XNAS:USBI United Security Bancshares Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 0-14549

 

 

United Security Bancshares, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   63-0843362

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

131 West Front Street

Post Office Box 249

Thomasville, AL

  36784
(Address of Principal Executive Offices)   (Zip Code)

(334) 636-5424

(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 Regulations 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 (Check one):

 

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

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

 

Class

 

Outstanding at August 10, 2012

Common Stock, $0.01 par value   6,017,732 shares

 

 

 


Table of Contents

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

 

         PAGE  
  PART I. FINANCIAL INFORMATION   

ITEM 1.

  FINANCIAL STATEMENTS   

Condensed Consolidated Statements of Financial Condition at June  30, 2012 (Unaudited) and December 31, 2011

     4   

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June  30, 2012 and 2011 (Unaudited)

     5   

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

     6   

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

     7   

Notes to Condensed Consolidated Financial Statements (Unaudited)

     8   

ITEM 2.

  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      30   

ITEM 3.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      34   

ITEM 4.

  CONTROLS AND PROCEDURES      35   
  PART II. OTHER INFORMATION   

ITEM 1.

  LEGAL PROCEEDINGS      35   

ITEM 1A.

  RISK FACTORS      36   

ITEM 2.

  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      36   

ITEM 6.

  EXHIBITS      36   

Signature Page

     36   

 

2


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FORWARD-LOOKING STATEMENTS

Statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In addition, United Security Bancshares, Inc. and its subsidiaries (the “Company” or “USBI”), through its senior management, from time to time makes forward-looking statements concerning its expected future operations and performance and other developments. The words “estimate,” “project,” “intend,” “anticipate,” “expect,” “believe” and similar expressions are indicative of forward-looking statements. Such forward-looking statements are necessarily estimates reflecting the Company’s best judgment based upon current information and involve a number of risks and uncertainties, and various factors could cause results to differ materially from those contemplated by such forward-looking statements. Such factors could include those identified from time to time in the Company’s Securities and Exchange Commission (“SEC”) filings and other public announcements, including the risk factors described in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. With respect to the adequacy of the allowance for loan losses for the Company, these factors include, but are not limited to, the rate of growth (or lack thereof) in the economy, the relative strength and weakness in the consumer and commercial credit sectors and in the real estate markets and collateral values. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to revise forward-looking statements to reflect circumstances or events that occur after the dates on which the forward-looking statements are made, except as required by law.

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in Thousands, Except Per Share Data)

 

     June 30,
2012
    December 31,
2011
 
     (Unaudited)        
ASSETS   

Cash and Due from Banks

   $ 11,992      $ 9,491   

Interest Bearing Deposits in Banks

     62,809        43,306   
  

 

 

   

 

 

 

Total Cash and Cash Equivalents

     74,801        52,797   

Investment Securities Available-for-Sale, at fair market value

     107,457        122,170   

Investment Securities Held-to-Maturity, at cost

     5,163        1,170   

Federal Home Loan Bank Stock, at cost

     1,418        2,861   

Loans, net of allowance for loan losses of $20,154 and $22,267, respectively

     355,411        381,085   

Premises and Equipment, net

     9,040        9,050   

Cash Surrender Value of Bank-Owned Life Insurance

     13,116        12,922   

Accrued Interest Receivable

     3,370        3,958   

Investment in Limited Partnerships

     1,416        1,456   

Other Real Estate Owned

     15,005        16,774   

Other Assets

     17,088        17,567   
  

 

 

   

 

 

 

Total Assets

   $ 603,285      $ 621,810   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Deposits

   $ 527,247      $ 527,073   

Accrued Interest Expense

     574        790   

Short-Term Borrowings

     714        356   

Long-Term Debt

     —          20,000   

Other Liabilities

     8,009        7,384   
  

 

 

   

 

 

 

Total Liabilities

     536,544        555,603   
  

 

 

   

 

 

 

Commitments and Contingencies (See Note 13)

    

Shareholders’ Equity:

    

Common Stock, par value $0.01 per share, 10,000,000 shares authorized; 7,322,560 shares issued; 6,017,732 and 6,015,737 shares outstanding, respectively

     73        73   

Surplus

     9,259        9,259   

Accumulated Other Comprehensive Income, net of tax

     3,347        3,004   

Retained Earnings

     75,224        75,091   

Less Treasury Stock: 1,304,828 and 1,306,823 shares at cost, respectively

     (21,150     (21,208

Noncontrolling Interest

     (12     (12
  

 

 

   

 

 

 

Total Shareholders’ Equity

     66,741        66,207   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 603,285      $ 621,810   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Statements.

 

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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Data)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012      2011     2012     2011  
     (Unaudited)     (Unaudited)  

INTEREST INCOME:

         

Interest and Fees on Loans

   $ 8,883       $ 9,270      $ 17,966      $ 18,357   

Interest on Investment Securities

     865         1,337        1,792        2,694   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Interest Income

     9,748         10,607        19,758        21,051   

INTEREST EXPENSE:

         

Interest on Deposits

     1,147         1,579        2,522        3,176   

Interest on Borrowings

     30         200        115        470   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Interest Expense

     1,177         1,779        2,637        3,646   
  

 

 

    

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME

     8,571         8,828        17,121        17,405   

PROVISION FOR LOAN LOSSES

     468         1,609        2,683        2,914   
  

 

 

    

 

 

   

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     8,103         7,219        14,438        14,491   

NON-INTEREST INCOME:

         

Service and Other Charges on Deposit Accounts

     603         722        1,231        1,438   

Credit Life Insurance Income

     222         218        341        340   

Other Income

     506         1,256        1,033        1,607   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Non-Interest Income

     1,331         2,196        2,605        3,385   

NON-INTEREST EXPENSE:

         

Salaries and Employee Benefits

     3,714         3,851        7,479        7,421   

Occupancy Expense

     480         467        928        943   

Furniture and Equipment Expense

     343         317        653        620   

Impairment on Other Real Estate

     30         402        2,864        886   

Loss on Sale of Other Real Estate

     266         169        460        508   

Other Expense

     2,607         2,945        4,886        5,208   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Non-Interest Expense

     7,440         8,151        17,270        15,586   
  

 

 

    

 

 

   

 

 

   

 

 

 

INCOME (LOSS) BEFORE INCOME TAXES

     1,994         1,264        (227     2,290   

PROVISION FOR (BENEFIT FROM) INCOME TAXES

     623         361        (360     568   
  

 

 

    

 

 

   

 

 

   

 

 

 

NET INCOME

   $ 1,371       $ 903      $ 133      $ 1,722   
  

 

 

    

 

 

   

 

 

   

 

 

 

Less: Net Loss Attributable to Noncontrolling Interest

     —           (1     —          (1
  

 

 

    

 

 

   

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO USBI

   $ 1,371       $ 904      $ 133      $ 1,723   
  

 

 

    

 

 

   

 

 

   

 

 

 

BASIC AND DILUTED NET INCOME ATTRIBUTABLE TO USBI PER SHARE

   $ 0.23       $ 0.15      $ 0.02      $ 0.29   
  

 

 

    

 

 

   

 

 

   

 

 

 

DIVIDENDS PER SHARE

   $ —         $ —        $ —        $ 0.04   
  

 

 

    

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Statements.

