XASE:ECBE Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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 June 30, 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 definition 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 August 10, 2012, there were 2,849,841 outstanding shares of Registrant’s common stock.

 

 

 


Table of Contents

Table of Contents

Index

 

     Begins
on Page
 

Part 1 – Financial Information

  

Item 1.

  

Financial Statements:

  

Consolidated Balance Sheets at June 30, 2012 (unaudited) and December 31, 2011

     3   

Consolidated Results of Operations for Three and Six Months Ended June  30, 2012 and 2011 (unaudited)

     4   

Consolidated Statements of Comprehensive Income for Three and Six Months Ended June  30, 2012 and 2011 (unaudited)

     5   

Consolidated Statements of Changes in Shareholders’ Equity for Six Months Ended June  30, 2012 and 2011 (unaudited)

     6   

Consolidated Statements of Cash Flows for Six Months Ended June  30, 2012 and 2011 (unaudited)

     7   

Notes to Consolidated Financial Statements

     8   

Item 2.

  

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

     39   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     56   

Item 4.

  

Controls and Procedures

     56   

Part II – Other Information

  

Item 1.

  

Legal Proceedings

     57   

Item 1A.

  

Risk Factors

     57   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     57   

Item 3.

  

Defaults upon Senior Securities

     57   

Item 4.

  

Mine Safety Disclosures

     57   

Item 5.

  

Other Information

     57   

Item 6.

  

Exhibits

     57   

Signatures

     58   

Exhibit Index

     59   

Certifications

  

 

2


Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

June 30, 2012 and December 31, 2011

(Dollars in thousands, except per share data)

 

     June 30,
2012
    December 31,
2011*
 
     (unaudited)        

Assets

    

Non-interest bearing deposits and cash

   $ 16,890      $ 18,363   

Interest bearing deposits

     61        63   

Overnight investments

     7,670        6,305   
  

 

 

   

 

 

 

Total cash and cash equivalents

     24,621        24,731   
  

 

 

   

 

 

 

Investment securities

    

Available-for-sale, at market value (cost of $346,271 and $338,685 at June 30, 2012 and December 31, 2011, respectively)

     350,779        339,450   

Loans held for sale

     3,059        2,866   

Loans

     506,257        496,542   

Allowance for loan losses

     (10,780     (12,092
  

 

 

   

 

 

 

Loans, net

     495,477        484,450   
  

 

 

   

 

 

 

Real estate and repossessions acquired in settlement of loans, net

     7,661        6,573   

Federal Home Loan Bank common stock, at cost

     3,899        3,456   

Bank premises and equipment, net

     26,111        26,289   

Accrued interest receivable

     5,030        5,308   

Bank owned life insurance

     11,981        11,778   

Other assets

     15,648        16,376   
  

 

 

   

 

 

 

Total

   $ 944,266      $ 921,277   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Deposits

    

Demand, noninterest bearing

   $ 146,326      $ 135,732   

Demand, interest bearing

     305,298        270,119   

Savings

     58,562        55,517   

Time

     285,302        336,277   
  

 

 

   

 

 

 

Total deposits

     795,488        797,645   
  

 

 

   

 

 

 

Accrued interest payable

     469        519   

Short-term borrowings

     42,101        11,679   

Long-term obligations

     18,000        25,500   

Other liabilities

     4,948        5,491   
  

 

 

   

 

 

 

Total liabilities

     861,006        840,834   
  

 

 

   

 

 

 

Shareholders’ equity

    

Preferred stock, Series A

     17,536        17,454   

Common stock, par value $3.50 per share

     9,974        9,974   

Capital surplus

     25,857        25,873   

Warrants

     878        878   

Retained earnings

     26,360        25,926   

Accumulated other comprehensive income

     2,655        338   
  

 

 

   

 

 

 

Total shareholders’ equity

     83,260        80,443   
  

 

 

   

 

 

 

Total

   $ 944,266      $ 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.

See accompanying notes to consolidated financial statements.

