XNAS:EVBS Eastern Virginia Bankshares Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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 Number: 000-23565

 

 

EASTERN VIRGINIA BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

VIRGINIA   54-1866052

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

330 Hospital Road, Tappahannock, Virginia   22560
(Address of principal executive offices)   (Zip Code)

(804) 443-8400

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

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

Indicate by 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    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

The number of shares of the registrant’s Common Stock outstanding as of May 10, 2012 was 6,032,527.

 

 

 


Table of Contents

EASTERN VIRGINIA BANKSHARES, INC.

INDEX

 

PART I.   FINANCIAL INFORMATION   
Item 1.  

Financial Statements

  
 

Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011

     2   
 

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

     3   
 

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

     4   
 

Consolidated Statements of Shareholders’ Equity (unaudited) for the Three Months Ended March  31, 2012 and March 31, 2011

     5   
 

Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March  31, 2012 and March 31, 2011

     6   
 

Notes to the Interim Consolidated Financial Statements (unaudited)

     7   
Item 2.  

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

     35   
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

     59   

 

1


Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands, except share and per share amounts)

 

     March 31,
2012
    December 31,
2011
 
     (unaudited)        

Assets:

    

Cash and due from banks

   $ 12,755      $ 12,676   

Interest bearing deposits with banks

     20,213        11,890   

Federal funds sold

     504        —     

Securities available for sale, at fair value

     254,744        236,820   

Restricted securities, at cost

     9,762        9,762   

Loans, net of allowance for loan losses of $23,141 and $24,102, respectively

     698,011        710,428   

Deferred income taxes, net

     12,058        12,160   

Bank premises and equipment, net

     20,064        20,054   

Accrued interest receivable

     3,925        3,761   

Other real estate owned, net of valuation allowance of $1,982 and $1,403, respectively

     5,950        7,326   

Goodwill

     15,970        15,970   

Other assets

     21,838        22,187   
  

 

 

   

 

 

 

Total assets

   $ 1,075,794      $ 1,063,034   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity:

    

Liabilities

    

Noninterest-bearing demand accounts

   $ 111,887      $ 103,639   

Interest-bearing deposits

     731,852        726,312   
  

 

 

   

 

 

 

Total deposits

     843,739        829,951   

Federal funds purchased and repurchase agreements

     2,144        4,003   

Long-term borrowings

     117,500        117,500   

Trust preferred debt

     10,310        10,310   

Accrued interest payable

     1,531        1,483   

Other liabilities

     5,037        4,664   
  

 

 

   

 

 

 

Total liabilities

     980,261        967,911   
  

 

 

   

 

 

 

Shareholders’ Equity

    

Preferred stock, $2 par value per share, authorized 10,000,000, issued and outstanding: Series A; $1,000 stated value per share, 24,000 shares fixed rate cumulative perpetual preferred

     24,000        24,000   

Common stock, $2 par value per share, authorized 50,000,000, issued and outstanding 6,032,527 and 6,025,478 including 14,500 nonvested shares in 2012 and 2011, respectively

     12,036        12,022   

Surplus

     19,465        19,446   

Retained earnings

     40,104        39,365   

Warrant

     1,481        1,481   

Discount on preferred stock

     (529     (604

Accumulated other comprehensive (loss), net

     (1,024     (587
  

 

 

   

 

 

 

Total shareholders’ equity

     95,533        95,123   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,075,794      $ 1,063,034   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

2


Table of Contents

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)

(dollars in thousands, except per share amounts)

 

     Three Months Ended
March 31,
 
     2012      2011  

Interest and Dividend Income

     

Loans and fees on loans

   $ 10,184       $ 10,856   

Interest on investments:

     

Taxable interest income

     934         1,388   

Tax exempt interest income

     345         382   

Dividends

     77         66   

Interest on deposits with banks

     14         6   
  

 

 

    

 

 

 

Total interest and dividend income

     11,554         12,698   
  

 

 

    

 

 

 

Interest Expense

     

Deposits

     1,819         2,621   

Federal funds purchased and repurchase agreements

     7         8   

Short-term borrowings

     —           6   

Long-term borrowings

     1,187         1,174   

Trust preferred debt

     91         81   
  

 

 

    

 

 

 

Total interest expense

     3,104         3,890   
  

 

 

    

 

 

 

Net interest income

     8,450         8,808   

Provision for Loan Losses

     2,900         2,000   
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     5,550         6,808   
  

 

 

    

 

 

 

Noninterest Income

     

Service charges and fees on deposit accounts

     769         935   

Debit/credit card fees

     319         324   

Gain on sale of available for sale securities, net

     2,531         193   

Gain on sale of bank premises and equipment

     —           256   

Other operating income

     288         383   
  

 

 

    

 

 

 

Total noninterest income

     3,907         2,091   
  

 

 

    

 

 

 

Noninterest Expenses

     

Salaries and employee benefits

     3,900         4,090   

Occupancy and equipment expenses

     1,271         1,213   

Telephone

     307         265   

FDIC expense

     588         497   

Consultant fees

     174         274   

Collection, repossession and other real estate owned

     305         453   

Marketing and advertising

     242         211   

Loss on sale of other real estate owned

     73         247   

Impairment losses on other real estate owned

     615         152   

Other operating expenses

     1,076         1,098   
  

 

 

    

 

 

 

Total noninterest expenses

     8,551         8,500   
  

 

 

    

 

 

 

Income before income taxes

     906         399   

Income Tax Expense (Benefit)

     92         (75
  

 

 

    

 

 

 

Net Income

   $ 814       $ 474   

Effective dividend on preferred stock

     375         374   
  

 

 

    

 

 

 

Net income available to common shareholders

   $ 439       $ 100   
  

 

 

    

 

 

 

Income per common share: basic

   $ 0.07       $ 0.02   

      diluted

   $ 0.07       $ 0.02   

Dividends per share, common

   $ —         $ —     

The accompanying notes are an integral part of the consolidated financial statements.

 

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Table of Contents

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

(dollars in thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  

Net income

   $ 814      $ 474   

Other comprehensive income (loss), net of tax:

    

Unrealized securities gains arising during period (net of tax, $636 and $525, respectively)

     1,233        1,020   

Less: reclassification adjustment for securities gains included in net income (net of tax, $861 and $66, respectively)

     (1,670     (127
  

 

 

   

 

 

 

Other comprehensive income (loss)

     (437     893   
  

 

 

   

 

 

 

Comprehensive income

   $ 377      $ 1,367   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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Table of Contents

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity (unaudited)

For the Three Months Ended March 31, 2012 and 2011

(dollars in thousands)

 

     Common
Stock
     Preferred
Stock (1)
     Surplus      Retained
Earnings
    Accumulated
Other
Comprehensive
(Loss)
    Total  

Balance, December 31, 2010

   $ 11,954       $ 24,581       $ 19,302       $ 37,884      $ (2,303   $ 91,418   

Net income for the three months ended March 31, 2011

              474          474   

Other comprehensive income

                893        893   

Preferred stock discount

        74            (74       —     

Stock based compensation

           32             32   

Issuance of common stock under dividend reinvestment and employee stock plans

     10         —           12         —          —          22   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, March 31, 2011

   $ 11,964       $ 24,655       $ 19,346       $ 38,284      $ (1,410   $ 92,839   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

   $ 12,022       $ 24,877       $ 19,446       $ 39,365      $ (587   $ 95,123   

Net income for the three months ended March 31, 2012

              814          814   

Other comprehensive (loss)

                (437     (437

Preferred stock discount

        75            (75       —     

Stock based compensation

           14             14   

Issuance of common stock under dividend reinvestment and employee stock plans

     14         —           5         —          —          19   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, March 31, 2012

   $ 12,036       $ 24,952       $ 19,465       $ 40,104      $ (1,024   $ 95,533   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) For the purposes of this table, preferred stock includes the effect of the warrant issued in connection with the sale of preferred stock to the U.S. Treasury pursuant to the Capital Purchase Program and the discount on such preferred stock.