 

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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in Thousands)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012      2011     2012      2011  
     (Unaudited)     (Unaudited)  

Net income attributable to USBI

   $ 1,371       $ 904      $ 133       $ 1,723   
  

 

 

    

 

 

   

 

 

    

 

 

 

Other comprehensive income:

          

Change in unrealized holding gains on available-for-sale securities arising during period, net of tax of $246, $364, $205 and $459, respectively

     410         608        342         766   

Reclassification adjustment for net gains realized on available-for-sale securities realized in net income, net of tax of $-, $150, $- and $150, respectively

     —           (251     —           (251
  

 

 

    

 

 

   

 

 

    

 

 

 

Other comprehensive income

     410         357        342         515   
  

 

 

    

 

 

   

 

 

    

 

 

 

Comprehensive income attributable to USBI

   $ 1,781       $ 1,261      $ 475       $ 2,238   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net loss attributable to noncontrolling interest

     —           (1     —           (1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total comprehensive income

   $ 1,781       $ 1,260      $ 475       $ 2,237   
  

 

 

    

 

 

   

 

 

    

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Statements.

 

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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)

 

     Six Months Ended  
     June 30,  
     2012     2011  
     (Unaudited)  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 133      $ 1,722   

Less net loss attributable to noncontrolling interest

     —          (1
  

 

 

   

 

 

 

Net income attributable to USBI

   $ 133      $ 1,723   

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

    

Depreciation

     360        350   

Amortization of premiums and discounts, net

     607        385   

Provision for loan losses

     2,683        2,914   

Gain on sale of securities, net

     —          (401

Impairment of OREO

     2,863        886   

Loss on sale of OREO

     460        508   

Net other operating activities

     1,055        1,995   
  

 

 

   

 

 

 

Total adjustments

     8,028        6,637   
  

 

 

   

 

 

 

Net cash provided by operating activities

     8,161        8,360   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from maturities and prepayments of investment securities, available for sale

     22,911        23,248   

Proceeds from maturities and prepayments of investment securities, held to maturity

     1,170        —     

Proceeds from sales of investment securities

     —          6,178   

Proceeds from redemption of Federal Home Loan Bank stock

     1,444        1,059   

Proceeds from the sale of other real estate

     1,633        2,721   

Purchase of premises and equipment, net

     (289     (300

Purchase of investment securities available-for-sale

     (8,258     (28,895

Purchase of investment securities held-to-maturity

     (5,161     —     

Net change in loan portfolio

     19,803        (9,841

Net effect of deconsolidating of variable interest entity

     —          5,010   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     33,253        (820
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase in customer deposits

     174        21,174   

Dividends paid

     —          (241

Decrease in borrowings

     (19,642     (9,859

Purchase of treasury stock

     —          (3

Reissuance of treasury stock

     58        —     
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (19,410     11,071   
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     22,004        18,611   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, beginning of period

     52,797        13,531   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, end of period

   $ 74,801      $ 32,142   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES:

    

Cash paid for:

    

Interest

   $ 2,853      $ 5,242   

Income Taxes

     82        498   

NON-CASH TRANSACTIONS:

    

Other real estate acquired in settlement of loans

   $ 3,187      $ 3,754   

The accompanying notes are an integral part of these Condensed Consolidated Statements.

 

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UNITED SECURITY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. GENERAL

The accompanying unaudited interim condensed consolidated financial statements include the accounts of United Security Bancshares, Inc. and its subsidiaries (the “Company” or “USBI”). The Company is the parent holding company of First United Security Bank (the “Bank” or “FUSB”). The Bank operates a finance company, Acceptance Loan Company, Inc. (“ALC”). All significant intercompany transactions and accounts have been eliminated.

The unaudited interim condensed consolidated financial statements, in the opinion of management, reflect all adjustments necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the periods presented. Such adjustments are of a normal, recurring nature. The results of operations for any interim period are not necessarily indicative of results expected for the fiscal year ending December 31, 2012. While certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), management believes that the disclosures herein are adequate to make the condensed consolidated information presented not misleading. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The accounting policies followed by the Company are set forth in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. In preparing the unaudited interim condensed consolidated financial statements, management evaluated subsequent events through the date on which the unaudited interim condensed consolidated financial statements were issued.

 

2. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The standards set forth in ASU 2011-04 supersede most of the accounting guidance currently found in Topic 820 of FASB’s Accounting Standards Codification (“ASC”) and previously known as Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. The amendments will improve comparability of fair value measurements presented and disclosed in financial statements prepared with GAAP and International Financial Reporting Standards (“IFRS”). The amendments also clarify the application of existing fair value measurement requirements. These amendments include (1) the application of the highest and best use and valuation premise concepts, (2) measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity and (3) disclosing quantitative information about the unobservable inputs used within the Level 3 hierarchy. This ASU became effective for the Company’s interim and annual periods beginning after December 15, 2011, and did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. See Note 5 for the newly-required disclosures.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends existing standards to allow an entity the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both options, an entity is required to present each component of net income along with total net income; each component

 

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of other comprehensive income along with a total for other comprehensive income; and a total amount for comprehensive income. Any changes pursuant to the options allowed in the amendments should be applied retrospectively. This guidance is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2011. The Company adopted this new guidance with first quarter 2012 financial reporting. In January 2012, the FASB issued accounting guidance that indefinitely defers the effective date of certain provisions concerning the presentation of comprehensive income. The guidance indefinitely defers the requirement to present reclassification adjustments by component in both the statement where net income is presented and the statement where other comprehensive income is presented. See the condensed consolidated statements of comprehensive income for further details.