 

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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Results of Operations

For the three and six months ended June 30, 2012 and 2011 (unaudited)

(Dollars in thousands, except per share data)

 

    

Three months ended

June 30,

   

Six months ended

June 30,

 
     2012      2011     2012      2011  

Interest income:

          

Interest and fees on loans

   $ 6,404       $ 7,329      $ 12,773       $ 14,686   

Interest on investment securities:

          

Interest exempt from federal income taxes

     249         117        484         245   

Taxable interest income

     1,774         2,163        3,656         4,100   

Dividend income

     14         9        25         18   

Other interest income

     4         14        6         21   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest income

     8,445         9,632        16,944         19,070   
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest expense:

          

Deposits:

          

Demand accounts

     390         505        796         1,062   

Savings

     60         74        155         127   

Time

     1,166         1,790        2,436         3,601   

Short-term borrowings

     95         73        176         142   

Long-term obligations

     76         145        195         325   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     1,787         2,587        3,758         5,257   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income

     6,658         7,045        13,186         13,813   

Provision for loan losses

     866         1,273        866         5,203   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income after provision for loan losses

     5,792         5,772        12,320         8,610   
  

 

 

    

 

 

   

 

 

    

 

 

 

Noninterest income:

          

Service charges on deposit accounts

     945         828        1,802         1,593   

Other service charges and fees

     518         330        847         574   

Mortgage origination fees

     376         452        782         778   

Net gain on sale of securities

     279         858        324         884   

Income from bank owned life insurance

     102         74        203         148   

Other operating (expense) income

     1         (3     2         (7
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest income

     2,221         2,539        3,960         3,970   
  

 

 

    

 

 

   

 

 

    

 

 

 

Noninterest expenses:

          

Salaries

     2,865         2,826        5,784         5,390   

Retirement and other employee benefits

     815         784        1,918         1,460   

Occupancy

     518         522        1,048         1,005   

Equipment

     603         513        1,193         1,072   

Professional fees

     343         271        562         542   

Supplies

     41         78        115         129   

Telephone

     184         189        382         358   

FDIC insurance

     203         201        407         527   

Other outside services

     92         162        192         343   

Data processing and related expenses

     346         83        742         153   

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

     463         79        1,147         97   

Other operating expenses

     784         949        1,685         1,825   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total noninterest expenses

     7,257         6,657        15,175         12,901   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income (loss) before income taxes

     756         1,654        1,105         (321

Income tax expense (benefit)

     168         509        140         (382
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

     588         1,145        965         61   
  

 

 

    

 

 

   

 

 

    

 

 

 

Preferred stock dividends

     225         224        449         448   

Accretion of discount

     41         41        82         82   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income (loss) available to common shareholders

   $ 322       $ 880      $ 434       ($ 469
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) per common share—basic

   $ 0.11       $ 0.31      $ 0.15       ($ 0.16
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) per common share—diluted

   $ 0.11       $ 0.31      $ 0.15       ($ 0.16
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average common shares outstanding—basic

     2,849,841         2,849,841        2,849,841         2,849,841   
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted average common shares outstanding—diluted

     2,849,841         2,849,841        2,849,841         2,849,841   
  

 

 

    

 

 

   

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (unaudited)

For the three and six months ended June 30, 2012 and 2011

(Dollars in thousands)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2012     2011     2012     2011  
     (Dollars in thousands)  

Net income

   $ 588      $ 1,145      $ 965      $ 61   

Other comprehensive income:

        

Unrealized gains on available for sale securities arising during the period

     3,093        4,404        4,067        4,247   

Tax related to unrealized gains

     (1,175     (1,696     (1,551     (1,635

Reclassification to realized gains

     (279     (858     (324     (884

Tax related to realized gains

     107        330        125        340   

Defined benefit pension plan:

        

Prior service cost

     —          —          —          7   

Net loss arising during period

     —          —          —          (116

Tax related to defined benefit pension plan

     —          —          —          42   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     1,746        2,180        2,317        2,001   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

   $ 2,334      $ 3,325      $ 3,282      $ 2,062   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity

Six months ended June 30, 2012 and 2011 (unaudited)

(Dollars in thousands, except per share data)

 

     Preferred
stock,

Series A
    

 

