XASE:ECBE Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

Table of Contents

 

 

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 No. 0-24753

 

 

ECB Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

North Carolina   56-2090738

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

Post Office Box 337, Engelhard, North Carolina 27824

(Address of principal executive offices) (Zip Code)

(252) 925-5501

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 Web site, 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. See definitions of “accelerated filer”, “large 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

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

On May 11, 2012, there were 2,849,841 outstanding shares of Registrant’s common stock.

This Form 10-Q has 62 pages.

 

 

 


Table of Contents

Table of Contents

 

Index    Begins
on Page
 

Part 1 – Financial Information

  

Item 1.

  

Financial Statements:

  

Consolidated Balance Sheets at March 31, 2012 and December 31, 2011

     3   

Consolidated Results of Operations for Three Months Ended March 31, 2012 and 2011

     4   

Consolidated Statements of Comprehensive Income (Loss) for Three Months Ended March  31, 2012 and 2011

     5   

Consolidated Statements of Changes in Shareholders’ Equity for Three Months Ended March 31, 2012 and 2011

     6   

Consolidated Statements of Cash Flows for Three Months Ended March 31, 2012 and 2011

     7   

Notes to Consolidated Financial Statements

     8   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     38   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     53   

Item 4.

  

Controls and Procedures

     53   

Part II – Other Information

  

Item 1.

  

Legal Proceedings

     53   

Item 1A.

  

Risk Factors

     53   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     53   

Item 3.

  

Defaults upon Senior Securities

     53   

Item 4.

  

Mine Safety Disclosures

     53   

Item 5.

  

Other Information

     53   

Item 6.

  

Exhibits

     53   

Signatures

     54   

Exhibit Index

     55   

Certifications

     56   

 

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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

March 31, 2012 and December 31, 2011

(Dollars in thousands, except per share data)

 

     March 31,
2012
    December 31,
2011*
 

Assets

    

Non-interest bearing deposits and cash

   $ 11,959      $ 18,363   

Interest bearing deposits

     61        63   

Overnight investments

     50        6,305   
  

 

 

   

 

 

 

Total cash and cash equivalents

     12,070        24,731   
  

 

 

   

 

 

 

Investment securities

    

Available-for-sale, at market value (cost of $347,116 and $338,685 at March 31, 2012 and December 31, 2011, respectively)

     348,810        339,450   

Loans held for sale

     3,310        2,866   

Loans

     491,383        496,542   

Allowance for loan losses

     (11,385     (12,092
  

 

 

   

 

 

 

Loans, net

     479,998        484,450   
  

 

 

   

 

 

 

Real estate and repossessions acquired in settlement of loans, net

     7,906        6,573   

Federal Home Loan Bank common stock, at cost

     4,279        3,456   

Bank premises and equipment, net

     26,286        26,289   

Accrued interest receivable

     4,984        5,308   

Bank owned life insurance

     11,879        11,778   

Other assets

     16,752        16,376   
  

 

 

   

 

 

 

Total

   $ 916,274      $ 921,277   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Deposits

    

Demand, noninterest bearing

   $ 134,828      $ 135,732   

Demand, interest bearing

     277,520        270,119   

Savings

     57,656        55,517   

Time

     302,593        336,277   
  

 

 

   

 

 

 

Total deposits

     772,597        797,645   
  

 

 

   

 

 

 

Accrued interest payable

     457        519   

Short-term borrowings

     39,218        11,679   

Long-term obligations

     18,000        25,500   

Other liabilities

     4,834        5,491   
  

 

 

   

 

 

 

Total liabilities

     835,106        840,834   
  

 

 

   

 

 

 

Shareholders’ equity

    

Preferred stock, Series A

     17,495        17,454   

Common stock, par value $3.50 per share

     9,974        9,974   

Capital surplus

     25,875        25,873   

Warrants

     878        878   

Retained earnings

     26,038        25,926   

Accumulated other comprehensive income

     908        338   
  

 

 

   

 

 

 

Total shareholders’ equity

     81,168        80,443   
  

 

 

   

 

 

 

Total

   $ 916,274      $ 921,277   
  

 

 

   

 

 

 

Common shares outstanding

     2,849,841        2,849,841   

Common shares authorized

     50,000,000        50,000,000   

Preferred shares outstanding

     17,949        17,949   

Preferred shares authorized

     2,000,000        2,000,000   

Non-voting common shares authorized

     2,000,000        2,000,000   

 

* Derived from audited consolidated financial statements.

 

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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Results of Operations

For the three months ended March 31, 2012 and 2011

(Dollars in thousands, except per share data)

 

    

Three months ended

March 31,

 
     2012     2011  

Interest income:

    

Interest and fees on loans

   $ 6,369      $ 7,357   

Interest on investment securities:

    

Interest exempt from federal income taxes

     235        128   

Taxable interest income

     1,882        1,937   

Dividend income

     11        9   

Other interest income

     2        7   
  

 

 

   

 

 

 

Total interest income

     8,499        9,438   
  

 

 

   

 

 

 

Interest expense:

    

Deposits:

    

Demand accounts

     406        557   

Savings

     95        53   

Time

     1,270        1,811   

Short-term borrowings

     81        69   

Long-term obligations

     119        180   
  

 

 

   

 

 

 

Total interest expense

     1,971        2,670   
  

 

 

   

 

 

 

Net interest income

     6,528        6,768   

Provision for loan losses

     —          3,930   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     6,528        2,838   
  

 

 

   

 

 

 

Noninterest income:

    

Service charges on deposit accounts

     857        765   

Other service charges and fees

     329        244   

Mortgage origination fees

     406        326   

Net gain on sale of securities

     45        26   

Income from bank owned life insurance

     101        74   

Other operating income (expense)

     1        (4
  

 

 

   

 

 

 

Total noninterest income

     1,739        1,431   
  

 

 

   

 

 

 

Noninterest expenses:

    

Salaries

     2,919        2,564   

Retirement and other employee benefits

     1,103        676   

Occupancy

     530        483   

Equipment

     590        559   

Professional fees

     219        271   

Supplies

     74        51   

Communications/data lines

     198        169   

FDIC insurance

     204        326   

Other outside services

     100        181   

Net cost of real estate and repossessions acquired in settlement of loans

     684        18   

Data processing and related expenses

     396        70   

Other operating expenses

     901        876   
  

 

 

   

 

 

 

Total noninterest expenses

     7,918        6,244   
  

 

 

   

 

 

 

Income (loss) before income taxes

     349        (1,975

Income tax benefit

     (28     (891
  

 

 

   

 

 

 

Net income (loss)

     377        (1,084
  

 

 

   

 

 

 

Preferred stock dividends

     224        224   

Accretion of discount

     41        41   
  

 

 

   

 

 

 

Income (loss) available to common shareholders

   $ 112      $ (1,349
  

 

 

   

 

 

 

Net income (loss) per share - basic

   $ 0.04      $ (0.47
  

 

 

   

 

 

 

Net income (loss) per share - diluted

   $ 0.04      $ (0.47
  

 

 

   

 

 

 

Weighted average shares outstanding - basic

     2,849,841        2,849,841   
  

 

 

   

 

 

 

Weighted average shares outstanding - diluted

     2,849,841        2,849,841   
  

 

 

   

 

 

 

 

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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Loss)

For the three months ended March 31, 2012 and 2011

(Dollars in thousands)

 

     Three months ended
March 31,
 
     2012     2011  

Net income (loss)

   $ 377      $ (1,084
  

 

 

   

 

 

 

Other comprehensive income (loss):

    

Unrealized gains (losses) on investment securities:

    

Unrealized gains (losses) arising during the period

     973        (158

Tax related to unrealized gains (losses)

     (375     61   

Reclassification of realized gains during the period

     (45     (26

Tax related to realized gains

     17        10   

Defined benefit pension plan:

    

Prior service cost

     —          7   

Net loss arising during the period

     —          (116

Tax related to defined benefit pension plan

     —          42   
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     570        (180
  

