PINX:CVBK Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012



 
UNITED STATES
  SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

 
[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the quarterly period ended March 31, 2012

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:  000-24002

CENTRAL VIRGINIA BANKSHARES, INC.
(Exact name of registrant as specified in its charter)

Virginia
(State or other jurisdiction of
incorporation or organization)
 
54-1467806
(I.R.S. Employer
Identification No.)
2036 New Dorset Road, Post Office Box 39
 Powhatan, Virginia
(Address of principal executive offices)
23139
(Zip Code)


  Registrant’s telephone number, including area code:  (804) 403-2000
 
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate web site, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See 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  ¨
Smaller reporting company x
(Do not check if smaller reporting company)
 

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

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

Class
Outstanding at May 9, 2012
Common stock, par value $1.25
2,673,666



 
 

 

CENTRAL VIRGINIA BANKSHARES, INC.
QUARTERLY REPORT ON FORM 10-Q

INDEX


Part I.  Financial Information
Page No.
       
Item 1
Financial Statements
 
       
 
Consolidated Balance Sheets -
 
 
March 31, 2012 (Unaudited) and December 31, 2011
3
       
 
Consolidated Statements of Income - Three Months
 
  Ended March 31, 2012 and 2011 (Unaudited) 4
       
 
Consolidated Statements of Comprehensive Income - Three Months
 
 
Ended March 31, 2012 and 2011 (Unaudited)
5
       
 
Consolidated Statements of Stockholders’ Equity - Three
 
 
Months Ended March 31, 2012 and 2011 (Unaudited)
6
       
 
Consolidated Statements of Cash Flows - Three
 
 
Months Ended March 31, 2012 and 2011 (Unaudited)
7
       
 
Notes to Consolidated Financial Statements -
 
 
March 31, 2012 and 2011 (Unaudited)
8
       
Item 2
Management’s Discussion and Analysis of Financial
 
   
Condition and Results of Operations
32
       
Item 3
Quantitative and Qualitative Disclosures About Market Risk
51
       
Item 4
Controls and Procedures
51
       
Part II.  Other Information
 
       
Item 1
Legal Proceedings
52
       
Item 1A
Risk Factors
52
       
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
52
       
Item 3
Defaults Upon Senior Securities
52
       
Item 4
Mine Safety Disclosures
52
       
Item 5
Other Information
52
       
Item 6
Exhibits
52



 
2

 



PART I            FINANCIAL INFORMATION

ITEM 1            FINANCIAL STATEMENTS

CENTRAL VIRGINIA BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2012 and December 31, 2011
(Dollars in thousands except per share amounts)

   
March 31, 2012
   
December 31, 2011
 
ASSETS
 
(Unaudited)
   
(Audited)
 
Cash and due from banks
  $ 7,107     $ 7,486  
Federal funds sold
    20,680       38,859  
Total cash and cash equivalents
    27,787       46,345  
                 
Securities available for sale at fair value
    124,989       99,304  
Securities held to maturity at amortized cost  (fair value 2012  - $1,567 ; 2011  - $1,572)
    1,543       1,544  
Total securities
    126,532       100,848  
SBA loans held for sale
    305       307  
Loans, net of unearned income
    212,697       224,065  
Less allowance for loan losses
    (8,736 )     (9,322 )
Net loans
    203,961       214,743  
Bank premises and equipment, net
    8,038       8,117  
Accrued interest receivable
    1,208       1,268  
Bank owned life insurance
    10,720       10,625  
Other real estate owned, net of valuation allowance of $413 and $279, respectively
    6,112       6,809  
Other assets
    6,564       6,295  
Total assets
  $ 391,227     $ 395,357  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
LIABILITIES
               
Deposits:
               
Non-interest bearing demand deposits
  $ 39,278     $ 37,473  
Interest bearing demand deposits and NOW accounts
    98,661       96,107  
Savings deposits
    43,611       40,227  
Time deposits, $100,000 and over
    43,343       48,882  
Other time deposits
    104,998       110,153  
  Total deposits
    329,891       332,842  
                 
Securities sold under repurchase agreements
    -       1,393  
FHLB borrowings
    40,000       40,000  
Capital trust preferred securities
    5,155       5,155  
Accrued interest payable
    671       665  
Other liabilities
    2,627       2,738  
Total liabilities
  $ 378,344     $ 382,793  
STOCKHOLDERS’ EQUITY
               
