall include, at a minimum:
 
(i)           specific training in the areas of lending, operations, and
compliance with laws, rules and regulations applicable to banks chartered in the
state of North Carolina; and,
 
(ii)          specific training in the duties and responsibilities of the Board
in connection with the safe and sound operation of the Bank.
 
Upon adoption of the educational program, it shall be submitted to the Regional
Director of the FDIC's Atlanta Regional Office ("Regional Director") and the
Commissioner (collectively, "Supervisory Authorities") for review and
comment.  The Board shall document the training activities in the minutes of the
next Board meeting following completion of the training.  The Board's actions as
required by this paragraph shall be satisfactory to the Supervisory Authorities
as determined at subsequent examinations.

 
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(h)           During the life of this ORDER, the Bank shall notify the
Supervisory Authorities in writing when it proposes to add any individual to the
Bank’s Board or employ any individual as a senior executive officer.  The
notification must be received at least 30 days before such addition or
employment is intended to become effective and should include a description of
the background and experience of the individual or individuals to be added or
employed.  The Bank may not add any individual to its Board or employ any
individual as a senior executive officer if the Regional Director issues a
notice of disapproval pursuant to Section 32 of the Act, 12 U.S.C. § 1831i.
 
(i)           During the life of this ORDER, the Bank shall notify the
Supervisory Authorities in writing within ten days when any Board member or
executive officer resigns or is terminated.
 
CAPITAL
 
3.            (a)         Within 120 days from the effective date of this ORDER,
the Bank shall have Tier 1 capital in such an amount as to equal or exceed eight
(8%) percent of the Bank's total assets and total risk-based capital in such an
amount as to equal or exceed eleven (11%) percent of the Bank’s total
risk-weighted assets.  The Bank shall maintain these levels during the life of
this ORDER.  In the event this ratio falls below the established minimum, the
Bank shall notify the Supervisory Authorities and shall increase capital in an
amount sufficient to comply with this paragraph within 90 days.
 
(b)         Within 60 days from the effective date of this ORDER, the Bank shall
develop and adopt a plan for achieving and maintaining the capital levels
required by paragraph 3(a) during the life of this ORDER.  The plan shall be
submitted to the Supervisory Authorities for review and approval.

 
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(c)          The level of Tier 1 capital and total risk-based capital to be
maintained during the life of this ORDER pursuant to paragraph 3(a) shall be in
addition to a fully funded allowance for loan and lease losses (“ALLL”), the
adequacy of which shall be satisfactory to the Supervisory Authorities as
determined at subsequent examinations and/or visitations.
 
(d)          Any increase in Tier 1 capital necessary to meet the requirements
of paragraph 3 of this ORDER may be accomplished by the following:
 
(i)           The sale of common stock;

(ii)          The sale of non-cumulative perpetual preferred stock;
 
(iii)         The direct contribution of cash by the Board, shareholders, and/or
parent holding company;

(iv)         Any other means acceptable to the Supervisory Authorities; or
 
(v)          Any combination of the above means.
 
(e)          Any increase in Tier 1 capital necessary to meet the requirements
of paragraph 3 of this ORDER may not be accomplished through a deduction from
the Bank’s ALLL.

 
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(f)           If all or part of the increase in Tier 1 capital required by
paragraph 3 of this ORDER is accomplished by the sale of new securities, the
Board shall adopt and implement a plan for the sale of such additional
securities, including the voting of any shares owned or proxies held or
controlled by them in favor of the plan.  Should the implementation of the plan
involve a public distribution of the Bank's securities (including a distribution
limited only to the Bank's existing shareholders), the Bank shall prepare
offering materials fully describing the securities being offered, including an
accurate description of the financial condition of the Bank and the
circumstances giving rise to the offering, and any other material disclosures
necessary to comply with the applicable securities laws.  Prior to the
implementation of the plan involving the public distribution of the Bank’s
securities and, in any event, not less than 20 days prior to the dissemination
of such materials, the plan and any materials used in the public distribution of
the Bank’s securities shall be submitted to the FDIC, Division of Supervision
and Consumer Protection, Accounting and Securities Disclosure Section, 550 17th
Street, N.W., Room F-6066, Washington, D.C. 20429 and to the North Carolina
Office of the Commissioner of Banks, 4309 Mail Service Center, Raleigh, North
Carolina 27699.  Any changes requested to be made in the plan or materials shall
be made prior to their dissemination.
 