 

 

   

 

 

 

Total comprehensive income (loss)

   $ 947      $ (1,264
  

 

 

   

 

 

 

 

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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity

Three months ended March 31, 2012 and 2011

(Dollars in thousands, except per share data)

 

     Preferred
stock,

Series A
    

Common Stock

     Common
stock
warrants
     Capital
surplus
     Retained
earnings
    Accumulated
other
comprehensive

loss
    Total  
                    
                    
        Number      Amount               

Balance January 1, 2011

   $ 17,288         2,849,841       $ 9,974       $ 878       $ 25,852       $ 28,554      $ (1,652   $ 80,894   

Other comprehensive loss

     —           —           —           —           —           —          (180     (180

Net loss

     —           —           —           —           —           (1,084     —          (1,084

Stock based compensation

     —           —           —           —           6           —          6   

Preferred stock accretion

     41         —           —           —           —           (41     —          —     

Cash dividends on preferred stock

     —           —           —           —           —           (224     —          (224

Cash dividends ($0.07 per share)

     —           —           —           —           —           (199     —          (199
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance March 31, 2011

   $ 17,329         2,849,841       $ 9,974       $ 878       $ 25,858       $ 27,006      $ (1,832   $ 79,213   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 
     Preferred
stock,

Series A
    

Common Stock

     Common
stock

warrants
     Capital
surplus
     Retained
earnings
    Accumulated
other
comprehensive

income
    Total  
                    
                    
        Number      Amount               

Balance January 1, 2012

   $ 17,454         2,849,841       $ 9,974       $ 878       $ 25,873       $ 25,926      $ 338      $ 80,443   

Other comprehensive income

     —           —           —           —           —           —          570        570   

Net income

     —           —           —           —           —           377        —          377   

Stock based compensation

     —           —           —           —           2           —          2   

Preferred stock accretion

     41         —           —           —           —           (41     —          —     

Cash dividends on preferred stock

     —           —           —           —           —           (224     —          (224
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance March 31, 2012

   $ 17,495         2,849,841       $ 9,974       $ 878       $ 25,875       $ 26,038      $ 908      $ 81,168   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Three months ended March 31, 2012 and 2011

(Dollar amounts in thousands)

 

     Three months ended
March 31,
 
     2012     2011  

Cash flows from operating activities:

    

Net income (loss)

   $ 377      $ (1,084

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation

     378        374   

Amortization of premium on investment securities, net

     1,226        749   

Provision for loan losses

     —          3,930   

Gain on sale of securities

     (45     (26

Stock based compensation

     2        6   

Decrease in accrued interest receivable

     324        435   

Impairment of real estate and repossessions acquired in settlement of loans

     443        —     

(Gain) loss on sale of real estate and repossessions acquired in settlement of loans

     7        (13

Income from Bank owned life insurance

     (101     (74

Originations of mortgage loans held for sale

     (16,359     (15,910

Proceeds from sale of loans held for sale

     15,915        19,423   

Decrease (increase) in other assets

     (734     1,162   

(Decrease) increase in accrued interest payable

     (62     8   

Decrease in other liabilities, net

     (657     (1,459
  

 

 

   

 

 

 

Net cash provided by operating activities

     714        7,521   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from sales of investment securities classified as available-for-sale

     13,451        4,902   

Proceeds from maturities of investment securities classified as available-for-sale

     12,940        10,991   

Purchases of investment securities classified as available-for-sale

     (36,004     (48,545

Purchases of FHLB stock

     (823     —     

Purchases of premises and equipment

     (375     (454

Proceeds from disposal of real estate and repossessions acquired in settlement of loans and real estate held for sale

     348        802   

Costs capitalized on real estate and repossessions acquired in settlement of loans and real estate held for sale

     (9     —     

Net loan originations

     2,330        15,521   
  

 

 

   

 

 

 

Net cash used by investing activities

     (8,142     (16,783
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     (25,048     813   

Net increase (decrease) in borrowings

     20,039        (1,088

Dividends paid to common shareholders

     —          (199

Dividends paid on preferred stock

     (224     (224
  

 

 

   

 

 

 

Net cash used by financing activities

     (5,233     (698
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (12,661     (9,960

Cash and cash equivalents at beginning of period

     24,731        20,166   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 12,070      $ 10,206   
  

 

 

   

 

 

 

Cash paid during the period:

    

Interest

   $ 2,033      $ 2,662   

Taxes

     —          —     

Supplemental disclosures of noncash financing and investing activities:

    

Cash dividends declared but not paid

   $ —        $ 199   

Unrealized gains (losses) on available-for-sale securities, net of deferred taxes

     570        (113

Transfer from loans to real estate and repossessions acquired in settlement of loans

     2,122        3,511   

Transfer from long-term to short-term borrowings

     7,500        7,000   

See accompanying notes to consolidated financial statements.

 

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ECB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(1) Basis of Presentation

The consolidated financial statements include the accounts of ECB Bancorp, Inc. (“Bancorp”) and its wholly-owned subsidiary, The East Carolina Bank (the “Bank”) (Bancorp and the Bank collectively referred to hereafter as the “Company”). The Bank has one wholly-owned subsidiary, ECB Financial Services, Inc., which formerly provided courier services to the Bank but is currently inactive. All intercompany transactions and balances are eliminated in consolidation. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of income and expenses for the periods presented. Actual results could differ from those estimates.

Management makes a number of estimates and assumptions relating to reported amounts of assets, liabilities, revenues and expenses in the preparation of the financial statements and disclosures. Estimates and assumptions that are most significant to the Company are related to the determination of the allowance for loan losses, asset impairment valuation, postretirement and benefit plan accounting and income taxes.

All adjustments considered necessary for a fair presentation of the results for the interim periods presented have been included (such adjustments are normal and recurring in nature). The notes to consolidated financial statements in Bancorp’s annual report on Form 10-K should be referenced when reading these unaudited interim financial statements. Operating results for the period ended March 31, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

Loans

Loans are generally stated at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses and any deferred fees or costs. Loan origination fees net of certain direct loan origination costs are deferred and amortized as a yield adjustment over the contractual life of the related loans using the level-yield method.

Impaired loans are defined as those which management believes it is probable we will not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms have been modified in a troubled debt restructuring.

Interest on loans is recorded based on the principal amount outstanding. The Company ceases accruing interest on loans (including impaired loans) when, in management’s judgment, the collection of interest appears doubtful or the loan is past due 90 days or more. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Management may return a loan classified as nonaccrual to accrual status when the obligation has been brought current, has performed in accordance with its contractual terms over an extended period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Troubled debt restructurings (“TDRs”) are loans in which the borrower is experiencing financial difficulty at the time of restructure, and the Company has granted an economic concession to the borrower. Prior to modifying a borrower’s loan terms, the Company performs an evaluation of the borrower’s financial condition and ability to service under the potential modified loan terms. The types of concessions generally granted are extensions of the loan maturity date, reductions in the original contractual interest rate and forgiveness of principal. The Company measures the impairment loss of a TDR using the methodology for individually impaired loans. If a loan is accruing at the time of modification, the loan remains on accrual status and is subject to the Company’s charge-off and nonaccrual policies. If a loan is on nonaccrual before it is determined to be a TDR then the loan remains on nonaccrual. TDRs may be returned to accrual status if there has been at least a six month sustained period of repayment performance by the borrower.

Allowance for Loan Losses

The allowance for loan losses (AFLL) is established through provisions for losses charged against income. Loan amounts deemed to be uncollectible are charged against the AFLL, and subsequent recoveries, if any, are credited to the allowance. The AFLL represents management’s estimate of the amount necessary to absorb estimated probable losses in the loan portfolio. Management’s periodic evaluation of the adequacy of the allowance is based on individual loan reviews, past loan loss experience, economic conditions in the Company’s market areas, the fair value and adequacy of underlying collateral, and the growth and loss attributes of the loan portfolio. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows

 

8


Table of Contents

expected to be received on impaired loans that may be susceptible to significant change. Thus, future changes to the AFLL may be necessary based on the impact of changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s AFLL. Such agencies may require the Company to recognize adjustments to the AFLL based on their judgments about information available to them at the time of their examination.