Preferred stock, $1.25 par value, $1,000 liquidation value, 1,000,000 shares authorized
               
    and 11,385 shares issued and outstanding
  $ 11,385     $ 11,385  
Common stock, $1.25 par value; 30,000,000 shares authorized; 2,673,666 (includes 38,310 and 47,689 of
               
    restricted stock awards) shares issued and outstanding, respectively
    3,294       3,282  
Common stock warrant
    412       412  
Discount on preferred stock
    (180 )     (199 )
Surplus
    16,919       16,924  
Retained deficit
    (14,086 )     (14,358 )
Accumulated other comprehensive loss
    (4,861 )     (4,882 )
Total stockholders’ equity
    12,883       12,564  
Total liabilities and stockholders’ equity
  $ 391,227     $ 395,357  

See Notes to Consolidated Financial Statements.

 
3

 
CENTRAL VIRGINIA BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands except per share data)
(Unaudited)
   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
Interest income:
           
   Interest and fees on loans
  $ 3,124     $ 3,705  
   Interest on securities and federal funds sold:
               
      U.S. Government Treasury notes, agencies and corporations
    371       547  
      States and political subdivisions
    202       90  
      Corporate and other
    203       236  
      Interest on federal funds sold
    10       13  
Total interest income
    3,910       4,591  
                 
Interest expense:
               
   Interest on deposits
    807       1,294  
   Interest on borrowings:
               
      Securities sold under repurchase agreements
    -       4  
      FHLB borrowings
    364       411  
      Capital trust preferred securities
    43       41  
Total interest expense
    1,214       1,750  
     Net interest income
    2,696       2,841  
Provision for loan losses
    200       500  
     Net interest income after provision for loan losses
    2,496       2,341  
Non-interest income
               
   Deposit fees and charges
    341       332  
   Other service charges, commission and fees
    206       271  
   Increase in cash surrender value of life insurance
    95       103  
   Realized gains on available for sale securities
    406       211  
   Other operating income
    55       77  
        Total non-interest income
    1,103       994  
Non-interest expense:
               
    Salaries and benefits
    1,289       1,334  
    Occupancy expenses
    261       288  
    Furniture and equipment expenses
    116       168  
    FDIC insurance expense
    165       289  
    Loss on securities write-down (1)
    -       13  
    Loss on other real estate owned and costs of operation
    480       77  
    Other operating expenses
    997       909  
        Total non-interest expenses
    3,308       3,078  
Income before income taxes
    291       257  
Income tax expense
    -       -  
        Net income
  $ 291     $ 257  
Effective dividends accrued on preferred stock
    161       161  
        Net income available to common stockholders
  $ 130     $ 96  
Income per common share, basic
  $ 0.05     $ 0.04  
Income per common share, diluted
  $ 0.05     $ 0.04  
(1) Total of other-than-temporary impairment losses on securities in the three months ended March 31, 2012 and 2011 is $1.0 million and $1.44 million of which $1.0 million and $1.43 million have been recognized in other comprehensive loss, and impairment losses of $0 and $13 thousand have been recognized in earnings in the three months ended March 31, 2012 and 2011.

See Notes to Consolidated Financial Statements.


 
4

 
CENTRAL VIRGINIA BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(Unaudited)


       
   
Three Months Ended
March 31,
 
   
2012
   
2011
 
   Net income
  $ 291     $ 257  
   Other comprehensive income:
               
      Unrealized holding gains arising during the period
    427       766  
      Less:  reclassification adjustment for gains included in net income
    (406 )     (211 )
      Add:  reclassification adjustment for loss on write-down of securities
    -       13  
Other comprehensive income
  $ 21     $ 568  
                 
Comprehensive income
  $ 312     $ 825  

















 
 
 
 
 
 
 
 

 











See Notes to Consolidated Financial Statements.

 
5

 

CENTRAL VIRGINIA BANKSHARES, INC.
 