(g)          In complying with the provisions of paragraph 3 of this ORDER, the
Bank shall provide to any subscriber and/or purchaser of the Bank's securities,
a written notice of any planned or existing development or other changes, which
are materially different from the information reflected in any offering
materials used in connection with the sale of Bank securities.  The written
notice required by this paragraph shall be furnished within 10 days from the
date such material development or change was planned or occurred, whichever is
earlier, and shall be furnished to every subscriber and/or purchaser of the
Bank's securities who received or was tendered the information contained in the
Bank's original offering materials.

 
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(h)           For the purposes of this ORDER, the terms “Tier 1 capital,” “total
risk-based capital,” and “total assets” shall have, the meanings ascribed to
them in Part 325 of the FDIC Rules and Regulations, 12 C.F.R. Part 325.
 
LIQUIDITY AND FUNDS MANAGEMENT POLICY
 
4.            (a)          Within 60 days from the effective date of this ORDER,
the Bank shall adopt and implement a written plan addressing liquidity,
contingency funding, interest rate risk, and asset liability management, which
plan shall include, at a minimum, revisions to address all items of criticism in
the Report of Examination dated as of June 30, 2010 (“Report”).
 
(b)          The plan shall incorporate the guidance contained in Financial
Institution Letter (“FIL”) 84-2008, dated August 26, 2008, entitled Liquidity
Risk Management.  The plan shall provide restrictions on the use of brokered and
internet deposits consistent with safe and sound banking practices.
 
(c)          A copy of the plan shall be submitted to the Supervisory
Authorities upon its completion for review and comment.  Within 30 days from the
receipt of any comments from the Supervisory Authorities, the Bank shall
incorporate those recommended changes.  Thereafter, the Bank shall implement and
follow the plan.
 
(d)          Beginning with the effective date of this ORDER, the Bank’s
management shall review its liquidity position to ensure that the Bank has
sufficient liquid assets or sources of liquidity to meet current and anticipated
liquidity needs.  This review shall include an analysis of the Bank’s sources
and uses of funds (cash flow analysis).  The results of this review shall be
presented to the Board for review each month, with the review noted in the
minutes of the Board meeting.

 
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REDUCTION OF CLASSIFIED ASSETS
 
5.           (a)           Within 60 days from the effective date of this ORDER,
the Bank shall formulate a written plan to reduce the Bank’s risk exposure in
each asset or relationship in excess of $250,000 classified “Substandard” or
“Doubtful” in the Report.  For purposes of this paragraph, “reduce” means to
collect, charge off, or improve the quality of an asset so as to warrant its
removal from adverse classification by Supervisory Authorities.  In developing
the plan mandated by this paragraph, the Bank shall, at a minimum, and with
respect to each adversely classified loan or lease, review, analyze, and
document the financial position of the borrower, including source of repayment,
repayment ability, and alternative repayment sources, as well as the value and
accessibility of any pledged or assigned collateral, and any possible actions to
improve the Bank’s collateral position.
 
(b)          In addition, the written plan mandated by this paragraph shall also
include, but not be limited to, the following:
 
(i)           A quarterly schedule for reducing the outstanding dollar amount of
adversely classified assets;
 
(ii)          A schedule showing, on a quarterly basis, the expected
consolidated balance of all adversely classified assets, and the ratio of the
consolidated balance to the Bank’s projected Tier 1 capital plus the ALLL;
 
(iii)         A provision for the Bank’s submission of monthly written progress
reports to its Board; and
 
(iv)         A provision mandating Board review of the progress reports, with a
notation of the review recorded in the minutes of the Board meeting.

 
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(c)           The plan mandated by this paragraph shall further require a
reduction in the aggregate balance of assets classified “Substandard” and
“Doubtful” in the Report in accordance with the following schedule.  For
purposes of this paragraph, “number of days” means number of days from the
effective date of this ORDER.
 
(i)           Within 180 days, a reduction of fifteen percent (15%) in the
balance of assets classified “Substandard” or “Doubtful.”
 
(ii)          Within 360 days, a reduction of thirty-five percent (35%) in the
balance of assets classified “Substandard” or “Doubtful.”
 
(iii)         Within 540 days, a reduction of sixty percent (60%) in the balance
of assets classified “Substandard” or “Doubtful.”
 
(iv)         Within 720 days, a reduction of seventy-five percent (75%) in the
balance of assets classified “Substandard” or “Doubtful.”
 
(d)          The requirements of this paragraph do not represent standards for
future operations of the Bank.  Following compliance with the above reduction
schedule, the Bank shall continue to reduce the total volume of adversely
classified assets.  The plan may include a provision for increasing Tier 1
capital when necessary to achieve the proscribed ratio.
 