The accompanying notes are an integral part of the consolidated financial statements.

 

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Table of Contents

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(dollars in thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  

Operating Activities:

    

Net income

   $ 814      $ 474   

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

    

Provision for loan losses

     2,900        2,000   

Depreciation and amortization

     547        519   

Stock based compensation

     14        32   

Net amortization of premiums and accretion of discounts on securities available for sale

     1,006        547   

(Gain) realized on securities available for sale transactions, net

     (2,531     (193

(Gain) on sale of bank premises and equipment

     —          (256

Loss on sale of other real estate owned

     73        247   

Impairment on other real estate owned

     615        152   

Loss on LLC investments

     15        11   

Deferred income taxes

     327        (352

Net change in:

    

Accrued interest receivable

     (164     49   

Other assets

     334        1,080   

Accrued interest payable

     48        (62

Other liabilities

     373        (465
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,371        3,783   
  

 

 

   

 

 

 

Investing Activities:

    

Purchase of securities available for sale

     (106,824     (13,892

Purchases of bank premises and equipment

     (557     (1,276

Improvements to other real estate owned

     —          (150

Net change in loans

     9,286        5,827   

Proceeds from:

    

Maturities, calls, and paydowns of securities available for sale

     11,060        28,422   

Sales of securities available for sale

     78,703        13,021   

Sale of bank premises and equipment

     —          299   

Sale of other real estate owned

     919        2,028   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (7,413     34,279   
  

 

 

   

 

 

 

Financing Activities:

    

Net change in:

    

Demand, interest-bearing demand and savings deposits

     20,253        (10,704

Time deposits

     (6,465     (7,913

Federal funds purchased and repurchase agreements

     (1,859     14   

Short-term borrowings

     —          (19,500

Issuance of common stock under dividend reinvestment and employee stock plans

     19        22   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     11,948        (38,081
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     8,906        (19

Cash and cash equivalents, January 1

     24,566        22,831   
  

 

 

   

 

 

 

Cash and cash equivalents, March 31

   $ 33,472      $ 22,812   
  

 

 

   

 

 

 

Supplemental disclosure:

    

Interest paid

   $ 3,056      $ 3,952   

Supplemental disclosure of noncash investing and financing activities:

    

Unrealized gains (losses) on securities available for sale

   $ (662   $ 1,352   

Loans transferred to other real estate owned

   $ (231   $ (1,900

The accompanying notes are an integral part of the consolidated financial statements.

 

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Table of Contents

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

Notes to the Interim Consolidated Financial Statements

(unaudited)

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited consolidated financial statements of Eastern Virginia Bankshares, Inc. (the “Parent”) and its subsidiaries, EVB Statutory Trust I (the “Trust”), and EVB (the “Bank”) and its subsidiaries, are in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Form 10-K”).

The accompanying unaudited consolidated financial statements include the accounts of the Parent, the Bank and its subsidiaries, collectively referred to as “the Company.” All significant intercompany balances and transactions have been eliminated in consolidation. In addition, the Parent owns the Trust which is an unconsolidated subsidiary. The subordinated debt owed to this trust is reported as a liability of the Parent.

Nature of Operations

Eastern Virginia Bankshares, Inc. is a bank holding company headquartered in Tappahannock, Virginia that was organized and chartered under the laws of the Commonwealth of Virginia on September 5, 1997 and commenced operations on December 29, 1997. The Company conducts its primary operations through its wholly-owned bank subsidiary, EVB. Two of EVB’s three predecessor banks, Bank of Northumberland, Inc. and Southside Bank, were established in 1910. The third bank, Hanover Bank, was established as a de novo bank in 2000. In April 2006, these three banks were merged and the surviving bank was re-branded as EVB. The Bank provides a full range of banking and related financial services to individuals and businesses through its network of retail branches. With twenty-three retail branches, the Bank serves diverse markets that primarily are in the counties of Caroline, Essex, Gloucester, Hanover, Henrico, King and Queen, King William, Lancaster, Middlesex, New Kent, Richmond, Northumberland, Southampton, Surry, Sussex and the City of Colonial Heights. The Bank operates under a state bank charter and as such is subject to regulation by the Virginia State Corporation Commission-Bureau of Financial Institutions (the “SCC”) and the Board of Governors of the Federal Reserve System (the “Federal Reserve”).

The Bank owns EVB Financial Services, Inc., which in turn has a 100% ownership interest in EVB Investments, Inc. and through March 31, 2011 a 50% ownership interest in EVB Mortgage, LLC. EVB Investments, Inc. is a full-service brokerage firm offering a comprehensive range of investment services. EVB Mortgage, LLC was formed to originate and sell residential mortgages. Due to the uncertainties surrounding potential regulatory pressures regarding the origination and funding of mortgage loans on one to four family residences, the Company decided in March 2011 to cease the operations of EVB Mortgage, LLC as a joint venture with Southern Trust Mortgage, LLC. On April 1, 2011, the Company entered into an independent contractor agreement with Southern Trust Mortgage, LLC. Under the terms of this agreement, the Company will advise and consult with Southern Trust Mortgage, LLC and facilitate the marketing and brand recognition of their mortgage business. In addition, the Company will provide Southern Trust Mortgage, LLC with offices at five retail branches in the Company’s market area and access to office equipment at these locations during normal work hours. For its services, the Company shall receive fixed monthly compensation from Southern Trust Mortgage, LLC in the amount of $1 thousand, which is adjustable on a quarterly basis going forward. The Bank has a 75% ownership interest in EVB Title, LLC, which primarily sells title insurance to the mortgage loan customers of the Bank and EVB Mortgage, LLC. The Bank has a 2.33% ownership in Virginia Bankers Insurance Center, LLC, which primarily sells insurance products to customers of the Bank, and other financial institutions that have an equity interest in the agency. The Bank also has a 100% ownership interest in Dunston Hall LLC, POS LLC, Tartan Holdings LLC and ECU-RE LLC which were formed to hold the title to real estate acquired by the Bank upon foreclosure on property of real estate secured loans. The financial position and operating results of all of these subsidiaries are not significant to the Company as a whole and are not considered principal activities of the Company at this time. The Company’s stock trades on the NASDAQ Global Market under the symbol EVBS.

 

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Table of Contents

Basis of Presentation

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, impairment of loans, impairment of securities, the valuation of other real estate owned, the projected benefit obligation under the defined benefit pension plan, the valuation of deferred taxes, goodwill impairment and fair value of financial instruments. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these interim financial statements, have been made. Certain prior year amounts have been reclassified to conform to the 2012 presentation. These reclassifications have no effect on previously reported net income.

The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results which may be expected for the year.

Recent Accounting Pronouncements

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

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

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

 

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Table of Contents

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

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

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

Note 2. Investment Securities

The amortized cost and estimated fair value, with gross unrealized gains and losses, of securities at March 31, 2012 and December 31, 2011 were as follows:

 

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

Available for Sale:

           

SBA Pool securities

   $ 58,604       $ 556       $ 190       $ 58,970   

Agency mortgage-backed securities

     50,635         353         87         50,901   

Agency CMO securities

     84,147         540         160         84,527   

Non agency CMO securities

     8,794         19         32         8,781   

State and political subdivisions

     49,756         580         264         50,072   

Pooled trust preferred securities

     535         174         —           709   

FNMA and FHLMC preferred stock

     77         101         —           178   

Corporate securities

     592         14         —           606   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 253,140       $ 2,337       $ 733       $ 254,744   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
(dollars in thousands)    December 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 

Available for Sale:

           

SBA Pool securities

   $ 60,873       $ 400       $ 191       $ 61,082   

Agency mortgage-backed securities

     40,470         595         2         41,063   

Agency CMO securities

     61,460         378         104         61,734   

Non agency CMO securities

     10,908         33         121         10,820   

State and political subdivisions*

     59,636         1,096         —           60,732   

Pooled trust preferred securities

     536         66         —           602   

FNMA and FHLMC preferred stock

     77         109         —           186   

Corporate securities

     594         7         —           601   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 234,554       $ 2,684       $ 418       $ 236,820   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

* The combined unrealized loss on these securities was less than $1 thousand.