Common Stock

     Common
stock

warrants
     Capital
surplus
     Retained
earnings
    Accumulated
other
comprehensive

income
    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 income

     —           —           —           —           —           —          2,001        2,001   

Net income

     —           —           —           —           —           61          61   

Stock based compensation

     —           —           —           —           11           —          11   

Preferred stock accretion

     82         —           —           —           —           (82     —          —     

Cash dividends on preferred stock

     —           —           —           —           —           (448     —          (448

Cash dividends ($0.07 per share)

     —           —           —           —           —           (199     —          (199
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance June 30, 2011

   $ 17,370         2,849,841       $ 9,974       $ 878       $ 25,863       $ 27,886      $ 349      $ 82,320   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

     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

     —           —           —           —           —          —          2,317         2,317   

Net income

     —           —           —           —           —          965        —           965   

Stock based compensation

     —           —           —           —           (16       —           (16

Preferred stock accretion

     82         —           —           —           —          (82     —           —     

Cash dividends on preferred stock

     —           —           —           —           —          (449     —           (449
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance June 30, 2012

   $ 17,536         2,849,841       $ 9,974       $ 878       $ 25,857      $ 26,360      $ 2,655       $ 83,260   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Six months ended June 30, 2012 and 2011 - (unaudited)

(Dollar amounts in thousands)

 

     Six months ended
June 30,
 
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 965      $ 61   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     757        724   

Amortization of premium on investment securities, net

     2,502        1,408   

Provision for loan losses

     866        5,203   

Gain on sale of securities

     (324     (884

Stock based compensation (benefit)

     (16     11   

Decrease in accrued interest receivable

     278        736   

Impairment of real estate and repossessions acquired in settlement of loans

     683        —     

Loss on sale of real estate and repossessions acquired in settlement of loans

     142        26   

Income from Bank owned life insurance

     (203     (148

Originations of mortgage loans held for sale

     (31,210     (29,425

Proceeds from sale of loans held for sale

     31,017        32,117   

Decrease in other assets

     728        1,697   

Increase (decrease) in accrued interest payable

     (50     17   

Decrease in other liabilities, net

     (1,969     (1,993
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,166        9,550   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

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

     74,073        56,536   

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

     24,049        25,908   

Purchases of investment securities classified as available-for-sale

     (107,886     (104,492

Purchases of premises and equipment

     (579     (828

Purchase (sale) of Federal Home Loan Bank common stock

     (443     539   

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

     909        1,449   

Net loan (originations) repayments

     (14,715     17,953   
  

 

 

   

 

 

 

Net cash used by investing activities

     (24,592     (2,935
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     (2,157     26,833   

Net increase (decrease) in borrowings

     22,922        (4,798

Dividends paid to common shareholders

     —          (199

Dividends paid on preferred stock

     (449     (448
  

 

 

   

 

 

 

Net cash provided by financing activities

     20,316        21,388   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (110     28,003   

Cash and cash equivalents at beginning of period

     24,731        20,166   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 24,621      $ 48,169   
  

 

 

   

 

 

 

Cash paid during the period:

    

Interest

   $ 3,808      $ 5,240   

Taxes

     —          —     

Supplemental disclosures of noncash financing and investing activities:

    

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

   $ 2,317      $ 2,068   

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

     2,822        3,989   

Transfer from long-term to short-term borrowings

     7,500        7,000   

See accompanying notes to consolidated financial statements.

 

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Table of Contents

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 are 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 June 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any other period.

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 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.

 

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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 Per Common Share

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

Diluted net income per common 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 per common 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 per common share for the six or three-month periods ended June 30, 2012 and June 30, 2011 as there were no shares outstanding during these periods.