Consolidated Statements of Stockholders’ Equity
(dollars in thousands, except share amounts)
For the Three Months Ended March 31, 2012 and 2011
(Unaudited)
 
                                                 
   
Preferred
Stock
   
Common
Stock
   
Surplus
   
Retained
Earnings
(Deficit)
   
Common
Stock
Warrant
   
Discount
on
Preferred
Stock
   
Accumulated
Other
Comprehensive
 (Loss)
   
Total
 
Balance, December 31, 2010
  $ 11,385     $ 3,278     $ 16,899     $ (15,063 )   $ 412     $ (272 )   $ (5,045 )   $ 11,594  
Net income
    -       -       -       257       -       -               257  
Other comprehensive income
    -       -       -       -       -       -       568       568  
Accretion of preferred stock discount
    -       -       -       (19 )     -       19       -       -  
Issuance of 1,000 shares of common stock pursuant to employment agreement
    -       1       -       -       -       -       -       1  
Issuance of 2,257 shares of common stock pursuant to dividend reinvestment plan
    -       3       -       -       -       -       -       3  
Balance, March 31, 2011
  $ 11,385     $ 3,282     $ 16,899     $ (14,825 )   $ 412     $ (253 )   $ (4,477 )   $ 12,423  
                                                                 
Balance, December 31, 2011
  $ 11,385     $ 3,282     $ 16,924     $ (14,358 )   $ 412     $ (199 )   $ (4,882 )   $ 12,564  
Net income
    -       -       -       291       -       -       -       291  
Other comprehensive income
    -       -       -       -       -       -       21       21  
Accretion of preferred stock discount
    -       -       -       (19 )     -       19       -       -  
Issuance of 9,379 shares of common stock pursuant to the vesting of restricted stock
    -       12       (12 )     -       -       -       -       -  
Stock based compensation
    -       -       7       -       -       -       -       7  
Balance, March 31, 2012
  $ 11,385     $ 3,294     $ 16,919     $ ( 14,086 )   $ 412     $ (180 )   $ (4,861 )   $ 12,883  
 
 


See Notes to Consolidated Financial Statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
6

 


CENTRAL VIRGINIA BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2012 and 2011
(amounts in thousands except share amounts)
(Unaudited)
   
2012
   
2011
 
Cash Flows from Operating Activities
           
  Net income
  $ 291     $ 257  
  Adjustments to reconcile net income to net cash provided by operating activities:
               
      Depreciation and amortization
    185       159  
      Provision for loan losses
    200       500  
      Stock based compensation
    7       -  
      Amortization and accretion on securities, net
    224       48  
      Realized gains on available for sale securities
    (406 )     (211 )
      Realized loss on sale of other real estate owned
    173       28  
      Loss on write-down in value of other real estate owned
    252       -  
      Loss on write-down of other than temporary impairment of securities
    -       13  
      Increase in cash surrender value of life insurance
    (95 )     (103 )
      Change in operating assets and liabilities:
               
          Decrease (increase) in assets:
               
              Mortgage and SBA loans held for sale
    2       1,527  
              Accrued interest receivable
    60       264  
              Other assets
    (265 )     271  
          Increase (decrease) in liabilities:
               
              Accrued interest payable and other liabilities
    (105 )     42  
      Net cash provided by operating activities
    523       2,795  
                 
Cash Flows from Investing Activities
               
  Proceeds from calls and maturities of securities available for sale
    8,467       39,657  
  Proceeds from sales of securities available for sale
    34,542       7,791  
  Purchase of securities available for sale
    (68,551 )     (47,066 )
  Proceeds from the sale of OREO
    1,028       119  
  Net decrease in loans made to customers
    9,825       8,488  
  Net purchases of premises and equipment
    (48 )     9  
      Net cash provided by (used in) investing activities
    (14,737 )     8,998  
                 
Cash Flows from Financing Activities
               
 Net increase in demand deposits, MMDA, NOW, and savings accounts
    7,743       9,199  
 Net decrease in time deposits
    (10,694 )     (13,518 )
 Net decrease in securities sold under repurchase agreements
    (1,393 )     (1,220 )
 Net proceeds from issuance of common stock
 
  -       4  
      Net cash used in financing activities
    (4,344 )     (5,535 )
                 
      Increase (decrease) in cash and cash equivalents
  $ (18,558 )   $ 6,258  
Cash and cash equivalents:
               
  Beginning
    46,345       13,861  
  Ending
  $ 27,787     $ 20,119  
Supplemental Disclosures of Cash Flow Information
               
Cash payments for:  Interest
  $ 1,208     $ 1,730  
                                 Income taxes
    -       -  
 Non-cash investing and financing activities:
               
    Unrealized gain on securities available for sale, net
    21       568  
    Loans transferred to other real estate owned
    756       2,118  

See Notes to Consolidated Financial Statements.