There are no securities classified as “Held to Maturity” or “Trading” at March 31, 2012 or December 31, 2011. The Company’s mortgage-backed securities consist entirely of residential mortgage-backed securities. The Company does not hold any commercial mortgage-backed securities. The Company’s mortgage-backed securities are all agency backed and rated Aaa and AA+ by Moody and S&P, respectively, with no subprime issues.

The Company’s pooled trust preferred securities include one senior issue of Preferred Term Securities XXVII which is current on all payments and on which the Company took an impairment charge in the third quarter of 2009 to reduce the Company’s book value to the market value at September 30, 2009. As of March 31, 2012, that security has an estimated fair value that is $174 thousand greater than its amortized cost after impairment. During the second quarter of 2010, the Company recognized an impairment charge in the amount of $77 thousand on the Company’s investment in Preferred Term Securities XXIII mezzanine tranche, thus reducing the book value of this investment to $0. The decision to recognize the other-than-temporary impairment was based upon an analysis of the market value of the discounted cash flow for the security as provided by Moody’s at June 30, 2010, which indicated that the Company was unlikely to recover any of its remaining investment in these securities.

The amortized cost and estimated fair values of securities at March 31, 2012, by the earlier of contractual maturity or expected maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

 

     March 31, 2012  
(dollars in thousands)    Amortized
Cost
     Estimated
Fair Value
 

Due in one year or less

   $ 5,191       $ 5,237   

Due after one year through five years

     167,318         168,138   

Due after five years through ten years

     74,758         75,280   

Due after ten years

     5,873         6,089   
  

 

 

    

 

 

 

Total

   $ 253,140       $ 254,744   
  

 

 

    

 

 

 

Proceeds from the sales of securities available for sale for the three months ended March 31, 2012 and 2011 were $78.7 million and $13.0 million, respectively. Net realized gains on the sales of securities available for sale for the three months ended March 31, 2012 and 2011 were $2.5 million and $193 thousand, respectively. Proceeds from maturities, calls and paydowns of securities available for sale for the three months ended March 31, 2012 and 2011 were $11.1 million and $28.4 million, respectively.

The Company pledges securities to secure public deposits, balances with the Federal Reserve Bank and repurchase agreements. Securities with an aggregate book value of $93.6 million and an aggregate fair value of $94.3 million were pledged at March 31, 2012. Securities with an aggregate book value of $115.8 million and an aggregate fair value of $116.4 million were pledged at December 31, 2011.

 

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Table of Contents

Securities in an unrealized loss position at March 31, 2012, by duration of the period of the unrealized loss, are shown below:

 

     March 31, 2012  
(dollars in thousands)    Less than 12 months      12 months or more      Total  

Description of Securities

   Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 

SBA Pool securities

   $ 18,685       $ 190       $ —         $ —         $ 18,685       $ 190   

Agency mortgage-backed securities

     12,383         87         —           —           12,383         87   

Agency CMO securities

     25,250         160         —           —           25,250         160   

Non agency CMO securities*

     1,905         —           3,830         32         5,735         32   

State and political subdivisions

     15,558         264         —           —           15,558         264   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 73,781       $ 701       $ 3,830       $ 32       $ 77,611       $ 733   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* The combined unrealized loss (less than 12 months) on these securities was less than $1 thousand.

The Company reviews the investment securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment that may result due to the current adverse economic conditions and associated credit deterioration. A determination as to whether a security’s decline in market value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors the Company may consider in the other-than-temporary impairment analysis include the length of time the security has been in an unrealized loss position, changes in security ratings, financial condition of the issuer, as well as security and industry specific economic conditions. In addition, with regards to its securities, the Company may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds, and the value of any underlying collateral. For certain securities in unrealized loss positions, the Company will enlist independent third-party firms to prepare cash flow analyses to compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.

Based on the Company’s evaluation, management does not believe any unrealized loss at March 31, 2012, represents an other-than-temporary impairment as these unrealized losses are primarily attributable to changes in interest rates and current financial market conditions, and are not attributable to credit deterioration. At March 31, 2012, there are 45 debt securities with fair values totaling $77.6 million considered temporarily impaired. Of these debt securities, 42 with fair values totaling $73.8 million were in an unrealized loss position of less than 12 months and 3 with fair values totaling $3.8 million were in an unrealized loss position of 12 months or more. Because the Company intends to hold these investments in debt securities to maturity and it is more likely than not that the Company will not be required to sell these investments before a recovery of unrealized losses, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2012 and no impairment has been recognized. At March 31, 2012, there are no equity securities in an unrealized loss position.

Securities in an unrealized loss position at December 31, 2011, by duration of the period of the unrealized loss, are shown below.

 

     December 31, 2011  
(dollars in thousands)    Less than 12 months      12 months or more      Total  

Description of Securities

   Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 

SBA Pool securities

   $ 25,353       $ 191       $ —         $ —         $ 25,353       $ 191   

Agency mortgage-backed securities

     2,735         2         —           —           2,735         2   

Agency CMO securities

     16,594         104         —           —           16,594         104   

Non agency CMO securities

     —           —           5,587         121         5,587         121   

State and political subdivisions*

     2,168         —           —           —           2,168         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 46,850       $ 297       $ 5,587       $ 121       $ 52,437       $ 418   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* The combined unrealized loss on these securities was less than $1 thousand.

As of March 31, 2012 and December 31, 2011, there were no corporate securities in an unrealized loss position.

 

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Table of Contents

The table below presents a roll forward of the credit loss component recognized in earnings (referred to as “credit-impaired debt securities”) on debt securities held by the Company for which a portion of an other-than-temporary impairment was recognized in other comprehensive income during 2009. Changes in the credit loss component of credit-impaired debt securities were:

 

(dollars in thousands)

   Three Months Ending
March 31, 2012
 

Balance, beginning of period

   $ 339   

Additions

  

Initial credit impairments

     —     

Subsequent credit impairments

     —     

Reductions

  

Subsequent chargeoff of previously impaired credits

     —     
  

 

 

 

Balance, end of period

   $ 339   
  

 

 

 

The Company’s investment in Federal Home Loan Bank of Atlanta (“FHLB”) stock totaled $7.4 million at March 31, 2012 and December 31, 2011, respectively. FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Despite the FHLB’s temporary suspension of repurchases of excess capital stock for parts of 2010 and because the FHLB generated positive net income for each quarterly period beginning January 1, 2010 and ending March 31, 2012, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2012 and no impairment has been recognized. FHLB stock is included in a separate line item on the consolidated balance sheets (Restricted securities, at cost) and is not part of the Company’s securities available for sale portfolio.