 

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In computing diluted net income per common 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 common share for the Company. Diluted weighted average shares outstanding did not increase for the six and three months ended June 30, 2012 or June 30, 2011 as there was no dilutive impact of options for the periods. There were 3,500 options outstanding for both the six and three months ended June 30, 2012, that were not included in the computation of diluted net income per share because the exercise price was above the average market value of the Company’s stock for the periods. As of June 30, 2012, the warrant, covering approximately 145 thousand shares, issued to the U.S. Treasury Department was not included in the computation of net income per share for either the six or three-month period because its exercise price exceeded the average market price of the company’s stock for the periods. For the six month period ending June 30, 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 earnings per common share as the effect would have been anti-dilutive. For the three month period ending June 30, 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 earnings per common share because the exercise price exceeded the average market price of the Company’s stock for that period.

 

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The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Net Income (Loss) Per Common Share for the six months ended June 30.

 

     Six months ended June 30, 2012
(dollars in thousands, except per share data)
 
     Income
(Numerator)
     Shares
(Denominator)
     Per
Share
Amount
 

Basic net income per common share

   $ 434         2,849,841       $ 0.15   
        

 

 

 

Effect of dilutive securities

     —           —        
  

 

 

    

 

 

    

Diluted net income per common share

   $  434         2,849,841       $  0.15   
  

 

 

    

 

 

    

 

 

 

 

     Six months ended June 30, 2011
(dollars in thousands, except per share data)
 
     Income
(Numerator)
    Shares
(Denominator)
     Per
Share
Amount
 

Basic net loss per common share

   $ (469     2,849,841       $ (0.16
       

 

 

 

Effect of dilutive securities

     —          —        
  

 

 

   

 

 

    

Diluted net loss per common share

   $ (469     2,849,841       $ (0.16
  

 

 

   

 

 

    

 

 

 

The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Net Income Per Common Share for the three months ended June 30.

 

     Three months ended June 30, 2012
(dollars in thousands, except per share data)
 
     Income
(Numerator)
     Shares
(Denominator)
     Per
Share
Amount
 

Basic net income per common share

   $ 322         2,849,841       $ 0.11   
        

 

 

 

Effect of dilutive securities

     —           —        
  

 

 

    

 

 

    

Diluted net income per common share

   $ 322         2,849,841       $ 0.11   
  

 

 

    

 

 

    

 

 

 

 

     Three months ended June 30, 2011
(dollars in thousands, except per share data)
 
     Income
(Numerator)
     Shares
(Denominator)
     Per
Share
Amount
 

Basic net income per common share

   $ 880         2,849,841       $ 0.31   
        

 

 

 

Effect of dilutive securities

     —           —        
  

 

 

    

 

 

    

Diluted net income per common share

   $ 880         2,849,841       $ 0.31   
  

 

 

    

 

 

    

 

 

 

 

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(3) Comprehensive Income

Comprehensive income 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. Other comprehensive income includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards. The components of comprehensive income for the periods have been presented in the consolidated statements of comprehensive income.

(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 Company’s financial statements.

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.

 

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Table of Contents

(5) Investment Securities

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

 

     June 30, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 
     (Dollars in thousands)  

Securities available-for-sale:

          

Obligations of states and political subdivisions

   $ 36,655       $ 1,181       $ (57   $ 37,779   

Mortgage-backed securities

     131,169         1,831         (201     132,799   

SBA-backed securities

     137,445         2,270         (113     139,602   

Corporate bonds

     41,002         337         (740     40,599   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 346,271       $ 5,619       $ (1,111   $ 350,779   

 

     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 and six-month periods ended June 30, 2012 and June 30, 2011 were as follows:

 

                   
    

Six months ended June 30,    

(Dollars in thousands)

 
     2012     2011  

Gross realized gains

   $ 433      $ 971   

Gross realized losses

     (109     (87
  

 

 

   

 

 

 

Net realized gains

   $ 324      $ 884   
  

 

 

   

 

 

 

 

                   
    

 Three months ended June 30,

(Dollars in thousands)

 
     2012     2011  

Gross realized gains

   $   362      $ 945   

Gross realized losses

     (83     (87
  

 

 

   

 

 

 

Net realized gains

   $ 279      $ 858   
  

 

 

   

 

 

 

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 June 30, 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

 

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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.