In evaluating the allowance for loan losses, the Company prepares an analysis of its current loan portfolio through the use of historical loss rates, homogeneous risk analysis grouping to include probabilities for loss in each group by risk grade, estimation of years to impairment in each homogeneous grouping, analysis of internal credit processes, past due loan portfolio performance and overall economic conditions, both regionally and nationally.

Historical loss calculations for each homogeneous risk group are based on a three year average loss ratio calculation with the most recent quarter’s loss history included in the model. The impact is to more quickly recognize and increase the loss history in a respective grouping. For those groups with little or no loss history, management increases the historical factor through a positive adjustment to more accurately represent current economic conditions and their potential impact on that particular loan group.

Homogeneous loan groups are assigned risk factors based on their perceived loss potential, current economic conditions and on their respective risk ratings. The probability of loss is increased as the risk grade increases within each risk grouping to more accurately reflect the Bank’s exposure in that particular group of loans. The Bank utilizes a system of eight possible risk ratings. The risk ratings are established based on perceived probability of loss. Most loans risk rated “substandard”, “doubtful” and “loss” are removed from their homogeneous group and individually analyzed for impairment. Some smaller loans risk rated “substandard”, “doubtful” and “loss” with balances less than $100 thousand are not removed from their homogeneous group and individually analyzed for impairment. Other groups of loans based on loan size may be selected for impairment review. Loans are considered impaired if, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is based on either the fair value of the underlying collateral, the present value of the future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, or the estimated market value of the loan. In measuring the fair value of the collateral, management uses a comparison to the recent selling price of similar assets, which is consistent with those that would be utilized by unrelated third parties.

A portion of the Bank’s AFLL is not allocated to any specific category of loans. This general portion of the allowance reflects the elements of imprecision and estimation risk inherent in the calculation of the overall allowance. Due to the subjectivity involved in determining the overall allowance, including the portion determined through general qualitative and quantitative internal and external factors, the general portion may fluctuate from period to period based on management’s evaluation of the factors affecting the assumptions used in calculating the allowance, including historical loss experience, current and expected economic conditions and geographic conditions. While the Company believes that our management uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the AFLL, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the final determination. Because these factors and management’s assumptions are subject to change, the allocation is not necessarily indicative of future loan portfolio performance.

Unsecured loans are charged-off in full against the Company’s AFLL as soon as the loan becomes uncollectible. Unsecured loans are considered uncollectible when no regularly scheduled monthly payment has been made within three months, the loan matured over 90 days ago and has not been renewed or extended or the borrower files for bankruptcy. Secured loans are considered uncollectible when the liquidation of collateral is deemed to be the most likely source of repayment. Once secured loans reach 90 days past due, they are placed into non-accrual status. If the loan is deemed to be collateral dependent, the principal balance is written down immediately to reflect the current market valuation based on current independent appraisal. Included in the write-down is the estimated expense to liquidate the property and typically an additional allowance for the foreclosure discount.

Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued.

(2) Net Income (loss) Per Share

Basic net income (loss) per share is calculated by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. For purposes of basic net income (loss) per share, restricted stock is considered “contingently issuable” and is not included in the weighted average number of common shares outstanding.

 

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Diluted net income (loss) per share is computed by assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. Restricted stock is considered outstanding for purposes of diluted net income (loss) per share. The amount of compensation cost attributed to future services and not yet recognized is considered “proceeds” using the treasury stock method. Restricted stock had no dilutive effect on earnings (loss) per share for the three months ended March 31, 2012 and March 31, 2011.

In computing diluted net income (loss) per share, it is assumed that all dilutive stock options are exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and the number of shares bought back is added to the number of weighted average common shares outstanding during the period. The sum is used as the denominator to calculate diluted net income per share for the Company. Diluted weighted average shares outstanding did not increase for the three month periods ended March 31, 2012 and March 31, 2011 as there were no dilutive impacts of options for the periods. As of March 31, 2012, the warrant, covering approximately 145 thousand shares, issued to the U.S. Treasury Department and 8,957 options were not included in the computation of diluted earnings per share because the exercise price exceeded the average market price of the Company’s stock for that period. As of March 31, 2011, the warrant, covering approximately 145 thousand shares, issued to the U.S. Treasury Department and 28,513 options were not included in the computation of diluted loss per share as the effect would have been anti-dilutive.

The following is a reconciliation of the numerators and denominators used in computing basic and diluted net income (loss) per share.

 

     Three months ended March 31, 2012
(Dollars in thousands, except share and per share data)
 
     Income
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
 

Basic net income per share

   $ 112        2,849,841       $ 0.04   
       

 

 

 

Effect of dilutive securities

     —          —        
  

 

 

   

 

 

    

Diluted net income per share

   $ 112        2,849,841       $ 0.04   
  

 

 

   

 

 

    

 

 

 
     Three months ended March 31, 2011
(Dollars in thousands, except share and per share data)
 
     Income
(Numerator)
    Shares
(Denominator)
     Per Share
Amount
 

Basic net loss per share

   $ (1,349     2,849,841       $ (0.47
       

 

 

 

Effect of dilutive securities

     —          —        
  

 

 

   

 

 

    

Diluted net loss per share

   $ (1,349     2,849,841       $ (0.47
  

 

 

   

 

 

    

 

 

 

(3) Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity during a period for non-owner transactions and is divided into net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards. The components of comprehensive income (loss) for the periods have been presented in the consolidated statements of comprehensive income (loss).

(4) Recent Accounting Pronouncements

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of financial information by the Company.

In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03. The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control. The other criteria to assess effective control were not changed. The amendments were effective for the Company on January 1, 2012 and had no effect on the financial statements.

 

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ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments were effective for the Company beginning January 1, 2012 and are included in Note 9.

The Comprehensive Income topic of the ASC was amended in June 2011 by ASU 2011-05. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and requires consecutive presentation of the statement of net income and other comprehensive income. The amendments were applicable to the Company on January 1, 2012 and have been applied retrospectively. In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements. Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates future requirements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

(5) Investment Securities

The following is a summary of the securities portfolio by major classification:

 

     March 31, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 
     (Dollars in thousands)  

Securities available-for-sale:

  

Government-sponsored enterprises and FFCB bonds

   $ 3       $ 23       $ —        $ 26   

Obligations of states and political subdivisions

     33,200         762         (176     33,786   

Mortgage-backed securities

     124,784         1,278         (150     125,912   

SBA-backed securities

     151,877         970         (512     152,335   

Corporate bonds

     37,252         295         (796     36,751   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 347,116       $ 3,328       $ (1,634   $ 348,810   
     December 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 
     (Dollars in thousands)  

Securities available-for-sale:

  

Government-sponsored enterprises and FFCB bonds

   $ 1,003       $ 29       $ —        $ 1,032   

Obligations of states and political subdivisions

     27,855         863         —          28,718   

Mortgage-backed securities

     130,949         1,460         (117     132,292   

SBA-backed securities

     146,195         774         (332     146,637   

Corporate bonds

     32,683         88         (2,000     30,771   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 338,685       $ 3,214       $ (2,449   $ 339,450   

Gross realized gains and losses on sales of securities for the three months ended March 31, 2012 and March 31, 2011 were as follows (dollars in thousands):

 

     Three months ended
March  31,
(Dollars in thousands)
 
     2012     2011  

Gross realized gains

   $ 70      $ 26   

Gross realized losses

     (25     —     
  

 

 

   

 

 

 

Net realized (losses) gains

   $ 45      $ 26   
  

 

 

   

 

 

 

 

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Table of Contents

Analysis of Certain Investments in Debt and Equity Securities for Other Than Temporary Impairment

The following tables set forth the amount of unrealized losses at March 31, 2012 and December 31, 2011 (that is, the amount by which cost or amortized cost exceeds fair value), and the related fair value of investments with unrealized losses, none of which are considered to be other-than-temporarily impaired. The tables are segregated into investments that have been in a continuous unrealized-loss position for less than 12 months from those that have been in a continuous unrealized-loss position for 12 months or longer.

