XNAS:FFKT Farmers Capital Bank Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

QUARTERLY REPORT
Pursuant to Section 13 OR 15(d) of
The Securities Exchange Act of 1934

For the quarterly period ended March 31, 2012
 
Farmers Capital Bank Corporation
(Exact name of registrant as specified in its charter)


Kentucky
 
0-14412
 
61-1017851
(State or other jurisdiction
 
(Commission
 
(IRS Employer
of incorporation)
 
File Number)
 
Identification No.)


P.O. Box 309  Frankfort, KY
 
40602
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code – (502) 227-1668

 
Not Applicable
 
 
(Former name or former address, 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 check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨                                                                                                             Accelerated filer  ¨

Non-accelerated filer  x(Do not check if a smaller reporting company)                             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.

Common stock, par value $0.125 per share
7,453,883 shares outstanding at May 8, 2012
 
 
1

 
 
TABLE OF CONTENTS


PART I – FINANCIAL INFORMATION
 
   
Item 1. Financial Statements
 
Unaudited Consolidated Balance Sheets
3
Unaudited Consolidated Statements of Income
4
Unaudited Consolidated Statements of Comprehensive Income
5
Unaudited Consolidated Statements of Cash Flows
6
Unaudited Consolidated Statements of Changes in Shareholders’ Equity
7
Notes to Unaudited Consolidated Financial Statements
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
47
   
Item 4. Controls and Procedures
47
   
PART II - OTHER INFORMATION
 
   
Item 1. Legal Proceedings
47
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
48
   
Item 5. Other Information
48
   
Item 6. Exhibits
49
   
SIGNATURES
51

 
2

 

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets

   
March 31,
   
December 31,
 
(Dollars in thousands, except share data)
 
2012
   
2011
 
Assets
           
Cash and cash equivalents:
           
Cash and due from banks
  $ 21,900     $ 28,842  
Interest bearing deposits in other banks
    62,052       62,226  
Federal funds sold and securities purchased under agreements to resell
    4,717       3,241  
Total cash and cash equivalents
    88,669       94,309  
Investment securities:
               
Available for sale, amortized cost of $620,061 (2012) and $583,951 (2011)
    633,375       597,819  
Held to maturity, fair value of $985 (2012) and $974 (2011)
    875       875  
Total investment securities
    634,250       598,694  
Loans, net of unearned income
    1,046,561       1,072,108  
Allowance for loan losses
    (27,053 )     (28,264 )
Loans, net
    1,019,508       1,043,844  
Premises and equipment, net
    38,335       38,770  
Company-owned life insurance
    27,153       27,461  
Intangible assets, net
    2,155       2,409  
Other real estate owned
    41,750       38,157  
Other assets
    39,007       39,946  
Total assets
  $ 1,890,827     $ 1,883,590  
Liabilities
               
Deposits:
               
Noninterest bearing
  $ 234,658     $ 224,259  
Interest bearing
    1,212,545       1,210,806  
Total deposits
    1,447,203       1,435,065  
Federal funds purchased and other short-term borrowings
    27,945       27,022  
Securities sold under agreements to repurchase and other long-term borrowings
    180,582       190,694  
Subordinated notes payable to unconsolidated trusts
    48,970       48,970  
Dividends payable
    188       188  
Other liabilities
    26,204       24,594  
Total liabilities
    1,731,092       1,726,533  
Shareholders’ Equity
               
Preferred stock, no par value 1,000,000 shares authorized; 30,000 Series A shares issued and outstanding at March 31, 2012 and December 31, 2011; Liquidation preference of $30,000
    29,218       29,115  
Common stock, par value $.125 per share 14,608,000 shares authorized; 7,453,883 and 7,446,445 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively
    932       931  
Capital surplus
    50,886       50,848  
Retained earnings
    72,351       69,520  
Accumulated other comprehensive income
    6,348       6,643  
Total shareholders’ equity
    159,735       157,057  
Total liabilities and shareholders’ equity
  $ 1,890,827     $ 1,883,590  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
3

 
 
Unaudited Consolidated Statements of Income

 
   
Three Months Ended
 
   
March 31,
 
(In thousands, except per share data)
 
2012
   
2011
 
Interest Income
           
Interest and fees on loans
  $ 14,281     $ 16,180  
Interest on investment securities:
               
Taxable
    3,566       3,370  
Nontaxable
    527       533  
Interest on deposits in other banks
    35       83  
Interest on federal funds sold and securities purchased under agreements to resell
    1       2  
Total interest income
    18,410       20,168  
Interest Expense
               
Interest on deposits
    2,811       3,947  
Interest on federal funds purchased and other short-term borrowings
    25       62  
Interest on securities sold under agreements to repurchase and other long-term borrowings
    1,843       1,998  
Interest on subordinated notes payable to unconsolidated trusts
    524       505  
Total interest expense
    5,203       6,512  
Net interest income
    13,207       13,656  
Provision for loan losses
    977       2,441  
Net interest income after provision for loan losses
    12,230       11,215  
Noninterest Income
               
Service charges and fees on deposits
    2,003       2,053  
Allotment processing fees
    1,296       1,329  
Other service charges, commissions, and fees
    1,092       1,029  
Data processing income
    84       264  
Trust income
    462       427  
Investment securities gains, net
    3       410  
Gains on sale of mortgage loans, net
    310       141  
Income from company-owned life insurance
    760       235  
Other
    18       5  
Total noninterest income
    6,028       5,893  
Noninterest Expense
               
Salaries and employee benefits
    7,121       6,765  
Occupancy expenses, net
    1,176       1,232  
Equipment expenses
    570       610  
Data processing and communication expenses
    1,163       1,228  
Bank franchise tax
    568       631  
Amortization of intangibles
    254       286  
Deposit insurance expense
    687       889  
Other real estate expenses, net
    962       680  
Deposit fraud loss
    -       700  
Other
    2,092       2,261  
Total noninterest expense
    14,593       15,282  
Income before income taxes
    3,665       1,826  
Income tax expense
    356       781  
Net income
    3,309       1,045  
Dividends and accretion on preferred shares
    (478 )     (472 )
Net income available to common shareholders
  $ 2,831     $ 573  
Per Common Share
               