(e)          Within 60 days from the effective date of this ORDER, the Bank
shall submit the written reduction plan to the Supervisory Authorities for
review and comment.  Within 30 days from receipt of any comment from the
Supervisory Authorities, and after due consideration of any recommended changes,
the Bank shall approve the plan, which approval shall be recorded in the minutes
of the meeting of the Board.  Thereafter, the Bank shall implement and fully
comply with the plan.  Such plans shall be monitored and progress reports
thereon shall be submitted to the Supervisory Authorities at 90-day intervals
concurrently with the other reporting requirements set forth in this ORDER.

 
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ALLOWANCE FOR LOAN AND LEASE LOSSES
 
6.           (a)          Immediately upon the entry of this ORDER, the Board
shall make a provision to replenish the ALLL which is underfunded as set forth
in the Report.
 
(b)         Within 60 days from the effective date of this ORDER, the Board
shall review the ALLL and establish a comprehensive policy for determining the
adequacy of the ALLL.  For the purpose of this determination, the adequacy of
the ALLL shall be determined after the charge-off of all loans or other items
classified "Loss".  The policy shall provide for a review of the ALLL at least
once each calendar quarter.  Said review shall be completed in time to properly
report the ALLL in the quarterly Reports of Condition and of Income.  The review
shall focus on the results of the Bank's internal loan review, loan and lease
loss experience, trends of delinquent and non-accrual loans, an estimate of
potential loss exposure of significant credits, concentrations of credit, and
present and prospective economic conditions.  The review should include a review
of compliance with FAS 114 currently codified as 310-10-35,
Receivables—Overall—Subsequent Measurement, including separate identification of
and the appropriate value for both collateral dependent loans and loans not
collateral dependent.  The policy shall adhere to the guidance set forth in the
Interagency Policy Statement on the Allowance for Loan and Lease Losses.  A
deficiency in the ALLL shall be remedied in the calendar quarter it is
discovered, prior to submitting the Reports of Condition and Income, by a charge
to current operating earnings.  The minutes of the Board meeting at which such
review is undertaken shall indicate the results of the review.  The Bank's
policy for determining the adequacy of the ALLL and its implementation shall be
satisfactory to the Supervisory Authorities.

 
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REDUCTION OF CONCENTRATIONS OF CREDIT

7.            Within 30 days from the effective date of this ORDER, the Bank
shall perform a risk segmentation analysis with respect to the Concentrations of
Credit listed on the Concentration page of the Report and any other
concentration deemed important by the Bank.  Concentrations should be identified
by product type, geographic distribution, underlying collateral or other asset
groups, which are considered economically related and, in the aggregate,
represent a large portion of the Bank’s Tier 1 capital.  The Bank shall provide
a copy of this analysis to the Supervisory Authorities, and the Board agrees to
develop a plan to reduce any segment of the portfolio which the Supervisory
Authorities deem to be an undue concentration of credit in relation to the
Bank’s Tier 1 Capital.  The plan and its implementation shall be in a form and
manner acceptable to the Supervisory Authorities as determined at subsequent
examinations or visitations.
 
CHARGE-OFF
 
8.            (a)          Within 30 days from the effective date of this ORDER,
the Bank shall eliminate from its books, by charge-off or collection, all assets
or portions of assets classified "Loss" and 50 percent of those assets
classified "Doubtful" in the Report that have not been previously collected or
charged-off.  Elimination of any of these assets through proceeds of other loans
made by the Bank is not considered collection for purposes of this paragraph.
 
(b)         Additionally, while this ORDER remains in effect, the Bank shall,
within 30 days from the receipt of any official Report of Examination of the
Bank from the FDIC or the Commissioner, eliminate from its books, by collection,
charge-off, or other proper entries, the remaining balance of any asset
classified “Loss” and 50 percent of the those classified “Doubtful” unless
otherwise approved in writing by the Supervisory Authorities.

 
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NO ADDITIONAL CREDIT
 
9.            (a)           As of the effective date of this ORDER, the Bank
shall not extend, directly or indirectly, any additional credit to, or for the
benefit of, any borrower who has a loan or other extension of credit from the
Bank that has been charged off or classified, in whole or in part, "Loss" or
"Doubtful" and is uncollected.  The requirements of this paragraph shall not
prohibit the Bank from renewing (after collection in cash of interest due from
the borrower) any credit already extended to any borrower.
 