March 31, 2012

 

     Less Than 12 Months      12 Months or longer      Total  
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (Dollars in thousands)  

Obligations of states and political subdivisions

   $ 6,424       $ 176       $ —         $ —         $ 6,424       $ 176   

Mortgage-backed securities

     29,576         114         2,800         36         32,376         150   

SBA-backed securities

     83,174         512         —           —           83,174         512   

Corporate bonds

     12,487         222         11,280         574         23,767         796   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 131,661       $ 1,024       $ 14,080       $ 610       $ 145,741       $ 1,634   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

 

     Less Than 12 Months      12 Months or longer      Total  
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 
     (Dollars in thousands)  

Mortgage-backed securities

   $ 25,011       $ 81       $ 2,880       $ 36      $ 27,891       $ 117   

SBA-backed securities

     62,543         332         —           —           62,543         332   

Corporate bonds

     11,824         485         13,755         1,515         25,579         2,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 99,378       $ 898       $ 16,635       $ 1,551       $ 116,013       $ 2,449   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

As of March 31, 2012 and December 31, 2011, management concluded that the unrealized losses presented above, which consisted of sixty-four securities at March 31, 2012 and fifty securities at December 31, 2011, are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has the intent to hold these investments for a time necessary to recover their cost and it is not likely that the Bank would be required to sell prior to recovery. The sixty-four securities at March 31, 2012 were comprised of five obligations of states and political subdivisions, fifteen mortgage-backed securities, ten corporate bonds and thirty-four SBA-backed securities. The fifty securities at December 31, 2011 were comprised of twelve mortgage-backed securities, twelve corporate bonds and twenty-six SBA-backed securities. The losses above are on debt securities that have contractual maturity dates and are primarily related to market interest rates. All unrealized losses on investment securities are not considered to be other-than-temporary, because they are related to changes in interest rates, lack of liquidity and demand in the general investment market and do not affect the expected cash flows of the underlying collateral or the issuer. The Bank’s mortgage-backed securities are all backed by government sponsored enterprises or agencies. The Bank does not own any private label mortgage-backed securities.

At March 31, 2012 and December 31, 2011, the balance of Federal Home Loan Bank (“FHLB”) of Atlanta stock held by the Company was $4.3 million and $3.5 million, respectively. On March 28, 2012, FHLB paid a dividend for the fourth quarter of 2011 with an annualized rate of 1.23%. The dividend rate was equal to average three-month LIBOR for the period of October 1, 2011 to December 31, 2011 plus 0.75%, and was applicable to capital stock held during that period. Management believes that its investment in FHLB stock was not other-than-temporarily impaired as of March 31, 2012 or December 31, 2011. However, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not also cause a decrease in the value of the FHLB stock held by the Company.

The aggregate amortized cost and fair value of the available-for-sale securities portfolio at March 31, 2012 by remaining contractual maturity are as follows:

 

     Amortized
Cost
     Fair
Value
 
     (Dollars in thousands)  

Government-sponsored enterprises and FFCB bonds:

  

Due in one through five years

   $ 3       $ 26   

Obligations of states and political subdivisions:

     

Due in one year or less

     150         151   

Due in one through five years

     960         1,027   

Due in five through ten years

     20,382         20,723   

Due after ten years

     11,708         11,885   

Mortgage-backed securities:

     

Due in five through ten years

     10,677         10,767   

Due after ten years

     114,107         115,145   

SBA-backed securities:

     

Due in five through ten years

     7,127         7,155   

Due after ten years

     144,750         145,180   

Corporate bonds:

     

Due in one through five years

     17,956         18,018   

Due in five through ten years

     19,296         18,733   
  

 

 

    

 

 

 

Total securities

   $ 347,116       $ 348,810   
  

 

 

    

 

 

 

 

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Table of Contents

Securities with an amortized cost of $216.3 million at March 31, 2012 are pledged as collateral. Of this total, securities with an amortized cost of $64.0 million and fair value of $64.4 million are pledged as collateral for FHLB advances.

The aggregate amortized cost and fair value of the available-for-sale securities portfolio at December 31, 2011 by remaining contractual maturity are as follows:

 

     Amortized
Cost
     Fair
Value
 
     (Dollars in thousands)  

Government-sponsored enterprises and FFCB bonds:

  

Due in one through five years

   $ 3       $ 28   

Due in five through ten years

     1,000         1,004   

Obligations of states and political subdivisions:

     

Due in one year or less

     250         252   

Due in one through five years

     961         1,033   

Due in five through ten years

     11,768         12,083   

Due after ten years

     14,876         15,350   

Mortgage-backed securities:

     

Due in five through ten years

     7,415         7,490   

Due after ten years

     123,534         124,802   

SBA-backed securities:

     

Due in five through ten years

     2,967         3,007   

Due after ten years

     143,228         143,630   

Corporate bonds:

     

Due in one year through five years

     13,338         13,081   

Due in five through ten years

     19,345         17,690   
  

 

 

    

 

 

 

Total securities

   $ 338,685       $ 339,450   
  

 

 

    

 

 

 

Securities with an amortized cost of $197.6 million at December 31, 2011 were pledged as collateral. Of this total, securities with an amortized cost of $47.4 million and fair value of $48.0 million were pledged as collateral for FHLB advances.

 

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Table of Contents

(6) LOANS

Loans at March 31, 2012 and December 31, 2011 classified by type are as follows (dollars in thousands):

 

     March 31,
2012
     December 31,
2011
 

Real estate loans:

     

Construction and land development

   $ 66,929       $ 67,232   

Secured by farmland

     28,954         29,947   

Secured by residential properties

     107,772         110,238   

Secured by nonfarm, nonresidential properties

     201,779         203,287   

Consumer installment

     5,762         6,485   

Credit cards and related plans

     1,668         1,660   

Commercial and all other loans:

     

Commercial and industrial

     46,414         45,649   

Loans to finance agricultural production

     21,754         21,524   

All other loans

     10,421         10,587   
  

 

 

    

 

 

 
     491,453         496,609   

Less deferred fees and costs, net

     70         67   
  

 

 

    

 

 

 
   $ 491,383       $ 496,542   
  

 

 

    

 

 

 

Included in the above:

     

Nonaccrual loans

   $ 19,406       $ 15,973   

Restructured loans 1

     10,892         10,138   

 

1. Restructured loans include loans restructured and still accruing. The Company is not committed to advance additional funds on restructured loans.

 

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Table of Contents

(6) LOANS, continued

 

There were no loans outstanding that were past due ninety days or more that were still accruing at March 31, 2012 or December 31, 2011.

The Company, through its normal lending activity, originates and maintains loans receivable that are substantially concentrated in the Eastern region of North Carolina, where its offices are located. The Company’s policy calls for collateral or other forms of repayment assurance to be received from the borrower at the time of loan origination. Such collateral or other form of repayment assurance is subject to changes in economic value due to various factors beyond the control of the Company, and such changes could be significant.

The Bank’s loan policies and procedures establish the basic guidelines governing its lending operations. The guidelines address the type of loans that the Bank seeks, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans or credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrower’s total outstanding indebtedness to the Bank, including any indebtedness as a guarantor. The policies are reviewed and approved at least annually by the Board of Directors of the Bank. The Bank supplements its own supervision of the loan underwriting and approval process with periodic loan reviews by independent, outside professionals experienced in loan review. On an annual basis, the Board of Directors of the Bank determines officers lending authority. Authorities may include loans, letters of credit, overdrafts, uncollected funds and such other authorities as determined by the Board of Directors.