In December 2011, the FASB issued ASU 2011-11 Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The amendments in this Update affect all entities that have financial instruments and derivative instruments that are either (1) offset in accordance with either ASC 210-20-45 or ASC 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements amend the disclosure requirements on offsetting in ASC 210-20-50. This information will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments in the scope of this Update. 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 is evaluating the impact that adoption will have on its consolidated financial statements.

 

3. NET INCOME ATTRIBUTABLE TO USBI PER SHARE

Basic net income attributable to USBI per share is computed by dividing net income attributable to USBI by the weighted average shares during the three- and six-month periods ended June 30, 2012 and 2011. Diluted net income attributable to USBI per share for each of the three- and six-month periods ended June 30, 2012 and 2011 is computed based on the weighted average shares outstanding during the period plus the dilutive effect of all potentially dilutive instruments outstanding. There were no outstanding potentially dilutive instruments during the three- and six-month periods ended June 30, 2012 or 2011, and, therefore, basic and diluted weighted average shares outstanding were the same.

The following table represents the basic and diluted net income attributable to USBI per share calculations for the three- and six-month periods ended June 30, 2012 and 2011 (dollars in thousands, except per share data):

 

                   Basic and  
                   Diluted Net  
            Weighted      Income  
     Net Income      Average      Attributable  
     Attributable      Shares      to USBI  
     to USBI      Outstanding      Per Share  

For the Three Months Ended:

        

June 30, 2012

   $ 1,371         6,017,732       $ 0.23   

June 30, 2011

   $ 904         6,010,749       $ 0.15   

For the Six Months Ended:

        

June 30, 2012

   $ 133         6,017,410       $ 0.02   

June 30, 2011

   $ 1,723         6,010,803       $ 0.29   

 

4. COMPREHENSIVE INCOME

Comprehensive income consists of net income attributable to USBI and the change in the unrealized gains or losses on the Company’s available-for-sale securities portfolio arising during the period. In the calculation of comprehensive income, certain reclassification adjustments are made to avoid double counting items that are displayed as part of net income for a period that also had been displayed as part of other comprehensive income in that period or earlier periods.

 

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company follows the provisions of ASC Topic 820 Fair Value Measurements and Disclosures which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

 

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ASC Topic 820 requires disclosure of fair value information about financial instruments, whether or not recognized on the face of the consolidated statements of financial condition, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather represent a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. In determining fair value, the Company uses various methods, including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

 

   

Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes equity securities in banks that are publicly traded. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

 

   

Level 2 — Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.

 

   

Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

Cash, due from banks and federal funds sold: The carrying amount of cash, due from banks and federal funds sold approximates fair value.

Federal Home Loan Bank: Based on the redemption provision of the Federal Home Loan Bank (“FHLB”), the stock has no quoted market value and is carried at cost.

Securities: Fair values of securities are based on quoted market prices where available. If quoted market prices are not available, estimated fair values are based on market prices of comparable instruments.

Accrued interest: The carrying amount of accrued interest approximates fair value.

Loans, net: For variable-rate loans, fair values are based on carrying values. Fixed-rate commercial loans, other installment loans and certain real estate mortgage loans were valued using discounted cash flows. The discount rate used to determine the present value of these loans is based on interest rates currently being charged by the Company on comparable loans as to credit risk and term.

Demand and savings deposits: The fair values of demand deposits are equal to the carrying value of such deposits. Demand deposits include non-interest bearing demand deposits, savings accounts, NOW accounts and money market demand accounts.

Time deposits: The fair values of relatively short-term time deposits are equal to their carrying values. Discounted cash flows are used to value long-term time deposits. The discount rate used is based on interest rates currently being offered by the Company on comparable deposits as to amount and term.

 

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Short-term borrowings: These borrowings may consist of federal funds purchased, securities sold under agreements to repurchase, and the floating rate borrowings from the FHLB. Due to the short-term nature of these borrowings, fair values approximate carrying values.

Long-term debt: The fair value of this debt is estimated using discounted cash flows based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements as of June 30, 2012 and December 31, 2011.

Off-balance sheet instruments: The carrying amount of commitments to extend credit and standby letters of credit approximates fair value. The carrying amount of the off-balance sheet financial instruments is based on fees currently charged to enter into such agreements.

Financial assets measured at fair value on a recurring basis at June 30, 2012 and December 31, 2011 are summarized below.

 

     Fair Value Measurements at June 30, 2012 Using  
            Quoted                
            Prices in                
            Active      Significant         
     Totals      Markets for      Other      Significant  
     at      Identical      Observable      Unobservable  
     June 30,      Assets      Inputs      Inputs  
     2012      (Level 1)      (Level 2)      (Level 3)  
     (Dollars in Thousands)  

Mortgage-backed securities

   $ 87,284       $ —         $ 87,284       $ —     

Obligations of states, counties and political subdivisions

     15,075         —           15,075         —     

Obligations of U.S. government sponsored agencies

     5,013         —           5,013         —     

U.S. treasury securities

     75         —           75         —     

Equity securities

     10         10         —           —     
     Fair Value Measurements at December 31, 2011 Using  
            Quoted                
            Prices in                
            Active      Significant         
     Totals      Markets for      Other      Significant  
     At      Identical      Observable      Unobservable  
     December 31,      Assets      Inputs      Inputs  
     2011      (Level 1)      (Level 2)      (Level 3)  
     (Dollars in Thousands)  

Mortgage-backed securities

   $ 99,691       $ —         $ 99,691       $ —     

Obligations of states, counties and political subdivisions

     15,885         —           15,885         —     

Obligations of U.S. government sponsored agencies

     6,509         —           6,509      

U.S. treasury securities

     75         —           75         —     

Equity securities

     10         10         —           —     

Assets Measured at Fair Value on a Recurring Basis

The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-Sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. Level 2 securities include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset-backed and other securities. Level 2 fair

 

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values are obtained from quoted prices of securities with similar characteristics. In certain cases, where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. Currently, all of the Company’s available-for-sale securities are considered to be Level 2 securities, except for $10,313 and $10,284 for June 30, 2012 and December 31, 2011, respectively, in equity securities that are considered to be Level 1 securities.