 

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Table of Contents

Note 3. Loan Portfolio

The following table sets forth the composition of the Company’s loan portfolio in dollar amounts and as a percentage of the Company’s total gross loans at the dates indicated:

 

     March 31, 2012     December 31, 2011  

(dollars in thousands)

   Amount     Percent     Amount     Percent  

Commercial, industrial and agricultural

   $ 53,069        7.36   $ 57,021        7.76

Real estate - one to four family residential:

        

Closed end first and seconds

     251,095        34.82     253,465        34.51

Home equity lines

     103,233        14.32     102,297        13.93
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - one to four family residential

     354,328        49.14     355,762        48.44

Real estate - multifamily residential

     15,362        2.13     13,035        1.77

Real estate - construction:

        

One to four family residential

     21,508        2.98     21,212        2.89

Other construction, land development and other land

     36,646        5.08     42,208        5.75
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - construction

     58,154        8.06     63,420        8.64

Real estate - farmland

     5,535        0.77     5,860        0.80

Real estate - non-farm, non-residential:

        

Owner occupied

     130,453        18.09     135,294        18.42

Non-owner occupied

     77,508        10.75     74,231        10.11
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - non-farm, non-residential

     207,961        28.84     209,525        28.53

Consumer

     25,210        3.49     28,355        3.86

Other

     1,533        0.21     1,553        0.20
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     721,152        100.00     734,531        100.00
    

 

 

     

 

 

 

Less unearned income

     —            (1  

Less allowance for loan losses

     (23,141       (24,102  
  

 

 

     

 

 

   

Loans, net

   $ 698,011        $ 710,428     
  

 

 

     

 

 

   

The following table presents the aging of the recorded investment in past due loans as of March 31, 2012 by class of loans:

 

(dollars in thousands)

  30-59
Days Past
Due
    60-89
Days Past
Due
    Over 90
Days Past
Due
    Total Past
Due
    Total
Current*
    Total
Loans
 

Commercial, industrial and agricultural

  $ 614      $ 45      $ 995      $ 1,654      $ 51,415      $ 53,069   

Real estate - one to four family residential:

           

Closed end first and seconds

    6,063        1,308        4,102        11,473        239,622        251,095   

Home equity lines

    1,328        200        359        1,887        101,346        103,233   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - one to four family residential

    7,391        1,508        4,461        13,360        340,968        354,328   

Real estate - multifamily residential

    —          —          —          —          15,362        15,362   

Real estate - construction:

           

One to four family residential

    169        197        476        842        20,666        21,508   

Other construction, land development and other land

    —          8,167        582        8,749        27,897        36,646   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - construction

    169        8,364        1,058        9,591        48,563        58,154   

Real estate - farmland

    —          —          199        199        5,336        5,535   

Real estate - non-farm, non-residential:

           

Owner occupied

    424        836        1,507        2,767        127,686        130,453   

Non-owner occupied

    168        451        1,525        2,144        75,364        77,508   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - non-farm, non-residential

    592        1,287        3,032        4,911        203,050        207,961   

Consumer

    271        27        422        720        24,490        25,210   

Other

    14        —          —          14        1,519        1,533   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 9,051      $ 11,231      $ 10,167      $ 30,449      $ 690,703      $ 721,152   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* For purposes of this table only, the “Total Current” column includes loans that are 1-29 days past due.

 

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Table of Contents

The following table presents the aging of the recorded investment in past due loans as of December 31, 2011 by class of loans:

 

(dollars in thousands)

  30-59
Days Past
Due
    60-89
Days Past
Due
    Over 90
Days Past
Due
    Total Past
Due
    Total
Current*
    Total
Loans
 

Commercial, industrial and agricultural

  $ 491      $ 963      $ 677      $ 2,131      $ 54,890      $ 57,021   

Real estate - one to four family residential:

           

Closed end first and seconds

    5,045        1,475        5,245        11,765        241,700        253,465   

Home equity lines

    545        275        514        1,334        100,963        102,297   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - one to four family residential

    5,590        1,750        5,759        13,099        342,663        355,762   

Real estate - multifamily residential

    —          —          —          —          13,035        13,035   

Real estate - construction:

           

One to four family residential

    336        329        315        980        20,232        21,212   

Other construction, land development and other land

    48        —          3,965        4,013        38,195        42,208   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - construction

    384        329        4,280        4,993        58,427        63,420   

Real estate - farmland

    —          —          190        190        5,670        5,860   

Real estate - non-farm, non-residential:

           

Owner occupied

    603        —          3,545        4,148        131,146        135,294   

Non-owner occupied

    442        —          1,835        2,277        71,954        74,231   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - non-farm, non-residential

    1,045        —          5,380        6,425        203,100        209,525   

Consumer

    300        97        484        881        27,474        28,355   

Other

    —          14        —          14        1,539        1,553   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $   7,810      $   3,153      $ 16,770      $ 27,733      $ 706,798      $ 734,531   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* For purposes of this table only, the “Total Current” column includes loans that are 1-29 days past due.

The following table presents nonaccrual loans, loans past due 90 days and accruing interest, and restructured loans at the dates indicated:

 

(dollars in thousands)

   March 31,
2012
     December 31,
2011
 

Nonaccrual loans

   $ 22,012       $ 30,293   

Loans past due 90 days and accruing interest

     409         168   

Restructured loans (accruing)

     3,997         5,517   

At March 31, 2012 and December 31, 2011, there were approximately $9.7 million and $13.4 million, respectively, in troubled debt restructurings (“TDRs”) included in nonaccrual loans.

 

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Table of Contents

The following table presents the recorded investment in nonaccrual loans and loans past due 90 days and accruing interest by class at March 31, 2012 and December 31, 2011:

 

                   Over 90 Days Past  
     Nonaccrual      Due and Accruing  

(dollars in thousands)

   March 31,
2012
     December 31,
2011
     March 31,
2012
     December 31,
2011
 

Commercial, industrial and agricultural

   $ 1,208       $ 634       $ 42       $ 43   

Real estate - one to four family residential:

           

Closed end first and seconds

     8,344         9,320         79         —     

Home equity lines

     639         1,059         49         55   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate - one to four family residential

     8,983         10,379         128         55   

Real estate - construction:

           

One to four family residential

     735         444         —           —     

Other construction, land development and other land

     1,755         5,293         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate - construction

     2,490         5,737         —           —     

Real estate - farmland

     —           190         199         —     

Real estate - non-farm, non-residential:

           

Owner occupied

     5,651         6,707         —           —     

Non-owner occupied

     2,795         5,730         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate - non-farm, non-residential

     8,446         12,437         —           —     

Consumer

     885         916         40         70   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 22,012       $ 30,293       $ 409       $ 168   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents commercial loans by credit quality indicator at March 31, 2012:

 

(dollars in thousands)

  Pass     Special Mention     Substandard     Doubtful     Impaired     Total  

Commercial, industrial and agricultural

  $ 39,452      $ 7,705      $ 4,550      $ 283      $ 1,079      $ 53,069   

Real estate - multifamily residential

    14,221        1,141        —          —          —          15,362   

Real estate - construction:

           

One to four family residential

    19,219        678        757        174        680        21,508   

Other construction, land development and other land

    9,415        1,870        4,136        —          21,225        36,646   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - construction

    28,634        2,548        4,893        174        21,905        58,154   

Real estate - farmland

    4,178        960        397        —          —          5,535   

Real estate - non-farm, non-residential:

           

Owner occupied

    90,666        16,843        13,862        75        9,007        130,453   

Non-owner occupied

    44,152        16,873        7,454        —          9,029        77,508   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - non-farm, non-residential

    134,818        33,716        21,316        75        18,036        207,961   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans

  $ 221,303      $ 46,070      $ 31,156      $ 532      $ 41,020      $ 340,081   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

The following table presents commercial loans by credit quality indicator at December 31, 2011:

 

(dollars in thousands)

  Pass     Special Mention     Substandard     Doubtful     Impaired     Total  

Commercial, industrial and agricultural

  $ 43,559      $ 8,681      $ 4,344      $ 437      $ —        $ 57,021   

Real estate - multifamily residential

    12,742        293        —          —          —          13,035   

Real estate - construction:

           

One to four family residential

    19,802        327        532        —          551        21,212   

Other construction, land development and other land

    9,934        2,381        16,542        —          13,351        42,208   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - construction

    29,736        2,708        17,074        —          13,902        63,420   

Real estate - farmland

    4,492        354        1,014        —          —          5,860   

Real estate - non-farm, non-residential:

           

Owner occupied

    89,016        20,775        12,546        934        12,023        135,294   

Non-owner occupied

    45,448        10,511        6,784        2,720        8,768        74,231   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - non-farm, non-residential

    134,464        31,286        19,330        3,654        20,791        209,525   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial loans

  $ 224,993      $ 43,322      $ 41,762      $ 4,091      $ 34,693      $ 348,861   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At March 31, 2012 and December 31, 2011, the Company did not have any loans classified as Loss.