Responsibility for loan underwriting resides with the Chief Credit Officer position. This position is responsible for loan underwriting and approval. This is accomplished through individual lender approval authorities with supervision by Credit Policy Officers who review and approve loans which exceed the lender’s authority. Also, all Special Mention and Classified loans are reviewed quarterly. Detailed, written action plans are updated by the lenders and those plans are reviewed by a joint committee consisting of Regional Managers, Credit Policy Officers, CCO, Commercial Banking Manager and Special Assets Manager.

The following describe the risk characteristics relevant to each of the portfolio segments.

Real Estate Loans. Our real estate loan classification includes all loans secured by real estate. Real estate loans include loans made to purchase, construct or improve residential or commercial real estate, and for real estate development purposes. However, many of our real estate loans, while secured by real estate, were made for various other commercial, agricultural and consumer purposes (which may or may not be related to our real estate collateral). This generally reflects our efforts to reduce credit risk by taking real estate as primary or additional collateral, whenever possible, without regard to loan purpose. Substantially all of our real estate loans are secured by real property located in or near our banking markets. We make long-term residential mortgage loans through our mortgage department. These loans are held for sale and we generally hold these loans for a short period of time of approximately ten days. This allows us to make long-term residential loans available to our customers and generate fee income but avoid most risks associated with those loans.

Construction and land development loans involve special risks because loan funds are advanced on the security of houses or other improvements that are under construction and are of uncertain value before construction is complete. For that reason, it is more difficult to evaluate accurately the total loan funds required to complete a project and the related loan-to-value ratios. To reduce these risks, we generally limit loan amounts to 85% of the projected “as built” appraised values of our collateral on completion of construction. For larger projects, we include amounts for contingencies in our construction cost estimates. We generally require a qualified permanent financing commitment from an outside lender unless we have agreed to convert the construction loan to permanent financing ourselves.

Loans secured by farmland are made to agricultural customers for the purpose of acquisition or improvement of farmland. The loans are typically secured by land which is cultivated for primarily row- crop production and related interests, such as grain elevator facilities and farming operations buildings. Repayment of loans secured by farmland may depend on successful crop production or other farm related operations.

Residential loans may be made at fixed or variable interest rates, and they generally have maturities that do not exceed five years and provide for payments based on amortization schedules of less than twenty years. Loans with a maturity of more than five years or that is based on an amortization schedule of more than five years generally will include contractual provisions that allow us to call the loan in full, or provide for a “balloon” payment in full, at the end of a period of no more than five years.

Nonfarm and nonresidential loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Repayment of commercial real estate loans may depend on the successful operation of income producing properties, a business, or a real estate project and, therefore, may, to a greater extent than in the case of other loans, be subject to the risk of adverse conditions in the economy generally or in the real estate market in particular.

 

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Table of Contents

Consumer Installment Loans, Credit Cards and Related Plans. Our consumer installment loans consist primarily of loans for various consumer purposes, as well as the outstanding balances of non-real estate secured consumer revolving credit accounts. A majority of these loans are secured by liens on various personal assets of the borrowers, but they also may be made on an unsecured basis. Consumer loans generally are made at fixed interest rates and with maturities or amortization schedules that generally do not exceed five years. Consumer installment loans involve greater risks than other loans, particularly in the case of loans that are unsecured or secured by depreciating assets. When damage or depreciation reduces the value of our collateral below the unpaid balance of a defaulted loan, repossession may not result in repayment of the entire outstanding loan balance. The resulting deficiency may not warrant further substantial collection efforts against the borrower. In connection with consumer lending in general, the success of our loan collection efforts is highly dependent on the continuing financial stability of our borrowers, and our collection of consumer installment loans may be more likely to be adversely affected by a borrower’s job loss, illness, personal bankruptcy or other change in personal circumstances than is the case with other types of loans.

Commercial and Industrial and Agricultural Loans. Our commercial and industrial loan and loans to finance agriculture includes loans to small- and medium-sized businesses and individuals for working capital, equipment purchases and various other business and agricultural purposes. These loans generally are secured by business assets, such as inventory, accounts receivable, equipment or similar assets, but they also may be made on an unsecured basis. Commercial and industrial loans typically are made on the basis of the borrower’s ability to make repayment from business cash flow. As a result, the ability of borrowers to repay commercial loans may be substantially dependent on the success of their businesses, and the collateral for commercial loans may depreciate over time and cannot be appraised with as much precision as real estate.

At March 31, 2012 and December 31, 2011, included in mortgage, commercial, and residential loans were loans collateralized by owner-occupied residential real estate of approximately $51.2 million and $53.2 million, respectively.

Loans with a book value of approximately $24.2 million at March 31, 2012 are pledged as eligible collateral for FHLB advances. Loans with a book value of approximately $25.8 million at December 31, 2011 were pledged as eligible collateral for FHLB advances.

 

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Table of Contents

(7) CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES

The following tables summarize the balances by loan category of the allowance for loan losses with changes arising from charge-offs, recoveries and provision expense for the quarters ending March 31, 2012 and March 31, 2011, and for the year ending December 31, 2011 (dollars in thousands):

Allowance for Loan Losses

As of and for the Three Months Ended March 31, 2012

 

Allowance for
Credit Losses
   Real Estate
Construction
and Land
Development
    Real Estate
Secured by
Farmland
    Real Estate
Secured by
Residential
Properties
    Real Estate
Secured by
Nonfarm
Nonresidential
    Consumer
Installment
    Credit
Cards and
Related
Plans
    Commercial
and
Industrial
    Loans to
Finance
Agricultural
Production
    All
Other
Loans
    General
Qualitative
&
Quantitative
Portion
    Total  

Beginning balance

   $ 3,655      $ 15      $ 2,418      $ 1,740      $ 46      $ 18      $ 555      $ 115      $ 26      $ 3,504      $ 12,092   

Charge-offs

     (219     (—       (102     (238     (41     (3     (357     (—       (52     (—       (1,012

Recoveries

     226        —          27        1       1        —          10        —          40        —          305   

Provisions

     (562     —          143        62        144        53        297        7        14        (158     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 3,100      $ 15      $ 2,486      $ 1,565      $ 150      $ 68      $ 505      $ 122      $ 28      $ 3,346      $ 11,385   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

   $ 321      $ —        $ 642      $ 890      $ —        $ —        $ —        $ —        $ —        $ —        $ 1,853   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

   $ 2,779      $ 15      $ 1,844      $ 675      $ 150      $ 68      $ 505      $ 122      $ 28      $ 3,346      $ 9,532   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans

                      

Ending Balance

   $ 66,820      $ 28,900      $ 107,912      $ 201,567      $ 5,890      $ 1,668      $ 46,434      $ 21,770      $ 10,422      $ —        $ 491,383   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

   $ 9,166      $ —        $ 7,314      $ 16,310      $ —        $ —        $ 335      $ —        $ —        $ —        $ 33,125   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

   $ 57,654      $ 28,900      $ 100,598      $ 185,257      $ 5,890      $ 1,668      $ 46,099      $ 21,770      $ 10,422      $ —        $ 458,258   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

Allowance for Loan Losses

As of and for the Three Months Ended March 31, 2011

 

Allowance for
Credit Losses
   Real Estate
Construction
and Land
Development
    Real Estate
Secured by
Farmland
    Real Estate
Secured by
Residential
Properties
    Real Estate
Secured by
Nonfarm
Nonresidential
    Consumer
Installment
    Credit
Cards and
Related
Plans
    Commercial
and
Industrial
    Loans to
Finance
Agricultural
Production
    All
Other
Loans
    General
Qualitative
&
Quantitative
Portion
    Total  

Beginning balance

   $ 6,168      $ 28      $ 3,450      $ 1,007      $ 12      $ 21      $ 882      $ 18      $ 139      $ 1,522      $ 13,247   

Charge-offs

     (1,273     (—       (449     (—       (9     (9     (254     (—       (66     (—       (2,060

Recoveries

     —          —          1        —          2        —          63        —          36        —          102   