 
7

 
CENTRAL VIRGINIA BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012 and 2011
 (Unaudited)

Note 1.  Basis of Presentation

Principles of consolidation:  The accompanying consolidated financial statements include the accounts of Central Virginia Bankshares, Inc., and its subsidiaries, Central Virginia Bank, including its subsidiary, CVB Title Services, Inc. and Central Virginia Bankshares Statutory Trust I.  All significant intercompany transactions and balances have been eliminated in consolidation.  ASC Topic 810 Consolidations requires that the Company no longer eliminate through consolidation the equity investment in Central Virginia Bankshares Statutory Trust I by the parent company, Central Virginia Bankshares, Inc., which equaled $155 thousand at March 31, 2012.  The subordinated debt of the Trust is reflected as a liability on the Company’s balance sheet.  When we refer to “the Company,” “we,” “our” or “us” in this Report, we mean Central Virginia Bankshares, Inc. (consolidated).  When we refer to “Central Virginia Bank” or “the Bank”, we mean Central Virginia Bank (subsidiary).

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles.

In our opinion, the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2012, and December 31, 2011, the results of operations and comprehensive income for the three month periods ended March 31, 2012 and 2011, and cash flows and statements of changes in stockholders’ equity for the three months ended March 31, 2012 and 2011.  The statements should be read in conjunction with Notes to Consolidated Financial Statements included in the annual report on Form 10-K for the year ended December 31, 2011.  The results of operations for the three month period ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year.

The consolidated financial statements of Central Virginia Bankshares, Inc. (the Company) and its wholly-owned subsidiary, Central Virginia Bank (the Bank), include the accounts of both companies.  All material inter-company balances and transactions have been eliminated in consolidation.  Certain reclassifications have been made to prior period amounts to conform to the current year presentations.

Recent Accounting Pronouncements

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.”  The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion.  The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date.  Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.”  This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements.  The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and International Financial Reporting Standards (IFRS).  The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application.  Early application is not permitted.  The Company has included the required disclosures in its consolidated financial statements. 

 
8

 
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.”  The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income.  In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income.  The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share.  The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011.  Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures.  The Company has included the required disclosures in its consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangible – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.”  The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350.  The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent.  Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount.  The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued.  The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.”  This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.

 
9

 
In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.”  The amendments are being made to allow the Board time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05.  All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has included the required disclosures in its consolidated financial statements.

Note 2.  Securities

Securities Available for Sale
The amortized cost, gross unrealized gains and losses and approximate fair values of securities available for sale at March 31, 2012 and December 31, 2011 are summarized as follows:

   
March 31, 2012
(Unaudited)
 
(Dollars in 000’s)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Approximate
Fair
Value
 
U.S. Treasury securities
  $ 2,190     $ 20     $ (34 )   $ 2,176  
U.S. government agencies & corporations
    30,683       25       (364 )     30,344  
Bank eligible preferred and equities
    2,277       126       (172 )     2,231  
Mortgage-backed securities
    57,934       142       (218 )     57,858  
Corporate and other debt
    13,640       24       (4,592 )     9,072  
States and political subdivisions
    23,126       368       (186 )     23,308  
    $ 129,850     $ 705     $ (5,566 )   $ 124,989  
   
   
December 31, 2011
 
(Dollars in 000’s)
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Approximate
Market
Value
 
U.S. Treasury securities
  $ 195     $ 23     $ -     $ 218  
U.S. government agencies & corporations
    16,902       137       -       17,039  
Bank eligible preferred and equities
    2,277       112       (425 )     1,964  
Mortgage-backed securities
    51,853       421       (58 )     52,216  
Corporate and other debt
    13,902       82       (5,135 )     8,849  
States and political subdivisions
    19,057       260       (299 )     19,018  
    $ 104,186     $ 1,035     $ (5,917 )   $ 99,304  


The following tables present the gross unrealized losses and fair values as of March 31, 2012 and December 31, 2011, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position:



 
10

 

 
(Dollars in 000’s)
March 31, 2012
(Unaudited)
Less than twelve months
Twelve months or longer
Total
Securities Available for Sale
Approximate
Fair
Value
Unrealized
Losses
Approximate
Market
Value
Unrealized
Losses
Approximate
Market
Value
Unrealized
Losses
 
 
U.S. Treasury securities
$1,962
$(34)
$-
$-
$1,962
$(34)
U.S. government agencies & corporations
28,489
(364)
-
-
28,489
(364)
Bank eligible preferred and equities
75
(1)
1,905
(171)
1,980
(172)
Mortgage-backed securities
44,070
(218)
-
-
44,070
(218)
Corporate and other debt
-
-
8,804
(4,592)
8,804
(4,592)
States and political subdivisions
12,092
(186)
-
-
12,092
(186)
 