The following table presents consumer loans, including one to four family residential first and seconds and home equity lines, by payment activity at March 31, 2012:

 

(dollars in thousands)

   Performing      Nonperforming      Total  

Real estate - one to four family residential:

        

Closed end first and seconds

   $ 237,327       $ 13,768       $ 251,095   

Home equity lines

     102,874         359         103,233   
  

 

 

    

 

 

    

 

 

 

Total real estate - one to four family residential

     340,201         14,127         354,328   

Consumer

     24,788         422         25,210   

Other

     1,033         500         1,533   
  

 

 

    

 

 

    

 

 

 

Total consumer loans

   $ 366,022       $ 15,049       $ 381,071   
  

 

 

    

 

 

    

 

 

 

The following table presents consumer loans, including one to four family residential first and seconds and home equity lines, by payment activity at December 31, 2011:

 

(dollars in thousands)

   Performing      Nonperforming      Total  

Real estate - one to four family residential:

        

Closed end first and seconds

   $ 238,033       $ 15,432       $ 253,465   

Home equity lines

     101,783         514         102,297   
  

 

 

    

 

 

    

 

 

 

Total real estate - one to four family residential

     339,816         15,946         355,762   

Consumer

     27,794         561         28,355   

Other

     1,050         503         1,553   
  

 

 

    

 

 

    

 

 

 

Total consumer loans

   $ 368,660       $ 17,010       $ 385,670   
  

 

 

    

 

 

    

 

 

 

The following table summarizes the activity in the Company’s allowance for loan losses for the periods presented:

 

(dollars in thousands)

   Three Months Ended
March 31,

2012
    Twelve Months Ended
December 31,

2011
    Three Months Ended
March 31,

2011
 

Balance at beginning of period

   $ 24,102      $ 25,288      $ 25,288   

Provision charged against income

     2,900        8,800        2,000   

Recoveries of loans charged off

     454        805        233   

Loans charged off

     (4,315     (10,791     (1,193
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 23,141      $ 24,102      $ 26,328   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table presents a rollforward of the Company’s allowance for loan losses for the three months ended March 31, 2012:

 

(dollars in thousands)

  Beginning Balance
January 1, 2012
    Charge-offs     Recoveries     Provision     Ending Balance
March 31, 2012
 

Commercial, industrial and agricultural

  $ 4,389      $ (228   $ 379      $ (296   $ 4,244   

Real estate - one to four family residential:

         

Closed end first and seconds

    2,856        (350     5        215        2,726   

Home equity lines

    278        (322     —          428        384   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - one to four family residential

    3,134        (672     5        643        3,110   

Real estate - multifamily residential

    29        —          —          8        37   

Real estate - construction:

         

One to four family residential

    382        (4     17        54        449   

Other construction, land development and other land

    6,861        (1,520     —          (845     4,496   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - construction

    7,243        (1,524     17        (791     4,945   

Real estate - farmland

    15        —          —          (3     12   

Real estate - non-farm, non-residential:

         

Owner occupied

    4,831        (508     1        522        4,846   

Non-owner occupied

    3,172        (1,135     —          2,699        4,736   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - non-farm, non-residential

    8,003        (1,643     1        3,221        9,582   

Consumer

    776        (224     39        30        621   

Other

    513        (24     13        13        515   

Unallocated

    —          —          —          75        75   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 24,102      $ (4,315   $ 454      $ 2,900      $ 23,141   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class based on impairment method as of March 31, 2012:

 

    Allowance allocated to loans:     Total Loans:  

(dollars in thousands)

  Individually
evaluated for
impairment
    Collectively
evaluated for
impairment
    Total     Individually
evaluated for
impairment
    Collectively
evaluated for
impairment
    Total  

Commercial, industrial and agricultural

  $ 792      $ 3,452      $ 4,244      $ 1,079      $ 51,990      $ 53,069   

Real estate - one to four family residential:

           

Closed end first and seconds

    1,045        1,681        2,726        9,204        241,891        251,095   

Home equity lines

    —          384        384        462        102,771        103,233   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - one to four family residential

    1,045        2,065        3,110        9,666        344,662        354,328   

Real estate - multifamily residential

    —          37        37        —          15,362        15,362   

Real estate - construction:

           

One to four family residential

    170        279        449        680        20,828        21,508   

Other construction, land development and other land

    875        3,621        4,496        21,225        15,421        36,646   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - construction

    1,045        3,900        4,945        21,905        36,249        58,154   

Real estate - farmland

    —          12        12        —          5,535        5,535   

Real estate - non-farm, non-residential:

           

Owner occupied

    1,320        3,526        4,846        9,007        121,446        130,453   

Non-owner occupied

    2,005        2,731        4,736        9,029        68,479        77,508   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - non-farm, non-residential

    3,325        6,257        9,582        18,036        189,925        207,961   

Consumer

    —          621        621        —          25,210        25,210   

Other

    367        148        515        500        1,033        1,533   

Unallocated

    —          75        75        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 6,574      $ 16,567      $ 23,141      $ 51,186      $ 669,966      $ 721,152   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class based on impairment method as of December 31, 2011:

 

     Allowance allocated to loans:      Total Loans:  

(dollars in thousands)

   Individually
evaluated for
impairment
     Collectively
evaluated for
impairment
     Total      Individually
evaluated for
impairment
     Collectively
evaluated for
impairment
     Total  

Commercial, industrial and agricultural

   $ —         $ 4,389       $ 4,389       $ —         $ 57,021       $ 57,021   

Real estate - one to four family residential:

                 

Closed end first and seconds

     1,215         1,641         2,856         10,187         243,278         253,465   

Home equity lines

     —           278         278         —           102,297         102,297   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate - one to four family residential

     1,215         1,919         3,134         10,187         345,575         355,762   

Real estate - multifamily residential

     —           29         29         —           13,035         13,035   

Real estate - construction:

                 

One to four family residential

     96         286         382         551         20,661         21,212   

Other construction, land development and other land

     316         6,545         6,861         13,351         28,857         42,208   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate - construction

     412         6,831         7,243         13,902         49,518         63,420   

Real estate - farmland

     —           15         15         —           5,860         5,860   

Real estate - non-farm, non-residential:

                 

Owner occupied

     2,990         1,841         4,831         12,023         123,271         135,294   

Non-owner occupied

     1,311         1,861         3,172         8,768         65,463         74,231   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate - non-farm, non-residential

     4,301         3,702         8,003         20,791         188,734         209,525   

Consumer

     42         734         776         77         28,278         28,355   

Other

     380         133         513         503         1,050         1,553   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,350       $ 17,752       $ 24,102       $ 45,460       $ 689,071       $ 734,531   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of information pertaining to impaired loans as of and for the three months ended March 31, 2012 and as of and for the year ended December 31, 2011:

 

(dollars in thousands)

   March 31,
2012
     December 31,
2011
 

Impaired loans without a specific reserve

   $ 25,404       $ 18,097   

Impaired loans with a specific reserve

     25,782         27,363   
  

 

 

    

 

 

 