Provisions

     2,692        1        1,000        111        11        177        441        (3     21        (521     3,930   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 7,587      $ 29      $ 4,002      $ 1,118      $ 16      $ 189      $ 1,132      $ 15      $ 130      $ 1,001      $ 15,219   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

   $ 2,113      $ —        $ 751      $ 594      $ —        $ 169      $ 362      $ —        $ —        $ —        $ 3,989   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

   $ 5,474      $ 29      $ 3,251      $ 524      $ 16      $ 20      $ 770      $ 15      $ 130      $ 1,001      $ 11,230   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans

                      

Ending Balance

   $ 84,045      $ 27,812      $ 119,202      $ 215,979      $ 4,192      $ 2,366      $ 55,150      $ 22,086      $ 15,809      $ —        $ 546,641   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

   $ 15,642      $ —        $ 7,285      $ 4,573      $ —        $ 200      $ 843      $ —        $ —        $ —        $ 28,543   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

   $ 68,403      $ 27,812      $ 111,917      $ 211,406      $ 4,192      $ 2,166      $ 54,307      $ 22,086      $ 15,809      $ —        $ 518,098   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

Allowance for Loan Losses

As of and for the Year Ended December 31, 2011

 

Allowance for
Credit Losses
   Real Estate
Construction
and Land
Development
    Real Estate
Secured by
Farmland
    Real Estate
Secured by
Residential
Properties
    Real Estate
Secured by
Nonfarm
Nonresidential
    Consumer
Installment
    Credit
Cards and
Related
Plans
    Commercial
and
Industrial
    Loans to
Finance
Agricultural
Production
    All
Other
Loans
    General
Qualitative
&
Quantitative
Portion
    Total  

Beginning balance

   $ 6,168      $ 28      $ 3,450      $ 1,007      $ 12      $ 21      $ 882      $ 18      $ 139      $ 1,522      $ 13,247   

Charge-offs

     (5,150     (—       (1,985     (1,887     (20     (294     (385     (—       (237     (—       (9,958

Recoveries

     10        —          12        43       5        3        103        —          144        —          320   

Provisions

     2,627        (13     941        2,577        49        288        (45     97        (20     1,982        8,483   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 3,655      $ 15      $ 2,418      $ 1,740      $ 46      $ 18      $ 555      $ 115      $ 26      $ 3,504      $ 12,092   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

   $ 637      $ —        $ 480      $ 1,181      $ —        $ —        $ 165      $ —        $ —        $ —        $ 2,463   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

   $ 3,018      $ 15      $ 1,938      $ 559      $ 46      $ 18      $ 390      $ 115      $ 26      $ 3,504      $ 9,629   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans

                      

Ending Balance

   $ 67,127      $ 29,890      $ 110,374      $ 203,063      $ 6,620      $ 1,661      $ 45,679      $ 21,539      $ 10,589      $ —        $ 496,542   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

   $ 10,074      $ —        $ 5,514      $ 14,029      $ —        $ —        $ 561      $ 1,111      $ —        $ —        $ 31,289   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

   $ 57,053      $ 29,890      $ 104,860      $ 189,034      $ 6,620      $ 1,661      $ 45,118      $ 20,428      $ 10,589      $ —        $ 465,253   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

(7) CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES, continued

 

Loans are closely monitored by management for changes in quality. This monitoring includes assessing the appropriateness of the credit quality indicator in relation to the risk of the loan. Management uses the following indicators to grade the risk of each loan based on a system of eight possible ratings. These indicators are included in the Company’s loan policy which is reviewed and updated at least annually.

Pass: Include loans that are risk rated one through three. The primary source of repayment for pass loans is very likely to be sufficient, with secondary sources readily available; strong financial position; minimal risk; profitability, liquidity and capitalization are better than industry norms.

Weak Pass: Include loans that are risk rated four. The asset quality for weak pass assets is generally acceptable. Primary source of loan repayment is acceptable and secondary sources are likely to be realized, if needed; acceptable business credit, but borrowers operations, cash flow, or financial condition evidence more than average risk; requires above average levels of supervision and attention from Loan Officer. The source of increased risk has been identified, can be effectively managed/corrected, and the increased risk is not significant to warrant a more severe rating.

Special Mention: Include loans that are risk rated five. A special mention asset is considered to be high risk due to potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard: Include loans that are risk rated six through eight. Loans rated as substandard are considered to be very high risk. A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

The following tables present loans as of March 31, 2012 and December 31, 2011 classified by risk type (dollars in thousands):

Credit Quality Indicators

As of March 31, 2012

 

     Pass      Weak Pass      Special
Mention
     Substandard      Total  

Real Estate – Construction and Land Development Loans

   $ 29,928       $ 21,389       $ 5,639       $ 9,864       $ 66,820   

Real Estate – Secured by Farmland

     21,136         3,617         4,147         —           28,900   

Real Estate – Secured by Residential Properties

     58,227         30,126         11,102         8,457         107,912   

Real Estate – Secured by Nonfarm Nonresidential

     91,605         68,083         20,178         21,701         201,567   

Consumer Installment

     3,738         1,782         302         68         5,890   

Credit Cards and Related Plans

     821         572         273         2         1,668   

Commercial and Industrial

     25,957         16,536         2,147         1,794         46,434   

Loans to Finance Agriculture Production

     18,783         2,297         690         —           21,770   

All Other Loans

     5,940         4,458         24         —           10,422   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 256,135       $ 148,860       $ 44,502       $ 41,886       $ 491,383   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

Credit Quality Indicators

As of December 31, 2011

 

     Pass      Weak Pass      Special
Mention
     Substandard      Total  

Real Estate – Construction and Land Development Loans

   $ 27,833       $ 23,237       $ 4,853       $ 11,204       $ 67,127   

Real Estate – Secured by Farmland

     22,008         4,430         3,452         —           29,890   

Real Estate – Secured by Residential Properties

     60,121         31,146         12,302         6,805         110,374   

Real Estate – Secured by Nonfarm Nonresidential

     90,099         75,384         18,663         18,917         203,063   

Consumer Installment

     4,025         2,212         254         129         6,620   

Credit Cards and Related Plans

     850         529         279         3         1,661   

Commercial and Industrial

     25,133         16,146         2,686         1,714         45,679   

Loans to Finance Agriculture Production

     16,473         3,290         584         1,192         21,539   

All Other Loans

     3,171         7,393         25         —           10,589   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 249,713       $ 163,767       $ 43,098      $ 39,964       $ 496,542   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following tables summarize the past due loans by category as of March 31, 2012 and December 31, 2011 (dollars in thousands):

Past Due Loans

As of March 31, 2012

 

     30 -59 Days
Past Due
     60 -89 Days
Past Due
     Greater than
90 Days
     Total Past
Due
     Current      Total  

Real Estate Construction and Land Development

   $ 591       $ 79       $ 4,791       $ 5,461       $ 61,359       $ 66,820   

Real Estate Secured by Farmland

     42         —           —           42         28,858         28,900   

Real Estate Secured by Residential Properties

     1,040         65         1,859         2,964         104,948         107,912   

Real Estate Secured by Nonfarm Nonresidential

     583         1,377         6,040         8,000         193,567         201,567   

Consumer Installment

     20         9         —           29         5,861         5,890   

Credit Cards and Related Plans

     6         —           —           6        1,662         1,668   

Commercial and Industrial

     64         138        159         361         46,073         46,434   

Loans to Finance Agricultural Production

     —           —           —           —           21,770         21,770   

All Other Loans

     —           —           —           —           10,422         10,422   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,346       $ 1,668       $ 12,849       $ 16,863       $ 474,520       $ 491,383   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-Accrual Loans Included in above Total

   $ 1,256       $ 1,536       $ 12,849       $ 15,641       $ 3,765       $ 19,406   

 

22


Table of Contents

Past Due Loans

As of December 31, 2011

 