Net income, basic and diluted
  $ .38     $ .08  
Cash dividends declared
    N/A       N/A  
Weighted Average Shares Common Outstanding
               
Basic and diluted
    7,447       7,412  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
4

 
 
Unaudited Consolidated Statements of Comprehensive Income

 
   
Three Months Ended
 
   
March 31,
 
(In thousands)
 
2012
   
2011
 
Net Income
  $ 3,309     $ 1,045  
Other comprehensive income:
               
Net unrealized holding gain on available for sale securities arising during the period on securities held at end of period, net of tax of $188 and $98, respectively
    (350 )     (182 )
                 
Reclassification adjustment for prior period unrealized gain previously reported in other comprehensive income recognized during current period, net of tax of $5 and $226, respectively
    (10 )     (419 )
                 
Change in unfunded portion of postretirement benefit obligation, net of tax of $36 and $32, respectively
    65       58  
Other comprehensive loss
    (295 )     (543 )
Comprehensive Income
  $ 3,014     $ 502  
 
See accompanying notes to unaudited consolidated financial statements.

 
5

 
 
Unaudited Consolidated Statements of Cash Flows

 
Three months ended March 31, (In thousands)
 
2012
   
2011
 
Cash Flows from Operating Activities
           
Net income
  $ 3,309     $ 1,045  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,124       1,237  
Net premium amortization of available for sale investment securities
    1,168       828  
Provision for loan losses
    977       2,441  
Deferred income tax expense
    427       2,063  
Noncash employee stock purchase plan expense
    10       17  
Mortgage loans originated for sale
    (16,497 )     (5,621 )
Proceeds from sale of mortgage loans
    13,159       7,027  
Gain on sale of mortgage loans, net
    (310 )     (141 )
Net loss on sale and write downs of other real estate
    751       396  
Net gain on sale of available for sale investment securities
    (3 )     (410 )
Decrease in accrued interest receivable
    239       405  
Increase in cash surrender value of company-owned life insurance
    (214 )     (235 )
Death benefits in excess of cash surrender value on company-owned life insurance
    (529 )     -  
Decrease (increase) in other assets
    394       (1,298 )
Decrease in accrued interest payable
    (87 )     (133 )
Decrease in other liabilities
    (489 )     (875 )
Net cash provided by operating activities
    3,429       6,746  
Cash Flows from Investing Activities
               
Proceeds from maturities and calls of available for sale investment securities
    51,330       22,052  
Proceeds from sale of available for sale investment securities
    479       25,606  
Purchase of available for sale investment securities
    (86,797 )     (120,341 )
Principal collected on loans originated for investment, net
    21,070       32,700  
Proceeds from surrender of company-owned life insurance
    -       2,248  
Proceeds from death benefits of company-owned life insurance
    1,051       -  
Purchase of premises and equipment
    (398 )     (436 )
Proceeds from sale of other real estate
    1,593       982  
Net cash used in investing activities
    (11,672 )     (37,189 )
Cash Flows from Financing Activities
               
Net increase in deposits
    12,138       9,685  
Net increase in federal funds purchased and other short-term borrowings
    923       25,401  
Repayments of securities sold under agreements to repurchase and other long-term borrowings
    (10,112 )     (2,171 )
Dividends paid, preferred
    (375 )     (375 )
Shares issued under employee stock purchase plan
    29       34  
Net cash provided by financing activities
    2,603       32,574  
Net (decrease) increase in cash and cash equivalents
    (5,640 )     2,131  
Cash and cash equivalents at beginning of year
    94,309       182,056  
Cash and cash equivalents at end of period
  $ 88,669     $ 184,187  
Supplemental Disclosures
               
Cash paid during the period for:
               
Interest
  $ 5,290     $ 6,645  
Income taxes
    -       750  
Transfers from loans to other real estate
    7,239       5,525  
Sale and financing of other real estate
    1,302       321  
Cash dividends payable, preferred
    188       188  
 
See accompanying notes to unaudited consolidated financial statements.

 
6

 

Unaudited Consolidated Statements of Changes in Shareholders’ Equity

 
(Dollars in thousands, except per share data)
                         
Accumulated
       
                           
Other
   
Total
 
Three months ended
 
Preferred
   
Common Stock
   
Capital
   
Retained
   
Comprehensive
   
Shareholders’
 
March 31, 2012 and 2011
 
Stock
   
Shares
   
Amount
   
Surplus
   
Earnings
   
Income
   
Equity
 
Balance at January 1, 2012
  $ 29,115       7,446     $ 931     $ 50,848     $ 69,520     $ 6,643     $ 157,057  
Net income
    -       -       -       -       3,309       -       3,309  
Other comprehensive loss
    -       -       -       -       -       (295 )     (295 )
Preferred stock dividends, $12.50 per share
    -       -       -       -       (375 )     -       (375 )
Preferred stock discount accretion
    103       -       -       -       (103 )     -       -  
Shares issued pursuant to employee stock purchase plan
    -       8       1       28       -       -       29  
Expense related to employee stock purchase plan
    -       -       -       10       -       -       10  
Balance at March 31, 2012
  $ 29,218       7,454     $ 932     $ 50,886     $ 72,351     $ 6,348     $ 159,735  
                                                         
                                                         
                                                         
Balance at January 1, 2011
  $ 28,719       7,412     $ 926     $ 50,675     $ 68,678     $ 898     $ 149,896  
Net income
    -       -       -       -       1,045       -       1,045  
Other comprehensive loss
    -       -       -       -       -       (543 )     (543 )
Preferred stock dividends, $12.50 per share
    -       -       -       -       (375 )     -       (375 )
Preferred stock discount accretion
    97       -       -       -       (97 )     -       -  
Shares issued pursuant to employee stock purchase plan
    -       8       1       33       -       -       34  
Expense related to employee stock purchase plan
    -       -       -       17       -       -       17  
Balance at March 31, 2011
  $ 28,816       7,420     $ 927     $ 50,725     $ 69,251     $ 355     $ 150,074  
 
See accompanying notes to unaudited consolidated financial statements.
 