Financial Assets Measured at Fair Value on a Nonrecurring Basis

The Company is required to measure certain assets at fair value on a nonrecurring basis, including impaired loans. Loan impairment is reported when full payment under the loan terms is not expected. Impaired loans are carried at the present value of estimated future cash flows using the loan’s existing rate or the fair value of collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance. If these allocations cause the allowance for loan losses to increase, such increase is reported as a component of the provision for loan losses. Loan losses are charged against the allowance when management believes that the uncollectibility of a loan is confirmed. Loans, net of specific allowances, subject to this evaluation amounted to $16,052,303 and $16,245,779 as of June 30, 2012 and December 31, 2011, respectively. This valuation would be considered Level 3, consisting of appraisals of underlying collateral and discounted cash flow analysis.

Non-Financial Assets and Non-Financial Liabilities Measured at Fair Value

The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test and intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment.

During 2012, certain foreclosed assets, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value of a foreclosed asset, upon initial recognition, is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. Foreclosed assets measured at fair value upon initial recognition totaled $302,740 and $5,115,994, (utilizing Level 3 valuation inputs) for the periods ended June 30, 2012 and December 31, 2011, respectively. In connection with the measurement and initial recognition of the foregoing foreclosed assets, the Company recognized charge-offs of the allowance for possible loan losses totaling approximately $238,929 for the six months ended June 30, 2012 and $2,514,983 for the year ended December 31, 2011. Foreclosed assets totaling $8,525,171 for the six months ended June 30, 2012, and $14,157,679 for the year ended December 31, 2011, were remeasured at fair value, resulting in impairment loss of $2,863,446 for the six months ended June 30, 2012 and $6,389,774 for the year ended December 31, 2011.

The following table presents detailed information regarding assets and liabilities measured at fair value using significant unobservable inputs (Level 3) as of June 30, 2012. The table includes the valuation techniques and the significant unobservable inputs utilized. The range of each unobservable input as well as the weighted average within the range utilized at June 30, 2012 is included. Following the table is a description of the valuation technique and the sensitivity of the technique to changes in the significant unobservable input.

 

     Level 3 Significant Unobservable Input Assumptions
     Fair
Value
June 30,
2012
     Valuation Technique    Unobservable Input   

Quantitative Range

of Unobservable

Inputs and
Weighted-Average

     (Dollars in thousands)
Nonrecurring fair value measurements:            
Impaired loans    $ 16,052       Multiple data points, including discount to appraised value of collateral based on recent market activity    Appraisal compatibility adjustment (discount)    6% - 9%
Foreclosed property and other real estate    $ 303       Discount to appraised value of property based on recent market activity for sales of similar properties    Appraisal compatibility adjustment (discount)    6% - 9%

 

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NON-RECURRING FAIR VALUE MEASUREMENTS USING SIGNIFICANT UNOBSERVABLE INPUTS

Impaired loans

Impaired loans are valued based on multiple data points indicating the fair value for each loan. The primary data point for non-performing loans is the appraisal value of the underlying collateral to which a discount is applied. Management establishes this discount or comparability adjustment based on recent sales of similar property types. As liquidity in the market increases or decreases, the comparability adjustment and the resulting asset valuation are impacted.

Foreclosed property and other real estate

Foreclosed property and other real estate under contract for sale are valued based on contract price. If no sales contract is pending for a specific property, management establishes a comparability adjustment to the appraised value based on historical activity considering proceeds for properties sold versus the corresponding appraised value. Increases or decreases in realization for properties sold impact the comparability adjustment for similar assets remaining on the balance sheet.

The estimated fair value and related carrying or notional amounts of the Company’s financial instruments at June 30, 2012 and December 31, 2011 were as follows:

 

     June 30, 2012      December 31, 2011  
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 
     (Dollars in Thousands)  

Assets:

           

Cash and cash equivalents

   $ 74,801       $ 74,801       $ 52,797       $ 52,797   

Investment securities available-for-sale

     107,457         107,457         122,170         122,170   

Investment securities held-to-maturity

     5,163         5,205         1,170         1,170   

Federal Home Loan Bank stock

     1,418         1,418         2,861         2,861   

Accrued interest receivable

     3,370         3,370         3,958         3,958   

Loans, net of allowance for loan losses

     355,411         357,605         381,085         383,879   

Liabilities:

           

Deposits

     527,247         528,953         527,073         528,741   

Short-term borrowings

     714         714         356         356   

Long-term debt

     —           —           20,000         20,383   

Accrued interest payable

     574         574         790         790   

 

6. INVESTMENT SECURITIES

Details of investment securities available-for-sale and held-to-maturity at June 30, 2012 and December 31, 2011 are as follows:

 

     Available-for-Sale  
     June 30, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 
     (Dollars in Thousands)  

Mortgage-backed securities

   $ 83,442       $ 3,988       $ (146   $ 87,284   

Obligations of states, counties and political subdivisions

     13,582         1,493         —          15,075   

Obligations of U.S. government sponsored agencies

     4,994         19         —          5,013   

U.S. treasury securities

     75         —           —          75   

Equity securities

     9         1         —          10   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 102,102       $ 5,501       $ (146   $ 107,457   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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     Held-to-Maturity  
     June 30, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 
     (Dollars in Thousands)  

U.S. agencies

   $ 5,163       $ 42       $ —         $ 5,205   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Available-for-Sale  
     December 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated
Fair Value
 
     (Dollars in Thousands)  

Mortgage-backed securities

   $ 96,104       $ 3,903       $ (316   $ 99,691   

Obligations of states, counties and political subdivisions

     14,684         1,201         —          15,885   

Obligations of U.S. government sponsored agencies

     6,490         19         —          6,509   

U.S. treasury securities

     75         —           —          75   

Equity securities

     10         —           —          10   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 117,363       $ 5,123       $ (316   $ 122,170   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     Held-to-Maturity  
     December 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Estimated
Fair Value
 
     (Dollars in Thousands)  

Obligations of states, counties and political subdivisions

   $ 1,170       $ 1       $ —         $ 1,171   
  

 

 

    

 

 

    

 

 

    

 

 

 

The scheduled maturities of investment securities available-for-sale and held-to-maturity at June 30, 2012 are presented in the following table:

 

     Available-for Sale      Held-to-Maturity  
     Amortized
Cost
     Estimated
Fair Value
     Amortized
Cost
     Estimated
Fair Value
 
     (Dollars in Thousands)  

Maturing within one year

   $ 120       $ 121       $ —         $ —     

Maturing after one to five years

     4,875         5,133         —           —     

Maturing after five to fifteen years

     57,508         60,870         5,163         5,205   

Maturing after fifteen years

     39,590         41,323         —           —     

Equity securities and Preferred Stock

     9         10         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 102,102       $ 107,457       $ 5,163       $ 5,205   
  

 

 

    

 

 

    

 

 

    

 

 

 

For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities generally mature earlier than their weighted-average contractual maturities because of principal prepayments.