     30 -59 Days
Past Due
     60 -89 Days
Past Due
     Greater than
89 Days(1)
     Total Past
Due
     Current      Total  

Real Estate Construction and Land Development

   $ 447       $ 198       $ 6,142       $ 6,787       $ 60,340       $ 67,127   

Real Estate Secured by Farmland

     —           —           —           —           29,890         29,890   

Real Estate Secured by Residential Properties

     1,055         993         1,278         3,326         107,048         110,374   

Real Estate Secured by Nonfarm Nonresidential

     2,357         —           4,446         6,803         196,260         203,063   

Consumer Installment

     65         —           22         87         6,533         6,620   

Credit Cards and Related Plans

     2         2         —           4         1,657         1,661   

Commercial and Industrial

     294         —           205         499         45,180         45,679   

Loans to Finance Agricultural Production

     —           —           —           —           21,539         21,539   

All Other Loans

     —           —           —           —           10,589         10,589   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,220       $ 1,193       $ 12,093       $ 17,506       $ 479,036       $ 496,542   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-Accrual Loans Included in above Total

   $ 1,426       $ 588       $ 12,093       $ 14,107       $ 1,866       $ 15,973   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

(7) CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES, continued

 

The following tables summarize impaired loans as of March 31, 2012, March 31, 2011 and December 31, 2011 (dollars in thousands). The recorded investment balance includes the loan balance, deferred fees that have yet to be recognized and accrued interest. The deferred fees that have yet to be recognized are not material amounts.

Impaired Loans

As of and for the Three Months Ended March 31, 2012

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Real Estate Construction and Land Development

   $ 5,776       $ 8,508       $ —         $ 6,030       $ 23   

Real Estate Secured by Farmland

     —           —           —           —           —     

Real Estate Secured by Residential Properties

     1,455         1,611         —           1,587         12   

Real Estate Secured by Nonfarm Nonresidential

     7,723         7,991         —           7,151         34   

Consumer Installment

     —           —           —           —           —     

Credit Cards and Related Plans

     —           —           —           —           —     

Commercial and Industrial

     335         500         —           303         2   

Loans to Finance Agricultural Production

     —           —           —           586         8   

All Other Loans

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no related allowance

   $ 15,289       $ 18,610       $ —         $ 15,657       $ 79   

With an allowance recorded:

              

Real Estate Construction and Land Development

   $ 3,399       $ 3,465       $ 321       $ 3,904       $ 15   

Real Estate Secured by Farmland

     —           —           —           —           —     

Real Estate Secured by Residential Properties

     5,867         5,950         642         5,130         39   

Real Estate Secured by Nonfarm Nonresidential

     8,600         8,829         890         8,775         41   

Consumer Installment

     —           —           —           —           —     

Credit Cards and Related Plans

     —           —           —           —           —     

Commercial and Industrial

     —           —           —           182         2   

Loans to Finance Agricultural Production

     —           —           —           —           —     

All Other Loans

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with related allowance recorded

   $ 17,866       $ 18,244       $ 1,853       $ 17,991       $ 97   

Total

              

Construction and Land Development

   $ 9,175       $ 11,973       $ 321       $ 9,934       $ 38   

Residential

     7,322         7,561         642         6,717         51   

Commercial

     16,658         17,320         890         16,997         87   

Consumer

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 33,155       $ 36,854       $ 1,853       $ 33,648       $ 176   

 

24


Table of Contents

Impaired Loans

As of and for the Three Months Ended March 31, 2011

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance recorded:

              

Real Estate Construction and Land Development

   $ 6,858       $ 10,859       $ —         $ 8,534       $ 45   

Real Estate Secured by Farmland

     —           —           —           —           —     

Real Estate Secured by Residential Properties

     4,406         4,694         —           3,837         15   

Real Estate Secured by Nonfarm Nonresidential

     1,548         1,546         —           851         6   

Consumer Installment

     —           —           —              —     

Credit Cards and Related Plans

     —           —           —           —           —     

Commercial and Industrial

     393         518         —           434         5   

Loans to Finance Agricultural Production

     —           —           —           —           —     

All Other Loans

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no related allowance

   $ 13,205       $ 17,617       $ —         $ 13,656       $ 71   

With an allowance recorded:

              

Real Estate Construction and Land Development

   $ 8,792       $ 9,796       $ 2,112       $ 7,622       $ 40   

Real Estate Secured by Farmland

     —           —           —           —           —     

Real Estate Secured by Residential Properties

     2,885         2,880         751         2,921         11   

Real Estate Secured by Nonfarm Nonresidential

     3,030         3,095         594         3,402         22   

Consumer Installment

     —           —           —           —           —     

Credit Cards and Related Plans

     201         200         170         200         3   

Commercial and Industrial

     452         451         362         449         6   

Loans to Finance Agricultural Production

     —           —           —           —           —     

All Other Loans

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with related allowance recorded

   $ 15,360       $ 16,422       $ 3,989       $ 14,594       $ 82   

Total

              

Construction and Land Development

   $ 15,650       $ 20,655       $ 2,112       $ 16,156       $ 85   

Residential

     7,291         7,574         751         6,758         26   

Commercial

     5,423         5,610         956         5,136         39   

Consumer

     201         200         170         200         3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 28,565       $ 34,039       $ 3,989       $ 28,250       $ 153   

 

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(7) CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES, continued

 

Impaired Loans

As of December 31, 2011

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no related allowance recorded:

        

Real Estate Construction and Land Development

   $ 6,280       $ 11,137       $ —     

Real Estate Secured by Farmland

     —           —           —     

Real Estate Secured by Residential Properties

     2,135         2,611         —     

Real Estate Secured by Nonfarm Nonresidential

     7,075         7,484         —     

Consumer Installment

     —           —           —     

Credit Cards and Related Plans

     —           —           —     

Commercial and Industrial

     379         500         —     

Loans to Finance Agricultural Production

     1,109         1,110         —     

All Other Loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total impaired loans with no related allowance

   $ 16,978       $ 22,842       $ —     

With an allowance recorded:

        

Real Estate Construction and Land Development

   $ 3,806       $ 3,794       $ 637   

Real Estate Secured by Farmland

     —           —           —     

Real Estate Secured by Residential Properties

     3,391         3,382         480   

Real Estate Secured by Nonfarm Nonresidential

     6,976         6,957         1,181   

Consumer Installment

     —           —           —     

Credit Cards and Related Plans

     —           —           —     

Commercial and Industrial

     186         186         165   

Loans to Finance Agricultural Production

     —           —           —     

All Other Loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total impaired loans with related allowance recorded

   $ 14,359       $ 14,319       $ 2,463   

Total

        

Construction and Land Development

   $ 10,086       $ 14,931       $ 637   

Residential

     5,526         5,993         480   

Commercial

     15,725         16,237         1,346   

Consumer

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 31,337       $ 37,161       $ 2,463   

 

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The following table presents nonaccrual loans as of March 31, 2012 and December 31, 2011 by loan category (dollars in thousands):

Nonaccrual Loans

 

     March 31,
2012
     December 31,
2011
 

Real Estate Construction and Land Development

   $ 5,937       $ 6,795   

Real Estate Secured by Farmland

     —           —     

Real Estate Secured by Residential Properties

     2,263         2,113   

Real Estate Secured by Nonfarm Nonresidential

     10,898         6,767   

Consumer Installment

     8         22   

Credit Cards and Related Plans

     —           —     

Commercial and Industrial

     300         276   

Loans to Finance Agricultural Production

     —           —     

All Other Loans

     —           —     
  

 

 

    

 

 

 

Total

   $ 19,406       $ 15,973   
  

 

 

    

 

 

 

Interest income not recognized due to loans being on nonaccrual status during the quarters ended March 31, 2012 and March 31, 2011 was approximately $248 thousand and $205 thousand, respectively.