 $86,688
$  (803)
$10,709
$   (4,763)
$97,397
$(5,566)
 
 
 
 
December 31, 2011
Less than twelve months
Twelve months or longer
Total
Approximate
Fair
Value
Unrealized
Losses
Approximate
Market
Value
Unrealized
Losses
Approximate
Market
Value
Unrealized
Losses
 
Securities Available for Sale
Bank eligible preferred and equities
$115
$(10)
$1,662
$(415)
$1,777
$(425)
Mortgage-backed securities
13,784
(58)
-
-
13,784
(58)
Corporate and other debt
-
-
8,525
(5,135)
8,525
(5,135)
States and political subdivisions
13,296
(299)
-
-
13,296
(299)
 
$27,195
$(367)
$10,187
$(5,550)
$37,382
$(5,917)

Changes in market interest rates and changes in credit spreads may result in temporary impairment or unrealized losses, as the fair value of securities will fluctuate in response to these market factors.  Of the securities in a net unrealized loss position longer than 12 months as of March 31, 2012, $4.6 million of the total $4.8 million unrealized loss is in the corporate and other debt category where the Company has a number of corporate debt securities issued by companies within the financial sector, and other pooled trust preferred securities where the underlying instruments are commercial bank or insurance company trust preferred issues.  Due to the multitude of economic issues, and the resulting general market unrest, most all of the financial sector debt instruments have experienced historical lows in their market value.  While this is not considered a permanent condition, the Company cannot predict with any degree of accuracy when prices will return to historical levels.
 
The primary relevant factors considered by us in our evaluation to determine if the impairment is other than temporary are the relationship of current market interest rates as compared to the fixed coupon rate of the securities, credit risk (all the issuers of the securities had investment grade credit ratings or better at the time the securities were purchased), the continued ability to maintain payment of the dividend or coupon, continuation as a going concern, adverse market factors, and any other significant adverse factors. The compilation of these factors leads to a determination that if the overall evidence suggests that the Company can recover substantially all of our entire investment in the securities within a reasonable period of time, the impairment is considered temporary. After such an analysis, the Company did not record an Other Than Temporary Impairment (OTTI) during the first three months of 2012.
 
During the quarter ended March 31, 2012, the Company sold three pooled trust preferred securities that were deemed to be completely OTTI and one pooled trust preferred security that was deemed to be OTTI based on a present value analysis of expected future cash flows.   These securities had a book value of zero and a gain was recorded on the sale of these securities for $30 thousand during the first quarter 2012.

 
11

 
As of March 31, 2012, the Company had four pooled trust preferred securities that were deemed to be OTTI based on a present value analysis of expected future cash flows. These securities had a fair value of $2.0 million and an unrealized loss of $3.4 million, of which $1.0 million was recognized in other comprehensive loss and $2.4 million was recognized in earnings. The following table provides further information on these four securities as of March 31, 2012 (in thousands):

Security
 
Class
 
Current
Moody’s
Ratings
(Lowest
Assigned
Rating)
 
Amortized Cost
   
Book
Value/
Fair
Value
   
Unrealized
Loss
   
Cumulative 
Other
Comprehensive
(Gain) Loss (1)
   
Amount of
OTTI
Related to
Credit
Loss (1)
 
PreTSL II
 
Mez
 
Ca
  $ 2,259     $ 771     $ 1,488     $ 112     $ 1,376  
PreTSL XII
   B-3  
Ca
    1,994       566       1,428       648       780  
Preferred CPO Ltd
   B/C  
Ba3
    344       261       83       61       22  
Reg Div Fund
 
Senior
 
Ca
    893       427       466       219       247  
              $ 5,490     $ 2,025     $ 3,465     $ 1,040     $ 2,425  
(1)  
Pre-tax.

As of March 31, 2012, the Company had three pooled trust preferred securities that were deemed to be temporarily impaired based on a present value analysis of expected future cash flows. The securities had a fair value of $1.3 million. The following table provides further information on these securities as of March 31, 2012 (in thousands):

Security
 
Class
   
Current
Moody’s
Ratings
(Lowest
Assigned
Rating)
   
Amortized Cost
   
Book
Value/
Fair
Value
   
Unrealized
Loss
   
Cumulative 
Other
Comprehensive
Loss (1)
   
Amount of
OTTI
Related to
Credit
Loss (1)
 
PreTSL XXIII
   C-2      C     $ 498     $ 218     $ 280     $ 280     $ -  
i-PreTSL III
   B-3      B2       1,500       653       847       847       -  
i-PreTSL IV
   B-2    
Ba2
      1,000       379       621       621       -  
                    $ 2,998     $ 1,250     $ 1,748     $ 1,748     $ -  
(1)  
Pre-tax.