 

     June 30, 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

   $ 5,032       $ 57       $ —         $ —         $ 5,032       $ 57   

Mortgage-backed securities

     20,968         201         —           —           20,968         201   

SBA-backed securities

     19,996         113         —           —           19,996         113   

Corporate bonds

     15,356         252         8,173         488         23,529         740   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 61,352       $ 623       $   8,173       $   488       $   69,525       $ 1,111   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     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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As of June 30, 2012 and December 31, 2011, management concluded that the unrealized losses presented above, which consisted of twenty-five securities at June 30, 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 Bank 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 twenty-five securities at June 30, 2012 were comprised of three obligations of states and political subdivisions, five mortgage-backed securities, ten corporate bonds and seven 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 June 30, 2012 and December 31, 2011, the balance of Federal Home Loan Bank (“FHLB”) of Atlanta stock held by the Bank was $3.9 million and $3.5 million, respectively. The FHLB paid a dividend for the first quarter of 2012 with an annualized rate of 1.51%. The dividend rate was equal to average three-month LIBOR for the period of January 1, 2012 to March 31, 2012 plus 1.00%, 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 June 30, 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 Bank.

The aggregate amortized cost and fair value of the available-for-sale securities portfolio at June 30, 2012 by remaining contractual maturity are as follows:

 

     Amortized
Cost
     Fair
Value
 
     (Dollars in thousands)  

Obligations of states and political subdivisions:

     

Due in one through five years

   $ 1,605         1,704   

Due in five through ten years

     20,196         20,930   

Due after ten years

     14,854         15,145   

Mortgage-backed securities:

     

Due in one through five years

     1,044         1,044   

Due in five through ten years

     27,230         27,488   

Due after ten years

     102,896         104,267   

SBA-backed securities:

     

Due in five through ten years

     5,190         5,224   

Due after ten years

     132,255         134,378   

Corporate bonds:

     

Due in one through five years

     23,326         23,271   

Due in five through ten years

     17,675         17,328   
  

 

 

    

 

 

 

Total securities

   $ 346,271       $ 350,779   
  

 

 

    

 

 

 

 

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Table of Contents

Securities with an amortized cost of $186.6 million at June 30, 2012 are pledged as collateral. Of this total, securities with an amortized cost of $60.8 million and fair value of $62.3 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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(6) Loans

Loans at June 30, 2012 and December 31, 2011 classified by type are as follows:

 

     June 30,
2012
     December 31,
2011
 

Real estate loans:

     

Construction and land development

   $ 63,041       $ 67,232   

Secured by farmland

     27,677         29,947   

Secured by residential properties

     107,545         110,238   

Secured by nonfarm, nonresidential properties

     198,221         203,287   

Consumer installment

     6,028         6,485   

Credit cards and related plans

     1,723         1,660   

Commercial and all other loans:

     

Commercial and industrial

     54,989         45,649   

Loans to finance agricultural production

     36,840         21,524   

All other loans

     10,237         10,587   
  

 

 

    

 

 

 
     506,301         496,609   

Less deferred fees and costs, net

     44         67   
  

 

 

    

 

 

 
   $ 506,257       $ 496,542   
  

 

 

    

 

 

 

Included in the above:

     

Nonaccrual loans

   $ 18,204       $ 15,973   

Restructured loans 1

     10,439         10,138   

 

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

There were no loans outstanding that were past due ninety days or more that were still accruing at June 30, 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.

 

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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.

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.

 

18


Table of Contents

At June 30, 2012 and December 31, 2011, included in mortgage, commercial, and residential loans were loans collateralized by owner-occupied residential real estate of approximately $49.5 million and $53.2 million, respectively.

Loans with a book value of approximately $25.0 million at June 30, 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.