 
7

 
 
Notes to Unaudited Consolidated Financial Statements
 
1.  Basis of Presentation and Nature of Operations
 
The consolidated financial statements include the accounts of Farmers Capital Bank Corporation (the “Company” or “Parent Company”), a bank holding company, and its bank and nonbank subsidiaries. Bank subsidiaries include Farmers Bank & Capital Trust Company (“Farmers Bank”) in Frankfort, KY, First Citizens Bank (“First Citizens”) in Elizabethtown, KY, United Bank & Trust Company (“United Bank”) in Versailles, KY, and Citizens Bank of Northern Kentucky, Inc. (“Citizens Northern”) in Newport, KY.

Farmers Bank’s significant subsidiaries include EG Properties, Inc., Leasing One Corporation (“Leasing One”), and Farmers Capital Insurance Corporation (“Farmers Insurance”). EG Properties, Inc. is involved in real estate management and liquidation for certain repossessed properties of Farmers Bank. Leasing One is a commercial leasing company in Frankfort, KY, and Farmers Insurance is an insurance agency in Frankfort, KY. United Bank has one wholly-owned subsidiary, EGT Properties, Inc. EGT Properties, Inc. is involved in real estate management and liquidation for certain repossessed properties of United Bank. First Citizens has one wholly-owned subsidiary, HBJ Properties, LLC. HBJ Properties, LLC is involved in real estate management and liquidation for certain repossessed properties of First Citizens. Citizens Northern has one wholly-owned subsidiary, ENKY Properties, Inc. ENKY Properties, Inc. is involved in real estate management and liquidation for certain repossessed properties of Citizens Northern.

The Company has three active nonbank subsidiaries, FCB Services, Inc. (“FCB Services”), FFKT Insurance Services, Inc. (“FFKT Insurance”), and EKT Properties, Inc. (“EKT”). FCB Services is a data processing subsidiary located in Frankfort, KY that provides services to the Company’s banks as well as unaffiliated entities. FFKT Insurance is a captive property and casualty insurance company insuring primarily deductible exposures and uncovered liability related to properties of the Company. EKT was formed to manage and liquidate certain real estate properties repossessed by the Company. In addition, the Company has three subsidiaries organized as Delaware statutory trusts that are not consolidated into its financial statements. These trusts were formed for the purpose of issuing trust preferred securities.

The Company provides financial services at its 36 locations in 23 communities throughout Central and Northern Kentucky to individual, business, agriculture, government, and educational customers. Its primary deposit products are checking, savings, and term certificate accounts.  Its primary lending products are residential mortgage, commercial lending, and installment loans. Substantially all loans and leases are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans and leases are expected to be repaid from cash flow from operations of businesses. Other services include, but are not limited to, cash management services, issuing letters of credit, safe deposit box rental, and providing funds transfer services.  Other financial instruments, which potentially represent concentrations of credit risk, include deposit accounts in other financial institutions and federal funds sold.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Estimates used in the preparation of the financial statements are based on various factors including the current interest rate environment and the general strength of the local and state economy.  Changes in the overall interest rate environment can significantly affect the Company’s net interest income and the value of its recorded assets and liabilities. Actual results could differ from those estimates used in the preparation of the financial statements. The allowance for loan losses, carrying value of other real estate owned, actuarial assumptions used to calculate postretirement benefits, and the fair values of financial instruments are estimates that are particularly subject to change.

The consolidated balance sheet as of December 31, 2011 has been derived from the audited financial statements of the Company as of that date. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2011 included in the Company’s annual report on Form 10-K. The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and the footnotes required by U.S. GAAP for complete statements.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such financial statements, have been included.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. All significant intercompany transactions and balances are eliminated in consolidation.
 
 
8

 
 
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

2. Accounting Policy

Loans and Interest Income
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their unpaid principal amount outstanding adjusted for any charge-offs and any deferred fees or costs on originated loans. Interest income on loans is recognized using the interest method based on loan principal amounts outstanding during the period. Interest income also includes amortization and accretion of any premiums or discounts over the expected life of acquired loans at the time of purchase or business acquisition. Loan origination fees, net of certain direct origination costs, are deferred and amortized as yield adjustments over the contractual term of the loans.

The Company disaggregates certain disclosure information related to loans, the related allowance for loan losses, and credit quality measures by either portfolio segment or by loan class. The Company segregates its loan portfolio segments based on similar risk characteristics and are as follows: real estate loans, commercial loans, and consumer loans.

The Company has a loan policy in place that is amended and approved from time to time as needed to reflect current economic conditions and product offerings in its markets. The policy establishes written procedures concerning areas such as the lending authorities of loan officers, committee review and approval of certain credit requests, underwriting criteria, policy exceptions, appraisal requirements, and loan review. Credit is extended to borrowers based primarily on their ability to repay as demonstrated by income and cash flow analysis.

Loans secured by real estate make up the largest segment of the Company’s loan portfolio. If a borrower fails to repay a loan secured by real estate, the Company may liquidate the collateral in order to satisfy the amount owed. Determining the value of real estate is a key component to the lending process for real estate backed loans. If the fair value of real estate (less estimated cost to sell) securing a collateral dependent loan declines below the outstanding loan amount, the Company will write down the carrying value of the loan and thereby incur a loss. The Company uses independent third party state-certified or licensed appraisers in accordance with its loan policy to mitigate risk when underwriting real estate loans. Cash flow analysis of the borrower, loan to value limits as adopted by loan policy, and other customary underwriting standards are also in place which are designed to maximize credit quality and mitigate risks associated with real estate lending.

Commercial loans are made to businesses and are secured mainly by assets such as inventory, accounts receivable, machinery, fixtures and equipment, or other business assets. Commercial lending involves significant risk, as loan repayments are more dependent on the successful operation or management of the business and its cash flows. Consumer lending includes loans to individuals mainly for personal autos, boats, or a variety of other personal uses and may be secured or unsecured. Loan repayment associated with consumer loans is highly dependent upon the borrower’s continuing financial stability, which is heavily influenced by local unemployment rates. The Company mitigates its risk exposure to each of its loan segments by analyzing the borrower’s repayment capacity, imposing restrictions on the amount it will loan compared to estimated collateral values, limiting the payback periods, and following other customary underwriting practices as adopted in its loan policy.