The Company’s investment in Federal Home Loan Bank (FHLB) stock totaled $2.6 million at March 31, 2012.  FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock, other than the FHLBs or member institutions.  Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.  Despite the FHLB’s temporary suspension of repurchases of excess capital stock in 2010, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2012 and no impairment has been recognized.  FHLB stock is included with other assets on the consolidated balance sheet and is not a part of the available for sale securities portfolio.








 
12

 

The following table presents a roll-forward of the cumulative credit loss component amount of OTTI recognized in earnings:

(Dollars in 000’s)
 
Three Months Ended March 31, 2012
   
Three Months Ended March 31, 2011
 
Balance, beginning of period
  $ 25,913     $ 25,900  
Additions:
               
Initial credit impairments
    -       -  
Subsequent credit impairments
    -       13  
                 
Balance, end of period
  $ 25,913     $ 25,913  

Available for Sale Securities with an amortized cost of $24.9 million and $18.0 million and a market value of $24.9 million and $18.1 million and Held to Maturity Securities with an amortized cost of $1.4 million and $1.4 million and a market value of $1.4 million and $1.4 million at March 31, 2012 and December 31, 2011, respectively, were pledged as collateral for repurchase agreement borrowings with correspondent banks and public deposits and for other purposes as required or permitted by law.

Securities Held to Maturity

The amortized cost, gross unrealized gains and losses and estimated fair value of securities being held to maturity at March 31, 2012 and December 31, 2011 are summarized as follows:

(Dollars in 000’s)
 
March 31, 2012
(Unaudited)
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Approximate
Market
Value
 
States and political subdivisions
  $ 1,543     $ 24     $ -     $ 1,567  
   
   
December 31, 2011
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Approximate
Market
Value
 
States and political subdivisions
  $ 1,544     $ 28     $ -     $ 1,572  
 
 
 
 
 

 

 
13

 


Note 3.  Loans and allowance for loan losses

Major classifications of our loans as of March 31, 2012 and December 31, 2011 are summarized as follows:

(Dollars in 000’s)
 
March 31, 2012 (Unaudited)
   
December 31, 2011
 
Commercial
  $ 22,761     $ 23,574  
Real Estate:
               
   Residential
    64,282       66,611  
   Commercial
    57,901       62,499  
   Home equity
    23,430       24,739  
   Construction
    40,698       42,801  
      Total real estate
    186,311       196,650  
                 
Bank cards
    907       967  
Installment
    2,862       3,021  
      212,841       224,212  
Less unearned income
    (144 )     (147 )
  Loans, net of unearned income
  $ 212,697     $ 224,065  
Allowance for loan losses
    (8,736 )     (9,322 )
Loans, net
  $ 203,961     $ 214,743  

Credit Quality.  The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all.  The Company’s internal credit risk grading system is based on experiences with similarly graded loans. For consumer and residential loans, the Company believes that performance and delinquency status is a better indicator of credit quality, therefore, the Company does not generally risk grade real estate mortgage, real estate home equity or installment loans.  In general, commercial loans are risk graded; however, there may be certain instances whereby these loans are not risk graded, such as when loans are approved by branch lenders under their loan authority.  In general, construction loans are risk graded; however, in instances where construction loans are for residential purposes, these loans are considered to be consumer loans and are not risk graded.

The Company’s internally assigned grades are as follows:

Pass – No change in credit rating of borrower and loan-to-value ratio of asset;
Weak Pass – Weakening of borrower’s debt capacity, earnings and cash flows;
Special Mention – Deterioration in the credit rating of borrower;
Sub-Standard – Deteriorating financial position of borrower, possibility of loss exists if corrective action is not taken;
Doubtful – Bankruptcy exists or is highly probable; and
Loss – Borrowers deemed incapable of repayment of debt.




 
14

 

The following table represents credit exposures by internally assigned grades for the quarter ended March 31, 2012.
 