Allowance related to impaired loans

   $ 6,574       $ 6,350   
  

 

 

    

 

 

 

Average balance of impaired loans

   $ 52,562       $ 50,306   
  

 

 

    

 

 

 

Interest income recognized and collected on impaired loans

   $ 447       $ 2,051   
  

 

 

    

 

 

 

 

18


Table of Contents

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2012:

 

(dollars in thousands)

  Recorded
Investment
    Unpaid
Principal
Balance
    Recorded
Investment With
No Allowance
    Recorded
Investment With
Allowance
    Related
Allowance
    Average
Recorded
Investment
    Interest
Income
Recognized
 

Commercial, industrial and agricultural

  $ 1,079      $ 1,079      $ —        $ 1,079      $ 792      $ 416      $ 8   

Real estate - one to four family residential:

             

Closed end first and seconds

    9,204        9,723        1,580        7,624        1,045        9,022        108   

Home equity lines

    462        662        462        —          —          1,113        3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - one to four family residential

    9,666        10,385        2,042        7,624        1,045        10,135        111   

Real estate - construction:

             

One to four family residential

    680        680        422        258        170        583        1   

Other construction, land development and other land

    21,225        22,530        19,163        2,062        875        20,840        142   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - construction

    21,905        23,210        19,585        2,320        1,045        21,423        143   

Real estate - non-farm, non-residential:

             

Owner occupied

    9,007        11,375        2,361        6,646        1,320        11,237        82   

Non-owner occupied

    9,029        9,875        1,400        7,629        2,005        8,831        103   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - non-farm, non-residential

    18,036        21,250        3,761        14,275        3,325        20,068        185   

Consumer

    —          —          —          —          —          19        —     

Other

    500        500        16        484        367        501        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 51,186      $ 56,424      $ 25,404      $ 25,782      $ 6,574      $ 52,562      $ 447   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2011:

 

(dollars in thousands)

  Recorded
Investment
    Unpaid
Principal
Balance
    Recorded
Investment With
No Allowance
    Recorded
Investment With
Allowance
    Related
Allowance
    Average
Recorded
Investment
    Interest
Income
Recognized
 

Commercial, industrial and agricultural

  $ —        $ —        $ —        $ —        $ —        $ 400      $ —     

Real estate - one to four family residential:

             

Closed end first and seconds

    10,187        10,536        3,511        6,676        1,215        9,020        314   

Real estate - construction:

             

One to four family residential

    551        551        422        129        96        642        21   

Other construction, land development and other land

    13,351        15,525        12,249        1,102        316        16,393        709   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - construction

    13,902        16,076        12,671        1,231        412        17,035        730   

Real estate - non-farm, non-residential:

             

Owner occupied

    12,023        13,882        1,100        10,923        2,990        12,514        401   

Non-owner occupied

    8,768        9,585        798        7,970        1,311        11,060        602   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate - non-farm, non-residential

    20,791        23,467        1,898        18,893        4,301        23,574        1,003   

Consumer

    77        77        —          77        42        161        4   

Other

    503        503        17        486        380        116        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 45,460      $ 50,659      $ 18,097      $ 27,363      $ 6,350      $ 50,306      $ 2,051   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

The following table presents, by class of loans, information related to loans modified as TDRs during the three months ended March 31, 2012:

 

     Three Months Ended March 31, 2012  

(dollars in thousands)

   Number of
Loans
     Pre-Modification
Recorded Balance
     Post-Modification
Recorded Balance*
 

Real estate - construction:

        

One to four family residential

     1       $ 131       $ 131   
  

 

 

    

 

 

    

 

 

 

Total

     1       $ 131       $ 131   
  

 

 

    

 

 

    

 

 

 

 

* The period end balances are inclusive of all partial paydowns and charge-offs since the modification date. Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reported.

There were no loans modified as TDRs that subsequently defaulted (i.e., 90 days or more past due following a modification) during the three months ended March 31, 2012 and were modified as TDRs within the 12 months prior to default.

Note 4. Deferred Income Taxes

As of March 31, 2012 and December 31, 2011, the Company had recorded net deferred income tax assets of approximately $12.1 million and $12.2 million, respectively. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax asset will not be realized. “More likely than not” is defined as greater than a 50% chance. Management considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. Management’s assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to the Company’s core earnings capacity and its prospects to generate core earnings in the future. Projections of core earnings and taxable income are inherently subject to uncertainty and estimates that may change given the uncertain economic outlook, banking industry conditions and other factors. Further, management has considered future reversals of existing taxable temporary differences and limited prudent and feasible tax-planning strategies, such as, changes in investment security income (tax-exempt to taxable), additional sales of loans and sales of branches/buildings with an appreciated asset value over the tax basis. Based upon an analysis of available evidence, management has determined that it is “more likely than not” that the Company’s deferred income tax assets as of March 31, 2012 will be fully realized and therefore no valuation allowance to the Company’s deferred income tax assets was recorded. However, the Company can give no assurance that in the future its deferred income tax assets will not be impaired because such determination is based on projections of future earnings and the possible effect of certain transactions, which are subject to uncertainty and based on estimates that may change due to changing economic conditions and other factors. Due to the uncertainty of estimates and projections, it is possible that the Company will be required to record adjustments to the valuation allowance in future reporting periods.

Due primarily to the net operating loss incurred for the years ended December 31, 2010 and 2009, the Company has recorded income taxes receivable, which have been carried back to prior years, of approximately $2.6 million at March 31, 2012 and December 31, 2011, which are included in other assets on the accompanying consolidated balance sheets.

 

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Table of Contents

Note 5. Bank Premises and Equipment

Bank premises and equipment are summarized as follows:

 

(dollars in thousands)    March 31,
2012
    December 31,
2011
 

Land and improvements

   $ 6,009      $ 6,009   

Buildings and leasehold improvements

     20,368        20,556   

Furniture, fixtures and equipment

     17,898        17,530   

Construction in progress

     292        94   
  

 

 

   

 

 

 
     44,567        44,189   

Less accumulated depreciation

     (24,503     (24,135
  

 

 

   

 

 

 

Net balance

   $ 20,064      $ 20,054   
  

 

 

   

 

 

 

Depreciation and amortization of bank premises and equipment for the three months ended March 31, 2012 and 2011 amounted to $547 thousand and $519 thousand, respectively.

Note 6. Borrowings

Federal funds purchased and repurchase agreements. The Company has unsecured lines of credit with SunTrust Bank, Community Bankers Bank and Pacific Coast Bankers Bank for the purchase of federal funds in the amount of $20.0 million, $15.0 million and $5.0 million, respectively. These lines of credit have a variable rate based on the lending bank’s daily federal funds sold and are due on demand. Repurchase agreements are secured transactions and generally mature the day following the day sold. Customer repurchases are standard transactions that involve a Bank customer instead of a wholesale bank or broker. The Company offers this product as an accommodation to larger retail and commercial customers that request safety for their funds beyond the FDIC deposit insurance limits. The Company does not use or have any open repurchase agreements with broker-dealers.

The tables below present selected information on federal funds purchased and repurchase agreements during the three months ended March 31, 2012 and the year ended December 31, 2011:

 

Federal funds purchased

(dollars in thousands)

   March 31,
2012
    December 31,
2011
 

Balance outstanding at period end

   $ 1      $ —     

Maximum balance at any month end during the period

   $ 1      $ 2   

Average balance for the period

   $ 338      $ 57   

Weighted average rate for the period

     0.74     0.86

Weighted average rate at period end

     1.00     0.00

 

Repurchase agreements

(dollars in thousands)

   March 31,
2012
    December 31,
2011
 

Balance outstanding at period end

   $ 2,143      $ 4,003   

Maximum balance at any month end during the period

   $ 2,296      $ 4,984   

Average balance for the period

   $ 2,446      $ 3,072   

Weighted average rate for the period

     0.99     1.11

Weighted average rate at period end

     0.92     1.09

Short-term borrowings. Short-term borrowings consist of advances from the FHLB using a daily rate credit and due on demand. These advances are secured by a blanket floating lien on all qualifying closed-end and revolving open-end loans that are secured by 1-4 family residential properties.