The following table reflects the Company’s investments’ gross unrealized losses and market value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2012 and December 31, 2011. Management evaluates securities for other-than-temporary impairment no less frequently than quarterly and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) whether the Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost bases. At June 30, 2012 and December 31, 2011, based on the aforementioned considerations, management did not record other-than-temporary impairment on any security that was in an unrealized loss position.

 

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     Available-for-Sale  
     June 30, 2012  
     Less than 12 Months     12 Months or More  
     Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 
     (Dollars in Thousands)  

Mortgage-backed securities

   $ 10,256       $ (52   $ 4,073       $ (94
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     Available-for-Sale  
     December 31, 2011  
     Less than 12 Months     12 Months or More  
     Fair Value      Unrealized
Losses
    Fair Value      Unrealized
Losses
 
  

 

(Dollars in Thousands)

  

Mortgage-backed securities

   $ 16,318       $ (276   $ 811       $ (40
  

 

 

    

 

 

   

 

 

    

 

 

 

As of June 30, 2012, six debt securities had been in a loss position for more than twelve months, and five debt securities had been in a loss position for less than twelve months. The losses for all securities are considered to be a direct result of the effect that the current interest rate environment has on the value of debt securities and not related to the creditworthiness of the issuers. Further, the Company has the current intent and ability to retain its investments in the issuers for a period of time sufficient to allow for any anticipated recovery in fair value. Therefore, the Company has not recognized any other-than-temporary impairments.

Investment securities available-for-sale with a carrying amount of $72.1 million and $80.0 million at June 30, 2012 and December 31, 2011, respectively, were pledged to secure public deposits and for FHLB advances.

The following chart represents the gross gains and losses realized on securities:

 

     Gross
Gains
     Gross
Losses
     Net
Gains
(Losses)
 
     (Dollars in Thousands)  

Three Months Ended:

        

June 30, 2012

   $ —         $ —         $ —     

June 30, 2011

   $ 401       $ —         $ 401   

Six Months Ended:

        

June 30, 2012

   $ —         $ —         $ —     

June 30, 2011

   $ 401       $ —         $ 401   

 

7. INVESTMENTS IN LIMITED PARTNERSHIPS

The Company has limited partnership investments in affordable housing projects for which it provides funding as a limited partner and receives tax credits related to its investments in the projects based on its partnership share. The Company has invested in limited partnerships of affordable housing projects as investments in funds that invest solely in affordable housing projects. The Company has determined that these structures require valuation as a variable interest entity (“VIE”) under ASC Topic 810 Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. The Company consolidates one of the funds in which it has a 99.9% limited partnership interest. The resulting financial impact to the Company of the consolidation was a net increase to total assets of approximately $148,510 as of June 30, 2012 and $150,000 as of December 31, 2011. The remaining limited partnership investments are unconsolidated and are accounted for under the cost method as allowed under ASC Topic 325 Accounting for Tax Benefits Resulting from Investments in Affordable Housing Projects. The Company amortizes the excess of carrying value of the investment over its estimated residual value during the period in which tax credits are allocated to the investors. The Company’s maximum exposure to future loss related to these limited partnerships is limited to the $1.4 million recorded investment.

The assets and liabilities of these partnerships consist primarily of apartment complexes and related mortgages. The Bank’s carrying value approximates cost or its underlying equity in the net assets of the partnerships. Market quotations are not available for any of the aforementioned partnerships. Management has no knowledge of intervening events since the date of the partnerships’ financial statements that would have had a material effect on the Company’s consolidated financial position, results of operations or cash flows.

 

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The Bank had no remaining cash commitments to these partnerships at June 30, 2012.

 

8. LOANS AND ALLOWANCE FOR LOAN LOSSES

At June 30, 2012 and December 31, 2011, the composition of the loan portfolio by reporting segment and portfolio segment was as follows:

 

     June 30, 2012  
     FUSB      ALC      Total  
     (Dollars in Thousands)  

Real estate loans:

        

Construction, land development and other land loans

   $ 38,370       $ —         $ 38,370   

Secured by 1-4 family residential properties

     40,239         36,770         77,009   

Secured by multi-family residential properties

     24,344         —           24,344   

Secured by non-farm, non-residential properties

     136,019         —           136,019   

Other

     802         —           802   

Commercial and industrial loans

     39,488         —           39,488   

Consumer loans

     16,393         46,978         63,371   

Other loans

     1,213         —           1,213   
  

 

 

    

 

 

    

 

 

 

Total loans

   $ 296,868       $ 83,748       $ 380,616   

Less: Unearned interest

     210         4,841         5,051   

Allowance for loan losses

     16,796         3,358         20,154   
  

 

 

    

 

 

    

 

 

 

Net loans

   $ 279,862       $ 75,549       $ 355,411   
  

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     FUSB      ALC      Total  
     (Dollars in Thousands)  

Real estate loans:

        

Construction, land development and other land loans

   $ 40,311       $ —         $ 40,311   

Secured by 1-4 family residential properties

     43,691         40,532         84,223   

Secured by multi-family residential properties

     26,722         —           26,722   

Secured by non-farm, non-residential properties

     147,518         —           147,518   

Other

     820         —           820   

Commercial and industrial loans

     43,060         —           43,060   

Consumer loans

     18,886         45,688         64,574   

Other loans

     910         —           910   
  

 

 

    

 

 

    

 

 

 

Total loans

   $ 321,918       $ 86,220       $ 408,138   

Less: Unearned Interest

     277         4,509         4,786   

Allowance for loan losses

     18,691         3,576         22,267   
  

 

 

    

 

 

    

 

 

 

Net loans

   $ 302,950       $ 78,135       $ 381,085   
  

 

 

    

 

 

    

 

 

 

The Company grants commercial, real estate and installment loans to its customers. Although the Company has a diversified loan portfolio, 72.7% of the portfolio is concentrated in loans secured by real estate.

Portfolio Segments

The Company has divided the loan portfolio into eight portfolio segments, each with different risk characteristics and methodologies for assessing the risk described as follows:

Construction, land development and other land loans – Commercial construction, land and land development loans include the development of residential housing projects, loans for the development of commercial and industrial use property and loans for the purchase and improvement of raw land. These loans are secured in whole or in part by the underlying real estate collateral and are generally guaranteed by the principals of the borrower.