Generally, the accrual of interest on loans is discontinued when it is determined that the collection of interest or principal is doubtful, or when a default of interest or principal has existed for 90 days or more, unless such loan is well secured and in the process of collection. Past due status is based on the contractual terms of the loan.  All interest accrued but not received for loans placed on nonaccrual status is reversed against interest income. Cash payments received on nonaccrual loans generally are applied to principal, and interest income is only recorded once principal recovery is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Company’s policy for placing a loan on nonaccrual status or subsequently returning a loan to accrual status does not differ based on its portfolio class or segment.
 
 
9

 
 
Commercial and real estate loans delinquent in excess of 120 days and consumer loans delinquent in excess of 180 days are charged off, unless the collateral securing the debt is of such value that any loss appears to be unlikely. In all cases, loans are charged off at an earlier date if classified as loss under its loan grading process or as a result of regulatory examination. The Company’s charge-off policy for impaired loans does not differ from the charge-off policy for loans outside the definition of impaired.

Provision and Allowance for Loan Losses
The provision for loan losses represents charges made to earnings to maintain an allowance for loan losses at a level considered adequate to provide for probable incurred credit losses at the balance sheet date. The allowance for loan losses is a valuation allowance increased by the provision for loan losses and decreased by net charge-offs. Loan losses are charged against the allowance when management believes the uncollectibility of a loan is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The Company estimates the adequacy of the allowance using a risk-rated methodology which is based on the Company’s past loan loss experience, known and inherent risks in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral securing loans, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires significant judgment and the use of estimates that may be susceptible to change.

The allowance for loan losses consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current risk factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Actual loan losses could differ significantly from the amounts estimated by management.

The Company’s risk-rated methodology includes segregating watch list and past due loans from the general portfolio and allocating specific amounts to these loans depending on their status. For example, watch list loans, which may be identified by the internal loan review risk-rating process or by regulatory examiner classification, are assigned a certain loss percentage while loans past due 30 days or more are assigned a different loss percentage. Each of these percentages considers past experience as well as current factors. The remainder of the general loan portfolio is segregated into portfolio segments having similar risk characteristics identified as follows:  real estate loans, commercial loans, and consumer loans. Each of these portfolio segments is assigned a loss percentage based on their respective actual twelve-quarter rolling historical loss rates, adjusted for qualitative risk factors.

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

The Company accounts for impaired loans in accordance with ASC Topic 310, “Receivables”. ASC Topic 310 requires that impaired loans be measured at the present value of expected future cash flows, discounted at the loan’s effective interest rate, at the loan’s observable market price, or at the fair value of the collateral if the loan is collateral dependent. Generally, impaired loans are also in nonaccrual status. In certain circumstances, however, the Company may continue to accrue interest on an impaired loan. Cash receipts on impaired loans are typically applied to the recorded investment in the loan, including any accrued interest receivable. Loans that are part of a large group of smaller-balance homogeneous loans, such as residential mortgage, consumer, and smaller-balance commercial loans, are collectively evaluated for impairment and, accordingly, they are not separately identified for impairment disclosures. Troubled debt restructurings are measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception, or at the fair value of collateral. The Company determines the amount of reserve for troubled debt restructurings that subsequently default in accordance with its accounting policy for the allowance for loan losses.
 
 
10

 
 
Changes
During the first quarter of 2012, the Company refined the methodology it uses for calculating the allowance for loan losses. The Company, with assistance from an independent third party advisor, adopted the revisions to better reflect the impact of adjustments made to historic loss percentages, which are based on an evaluation of certain qualitative risk factors used in estimating credit losses inherent in the general component of the allowance for loan losses. Like the previously established model, the new methodology consists of a formula-based approach applied at the subsidiary bank level to estimate the allowance for segments of loans in the general component as well as specific allocations for individually identified impaired loans. Both the revised and previous methodologies use historical loss rates adjusted for qualitative factors. Prior to being formally adopted, the Company tested the updated methodology with live data over a period of several months to ensure that the allowance was supported and directionally consistent with changes in overall credit quality and that fluctuations were explainable and supportable.

The Company’s new methodology includes enhancements to the qualitative risk factors applied to the general component of its real estate, commercial, and consumer loan portfolio segments. Qualitative risk factors are adjustments for current market conditions that are likely to cause estimated credit losses to differ from historical loss experience. The most significant parts of the change by the Company to its methodology includes the addition of a considerably greater amount of economic and other qualitative input which are more reflective of current market conditions, the removal of a qualitative factor in which the objective was to quantify losses based on a migration analysis of loans from performing to nonperforming status over time which is no longer reflective of current credit quality trends, and the removal of a qualitative component for which the objective was to identify and capture larger, unexpected losses which is no longer relevant to the current portfolio composition. The net effect of the changes in the methodology related to the qualitative risk factors was a reduction in the allowance for loan losses of $2.9 million.

The qualitative risk factors used in the methodology are consistent with the guidance in the most recent Interagency Policy Statement on the Allowance for Loan Losses issued in 2006. Each factor is supported by a detailed analysis performed at each subsidiary bank and are both measureable and supportable. Some factors include a minimum allocation in some instances where loss levels are extremely low and it is determined to be prudent from a safety and soundness perspective. Qualitative risk factors that are used in the methodology include the following for each loan portfolio segment:

 
·
Delinquency trends
 
·
Trends in net charge-offs
 
·
Trends in loan volume
 
·
Lending philosophy risk
 
·
Management experience risk
 
·
Concentration of credit risk
 
·
Economic conditions risk

The qualitative risk factors above are used to adjust the actual twelve-quarter rolling historical loss rates for each loan segment. Components of the methodology that did not change include the computation of historical loss rates, loss estimates related to “Watch List” loans, and loss estimates related to loans 30 days or more past due that are not included in other components of the analysis.

In addition to the refinements made to the Company’s allowance for loans losses methodology as detailed above, the Company also made a policy change regarding how it identifies impaired loans. Previously, the Company identified as impaired all loans that were both in excess of a predetermined dollar threshold and that were also risk rated as substandard as part of its quarterly loan review analysis. Under the revised policy, certain substandard loans that previously were considered impaired may no longer be classified as such.
 