 

19


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 six months ending June 30, 2012 and 2011, and the three months ending June 30, 2012 and 2011:

 

Allowance for Loan Losses

As of and for the Six Months Ended June 30, 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  
    (Dollars in thousands)  

Beginning balance

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

Charge-offs

    (913     —          (278     (892     (43     (17     (421     —          (99     —          (2,663

Recoveries

    337        —          47        2        13        3        12        —          71        —          485   

Provisions

    176        (2     202        200        134        65        505        (14     41        (441     866   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 3,255      $ 13      $ 2,389      $ 1,050      $ 150      $ 69      $ 651      $ 101      $ 39      $ 3,063      $ 10,780   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

  $ 575      $ —        $ 617      $ 180      $ —        $ —        $ 20      $ —        $ —        $ —        $ 1,392   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

  $ 2,680      $ 13      $ 1,772      $ 870      $ 150      $ 69      $ 631      $ 101      $ 39      $ 3,063      $ 9,388   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans

                     

Ending Balance

  $ 62,944      $ 27,627      $ 107,695      $ 198,007      $ 6,160      $ 1,723      $ 55,005      $ 36,856      $ 10,240      $ —        $ 506,257   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

  $ 8,797      $ 356      $ 7,614      $ 15,093      $ —        $ —        $ 417      $ —        $ —        $ —        $ 32,277   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

  $ 54,147      $ 27,271      $ 100,081      $ 182,914      $ 6,160      $ 1,723      $ 54,588      $ 36,856      $ 10,240      $ —        $ 473,980   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Loan Losses

As of and for the Three Months Ended June 30, 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  
    (Dollars in thousands)  

Beginning balance

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

Charge-offs

    (694     —          (176     (654     (2     (14     (64     —          (47     —          (1,651

Recoveries

    111        —          20        1        12        3        2        —          31        —          180   

Provisions

    738        (2     59        138        (10     12        208        (21     27        (283     866   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 3,255      $ 13      $ 2,389      $ 1,050      $ 150      $ 69      $ 651      $ 101      $ 39      $ 3,063      $ 10,780   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

  $ 575      $ —        $ 617      $ 180      $ —        $ —        $ 20      $ —        $ —        $ —        $ 1,392   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

  $ 2,680      $ 13      $ 1,772      $ 870      $ 150      $ 69      $ 631      $ 101      $ 39      $ 3,063      $ 9,388   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans

                     

Ending Balance

  $ 62,944      $ 27,627      $ 107,695      $ 198,007      $ 6,160      $ 1,723      $ 55,005      $ 36,856      $ 10,240      $ —        $ 506,257   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

  $ 8,797      $ 356      $ 7,614      $ 15,093      $ —        $ —        $ 417      $ —        $ —        $ —        $ 32,277   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

  $ 54,147      $ 27,271      $ 100,081      $ 182,914      $ 6,160      $ 1,723      $ 54,588      $ 36,856      $ 10,240      $ —        $ 473,980   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

Allowance for Loan Losses

As of and for the Six Months Ended June 30, 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  
    (Dollars in thousands)  

Beginning balance

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

Charge-offs

    (1,917     —          (704     (43     (15     (9     (338     —          (122     —          (3,148

Recoveries

    6        —          2        —          2        1        78        —          57        —          146   

Provisions

    3,210        5        1,491        168        31        175        —          (3     100        26        5,203   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 7,467      $ 33      $ 4,239      $ 1,132      $ 30      $ 188      $ 622      $ 15      $ 174      $ 1,548      $ 15,448   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

  $ 1,931      $ —        $ 1,124      $ 585      $ —        $ 170      $ 249      $ —        $ —        $ —        $ 4,059   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

  $ 5,536      $ 33      $ 3,115      $ 547      $ 30      $ 18      $ 373      $ 15      $ 174      $ 1,548      $ 11,389   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans

                     

Ending Balance

  $ 84,291      $ 33,641      $ 117,458      $ 211,556      $ 5,191      $ 2,422      $ 47,780      $ 23,715      $ 16,633      $ —        $ 542,687   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

  $ 16,331      $ —        $ 8,762      $ 5,508      $ —        $ 200      $ 511      $ —        $ —        $ —        $ 31,312   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

  $ 67,960      $ 33,641      $ 108,696      $ 206,048      $ 5,191      $ 2,222      $ 47,269      $ 23,715      $ 16,633      $ —        $ 511,375   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Loan Losses

As of and for the Three Months Ended June 30, 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  
    (Dollars in thousands)  

Beginning balance

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

Charge-offs

    (644     —          (255     (43     (6     —          (84     —          (56     —          (1,088