Secured by 1-4 residential properties – These loans include conventional mortgage loans on one-to-four family residential properties. These properties may serve as the borrower’s primary resident, vacation home or investment property. Also included in this portfolio are home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrower’s residence, allows customers to borrow against the equity in their home.

 

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Secured by multi-family residential properties – These are mortgage loans secured by apartment buildings.

Secured by non-farm, non-residential properties – Commercial real estate loans include loans secured by commercial and industrial properties, office or mixed-use facilities, strip shopping centers or other commercial property. These loans are generally guaranteed by the principals of the borrower.

Other real estate loans – Other real estate loans are loans primarily for agricultural production, secured by mortgages on farm land.

Commercial and industrial loans – Includes loans to commercial customers for use in normal business to finance working projects. These credits may be loans and lines to financially strong borrowers, secured by inventories, equipment or receivables, and are generally guaranteed by the principals of the borrower.

Consumer loans – Includes a variety of secured and unsecured personal loans, including automobile loans, loans for household and personal purpose and all other direct consumer installment loans.

Other loans – Other loans comprise overdrawn checking accounts reclassified to loans and overdraft lines of credit.

Related Party Loans

In the ordinary course of business, the Bank makes loans to certain officers and directors of the Company, the Bank and ALC, including companies with which they are associated. These loans are made on the same terms as those prevailing for comparable transactions with others. Such loans do not represent more than normal risk of collectibility, nor do they present other unfavorable features. The amounts of such related party loans and commitments at June 30, 2012, December 31, 2011and June 30, 2011 were $2,711,659, $3,036,740 and $2,450,038, respectively. During the six-month period ended June 30, 2012, new loans to these parties totaled $53,283, and repayments by active related parties were $372,984. Director Dan Barlow retired from the Board of Directors of the Company and the Bank in May of 2012; his loan totaling $5,380 was eliminated from the June 30, 2012 balance. During the twelve-month period ended December 31, 2011, new loans to these parties totaled $1,301,901, and repayments were $426,665. During the six-month period ended June 30, 2011, new loans to these parties totaled $449,601, and repayments were $138,093.

Allowance for Loan Losses

Changes in the allowance for loan losses by reporting segment and portfolio segment were as follows:

 

     FUSB  
     June 30, 2012  
     Commercial      Commercial
Real Estate
     Consumer     Residential
Real Estate
     Other     Total  
     (Dollars in Thousands)  

Beginning balance

   $ 889       $ 16,533       $ 306      $ 684       $ 279      $ 18,691   

Charge-offs

     482         3,073         87        115         11        3,768   

Recoveries

     115         192         41        3         —          351   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net charge-offs

     367         2,881         46        112         11        3,417   

Provision

     279         1,426         (36     81         (227     1,523   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance

   $ 801       $ 15,078       $ 224      $ 653       $ 41      $ 16,797   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     ALC  
     June 30, 2012  
     Commercial      Commercial
Real Estate
     Consumer      Residential
Real Estate
     Other      Total  
     (Dollars in Thousands)  

Beginning balance

   $ —         $ —         $ 2,542       $ 1,034       $ —         $ 3,576   

Charge-offs

     —           —           1,383         472         —           1,855   

Recoveries

     —           —           448         28         —           476   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net charge-offs

     —           —           935         444         —           1,379   

Provision

     —           —           777         383         —           1,160   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ —         $ —         $ 2,384       $ 973       $ —         $ 3,357   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents
     FUSB & ALC  
     June 30, 2012  
     Commercial      Commercial
Real Estate
     Consumer      Residential
Real Estate
     Other     Total  
     (Dollars in Thousands)  

Beginning balance

   $ 889       $ 16,533       $ 2,848       $ 1,718       $ 279      $ 22,267   

Charge-offs

     482         3,073         1,470         587         11        5,623   

Recoveries

     115         192         489         31         —          827   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net charge-offs

     367         2,881         981         556         11        4,796   

Provision

     279         1,426         741         464         (227     2,683   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance

   $ 801       $ 15,078       $ 2,608       $ 1,626       $ 41      $ 20,154   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     FUSB  
     December 31, 2011  
     Commercial      Commercial
Real Estate
     Consumer      Residential
Real Estate
     Other     Total  
     (Dollars in Thousands)  

Beginning balance

   $ 988       $ 15,206       $ 375       $ 359       $ 99      $ 17,027   

Charge-offs

     407         12,915         420         973         3        14,718   

Recoveries

     152         44         121         172         —          489   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net charge-offs

     255         12,871         299         801         3        14,229   

Provision

     156         14,198         230         1,126         183        15,893   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance

   $ 889       $ 16,533       $ 306       $ 684       $ 279      $ 18,691   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     ALC  
     December 31, 2011  
     Commercial      Commercial
Real Estate
     Consumer      Residential
Real Estate
     Other     Total  
     (Dollars in Thousands)  

Beginning balance

   $ —         $ —         $ 2,663       $ 1,246       $ —        $ 3,909   

Charge-offs

     —           —           2,993         1,049         —          4,042   

Recoveries

     —           —           707         93         —          800   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net charge-offs

     —           —           2,286         956         —          3,242   

Provision

     —           —           2,165         744         —          2,909   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance

   $ —         $ —         $ 2,542       $ 1,034       $ —        $ 3,576   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     FUSB & ALC  
     December 31, 2011  
     Commercial      Commercial
Real Estate
     Consumer      Residential
Real Estate
     Other     Total  
     (Dollars in Thousands)  

Beginning balance

   $ 988       $ 15,206       $ 3,038       $ 1,605       $ 99      $ 20,936   

Charge-offs

     407         12,915         3,413         2,022         3        18,760   

Recoveries

     152         44         828         265         —          1,289   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net charge-offs

     255         12,871         2,585         1,757         3        17,471   

Provision

     156         14,198         2,395         1,870         183        18,802   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance

   $ 889       $ 16,533       $ 2,848       $ 1,718       $ 279      $ 22,267   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     FUSB  
     June 30, 2011  
     Commercial      Commercial
Real Estate
     Consumer      Residential
Real Estate
     Other     Total  
     (Dollars in Thousands)  