 

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The table below presents selected information on short-term borrowings during the three months ended March 31, 2012 and the year ended December 31, 2011:

 

Short-term borrowings

(dollars in thousands)

   March 31,
2012
    December 31,
2011
 

Balance outstanding at period end

   $ —        $ —     

Maximum balance at any month end during the period

   $ —        $ 10,325   

Average balance for the period

   $ —        $ 1,878   

Weighted average rate for the period

     0.00     0.43

Weighted average rate at period end

     0.00     0.00

Long-term borrowings. Long-term borrowings consist of advances from the FHLB, which are secured by a blanket floating lien on all qualifying closed-end and revolving open-end loans that are secured by 1-4 family residential properties. Long-term advances from the FHLB at March 31, 2012 and December 31, 2011 consisted of $107.5 million in convertible advances and a $10.0 million fixed rate hybrid advance, respectively. The convertible advances have fixed rates of interest unless the FHLB exercises its option to convert the interest on these advances from fixed rate to variable rate.

The table below shows the year of maturity and potential call dates of long-term FHLB advances as of March 31, 2012. All of the convertible advances have a call provision.

 

(dollars in thousands)

   Maturity
Amount
     Average
Rate
    Callable
Amount
     Average
Rate
 

2012

   $ —           —        $ 94,000         4.18

2013

     10,000         2.42     —        

2015

     13,500         3.87     —           —     

2016

     10,000         4.85     —           —     

2017

     75,000         4.30     —           —     

2018

     9,000         2.44     —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 117,500         4.00   $ 94,000         4.18
  

 

 

      

 

 

    

The Company’s line of credit with the FHLB can equal up to 25% of the Company’s assets or approximately $265.4 million at March 31, 2012. This line of credit totaled $178.0 million with approximately $54.4 million available at March 31, 2012. As of March 31, 2012 and December 31, 2011, loans with a carrying value of $303.5 million and $300.1 million, respectively, are pledged to the FHLB as collateral for borrowings. Additional loans are available that can be pledged as collateral for future borrowings from the FHLB above the current lendable collateral value. Combined long-term borrowings outstanding under the FHLB line of credit was $117.5 million at March 31, 2012 and December 31, 2011.

Note 7. Earnings Per Common Share

The following table shows the weighted average number of common shares used in computing earnings per common share and the effect on the weighted average number of shares of potential dilutive common stock for the three months ended March 31, 2012 and 2011. Potential dilutive common stock had no effect on earnings per common share otherwise available to common shareholders for the three months ended March 31, 2012 and 2011.

 

     Three Months Ended  
     March 31, 2012      March 31, 2011  
     Shares      Per Share
Amount
     Shares      Per Share
Amount
 

Basic earnings per common share

     6,029,041       $ 0.07         5,995,907       $ 0.02   

Effect of dilutive securities, stock options

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

     6,029,041       $ 0.07         5,995,907       $ 0.02   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

At March 31, 2012 and 2011, options to acquire 216,442 and 251,137 shares of common stock, respectively were not included in computing diluted earnings per common share because their effects were anti-dilutive.

Note 8. Stock Based Compensation Plans

On September 21, 2000, the Company adopted the Eastern Virginia Bankshares, Inc. 2000 Stock Option Plan (the “2000 Plan”) to provide a means for selected key employees and directors to increase their personal financial interest in the Company, thereby stimulating their efforts and strengthening their desire to remain with the Company. Under the 2000 Plan, up to 400,000 shares of Company common stock could be granted in the form of stock options. On April 17, 2003, the shareholders approved the Eastern Virginia Bankshares, Inc. 2003 Stock Incentive Plan, amending and restating the 2000 Plan (the “2003 Plan”) still authorizing the issuance of up to 400,000 shares of common stock under the plan, but expanding the award types available under the plan to include stock options, stock appreciation rights, common stock, restricted stock and phantom stock. There are 97,813 shares still available to be granted as awards under the 2003 Plan.

On April 19, 2007, the Company’s shareholders approved the Eastern Virginia Bankshares, Inc. 2007 Equity Compensation Plan (the “2007 Plan”) to enhance the Company’s ability to recruit and retain officers, directors, employees, consultants and advisors with ability and initiative and to encourage such persons to have a greater financial interest in the Company. The 2007 Plan authorizes the Company to issue up to 400,000 additional shares of common stock pursuant to grants of stock options, stock appreciation rights, common stock, restricted stock, performance shares, incentive awards and stock units. No awards have been issued under the 2007 Plan.

Accounting standards require companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options, based on the fair value of those awards at the date of grant.

Accounting standards also require that new awards to employees eligible for retirement prior to the awards becoming fully vested be recognized as compensation cost over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. The Company’s stock options granted to eligible participants are being recognized, as required, as compensation cost over the vesting period except in the instance where a participant reaches normal retirement age of 65 prior to the normal vesting date. For the three months ended March 31, 2012 and 2011, stock option compensation expense was $11 thousand and $27 thousand, respectively, and was included in salaries and employee benefits expense in the consolidated statements of income.

Stock option compensation expense is the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period for each stock option award. There were no stock options granted or exercised in the three months ended March 31, 2012 and 2011.

A summary of the Company’s stock option activity and related information for the three months ended March 31, 2012 is as follows:

 

     Options
Outstanding
    Weighted Average
Exercise Price
     Remaining
Contractual Life
(in years)
     Aggregate
Intrinsic Value
(in thousands)
 

Stock options outstanding at January 1, 2012

     218,442      $ 19.86         

Forfeited

     (2,000     20.30         
  

 

 

   

 

 

       

Stock options outstanding at March 31, 2012

     216,442      $ 19.86         3.92       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Stock options exercisable at March 31, 2012

     189,192      $ 20.94         3.40       $ —     
  

 

 

   

 

 

    

 

 

    

 

 

 

 

* Intrinsic value is the amount by which the fair value of the underlying common stock exceeds the exercise price of a stock option on exercise date.

As of March 31, 2012, there was $19 thousand of unrecognized compensation expense related to stock options that will be recognized over the remaining requisite average service period of approximately 6 months.

 

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Table of Contents

The table below summarizes information concerning stock options outstanding and exercisable at March 31, 2012:

 

Stock Options Outstanding      Stock Options Exercisable  
Exercise
Price
     Number
Outstanding
     Weighted
Average
Remaining
Term
     Exercise
Price
     Number
Exercisable
 
           
$ 16.10         17,530         0.00 years       $ 16.10         17,530   
$ 28.60         22,725         1.50 years       $ 28.60         22,725   
$ 19.92         32,200         2.25 years       $ 19.92         32,200   
$ 20.57         42,412         3.25 years       $ 20.57         42,412   
$ 21.16         44,325         4.50 years       $ 21.16         44,325   
$ 19.25         30,000         5.50 years       $ 19.25         30,000   
$ 12.36         27,250         6.50 years       $ —           —     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
$ 19.86         216,442         3.92 years       $ 20.94         189,192   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For the three months ended March 31, 2012 and 2011, the Company issued no restricted stock. On December 16, 2010, the Company cancelled 8,000 shares of restricted stock previously awarded to its Chief Executive Officer on July 1, 2009 as the award did not contain the terms necessary to comply with the TARP executive compensation limits and therefore prevented the employee from accruing or vesting in any portion of the award to date. In conjunction with this cancellation, the Company granted a TARP compliant restricted stock award to its Chief Executive Officer in an equal amount of shares and in substantially the same form as previously awarded. On July 1, 2009, the Company awarded 18,000 shares of restricted stock to employees. One half of these shares are subject to time vesting at 20% per year over a five year period. The other half of these restricted stock awards is performance based and will vest on June 30, 2012 if, and only if, the year ended December 31, 2011 financial achievements of the Company meet pre-specified targets for earnings per share or return on equity compared to a board compensation committee defined peer group. Performance based vesting is based on a sliding scale at various levels for performance at or above the 50th percentile of the peer group performance.