(b)          Additionally, during the life of this ORDER, the Bank shall not
extend, directly or indirectly, any additional credit to, or for the benefit of,
any borrower who has a loan or other extension of credit from the Bank that has
been classified, in whole or part, "Substandard” and is uncollected.
 
(c)          Paragraph 9(b) shall not apply if the Bank’s failure to extend
further credit to a particular borrower would be detrimental to the best
interests of the Bank.  Prior to the extending of any additional credit pursuant
to this paragraph, either in the form of a renewal, extension, or further
advance of funds, such additional credit shall be approved by a majority of the
Board or a designated committee thereof, who shall certify in writing:
 
(i)           why the failure of the Bank to extend such credit would be
detrimental to the best interests of the Bank;
 
(ii)          why the Bank’s position would be improved thereby, including an
explanatory statement of how the Bank’s position would be improved; and

 
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(iii)         that an appropriate workout plan has been developed and will be
implemented in conjunction with the additional credit to be extended.
 
(d)          The signed certification shall be made a part of the minutes of the
Board or its designated committee and a copy of the signed certification shall
be retained in the borrower’s credit file.
 
LENDING AND COLLECTION POLICIES
 
10.          (a)          Within 90 days from the effective date of this ORDER,
the Bank shall revise, adopt, and implement written lending and collection
policies to provide effective guidance and control over the Bank’s lending
function.
 
(b)          The initial revisions to the Bank's written lending and collection
policies, required by this paragraph, at a minimum, shall include the following:
 
(i)           provisions which require complete loan documentation, realistic
repayment terms and current credit information adequate to support the
outstanding indebtedness of the borrower.  Such documentation shall include
current financial information, profit and loss statements or copies of tax
returns and cash flow projections;
 
(ii)          provisions which incorporate limitations on the amount that can be
loaned in relation to established collateral values;
 
(iii)         provisions which specify the circumstances and conditions under
which real estate appraisals must be conducted by an independent third party;
 
(iv)         provisions which establish officer lending limits;

 
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(v)          provisions that require proper supervision of construction loans
and that adequate procedures are in place to monitor construction in relation to
construction loan advances;
 
(vi)         provisions which require the preparation of a loan "watch list,"
which shall include relevant information on all loans in excess of $100,000 that
are classified "Substandard" and "Doubtful" in the Report and by the Supervisory
Authorities in subsequent Reports of Examination and all other loans in excess
of $100,000 that warrant individual review and consideration by the Board as
determined by the Loan Committee or active management of the Bank.  The loan
"watch list" shall be presented to the Board for review at least monthly with
such review noted in the minutes; and
 
(vii)        provisions to ensure compliance with FASB Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan.
 
(c)          The Bank shall also within 90 days from the effective date of this
ORDER submit a copy of the revised written lending and collection policies to
the Supervisory Authorities for review and comment.  Within 30 days from the
receipt of any comments from the Supervisory Authorities, the Bank shall
incorporate those recommended changes.  Thereafter, the Bank shall implement and
follow the plan.
 
(d)          The Board shall adopt procedures whereby loan officer compliance
with the revised written lending and collection policies are monitored and
responsibility for exceptions thereto assigned.  The procedures adopted shall be
reflected in the minutes of a Board meeting at which all members are present and
the vote of each is noted.

 
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INTERNAL LOAN REVIEW
 
11.          Within 90 days from the effective date of this ORDER, the Bank
shall adopt an effective internal loan review and grading system to provide for
the periodic review of the Bank's loan portfolio in order to identify and
categorize the Bank's loans, and other extensions of credit which are carried on
the Bank's books as loans, on the basis of credit quality.  Such system and its
implementation shall be satisfactory to the Supervisory Authorities as
determined at their initial review and at subsequent examinations and/or
visitations.  At a minimum, the grading system shall provide for the following:
 
(a)           Specification of standards and criteria for assessing the credit
quality of the Bank's loans;
 
(b)           Application of loan grading standards and criteria to the Bank's
loan portfolio;
 
(c)           Categorization of the Bank's loans into groupings based on the
varying degrees of credit and other risks that may be presented under the
applicable grading standards and criteria, but in no case, will a loan be
assigned a rating higher than that assigned by examiners at the last examination
of the Bank without prior written notification to the Supervisory Authorities;
 
(d)           Assessment of the likelihood that each loan exhibiting credit and
other risks will not be repaid according to its terms and conditions;
 
(e)           Identification of any loan that is not in conformance with the
Bank's loan policy;
 
(f)           Identification of any loan which presents any unsafe or unsound
banking practice or condition or is otherwise in violation of any applicable
State or Federal law, regulation, or statement of policy;

 
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(g)           Requirement of a written report to be made to the Board and Audit
Committee, not less than quarterly after the effective date of this ORDER.  The
report shall identify the status of those loans that exhibit credit and other
risks under the applicable grading standards/criteria and the prospects for full
collection and/or strengthening of the quality of any such loans; and
 
(h)           Specific policies governing Bank charge-offs of loans and
underlying collateral taken to repay loans.
 