 
11

 
 
The determination of whether a loan is considered impaired is based on a loan’s individual impairment analysis and not strictly by the fact that it is rated as substandard and in excess of a certain dollar amount. An impairment analysis may indicate that an impaired loan needs no specific reserve allocation, but nonetheless the loan is still considered impaired. These situations occur primarily as a result of loans that are on nonaccrual status, loans that are troubled debt restructurings, or loans with prior charge-offs. There were loans in the amount of $28 million during the first quarter of 2012 that are no longer considered impaired as a result of the policy change. This change resulted in an increase in the allowance for loan losses in the amount of $945 thousand. Although impaired loans decreased as a result of the policy change, the amount of overall reserves increased because these loans previously had no specific reserves allocated. When these loans were removed from the impaired loan classification due to the policy change, reserve amounts attributable to the general component of the allowance methodology became applicable.

3.  Reclassifications

Certain reclassifications have been made to the consolidated financial statements of prior periods to conform to the current period presentation. These reclassifications do not affect net income or total shareholders’ equity as previously reported.

4.  Net Income Per Common Share

Basic net income per common share is determined by dividing net income available to common shareholders by the weighted average total number of common shares issued and outstanding.  Net income available to common shareholders represents net income adjusted for preferred stock dividends including dividends declared, accretion of discounts on preferred stock issuances, and cumulative dividends related to the current dividend period that have not been declared as of the end of the period.

Diluted net income per common share is determined by dividing net income available to common shareholders by the total weighted average number of common shares issued and outstanding plus amounts representing the dilutive effect of stock options outstanding and outstanding warrants. The effects of stock options and outstanding warrants are excluded from the computation of diluted earnings per common share in periods in which the effect would be antidilutive. Dilutive potential common shares are calculated using the treasury stock method.

Net income per common share computations were as follows at March 31, 2012 and 2011.

   
Three Months Ended
March 31,
 
(In thousands, except per share data)
 
2012
   
2011
 
             
Net income, basic and diluted
  $ 3,309     $ 1,045  
Preferred stock dividends and discount accretion
    (478 )     (472 )
Net income available to common shareholders, basic and diluted
  $ 2,831     $ 573  
                 
                 
Average common shares issued and outstanding, basic and diluted
    7,447       7,412  
                 
Net income per common share, basic and diluted
  $ .38     $ .08  

Options to purchase 24,049 shares of common stock at March 31, 2012 and 2011 were excluded from the computation of net income per common share because they were antidilutive. There were 223,992 potential common shares associated with a warrant issued to the U.S. Treasury that were excluded from the computation of earnings per common share at March 31, 2012 and 2011 because they were antidilutive.

5.  Fair Value Measurements

ASC Topic 820, “Fair Value Measurements and Disclosures”, defines fair value, establishes a framework for measuring fair value, and sets forth disclosures about fair value measurements. ASC Topic 825, “Financial Instruments”, allows entities to choose to measure certain financial assets and liabilities at fair value. The Company has not elected the fair value option for any of its financial assets or liabilities.
 
 
12

 
 
ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This Topic describes three levels of inputs that may be used to measure fair value:

 
Level 1:
Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.

 
Level 2:
Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 
Level 3:
Significant unobservable inputs that reflect a reporting entity’s own assumptions supported by little or no market activity, about the assumptions that market participants would use in pricing the asset or liability.

Following is a description of the valuation method used for financial instruments measured at fair value on a recurring basis. For this disclosure, the Company only has available for sale investment securities that meet the requirement.

Available for sale investment securities
Valued primarily by independent third party pricing services under the market valuation approach that include, but not limited to, the following inputs:

 
·
Mutual funds and equity securities are priced utilizing real-time data feeds from active market exchanges for identical securities and are considered Level 1 inputs.
 
·
Government-sponsored agency debt securities, obligations of states and political subdivisions, mortgage-backed securities, corporate bonds, and other similar investment securities are priced with available market information through processes using benchmark yields, matrix pricing, prepayment speeds, cash flows, live trading data, and market spreads sourced from new issues, dealer quotes, and trade prices, among others sources and are considered Level 2 inputs.
 
 
13

 
 
Available for sale investment securities are the Company’s only balance sheet item that meets the disclosure requirements for instruments measured at fair value on a recurring basis. Disclosures as of March 31, 2012 and December 31, 2011 are as follows:
         
Fair Value Measurements Using
 
(In thousands)
 
 
Available For Sale Investment Securities
 
Fair Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
                         
March 31, 2012
                       
Obligations of U.S. government-sponsored entities
  $ 99,319       -     $ 99,319       -  
Obligations of states and political subdivisions
    98,256       -       98,256       -  
Mortgage-backed securities – residential
    427,133       -       427,133       -  
Mortgage-backed securities – commercial
    94       -       94       -  
Mutual funds and equity securities
    1,319     $ 1,319       -       -  
Corporate debt securities
    7,254       -       7,254       -  
Total
  $ 633,375     $ 1,319     $ 632,056     $ 0  


         
Fair Value Measurements Using
 
(In thousands)
 
 
Available For Sale Investment Securities
 
Fair Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
                         
December 31, 2011
                       
Obligations of U.S. government-sponsored entities
  $ 96,163       -     $ 96,163       -  
Obligations of states and political subdivisions
    84,619       -       84,619       -  
Mortgage-backed securities – residential
    408,863       -       408,863       -  
Mortgage-backed securities – commercial
    209       -       209       -  
Mutual funds and equity securities
    1,601     $ 1,601       -       -  
Corporate debt securities
    6,364       -       6,364       -  
Total
  $ 597,819     $ 1,601     $ 596,218     $ 0  

The Company is required to measure and disclose certain other assets and liabilities at fair value on a nonrecurring basis in periods following their initial recognition. The Company’s disclosure about assets and liabilities measured at fair value on a nonrecurring basis consists of impaired loans and other real estate owned (“OREO”). The carrying value of these assets are adjusted to fair value on a nonrecurring basis through impairment charges as described more fully below.