   
March 31, 2012 (unaudited)
 
  (Dollars in 000’s)
 
Commercial
   
Real Estate - Residential
   
Real Estate - Commercial
   
Real Estate – Home Equity
   
Real Estate - Construction
   
Bank Cards
   
 
Installment
   
 
Total
 
Pass
  $ 8,477     $ 4,989     $ 17,248     $ 1,118     $ 1,126     $ -     $ 10     $ 32,968  
Weak Pass
    6,505       11,865       27,789       2,497       8,282       -       1       56,939  
Special Mention
    3,858       892       6,977       100       4,605       -       -       16,432  
Sub-Standard
    3,428       7,716       5,887       809       25,244       -       233       43,317  
Doubtful
    -       -       -       -       -       -       -       -  
 Total
  $ 22,268     $ 25,462     $ 57,901     $ 4,524     $ 39,257     $ -     $ 244     $ 149,656  

The following table shows a breakdown of loans that are not risk rated in the table above:

  (Dollars in 000’s)
 
March 31, 2012 (unaudited)
 
   
Performing
   
Non-Performing
   
Total
 
Commercial
  $ 493     $ -     $ 493  
Real Estate – Residential
    37,249       1,571       38,820  
Real Estate – Commercial
    -       -       -  
Real Estate – Home Equity
    18,790       116       18,906  
Real Estate -  Construction
    1,435       6       1,441  
Bank Cards
    897       10       907  
Installment
    2,344       274       2,618  
Total
  $ 61,208     $ 1,977     $ 63,185  

The following table represents credit exposures by internally assigned grades for the year ended December 31, 2011.

   
December 31, 2011
 
  (Dollars in 000’s)
 
Commercial
   
Real Estate - Residential
   
Real Estate - Commercial
   
Real Estate – Home Equity
   
Real Estate - Construction
   
Bank Cards
   
 
Installment
   
 
Total
 
Pass
  $ 9,203     $ 5,089     $ 19,602     $ 1,756     $ 1,309     $ -     $ 10     $ 36,969  
Weak Pass
    6,725       12,458       29,783       1,876       6,974       -       4       57,820  
Special Mention
    3,958       907       6,896       104       6,376       -       -       18,241  
Sub-Standard
    3,166       8,824       6,218       814       26,832       -       257       46,111  
Doubtful
    65       -       -       -       -       -       -       65  
Loss
    -       8       -       -       3       -       -       11  
 Total
  $ 23,117     $ 27,286     $ 62,499     $ 4,550     $ 41,494     $ -     $ 271     $ 159,217  

 
 
 
 
 

 
 
15

 


The following table shows a breakdown of loans that are not risk rated in the table above:

  (Dollars in 000’s)
 
December 31, 2011
 
   
Performing
   
Non-Performing
   
Total
 
Commercial
  $ 398     $ 59     $ 457  
Real Estate – Residential
    37,241       2,084       39,325  
Real Estate – Commercial
    -       -       -  
Real Estate – Home Equity
    19,988       201       20,189  
Real Estate -  Construction
    1,238       69       1,307  
Bank Cards
    933       34       967  
Installment
    2,438       312       2,750  
Total
  $ 62,236     $ 2,759     $ 64,995  

The following table details activity in the allowance for loan losses by portfolio segment for the quarter ended March 31, 2012 and the Company’s recorded investment in loans as of March 31, 2012 related to each balance in the allowance for loan losses.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

   
March 31, 2012 (unaudited)
 
  (Dollars in 000’s)
 
Commercial
   
Real Estate - Residential
   
Real Estate - Commercial
   
Real Estate – Home Equity
   
Real Estate - Construction
   
Bank Cards
   
 
Installment
   
 
Total
 
Beginning balance
  $ 1,700     $ 956     $ 650     $ 82     $ 5,416     $ 18     $ 500     $ 9,322  
Recoveries credited to allowance
    2       5       -       -       -       -       31       38  
Loans charged-off
    (47 )     (358 )     (165 )     -       (226 )     (18 )     (10 )     (824 )
Provision for loan losses
    (172 )     914       11       78       (566 )     17       (82 )     200  
Ending balance - allowance for loan loss
  $ 1,483     $ 1,517     $ 496     $ 160     $ 4,624     $ 17     $ 439     $ 8,736  
                                                                 
Period-end amount allocated to:
                                                               
Loans individually evaluated for impairment
  $ 716     $ 488     $ 170     $ -     $ 582     $ -     $ 193     $ 2,149  
Loans collectively evaluated for impairment
    767       1,029       326       160       4,042       17       246       6,587  
 Ending balance – allowance for loan loss
  $ 1,483     $ 1,517     $ 496     $ 160     $ 4,624     $ 17     $ 439     $ 8,736  
                                                                 