Recoveries

    6        —          1        —          —          1        15        —          21        —          44   

Provisions

    518        4        491        57        20        (2     (441     —          79        547        1,273   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 7,467      $ 33      $ 4,239      $ 1,132      $ 30      $ 188      $ 622      $ 15      $ 174      $ 1,548      $ 15,448   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

  $ 1,931      $ —        $ 1,124      $ 585      $ —        $ 170      $ 249      $ —        $ —        $ —        $ 4,059   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

  $ 5,536      $ 33      $ 3,115      $ 547      $ 30      $ 18      $ 373      $ 15      $ 174      $ 1,548      $ 11,389   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans

                     

Ending Balance

  $ 84,291      $ 33,641      $ 117,458      $ 211,556      $ 5,191      $ 2,422      $ 47,780      $ 23,715      $ 16,633      $ —        $ 542,687   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: individually evaluated for impairment

  $ 16,331      $ —        $ 8,762      $ 5,508      $ —        $ 200      $ 511      $ —        $ —        $ —        $ 31,312   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance: collectively evaluated for impairment

  $ 67,960      $ 33,641      $ 108,696      $ 206,048      $ 5,191      $ 2,222      $ 47,269      $ 23,715      $ 16,633      $ —        $ 511,375   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

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 June 30, 2012 and December 31, 2011 classified by risk type:

Credit Quality Indicators

As of June 30, 2012

 

     Pass      Weak Pass      Special
Mention
     Substandard      Total  
     (Dollars in thousands)  

Real Estate—Construction and Land Development Loans

   $ 27,929       $ 19,992       $ 5,682       $ 9,341       $ 62,944   

Real Estate—Secured by Farmland

     21,265         3,326         2,680         356         27,627   

Real Estate—Secured by Residential Properties

     59,344         29,079         10,488         8,784         107,695   

Real Estate—Secured by Nonfarm Nonresidential

     87,857         71,532         19,611         19,007         198,007   

Consumer Installment

     4,071         1,741         284         64         6,160   

Credit Cards and Related Plans

     871         580         270         2         1,723   

Commercial and Industrial

     29,978         19,737         3,627         1,663         55,005   

Loans to Finance Agriculture Production

     28,582         7,917         357         —           36,856   

All Other Loans

     5,826         4,390         24         —           10,240   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 265,723       $ 158,294       $ 43,023       $ 39,217       $ 506,257   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

Credit Quality Indicators

As of December 31, 2011

 

     Pass      Weak Pass      Special
Mention
     Substandard      Total  
     (Dollars in thousands)  

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 June 30, 2012 and December 31, 2011:

Past Due Loans

As of June 30, 2012

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     Greater than
90 Days
     Total Past
Due
     Current      Total  
     (Dollars in thousands)  

Real Estate Construction and Land Development

   $ 178       $ 76       $ 5,271       $ 5,525       $ 57,419       $ 62,944   

Real Estate Secured by Farmland

     —           156        200        356         27,271         27,627   

Real Estate Secured by Residential Properties

     211         222         2,312         2,745         104,950         107,695   

Real Estate Secured by Nonfarm Nonresidential

     2,430         210         6,401         9,041         188,966         198,007   

Consumer Installment

     20         2         7         29         6,131         6,160   

Credit Cards and Related Plans

     2         —           —           2         1,721         1,723   

Commercial and Industrial

     101         —           151         252         54,753         55,005   

Loans to Finance Agricultural Production

     —           —           —           —           36,856         36,856   

All Other Loans

     —           —           —           —           10,240         10,240   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,942       $ 666       $ 14,342       $ 17,950       $ 488,307       $ 506,257   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-Accrual Loans Included in above Total

   $ 1,941       $ 529       $ 14,342       $ 16,812       $ 1,392       $ 18,204   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

Past Due Loans

As of December 31, 2011

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     Greater than
90 Days
     Total Past
Due
     Current      Total  
     (Dollars in thousands)  

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

The following tables summarize impaired loans as of June 30, 2012, June 30, 2011 and December 31, 2011. 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