Impairment charges on loans are recorded by either an increase to the provision for loan losses and related allowance or by direct loan charge-offs. The fair value of impaired loans with specific allocations of the allowance for loan losses is measured based on recent appraisals of the underlying collateral. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraisers take absorption rates into consideration and adjustments are routinely made in the appraisal process to identify differences between the comparable sales and income data available. Such adjustments consist mainly of estimated costs to sell that are not included in certain appraisals or to update appraised collateral values as a result of market declines of similar properties for which a newer appraisal is available. These adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value.
 
 
14

 
 
OREO includes properties acquired by the Company through actual loan foreclosures and is carried at fair value less estimated costs to sell. Fair value of OREO at acquisition is generally based on third party appraisals of the property that includes comparable sales data and is considered as Level 3 inputs. The carrying value of each OREO property is updated at least annually and more frequently when market conditions significantly impact the value of the property. If the carrying amount of the OREO exceeds fair value less estimated costs to sell, an impairment loss is recorded through expense.

The following tables represent the carrying amount of assets measured at fair value on a nonrecurring basis and still held by the Company as of the dates indicated. The amounts in the tables only represent assets whose carrying amount has been adjusted by impairment charges during the period in a manner as described above; therefore, these amounts will differ from the total amounts outstanding. Impaired loan amounts in the tables below exclude restructured loans since they are measured based on present value techniques, which are outside the scope of the fair value reporting framework.

         
Fair Value Measurements Using
 
(In thousands)
 
 
Description
 
Fair Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
                         
March 31, 2012
                       
Impaired Loans
                       
Real estate-construction and land development
  $ 10,632       -       -     $ 10,632  
Real estate mortgage-residential
    9,463       -       -       9,463  
Real estate mortgage-farmland and other commercial enterprises
    8,242       -       -       8,242  
Commercial and industrial
    17       -       -       17  
Consumer-secured
    25       -       -       25  
Consumer-unsecured
    115       -       -       115  
Total impaired loans
  $ 28,494       -       -     $ 28,494  
                                 
OREO
                               
Real estate-construction and land development
  $ 1,874       -       -     $ 1,874  
Real estate mortgage-residential
    1,581       -       -       1,581  
Real estate mortgage-farmland and other commercial enterprises
    1,044       -       -       1,044  
Total OREO
  $ 4,499       -       -     $ 4,499  
 
 
15

 
 
         
Fair Value Measurements Using
 
(In thousands)
 
 
Description
 
Fair Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
                         
December 31, 2011
                       
Impaired Loans
                       
Real estate-construction and land development
  $ 18,636       -       -     $ 18,636  
Real estate mortgage-residential
    8,160       -       -       8,160  
Real estate mortgage-farmland and other commercial enterprises
    12,928       -       -       12,928  
Commercial and industrial
    293       -       -       293  
Consumer
    47       -       -       47  
Total impaired loans
  $ 40,064       -       -     $ 40,064  
                                 
OREO
                               
Real estate-construction and land development
  $ 8,826       -       -     $ 8,826  
Real estate mortgage-residential
    1,217       -       -       1,217  
Real estate mortgage-farmland and other commercial enterprises
    4,785       -       -       4,785  
Total OREO
  $ 14,828       -       -     $ 14,828  

The following table presents quantitative information about unobservable inputs for assets measured on a nonrecurring basis using Level 3 measurements.

(In thousands)
Fair Value at
 March 31, 2012
Valuation Technique
Unobservable Inputs
Range (Average)
Impaired loans
$28,494
Discounted appraisals
Marketability discount
3%-20% (6%)
OREO
$4,499
Discounted appraisals
Marketability discount
3%-10% (6%)

As previously discussed, the fair value of real estate securing impaired loans and OREO are based on current third party appraisals. It is often necessary, however, for the Company to discount the appraisal amounts supporting its impaired loans and OREO.  These discounts relate primarily to marketing and other holding costs that are not included in certain appraisals or to update values as a result of market declines of similar properties for which newer appraisals are available. The typical range of discounts is presented in the table above.

The following table represents impairment charges recorded in earnings for the periods indicated on assets measured at fair value on a nonrecurring basis.

(In thousands)
           
Three months ended
 
March 31, 2012
   
March 31, 2011
 
Impairment charges:
           
Impaired loans
  $ 4,306     $ 1,134  
OREO
    503       229  
Total
  $ 4,809     $ 1,363  

Fair Value of Financial Instruments

The table that follows represents the estimated fair values of the Company’s financial instruments made in accordance with the requirements of ASC 825, “Financial Instruments”. ASC 825 requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet for which it is practicable to estimate that value. The estimated fair value amounts have been determined by the Company using available market information and present value or other valuation techniques. These derived fair values are subjective in nature, involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. ASC 825 excludes certain financial instruments and all nonfinancial instruments from the disclosure requirements. Accordingly, the aggregate fair value amounts presented are not intended to represent the underlying value of the Company.
 
 
16

 
 
The following methods and assumptions were used to estimate the fair value of each of the financial instruments in the table that follows.

Cash and Cash Equivalents, Accrued Interest Receivable, and Accrued Interest Payable
The carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization or settlement.

Investment Securities Held to Maturity
Fair value is based on quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities or with available market information through processes using benchmark yields, matrix pricing, prepayment speeds, cash flows, live trading data, and market spreads sourced from new issues, dealer quotes, and trade prices, among others sources.

Loans
The fair value of loans is estimated by discounting expected future cash flows using current discount rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Expected future cash flows are projected based on contractual cash flows adjusted for estimated prepayments.

Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date and fair value approximates carrying value. The fair value of fixed maturity certificates of deposit is estimated by discounting the expected future cash flows using the rates currently offered for certificates of deposit with similar remaining maturities.

Federal Funds Purchased and other Short-term Borrowings
The carrying amount is the estimated fair value for these borrowings which reprice frequently in the near term.

Securities Sold Under Agreements to Repurchase, Subordinated Notes Payable, and Other Long-term Borrowings
The fair value of these borrowings is estimated by discounting the expected future cash flows using rates currently available for debt with similar terms and remaining maturities. For subordinated notes payable, the Company uses its best estimate to determine an appropriate discount rate since active markets for similar debt transactions are very limited.

