July 25, 2008 A Letter from our President & CEO - John Poole

Dear Carolina Alliance Bank Customers and Friends:

As events continue to develop in the banking sector and media coverage is increasing, I thought it appropriate to comment on the industry in general, the effect of market conditions on Carolina Alliance Bank, and more importantly how they affect you as a consumer.  With the continuing developments in the financial sector and related media attention, the most recent being the troubles at Fannie Mae and Freddie Mac as well as the latest bank failure – IndyMac Bank – I think it important to keep in mind that even with the problems the industry has had, overall the U.S. banking system remains healthy.  Banks like ours are required to have significant capital and reserves – that is, “rainy-day” funds for tough economic times.  At March 31, 2008 (the latest data available from the FDIC), approximately 99% of all banks were classified by banking regulators as “well capitalized,” the highest possible capitalization designation.  Carolina Alliance Bank was classified “well capitalized” at June 30, 2008, having nearly twice the level of capital required for the most stringent measure of regulatory capital to meet the “well capitalized” classification.

There also has been much attention focused on the slow-down in new housing construction and increasing loan delinquencies in the banking industry.  While this initially was more isolated to the large banks, it is filtering down to the community bank level, particularly in the areas of land development, construction and home equity lending.  However, it is important to note that these issues are more isolated to certain sectors such as resort properties and to geographic areas such as Nevada, California, Michigan and Florida.  Throughout its existence, Carolina Alliance Bank has maintained very manageable levels of exposure to real estate development and income-producing property and as of June 30, 2008 had no loans past due over 30 days and no non-performing assets.

The Federal Reserve’s efforts to stimulate the economy led to a rapid decline in short-term interest rates and at the same time, due to a lack of liquidity in the financial sector, deposit rates are relatively high in comparison to the prime rate.  Thus the industry has experienced a very narrow spread between the revenue earned on interest-earning assets (primarily loans) and the interest expense incurred on interest-bearing liabilities (primarily deposits).  This “squeeze” in the net interest margin has contributed to lower bank earnings and a focus on maintaining funding to support growth in earning assets.  We continue to price our deposit products aggressively relative to other local FDIC-insured institutions to maintain the deposit growth necessary to fund loan growth which is a key component of profitability.  We constantly monitor our liquidity position and believe that we have sufficient liquidity to operate in a safe and sound manner.

Not to minimize the fact that there have been major issues that have arisen in this current phase of the economic cycle, but it is worth noting the U.S. banking system has weathered much worse conditions than currently exist.  I believe that media coverage has focused extensively on the problems and not enough on the overall health of the banking system.  It also has failed to put this cycle in perspective to other difficult times (for example the early 1990s when there were nearly 1,500 banks on the FDIC “Problem Institution” list compared to 90 today) through which the system survived and even became stronger as a result.

Most recently, there has been extensive reporting about the safety of consumer deposits at banks and in the past week or so we have fielded many questions about FDIC deposit insurance coverage.  This leads me to point out that FDIC insurance provides an additional backstop at any bank in which you have deposits.  The FDIC protects depositors against the loss of their insured deposits if an FDIC-insured institution fails.  Deposits are insured by the FDIC for up to $100,000 per depositor per insured bank and up to $250,000 for retirement accounts.  (Through alternative account titling, additional FDIC insurance may be available.  Couples, for example, may potentially receive FDIC coverage of up to $600,000.)  No customer has ever lost a penny in insured deposits when a bank has failed.  I encourage you to get to know your bank and its bankers and ask questions about the bank’s financial condition, particularly if you have deposit levels in excess of the FDIC coverage limits.  Ask about the bank's level of non-performing loans and levels of regulatory capital.  You also may review financial condition and performance statistics for any deposit institution on the internet at www.fdic.gov.

If you are a certificate of depositor investor, Carolina Alliance has a relatively new program that customers have begun to utilize to obtain additional FDIC insurance without having to go to multiple banks.  This product offers “pooled” FDIC insurance coverage through the services of Promontory Interfinancial Network’s Certificate of Deposit Account Registry Service®, or CDARS®.  This deposit placement network enables banks to offer up to $50 million in federal deposit insurance coverage to its customers to allow them to keep their banking relationship with one bank. 

When a customer places a large deposit in Carolina Alliance CD accounts and elects to utilize CDARS, we arrange to place the funds into certificates of deposit issued by other network banks, in increments of less than $100,000 to ensure that both principal and interest are eligible for full FDIC protection.  The interest rate earned is the rate quoted by our bank and the customer’s contact is with our bank.  All of a customer’s deposits placed in the CDARS network are reported on a single statement.  Currently about 2,150 banks (roughly one-fourth of all banks in the country) now are network members and use CDARS to allow their customers to bank with the bank of their choice without the concern of adequate FDIC insurance coverage.

Thank you for the opportunity to update you on my perspective of the state of the banking industry and to assure you of the soundness of our bank.  Please let us know if you have questions or desire more information about Carolina Alliance or the CDARS program.  Give us a call or drop by our new headquarters at 200 South Church Street.

Yours truly,

John S. Poole
President CEO