For the three months ended March 31, 2012 and 2011, restricted stock compensation expense was $3 thousand and $5 thousand, respectively, and was included in salaries and employee benefits expense in the consolidated statements of income. Restricted stock compensation expense is accounted for using the fair market value of the Company’s common stock on the date the restricted shares were awarded, which was $3.75 per share for the 2010 award and $8.31 per share for the 2009 awards.

A summary of the status of the Company’s nonvested shares in relation to the Company’s restricted stock awards as of March 31, 2012, and changes during the three months ended March 31, 2012 is presented below; the weighted average price is the weighted average fair value at the date of grant:

 

     Shares      Weighted-Average
Price
 

Nonvested as of January 1, 2012

     14,500       $ 6.35   

Granted

     —           —     

Vested

     —           —     

Forfeited

     —           —     
  

 

 

    

 

 

 

Nonvested as of March 31, 2012

     14,500       $ 6.35   
  

 

 

    

 

 

 

At March 31, 2012, there was $10 thousand of total unrecognized compensation expense related to restricted stock awards. This unearned compensation is being amortized over the remaining vesting period for the time based shares, and over the remaining vesting period for 1/3rd of the 2009 performance based shares. The Company assumes that only 1/3rd of the 2009 performance based awards will vest.

 

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Table of Contents

Note 9. Employee Benefit Plan – Pension

The Company has historically maintained a defined benefit pension plan. The plan was amended January 28, 2008 to freeze the plan with no additional contributions for a majority of participants. Employees age 55 or greater or with 10 years of credited service were grandfathered in the plan. No additional participants have been added to the plan. The plan was again amended on February 28, 2011 to freeze the plan with no additional contributions for grandfathered participants. Benefits for all participants have remained frozen in the plan since such action was taken. Effective January 1, 2012, the plan was amended and restated as a cash balance plan. Under a cash balance plan, participant benefits are stated as an account balance. An opening account balance was established for each participant based on the lump sum value of his or her accrued benefit as of December 31, 2011 in the original defined benefit pension plan. Each participants account will be credited with an “interest” credit each year. The interest rate for each year is determined as the average annual interest rate on the 2 year U.S. Treasury securities for the month of December preceding the plan year. The interest credit for the 2012 plan year will be approximately 0.76%. Components of net periodic pension cost (benefit) related to the Company’s pension plan were as follows for the periods indicated:

 

     Three Months Ended
March 31,
 

(dollars in thousands)

   2012     2011  

Components of Net Periodic Pension Cost (Benefit)

    

Interest cost

   $ 123      $ 151   

Expected return on plan assets

     (169     (224

Amortization of prior service cost

     2        —     

Recognized net actuarial loss

     31        —     
  

 

 

   

 

 

 

Net periodic pension cost (benefit)

   $ (13   $ (73
  

 

 

   

 

 

 

The Company made no contributions to the pension plan during 2011. The Company has not determined at this time how much, if any, contributions to the plan will be made for the year ended December 31, 2012.

Note 10. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. U.S. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:

 

   

Level 1 – Valuation is based upon quoted prices (unadjusted) 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 or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

   

Level 3 – Valuation is determined using model-based techniques with significant assumptions not observable in the market.

U.S. GAAP allows an entity the irrevocable option to elect fair value (the fair value option) for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company has not made any fair value option elections as of March 31, 2012.

 

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Table of Contents

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Assets Measured at Fair Value on a Recurring Basis

Securities Available For Sale. Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2). The Company obtains a single quote for all securities. Quotes for most securities are provided by the Company’s securities accounting and safekeeping correspondent bank which uses Reuters for securities other than municipals for which they use a pricing matrix. The correspondent also uses securities trader quotations for a small number of securities. Securities pricing for a single pooled trust preferred senior security is provided through another correspondent by Moody’s Analytics. The Company does not adjust any quotes or prices provided by these third party sources. The Company performs a review of pricing data by comparing prices received from third party vendors to the previous month’s quote for the same security and evaluates any substantial changes.

The following table summarizes financial assets measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

$000000000000 $000000000000 $000000000000 $000000000000

Assets Measured at Fair Value on a Recurring Basis at March 31, 2012 Using

 
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Balance at
March 31,
2012
 
     (dollars in thousands)  

Assets

           

Securities available for sale

           

SBA Pool securities

   $                     —         $           58,970       $ —         $       58,970   

Agency mortgage-backed securities

     —           50,901         —           50,901   

Agency CMO securities

     —           84,527         —           84,527   

Non agency CMO securities

     —           8,781         —           8,781   

State and political subdivisions

     —           50,072         —           50,072   

Pooled trust preferred securities

     —           709         —           709   

FNMA and FHLMC preferred stock

     —           178         —           178   

Corporate securities

     —           606         —           606   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ —         $ 254,744       $ —         $ 254,744   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
$000000000000 $000000000000 $000000000000 $000000000000

Assets Measured at Fair Value on a Recurring Basis at December 31, 2011 Using

 
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Balance at
December 31,
2011
 
     (dollars in thousands)  

Assets

           

Securities available for sale

           

SBA Pool securities

   $                     —         $           61,082       $ —         $       61,082   

Agency mortgage-backed securities

     —           41,063         —           41,063   

Agency CMO securities

     —           61,734         —           61,734   

Non agency CMO securities

     —           10,820         —           10,820   

State and political subdivisions

     —           60,732         —           60,732   

Pooled trust preferred securities

     —           602         —           602   

FNMA and FHLMC preferred stock

     —           186         —           186   

Corporate securities

     —           601         —           601   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ —         $ 236,820       $ —         $ 236,820   
  

 

 

    

 

 

    

 

 

    

 

 

 

Assets Measured at Fair Value on a Non-Recurring Basis

Certain assets are measured at fair value on a non-recurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from the application of lower-of-cost-or-fair value accounting or impairment write-downs of individual assets.

Impaired Loans. Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that some portion of the amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed external appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. If a real estate loan becomes a nonperforming loan, and the valuation is over one year old, either an evaluation by an officer of the bank or an outside vendor or an appraisal is performed to determine current market value. The Company considers the value of a partially completed project for the loan analysis. For nonperforming construction loans, the Company obtains a valuation of each partially completed project “as is” from a third party appraiser. The Company uses this third party valuation to determine if any charge-offs are necessary.

The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a non-recurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of income.

Other Real Estate Owned. Certain assets such as other real estate owned (“OREO”) are measured at fair value less cost to sell. The fair value of other real estate owned is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed external appraiser using observable market data (Level 2). However, if the other real estate is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The estimated fair value is reviewed periodically by management and any write-downs are charged against current earnings. The Company believes that the fair value component in the Company’s valuation of OREO follows the provisions of accounting standards.

 

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Table of Contents

The following table summarizes assets measured at fair value on a non-recurring basis as of March 31, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

 

$000000000000 $000000000000 $000000000000 $000000000000

Assets Measured at Fair Value on a Non-Recurring Basis at March 31, 2012 Using

 
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Balance at
March 31,
2012
 
     (dollars in thousands)  

Assets

           

Impaired loans

   $                     —         $           17,932       $ 1,276       $       19,208   

Other real estate owned

   $ —         $ 5,413       $ 537       $ 5,950   

 

$000000000000