Commitments to Extend Credit and Standby Letters of Credit
Pricing of these financial instruments is based on the credit quality and relationship, fees, interest rates, probability of funding, compensating balance, and other covenants or requirements. Loan commitments generally have fixed expiration dates, variable interest rates and contain termination and other clauses that provide for relief from funding in the event there is a significant deterioration in the credit quality of the customer. Many loan commitments are expected to, and typically do, expire without being drawn upon. The rates and terms of the Company’s commitments to lend and standby letters of credit are competitive with others in the various markets in which the Company operates. There are no unamortized fees relating to these financial instruments, as such the carrying value and fair value are both zero.
 
 
17

 
 
The following table presents the estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2012 and December 31, 2011. Information for available for sale investment securities is presented within this footnote in greater detail above.

               
Fair Value Measurements Using
 
(In thousands)
 
Carrying
Amount
   
Fair
Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
March 31, 2012
                             
Assets
                             
Cash and cash equivalents
  $ 88,669     $ 88,669     $ 88,669       -       -  
Held to maturity investment securities
    875       985       -     $ 985       -  
Loans, net
    1,019,508       1,016,973       -       -     $ 1,016,973  
Accrued interest receivable
    6,380       6,380       -       6,380       -  
                                         
Liabilities
                                       
Deposits
    1,447,203       1,452,732       829,348       -       623,384  
Federal funds purchased and other short-term borrowings
    27,945       27,945       -       27,945       -  
Securities sold under agreements to repurchase and other long-term borrowings
    180,582       200,837       -       200,837       -  
Subordinated notes payable to unconsolidated trusts
    48,970       22,216       -       -       22,216  
Accrued interest payable
    2,288       2,288       -       2,288       -  
                                         
December 31, 2011
                                       
Assets
                                       
Cash and cash equivalents
  $ 94,309     $ 94,309     $ 94,309       -       -  
Held to maturity investment securities
    875       974       -     $ 974       -  
Loans, net
    1,043,844       1,043,824       -       -     $ 1,043,824  
Accrued interest receivable
    6,619       6,619       -       6,619       -  
                                         
Liabilities
                                       
Deposits
    1,435,065       1,441,490       787,396       -       654,094  
Federal funds purchased and other short-term borrowings
    27,022       27,022       -       27,022       -  
Securities sold under agreements to repurchase and other long-term borrowings
    190,694       212,176       -       212,176       -  
Subordinated notes payable to unconsolidated trusts
    48,970       20,982       -       -       20,982  
Accrued interest payable
    2,375       2,375       -       2,375       -  
 
 
18

 
 
6.  Investment Securities

The following tables summarize the amortized costs and estimated fair value of the securities portfolio at March 31, 2012 and December 31, 2011. The summary is divided into available for sale and held to maturity investment securities.
 
March 31, 2012 (In thousands)
 
Amortized
Cost
   
Gross
Unrealized Gains
   
Gross
Unrealized Losses
   
Estimated
Fair Value
 
Available For Sale
                       
Obligations of U.S. government-sponsored entities
  $ 99,070     $ 331     $ 82     $ 99,319  
Obligations of states and political subdivisions
    94,711       3,715       170       98,256  
Mortgage-backed securities – residential
    416,769       10,562       198       427,133  
Mortgage-backed securities – commercial
    92       2       -       94  
Mutual funds and equity securities
    1,312       16       9       1,319  
Corporate debt securities
    8,107       46       899       7,254  
Total securities – available for sale
  $ 620,061     $ 14,672     $ 1,358     $ 633,375  
Held To Maturity
                               
Obligations of states and political subdivisions
  $ 875     $ 110     $ 0     $ 985  


December 31, 2011 (In thousands)
 
Amortized
Cost
   
Gross
Unrealized Gains
   
Gross
Unrealized Losses
   
Estimated
Fair Value
 
Available For Sale
                       
Obligations of U.S. government-sponsored entities
  $ 95,770     $ 408     $ 15     $ 96,163  
Obligations of states and political subdivisions
    80,801       3,903       85       84,619  
Mortgage-backed securities – residential
    397,675       11,384       196       408,863  
Mortgage-backed securities – commercial
    203       6       -       209  
Mutual funds and equity securities
    1,601       -       -       1,601  
Corporate debt securities
    7,901       -       1,537       6,364  
Total securities – available for sale
  $ 583,951     $ 15,701     $ 1,833     $ 597,819  
Held To Maturity
                               
Obligations of states and political subdivisions
  $ 875     $ 99     $ 0     $ 974  

The amortized cost and estimated fair value of the debt securities portfolio at March 31, 2012, by contractual maturity, are detailed below. The summary is divided into available for sale and held to maturity securities. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are stated separately due to the nature of payment and prepayment characteristics of these securities, as principal is not due at a single date.
 
   
Available For Sale
   
Held To Maturity
 
March 31, 2012 (In thousands)
 
Amortized
Cost
   
Estimated
Fair Value
   
Amortized
Cost
   
Estimated
Fair Value
 
Due in one year or less
  $ 11,863     $ 11,849       -       -  
Due after one year through five years
    100,541       101,080       -       -  
Due after five years through ten years
    72,256       74,925       -       -  
Due after ten years
    17,228       16,975     $ 875     $ 985  
Mortgage-backed securities
    416,861       427,227       -       -  
Total
  $ 618,749     $ 632,056     $ 875     $ 985  
 
 
19

 
 
Gross realized gains and losses on the sale of available for sale investment securities were as follows:

   
Three Months Ended
 
   
March 31,
 
(In thousands)
 
2012
   
2011
 
             
Gross realized gains
  $ 7     $ 413  
Gross realized losses
    4       3  
Net realized gains
  $ 3     $ 410  

Investment securities with unrealized losses at March 31, 2012 and December 31, 2011 not recognized in income are presented in the tables below. The tables segregate investment securities that have been in a continuous unrealized loss position for less than twelve months from those that have been in a continuous unrealized loss position for twelve months or more. The tables also include the fair value of the related securities.
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
March 31, 2012 (In thousands)
 