WRITTEN STRATEGIC PLAN
 
12.          Within 120 days from the effective date of this ORDER, the Bank
shall prepare and submit to the Supervisory Authorities its written strategic
plan consisting of long-term goals designed to improve the condition of the Bank
and its viability and strategies for achieving those goals.  The plan shall be
in a form and manner acceptable to the Supervisory Authorities, but at a minimum
shall cover three years and provide specific objectives for asset growth, market
focus, earnings projections, capital needs, and liquidity position.
 
BUDGET
 
13.          (a)          Within 90 days from the effective date of this ORDER,
the Bank shall formulate and fully implement a written plan and a comprehensive
budget for all categories of income and expense for the calendar year ending
2011.  The plan and budget required by this paragraph shall include formal goals
and strategies, consistent with sound banking practices and taking into account
the Bank’s other written policies, to improve the Bank’s net interest margin,
increase interest income, reduce discretionary expenses, control overhead, and
improve and sustain earnings of the Bank.  The plan shall include a projected
balance sheet and a description of the operating assumptions that form the basis
for and adequately support major projected income and expense
components.  Thereafter, the Bank shall formulate such a plan and budget by
December 15 preceding each subsequent budget year.

 
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(b)          The plan and budget and any subsequent modification thereto shall
be submitted to the Supervisory Authorities for review and comment.  Within 30
days after the receipt of any comment from the Supervisory Authorities, the
Board shall approve the plan and budget or subsequent modification thereto,
which approval shall be recorded in the minutes of the meeting of the Board.
 
(c)          Following the end of each calendar quarter, the Board shall
evaluate the Bank’s actual performance in relation to the plan and budget and
shall record the results of the evaluation, and any actions taken by the Bank,
in the minutes of the Board meeting at which such evaluation is undertaken.
 
BROKERED DEPOSITS

14.           (a)          Throughout the effective life of this ORDER, the Bank
shall not accept, renew, rollover any brokered deposit, as defined by 12 C.F.R.
§ 337.6(a)(2), unless it is in compliance with the requirements of 12 C.F.R. §
337.6(b), governing solicitation and acceptance of brokered deposits by insured
depository institutions.
 
(b)          The Bank shall comply with the restrictions on the effective yields
on deposits as described in 12 C.F.R. § 337.6.
 
RESTRICTIONS ON CERTAIN PAYMENTS
 
15.           (a)         While this ORDER is in effect, the Bank shall not
declare or pay dividends or bonuses without the prior written approval of the
Supervisory Authorities.  All requests for prior approval shall be received at
least 30 days prior to the proposed dividend declaration date or bonus payment
(at least 5 days with respect to any request filed within the first 30 days
after the date of this ORDER) and shall contain, but not be limited to, an
analysis of the impact such dividend or bonus payment would have on the Bank's
capital, income, and/or liquidity positions.

 
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(b)          During the term of this ORDER, the Bank shall not make any
distributions of interest, principal or other sums on subordinated debentures,
if any, without the prior written approval of the Supervisory Authorities.
 
REDUCTION OF ADVERSELY CLASSIFIED LOANS TO INSIDERS
 
16.           (a)          Within 60 days after the effective date of this
ORDER, the Bank shall prepare and submit to the Supervisory Authorities for
review and comment a written plan to eliminate the amount of loans or other
extensions of credit advanced, directly or indirectly, to or for the benefit of
Bank directors, executive officers, principal shareholders, or their related
interests which were adversely classified in the Report.  For purposes of the
plan, these terms shall be defined pursuant to Section 215.2 of Regulation O, 12
C.F.R. § 215.2.  No new loans or other extensions of credit shall be granted to
or for the benefit of such obligors without first providing the Supervisory
Authorities 30 days prior written notification of the anticipated action.  Such
plan shall include, but not be limited to:
 
(i)           Dollar levels to which the Bank shall reduce each extension of
credit within 3 months after the effective date of this ORDER; and
 
(ii)          Provisions for the submission of monthly written progress reports
to the Bank’s board of directors for review and notation in minutes of the
meetings of the board of directors.  As used in this paragraph, “reduce” means
to:
 
 
a.
Charge-off

 
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b.
Collect, or

     
 
c.
Improve the quality of such assets so as to warrant removal of any adverse
classification by the FDIC and the State.