Beginning balance

   $ 988       $ 15,205       $ 375       $ 360       $ 99      $ 17,027   

Charge-offs

     237         2,611         227         509         —          3,584   

Recoveries

     34         24         54         2         —          114   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net charge-offs

     203         2,587         173         507         —          3,470   

Provision

     238         685         152         568         60        1,703   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance

   $ 1,023       $ 13,303       $ 354       $ 421       $ 159      $ 15,260   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     ALC  
     June 30, 2011  
     Commercial      Commercial
Real Estate
     Consumer      Residential
Real Estate
     Other      Total  
     (Dollars in Thousands)  

Beginning balance

   $ —         $ —         $ 2,663       $ 1,246       $ —         $ 3,909   

Charge-offs

     —           —           1,271         536         —           1,807   

Recoveries

     —           —           384         53         —           437   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net charge-offs

     —           —           887         483         —           1,370   

Provision

     —           —           762         449         —           1,211   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ —         $ —         $ 2,538       $ 1,212       $ —         $ 3,750   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     FUSB & ALC  
     June 30, 2011  
     Commercial      Commercial
Real Estate
     Consumer      Residential
Real Estate
     Other      Total  
     (Dollars in Thousands)  

Beginning balance

   $ 988       $ 15,205       $ 3,038       $ 1,606       $ 99       $ 20,936   

Charge-offs

     237         2,611         1,498         1,045         —           5,391   

Recoveries

     34         24         438         55         —           551   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net charge-offs

     203         2,587         1,060         990         —           4,840   

Provision

     238         685         914         1,017         60         2,914   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 1,023       $ 13,303       $ 2,892       $ 1,633       $ 159       $ 19,010   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired Loan Evaluations

The following table details loans individually evaluated for impairment at June 30, 2012 and December 31, 2011:

 

     June 30, 2012      December 31, 2011  
     Loans Evaluated Individually
for Impairment
     Loans Evaluated  Individually
for Impairment
 
     Recorded
Investment
     Balance in
Allowance for
Loan Losses
     Recorded
Investment
     Balance in
Allowance for
Loan Losses
 
     (Dollars in Thousands)      (Dollars in Thousands)  

Real estate loans:

           

Construction, land development and other land loans

   $ 18,490       $ 7,365       $ 19,674       $ 6,800   

Secured by 1-4 family residential properties

     —           —           186         —     

Secured by multi-family residential properties

     2,884         75         2,884         —     

Secured by non-farm, non-residential properties

     27,698         2,467         37,569         3,775   

Other

     —           —           —           —     

Commercial and industrial loans

     1,305         359         1,603         509   

Consumer loans

     —           —           —           —     

Other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 50,377       $ 10,266       $ 61,916       $ 11,084   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table details loans collectively evaluated for impairment at June 30, 2012 and December 31, 2011:

 

     June 30, 2012      December 31, 2011  
     Loans Evaluated Collectively
for Impairment
     Loans Evaluated  Collectively
for Impairment
 
     Recorded
Investment
     Balance in
Allowance for
Loan Losses
     Recorded
Investment
     Balance in
Allowance for
Loan Losses
 
     (Dollars in Thousands)      (Dollars in Thousands)  

Real estate loans:

           

Construction, land development and other land loans

   $ 19,880       $ 2,117       $ 20,637       $ 2,873   

Secured by 1-4 family residential properties

     77,009         1,627         84,037         113   

Secured by multi-family residential properties

     21,460         164         23,838         170   

Secured by non-farm, non-residential properties

     108,321         2,836         109,949         2,965   

Other

     802         3         820         1,555   

Commercial and industrial loans

     38,181         364         41,457         380   

Consumer loans

     63,372         2,607         64,574         2,848   

Other loans

     1,214         170         910         279   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 330,239       $ 9,888       $ 346,222       $ 11,183   
  

 

 

    

 

 

    

 

 

    

 

 

 

Credit Quality Indicators

The Bank has established a credit risk rating system to assess and manage the risk in the loan portfolio. It establishes a uniform framework and common language for assessing and monitoring risk in the portfolio.

The following is a guide for an 8-grade system of credit risk:

 

  1. Minimal Risk: Borrowers in this category have the lowest risk of any resulting loss. Borrowers are of the highest quality, presently and prospectively.

 

  2. Better Than Average Risk: Borrowers in the high end of medium range between borrowers who are definitely sound and those with minor risk characteristics.

 

  3. Moderate Risk: Borrowers in this category have little chance of resulting in a loss. This category should include the average loan, under average economic conditions.

 

  4. Acceptable Risk: Borrowers in this category have a limited chance of resulting in a loss.

 

  5. Special Mention (Potential Weakness): Borrowers in this category exhibit potential credit weaknesses or downward trends deserving bank management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in our credit position at some future date. Special Mention loans are not adversely classified and do not expose our institution to sufficient risk to warrant adverse classification.

Included in Special Mention assets could be workout or turnaround situations, as well as those borrowers previously rated 2-4 who have shown deterioration, for whatever reason, indicating a downgrading from the better grade. The Special Mention rating is designed to identify a specific level of risk and concern about a loan’s and/or borrower’s quality. Although a Special Mention asset has a higher probability of default than previously rated categories, its default is not imminent.

 

  6. Substandard (Definite Weakness – Loss Unlikely): These are borrowers with defined weaknesses that jeopardize the orderly liquidation of debt. A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. There is a distinct possibility that a partial loss of interest and/or principal will occur if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard.

 

  7.

Doubtful: Borrowers classified doubtful have all the weaknesses found in substandard borrowers with the added provision that the weaknesses make collection of debt in full, based on currently existing facts, conditions and values, highly questionable and improbable. Serious problems exist to the point where

 

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Table of Contents
  partial loss of principal is likely. The possibility of loss is extremely high, but, because of certain important, reasonably specific pending factors that may work to strengthen the assets, the loans’ classification as estimated losses is deferred until a more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. Additional factors include whether management has a demonstrated history of failing to live up to agreements, unethical or dishonest business practices and/or conviction on criminal charges.

 

  8. Loss: Borrowers deemed incapable of repayment of unsecured debt. Loans to such borrowers are considered uncollectible and of such little value that continuance as active assets of the bank is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off these worthless assets, even though partial recovery may be affected in the future.

The table below illustrates the carrying amount of loans by credit quality indicator at June 30, 2012.