 

     Balance at
June 30, 2012
     Six Months Ended
June 30, 2012
     Three Months Ended
June 30, 2012
 
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 
     (Dollars in thousands)  

With no related allowance recorded:

                    

Real Estate Construction and Land Development

   $ 5,750       $ 7,219       $ —         $ 5,791       $ 49       $ 5,552       $ 22   

Real Estate Secured by Farmland

     356         356         —           119         3         237         2   

Real Estate Secured by Residential Properties

     2,180         2,329         —           1,830         28         2,074         14   

Real Estate Secured by Nonfarm Nonresidential

     11,682         12,835         —           8,227         93         9,303         40   

Consumer Installment

     —           —           —           —           —           —           —     

Credit Cards and Related Plans

     —           —           —           —           —           —           —     

Commercial and Industrial

     219         217         —           300         12         296         9   

Loans to Finance Agricultural Production

     —           —           —           293         9        —           —     

All Other Loans

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no related allowance

   $ 20,187       $ 22,956       $ —         $ 16,560       $ 194       $ 17,462       $ 87   

With an allowance recorded:

                    

Real Estate Construction and Land Development

   $ 3,055       $ 3,472       $ 575       $ 3,321       $ 28       $ 2,738       $ 11   

Real Estate Secured by Farmland

     —           —           —           —           —           —           —     

Real Estate Secured by Residential Properties

     5,444         5,431         617         5,286         80         5,441         38   

Real Estate Secured by Nonfarm Nonresidential

     3,430         3,423         180         7,622         87         6,468         27   

Consumer Installment

     —           —           —           —           —           —           —     

Credit Cards and Related Plans

     —           —           —           —           —           —           —     

Commercial and Industrial

     199         199         20         124         5         67         2   

Loans to Finance Agricultural Production

     —           —           —           —           —           —           —     

All Other Loans

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with related allowance recorded

   $ 12,128       $ 12,525       $ 1,392       $ 16,353       $ 200       $ 14,714       $ 78   

Total

                    

Construction and Land Development

   $ 8,805       $ 10,691       $ 575       $ 9,112       $ 77       $ 8,290       $ 33   

Residential

     7,624         7,760         617         7,116         108         7,515         52   

Commercial

     15,886         17,030         200         16,685         209         16,371         80   

Consumer

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 32,315       $ 35,481       $ 1,392       $ 32,913       $ 394       $ 32,176       $ 165   

Impaired Loans

 

     Balance at
June 30, 2011
     Six Months Ended
June 30, 2011
     Three Months Ended
June 30, 2011
 
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 
     (Dollars in thousands)  

With no related allowance recorded:

                    

Real Estate Construction and Land Development

   $ 7,995       $ 11,610       $ —        $ 7,819       $ 82       $ 7,105       $ 33   

Real Estate Secured by Farmland

     —          —          —          —          —          —          —    

Real Estate Secured by Residential Properties

     3,860         4,222         —          3,846         38         3,855         22   

Real Estate Secured by Nonfarm Nonresidential

     2,501         2,544         —          1,517         24         2,183         17   

Consumer Installment

     —          —          —             —             —    

Credit Cards and Related Plans

     —          —          —          —          —          —          —    

Commercial and Industrial

     175         449         —          366         7         298         2   

Loans to Finance Agricultural Production

     —          —          —          —          —          —          —    

All Other Loans

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans with no related allowance

   $ 14,531       $ 18,825       $      $ 13,548       $ 151       $ 13,441       $ 74   

With an allowance recorded:

                    

Real Estate Construction and Land Development

   $ 8,267       $ 9,996       $ 1,931       $ 8,206       $ 86       $ 8,791       $ 40   

Real Estate Secured by Farmland

     —          —          —          —          —          —          —    

Real Estate Secured by Residential Properties

     5,042         4,901         1,124         3,912         39         4,904         28   

Real Estate Secured by Nonfarm Nonresidential

     3,011         3,076         585         3,245         51         3,089         24   

Consumer Installment

     —          —          —          —          —          —          —    

Credit Cards and Related Plans

     201         200