 
(b)         After the Supervisory Authorities have responded to the plan, the
Bank’s board of directors shall adopt the plan as amended or modified by the
Supervisory Authorities.  The plan will be implemented immediately to the extent
that such provisions are not already in effect at the Bank.
 
VIOLATIONS OF LAW AND
CONTRAVENTIONS OF STATEMENTS OF POLICY

17.           Within 60 days from the effective date of this ORDER, the Bank
shall eliminate and/or correct all violations of law and regulation as well as
all contraventions of statements of policy that are contained in the Report.  In
addition, the Bank shall take all necessary steps to ensure future compliance
with all applicable laws, regulations, and statements of policy.
 
NO MATERIAL GROWTH WITHOUT PRIOR NOTICE

18.           During the life of this ORDER, the Bank shall notify the
Supervisory Authorities at least 60 days prior to undertaking asset growth to 10
percent (10%) or more per annum or initiating material changes in asset or
liability composition.  In no event shall asset growth result in noncompliance
with the capital maintenance provisions of this ORDER unless the Bank receives
prior written approval of the Supervisory Authorities.
 
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PROGRESS REPORTS
 
19.           Within 30 days from the end of the first quarter following the
effective date of this ORDER, and within 30 days of the end of each quarter
thereafter, the Bank shall furnish written progress reports to the Supervisory
Authorities detailing the form and manner of any actions taken to secure
compliance with this ORDER and the results thereof.  Such reports shall include
a copy of the Bank's Reports of Condition and of Income.  Such reports may be
discontinued when the corrections required by this ORDER have been accomplished
and the Supervisory Authorities have released the Bank in writing from making
further reports.  All progress reports and other written responses to this ORDER
shall be reviewed by the Board and made a part of the minutes of the appropriate
Board meeting.
 
DISCLOSURE

20.           Following the issuance of this ORDER, the Bank shall provide to
its shareholders or otherwise furnish a description of this ORDER in conjunction
with the Bank's next shareholder communication or in conjunction with its notice
or proxy statement preceding the Bank's next shareholder meeting.  The
description shall fully describe the ORDER in all material respects.  The
description and any accompanying communication, statement, or notice shall be
sent to the FDIC, Division of Supervision and Consumer Protection, Accounting
and Securities Disclosure Section, 550 17th Street, N.W., Room F-6066,
Washington, D.C. 20429 and to the North Carolina Office of the Commissioner of
Banks, 4309 Mail Service Center, Raleigh, North Carolina 27699-4309, to review
at least twenty (20) days prior to dissemination to shareholders.  The Bank
shall make any changes required by the Supervisory Authorities prior to
dissemination of the description, communication, notice, or statement.
 
The provisions of this ORDER shall not bar, estop, or otherwise prevent the
FDIC, the Commissioner, or any other federal or state agency or department from
taking any other action against the Bank or any of the Bank’s current or former
institution-affiliated parties.

 
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This ORDER shall be effective on the date of issuance.
 
The provisions of this ORDER shall be binding upon the Bank, its
institution-affiliated parties, and any successors and assigns thereof.
 
The provisions of this ORDER shall remain effective and enforceable except to
the extent that and until such time as any provision has been modified,
terminated, suspended, or set aside in writing.
 
Issued Pursuant to Delegated Authority.
 
Dated this 16th day of February, 2011.
 

 
/s/ Thomas J. Dujenski
 
Thomas J. Dujenski
 
Regional Director
 
Division of Risk Management Supervision
 
Atlanta Region
 
Federal Deposit Insurance Corporation

 
 
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The North Carolina Commissioner of Banks having duly approved the foregoing
ORDER, and the Bank, through its Board, agree that the issuance of the said
ORDER by the Federal Deposit Insurance Corporation shall be binding as between
the Bank and the Commissioner to the same degree and legal effort that such
ORDER would be binding on the Bank if the Commissioner had issued a separate
ORDER that included and incorporated all of the provisions of the foregoing
ORDER pursuant to the provisions of N.C. Stat. § 53-107.1(2005).
 
Dated this 16th day of February, 2011.

 
/s/ Joseph A. Smith, Jr.
 
Joseph A. Smith, Jr.
 
Commissioner of Banks
 
State of North Carolina

 
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