Troubled Debt Restructurings

Loans which management identifies as impaired generally will be nonperforming loans or restructured loans (also known as “troubled debt restructurings” or “TDRs”). As a result of adopting the amendments in ASU 2011-02, the Company reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they are considered TDRs under the amended guidance. The Company identified no loans as TDRs which the allowance for loan losses had previously been measured under a general allowance methodology. TDRs are treated as impaired loans in determining the adequacy of the allowance for loan loss.

For the quarters ended March 31, 2012 and March 31, 2011 the following table presents a breakdown of the types of concessions made by loan class. The recorded investment balances presented are balances at the time of concessions.

 

     March 31, 2012  
     Number of
Loans
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 
     (Dollars in thousands)  

Below market interest rate:

        

Real Estate Secured by Residential Properties

     1       $ 1,943       $ 1,943   
  

 

 

    

 

 

    

 

 

 
     March 31, 2011  
     Number of
Loans
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 
     (Dollars in thousands)  

Below market interest rate:

        

Real Estate Secured by Residential Properties

     1       $ 219       $ 219   

Real Estate Secured by Nonfarm Nonresidential

     1       $ 1,145       $ 1,145   
  

 

 

    

 

 

    

 

 

 

Total

     2       $ 1,364       $ 1,364   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table presents the successes and failures during the quarter of loans modified by the types of modifications during the twelve months prior to March 31, 2012. The recorded investment balances presented are as of March 31, 2012.

 

     Paid in Full      Paying as Restructured      Converted to Non-accrual      Foreclosure/Default  
     Number of
Loans
     Recorded
Investment
     Number of
Loans
     Recorded
Investment
     Number of
Loans
     Recorded
Investment
     Number of
Loans
     Recorded
Investment
 
     (Dollars in thousands)  

Below market interest rate

     —         $ —           4      $ 3,520        1       $ 622         —         $ —     

Extended payment terms

     —           —           9        2,889        —           —           —           —     

Forgiveness of principal

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —           13      $ 6,409        1      $ 622      $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There was one loan with a recorded investment of $169 thousand that is included in paying as restructured in the table above that was placed on non-accrual in a prior period. While the loan was not ninety days past due, it was moved into nonaccrual status due to payment concerns. There were no loans that were restructured during the year ending on March 31, 2012 that were ninety or more past due and therefore had a payment default.

(8) Benefit Plans

Postretirement Benefits

The Company has a postretirement benefit plan whereby the Company pays postretirement health care benefits for certain of its retirees that have met minimum age and service requirements. Net periodic postretirement benefit cost for the three months ended March 31, 2012 and 2011 includes the following components.

 

     Three months ended
March 31,
 
Components of Net Periodic Benefit Cost    2012      2011  
     (Dollars in thousands)  

Service cost

   $ 2       $ 2   

Interest cost

     9         9   

Prior service cost

     —           —     

Amortization of (gain) loss

     3        —     
  

 

 

    

 

 

 

Net periodic postretirement benefit cost

   $ 14       $ 11   
  

 

 

    

 

 

 

The Company expects to contribute $56 thousand to its postretirement benefit plan in 2012. No contributions were made in the first quarter of 2012.

Stock Option and Restricted Option Plans

During the quarter ended March 31, 2012 19,556 stock options were forfeited. There was no other activity during the quarter.

(9) Fair Value Of Financial Instruments

Fair value estimates are made by management at a specific point in time, based on relevant information about the financial instrument and the market. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument nor are potential taxes and other expenses that would be incurred in an actual sale considered. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and/or the methodology used could significantly affect the estimates disclosed. Similarly, the fair values disclosed could vary significantly from amounts realized in actual transactions.

 

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Table of Contents

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of March 31, 2012 and December 31, 2011. For short-term financial assets such as cash and cash equivalents, accrued interest receivable and loans held for sale 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. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, savings deposits, short-term borrowing and accrued interest payable the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

The fair value of investment securities available-for-sale are recorded at fair value utilizing Level 1, Level 2 and Level 3 inputs and is described in more detail below.

The fair value of net loans is based on estimated cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. This does not include consideration of liquidity that market participants would use to value such loans. The estimated fair values of time deposits and long-term obligations are based on estimated cash flows discounted at market interest rates.

The fair value of off-balance sheet financial instruments is considered immaterial. These off-balance sheet financial instruments are commitments to extend credit and are either short-term in nature or subject to immediate repricing.

 

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Table of Contents

The following table presents the carrying values and estimated fair values of the Company’s financial instruments at March 31, 2012 and December 31, 2011:

 

     March 31, 2012  
     Carrying
Amount
     Fair Value      Fair Value Measurements Using  
(Dollarss in thousands)          Level 1      Level 2      Level 3  

Assets

              

Cash and cash equivalents

   $ 12,070       $ 12,070       $ 12,070       $ —         $ —     

Investment securities

     348,810         348,810         158,134         188,887         1,789  

FHLB stock

     4,279         4,279         —           3,532         —     

Accrued interest receivable

     4,984         4,984         —           4,984         —     

Net loans

     479,998         478,078         —           —           478,078   

Loans held for sale

     3,310         3,310         —           3,310         —     

Liabilities

              

Demand, noninterest bearing deposits

   $ 134,828       $ 134,828       $ —         $ 134,828       $ —     

Demand, interest-bearing deposits

     277,520         277,520         —           277,520         —     

Savings deposits

     57,656         57,656         —           57,656         —     

Time deposits

     302,593         309,067         —           309,067         —     

Accrued interest payable

     457         457         —           457         —     

Short-term borrowing

     39,218         39,218         —           39,218         —     

Long-term borrowing

     18,000         18,722         —           18,722         —     

 

     December 31, 2011  
     Carrying
Amount
     Fair Value      Fair Value Measurements Using  
(Dollarss in thousands)          Level 1      Level 2      Level 3  

Assets

              

Cash and cash equivalents

   $ 24,731       $ 24,731       $ 24,731       $ —         $ —     

Investment securities

     339,450         339,450         151,714         186,094         1,642  

FHLB stock

     3,456         3,456         —           3,456         —     

Accrued interest receivable

     5,308         5,308         —           5,308         —     

Net loans

     484,450         482,851         —           —           482,851   

Loans held for sale

     2,866         2,866         —           2,866         —     

Liabilities

              

Demand, noninterest bearing deposits

   $ 135,732       $ 135,732       $ —         $ 135,732       $ —     

Demand, interest-bearing deposits

     270,119         270,119         —           270,119         —     

Savings deposits

     55,517         55,517         —           55,517         —     

Time deposits

     336,277         343,374         —           343,374         —     

Accrued interest payable

     519         519         —           519         —     

Short-term borrowing

     11,679         11,679         —           11,679         —     

Long-term borrowing

     25,500         26,296         —           26,296         —     

 

 

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Table of Contents

Fair Value Hierarchy

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

Level 1    Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2    Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3    Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

There were no changes to the techniques used to measure fair value during the period.

Following is a description of valuation methodologies used for assets recorded at fair value.

Investment Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Mortgage Banking Activity

The Company enters into interest rate lock commitments and commitments to sell mortgages. At March 31, 2012 and December 31, 2011, the amount of fair value associated with these interest rate lock commitments was $111 thousand and $76 thousand, respectively, which is included in other assets. Fair value associated with the interest rate lock commitments are classified as Level 3 measurements due to the use of significant management judgment and estimation. Forward loan sale commitments have been deemed insignificant for both periods.

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of several methods, including collateral value, market price and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2012, the majority of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. The fair values of impaired loans are generally based on judgment and therefore are considered to be level 3 assets.

Real Estate and Repossessions Acquired in Settlement of Loans

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair

 

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Table of Contents

value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. The fair values of foreclosed assets are generally based on judgment and therefore are considered to be level 3 assets.

 

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Table of Contents

Assets recorded at fair value on a recurring basis

 

<
March 31, 2012    Total      Level 1      Level 2      Level 3  
     (Dollars in thousands)  

Investment Securities Available-for-Sale

  

Government-sponsored enterprises and FFCB bonds

   $ 26       $ —