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
 
Obligations of U.S. government-sponsored entities
  $ 27,268     $ 82       -       -     $ 27,268     $ 82  
Obligations of states and political subdivisions
    12,272       130     $ 6,486     $ 40       18,758       170  
Mortgage-backed securities – residential
    45,277       198       -       -       45,277       198  
Mutual funds and equity securities
    318       9       -       -       318       9  
Corporate debt securities
    696       8       4,951       891       5,647       899  
Total
  $ 85,831     $ 427     $ 11,437     $ 931     $ 97,268     $ 1,358  
 

   
Less than 12 Months
   
12 Months or More
   
Total
 
December 31, 2011 (In thousands)
 
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
 
Obligations of U.S. government-sponsored entities
  $ 13,494     $ 15       -       -     $ 13,494     $ 15  
Obligations of states and political subdivisions
    2,913       20     $ 6,886     $ 65       9,799       85  
Mortgage-backed securities – residential
    56,249       196       -       -       56,249       196  
Corporate debt securities
    -       -       4,299       1,537       4,299       1,537  
Total
  $ 72,656     $ 231     $ 11,185     $ 1,602     $ 83,841     $ 1,833  
 
Unrealized losses included in the tables above have not been recognized in income since they have been identified as temporary. The Company evaluates investment securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market conditions warrant. Many factors are considered, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was effected by macroeconomic conditions, and (4) whether the Company has the intent to sell the security or more likely than not will be required to sell the security before its anticipated recovery. The assessment of whether an OTTI charge exists involves a high degree of subjectivity and judgment and is based on the information available to the Company at a point in time.

At March 31, 2012, the Company’s investment securities portfolio had gross unrealized losses of $1.4 million, an improvement of $475 thousand or 25.9% from year-end 2011. Of the total gross unrealized losses at March 31, 2012, $931 thousand relates to investments that have been in a continuous loss position for 12 months or more. Unrealized losses on corporate debt securities make up $891 thousand of the total unrealized loss on investment securities in a continuous loss position of 12 months or more. This represents an improvement of $646 thousand or 42.0% from year-end 2011.
 
 
20

 
 
Corporate debt securities in the Company’s investment securities portfolio at March 31, 2012 include $5.0 million carrying value of single-issuer trust preferred capital securities issued by a national and global financial services firm. These securities are currently performing and the issuer continues to be rated as investment grade by major rating agencies. The total unrealized loss on corporate debt securities is primarily attributed to the single-issuer trust preferred capital securities. The unrealized losses on these securities is mainly a result of the general decline in financial markets and illiquidity events that began in 2008 and is not due to adverse changes in the expected cash flows of the individual securities. Overall market declines, particularly of banking and financial institutions, are a result of significant stress throughout the regional and national economy that began during 2008 which has not fully stabilized.

The Company attributes the unrealized losses in other sectors of its investment securities portfolio to changes in market interest rates. In general, market rates for these securities exceed the yield available at the time many of the securities in the portfolio were purchased. The Company does not expect to incur a loss on these securities unless they are sold prior to maturity. The Company’s current intent is to hold these securities until recovery.

Investment securities with unrealized losses at March 31, 2012 are performing according to their contractual terms. The Company does not have the intent to sell these securities and likely will not be required to sell these securities before their anticipated recovery. The Company does not consider any of the securities to be impaired due to reasons of credit quality or other factors.

7.  Loans and Allowance for Loan Losses

Major classifications of loans outstanding are summarized as follows:

   
March 31, 2012
   
December 31, 2011
 
(Dollars in thousands)
 
Amount
   
Amount
 
             
Real Estate:
           
Real estate – construction and land development
  $ 118,428     $ 119,989  
Real estate – residential
    439,390       445,464  
Real estate mortgage – farmland and other commercial enterprises
    373,761       384,331  
Commercial:
               
Commercial and industrial
    48,110       48,771  
States and political subdivisions
    23,189       23,601  
Lease financing
    5,903       7,578  
Other
    19,065       21,435  
Consumer:
               
Secured
    12,256       14,214  
Unsecured
    6,751       7,151  
Total loans
    1,046,853       1,072,534  
Less unearned income
    (292 )     (426 )
Total loans, net of unearned income
  $ 1,046,561     $ 1,072,108  
 
 
21

 
 
Activity in the allowance for loan losses by portfolio segment was as follows for the periods indicated.

Three months ended March 31, 2012
(Dollars in thousands)
 
Real Estate
   
Commercial
   
Consumer
   
Total
 
                         
Balance, beginning of period
  $ 23,538     $ 3,508     $ 1,218     $ 28,264  
Provision for loan losses
    2,593       (1,296 )     (320 )     977  
Recoveries
    127       99       56       282  
Loans charged off
    (2,268 )     (73 )     (129 )     (2,470 )
Balance, end of period
  $ 23,990     $ 2,238     $ 825     $ 27,053  
 
Three months ended March 31, 2011
(Dollars in thousands)
 
Real Estate
   
Commercial
   
Consumer
   
Total
 
                         
Balance, beginning of period
  $ 24,527     $ 3,260     $ 997     $ 28,784  
Provision for loan losses
    2,187       227       27       2,441  
Recoveries
    68       39       59       166  
Loans charged off
    (2,173 )     (72 )     (124 )     (2,369 )
Balance, end of period
  $ 24,609     $ 3,454     $ 959     $ 29,022  


The following tables present individually impaired loans by class of loans for the dates indicated.

March 31, 2012 (In thousands)
 
Recorded
Investment
   
Unpaid
Principal
Balance
   
Allowance for
Loan Losses
Allocated
 
Impaired loans with no related allowance recorded:
                 
Real Estate
                 
Real estate – construction and land development
  $ 23,965     $ 33,742        
Real estate mortgage – residential
    7,922       8,127        
Real estate mortgage – farmland and other commercial enterprises
    25,356       28,704        
Total
  $ 57,243     $ 70,573        
                       
Impaired loans with an allowance recorded:
                     
Real Estate
                     
Real estate – construction and land development
  $ 11,504     $ 11,752     $ 716  
Real estate mortgage – residential
    16,071       15,997       1,675  
Real estate mortgage – farmland and other commercial enterprises
    15,232       15,039       1,628  
Commercial