Ending balance – loans
  $ 22,761     $ 64,282     $ 57,901     $ 23,430     $ 40,698     $ 907     $ 2,862     $ 212,841  
                                                                 
Loans individually evaluated for impairment
  $ 4,333     $ 4,413     $ 5,265     $ -     $ 16,185     $ -     $ 208     $ 30,404  
Loans collectively evaluated for impairment
    18,428       59,869       52,636       23,430       24,513       907       2,654       182,437  
 Ending balance – loans
  $ 22,761     $ 64,282     $ 57,901     $ 23,430     $ 40,698     $ 907     $ 2,862     $ 212,841  
 

 

 
16

 


The following table details activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2011 and the Company’s recorded investment in loans as of December 31, 2011 related to each balance in the allowance for loan losses.

   
December 31, 2011
 
  (Dollars in 000’s)
 
Commercial
   
Real Estate - Residential
   
Real Estate - Commercial
   
Real Estate – Home Equity
   
Real Estate - Construction
   
Bank Cards
   
Installment
   
Total
 
Beginning balance
  $ 2,416     $ 1,543     $ 596     $ 224     $ 5,621     $ 13     $ 111     $ 10,524  
Recoveries credited to allowance
    4       5       7       1       1       3       20       41  
Loans charged-off
    (431 )     (800 )     (21 )     (124 )     (2,164 )     (10 )     (53 )     (3,603 )
Provision for loan losses
    (289 )     208       68       (19 )     1,958       12       422       2,360  
Ending balance - allowance for loan loss
  $ 1,700     $ 956     $ 650     $ 82     $ 5,416     $ 18     $ 500     $ 9,322  
                                                                 
Period-end amount allocated to:
                                                               
Loans individually evaluated for impairment
  $ 765     $ 199     $ 269     $ -     $ 579     $ -     $ 233     $ 2,045  
Loans collectively evaluated for impairment
    935       757       381       82       4,837       18       267       7,277  
 Ending balance – allowance for loan loss
  $ 1,700     $ 956     $ 650     $ 82     $ 5,416     $ 18     $ 500     $ 9,322  
                                                                 
Ending balance – loans
  $ 23,574     $ 66,611     $ 62,499     $ 24,739     $ 42,801     $ 967     $ 3,021     $ 224,212  
                                                                 
Loans individually evaluated for impairment
  $ 4,549     $ 4,731     $ 5,552     $ -     $ 18,340     $ -     $ 233     $ 33,405  
Loans collectively evaluated for impairment
    19,025       61,880       56,947       24,739       24,461       967       2,788       190,807  
 Ending balance – loans
  $ 23,574     $ 66,611     $ 62,499     $ 24,739     $ 42,801     $ 967     $ 3,021     $ 224,212  


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


 
17

 
Quarter-end impaired loans are set forth in the following table.
 
   
March 31, 2012 (unaudited)
 
  (Dollars in 000’s)
 
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
With no related allowance:
                             
Commercial
  $ 921     $ 921     $ -     $ 2,055     $ 2  
Real estate:
                    -                  
 Residential
    1,866       1,965       -       2,431       22  
Commercial
    2,336       2,378       -       3,553       34  
 Construction
    13,474       13,780       -       14,132       72  
                                         
With an allowance recorded:
                                       
Commercial
  $ 3,412     $ 3,465     $ 716     $ 2,386     $ 36  
Real estate:
                                       
Residential
    2,547       2,547       488       2,141       31  
Commercial
    2,929       2,950       170       1,855       43  
Construction
    2,711       3,624       582       3,131       9  
Installment
    208       208       193       220       -  
                                         
Total:
                                       
 Commercial
  $ 4,333     $ 4,386     $ 716     $ 4,441     $ 38  
Real Estate:
                                       
Residential
    4,413       4,512       488       4,572       53  
Commercial
    5,265       5,328       170       5,408       77  
Construction
    16,185       17,404       582       17,263       81  
Installment
    208       208       193       220       -  
Total:
  $ 30,404     $ 31,838     $ 2,149     $ 31,904     $ 249  























 
18

 

Year-end impaired loans are set forth in the following table.

   
December 31, 2011
 
  (Dollars in 000’s)
 
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
With no related allowance:
                             
Commercial