 

     FUSB  
     Pass
1-4
     Special
Mention
5
     Substandard
6
     Doubtful
7
     Total  
     (Dollars in Thousands)  

Loans secured by real estate:

              

Construction, land development and other land loans

   $ 17,067       $ 523       $ 20,747       $ 33       $ 38,370   

Secured by 1-4 family residential properties

     34,493         1,308         4,434         4         40,239   

Secured by multi-family residential properties

     21,460         —           2,884         —           24,344   

Secured by non-farm, non-residential properties

     97,842         7,542         30,635         —           136,019   

Other

     802         —           —           —           802   

Commercial and industrial loans

     36,752         456         2,244         36         39,488   

Consumer loans

     15,159         184         1,026         24         16,393   

Other loans

     1,212         —           1         —           1,213   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 224,787       $ 10,013       $ 61,971       $ 97       $ 296,868   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     ALC  
     Performing      Nonperforming      Total  
     (Dollars in Thousands)  

Loans secured by real estate:

        

Secured by 1-4 family residential properties

   $ 35,609       $ 1,161       $ 36,770   

Consumer loans

     45,073         1,905         46,978   
  

 

 

    

 

 

    

 

 

 

Total

   $ 80,682       $ 3,066       $ 83,748   
  

 

 

    

 

 

    

 

 

 

The table below illustrates the carrying amount of loans by credit quality indicator at December 31, 2011.

 

     FUSB  
     Pass
1-4
     Special
Mention
5
     Substandard
6
     Doubtful
7
     Total  
     (Dollars in Thousands)  

Loans secured by real estate:

              

Construction, land development and other land loans

   $ 18,047       $ 699       $ 21,327       $ 238       $ 40,311   

Secured by 1-4 family residential properties

     38,573         627         4,445         46         43,691   

Secured by multi-family residential properties

     23,838         —           2,884         —           26,722   

Secured by non-farm, non-residential properties

     105,590         11,579         30,349         —           147,518   

Other

     820         —           —           —           820   

Commercial and industrial loans

     39,676         845         2,498         41         43,060   

Consumer loans

     17,617         383         867         19         18,886   

Other loans

     909         —           1         —           910   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 245,070       $ 14,133       $ 62,371       $ 344       $ 321,918   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents
     ALC  
     Performing      Nonperforming      Total  
     (Dollars in Thousands)  

Loans secured by real estate:

        

Secured by 1-4 family residential properties

   $ 38,550       $ 1,982       $ 40,532   

Consumer loans

     43,675         2,013         45,688   
  

 

 

    

 

 

    

 

 

 

Total

   $ 82,225       $ 3,995       $ 86,220   
  

 

 

    

 

 

    

 

 

 

The following table provides an aging analysis of past due loans and nonaccruing loans by class at June 30, 2012.

 

     FUSB  
     Past Due                       
     30-89 Days      Greater than
90 Days
     Total      Nonaccrual      Current
Loans
     Total
Loans
 
     (Dollars in Thousands)  

Loans secured by real estate:

                 

Construction, land development and other land loans

   $ 3,568       $ 37       $ 3,605       $ 3,065       $ 31,700       $ 38,370   

Secured by 1-4 family residential properties

     920         —           920         448         38,871         40,239   

Secured by multi-family residential properties

     —           —           —           2,884         21,460         24,344   

Secured by non-farm, non-residential properties

     4,608         —           4,608         8,720         122,691         136,019   

Other

     —           —           —           —           802         802   

Commercial and industrial loans

     604         4         608         917         37,963         39,488   

Consumer loans

     438         —           438         53         15,902         16,393   

Other loans

     —           —           —           —           1,213         1,213   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due loans

   $ 10,138       $ 41       $ 10,179       $ 16,087       $ 270,602       $ 296,868   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     ALC  
     Past Due                       
     30-89 Days      Greater than
90 Days
     Total      Nonaccrual      Current
Loans
     Total
Loans
 
     (Dollars in Thousands)  

Loans secured by real estate:

                 

Secured by 1-4 family residential properties

   $ 862       $ 861       $ 1,723       $ 300       $ 34,747       $ 36,770   

Consumer loans

     1,329         759         2,088         1,146         43,744         46,978   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due loans

   $ 2,191       $ 1,620       $ 3,811       $ 1,446       $ 78,491       $ 83,748   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides an aging analysis of past due loans and nonaccruing loans by class at December 31, 2011.

 

     FUSB  
     Past Due                       
     30-89 Days      Greater than
90 Days
     Total      Nonaccrual      Current
Loans
     Total
Loans
 
     (Dollars in Thousands)  

Loans secured by real estate:

                 

Construction, land development and other land loans

   $ 3,094       $ —         $ 3,094       $ 3,087       $ 34,130       $ 40,311   

Secured by 1-4 family residential properties

     1,324         38         1,362         879         41,450         43,691   

Secured by multi-family residential properties

     —           —           —           2,884         23,838         26,722   

Secured by non-farm, non-residential properties

     1,281         88         1,369         7,563         138,586         147,518   

Other

     —           —           —           —           820         820   

Commercial and industrial loans

     1,459         13         1,472         129         41,459         43,060   

Consumer loans

     670         72         742         74         18,070         18,886   

Other loans

     3         13         16         —           894         910   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due loans

   $ 7,831       $ 224       $ 8,055       $ 14,616       $ 299,247       $ 321,918   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     ALC  
     Past Due                       
     30-89 Days      Greater than
90 Days
     Total      Nonaccrual      Current
Loans
     Total
Loans
 
     (Dollars in Thousands)  

Loans secured by real estate:

                 

Secured by 1-4 family residential properties

   $ 1,135       $ 1,462       $ 2,597       $ 520       $ 37,415       $ 40,532   

Consumer loans

     1,310         646         1,956         1,367         42,365         45,688   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total past due loans

   $ 2,445       $ 2,108       $ 4,553       $ 1,887       $ 79,780       $ 86,220   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired Loans

At June 30, 2012, the carrying amount of impaired loans consisted of the following:

 

     June 30, 2012  
     Carrying
Amount
     Unpaid
Principal
Balance
     Related
Allowances
 
     (Dollars in Thousands)  

Impaired loans with no related allowance recorded

        

Loans secured by real estate

        

Construction, land development and other land loans

   $ 4,679       $ 4,679       $ —     

Secured by 1-4 family residential properties

     —           —           —     

Secured by multi-family residential properties

     895         895         —     

Secured by non-farm, non-residential properties

     17,971         17,971         —     

Commercial and industrial

     514         514         —     
  

 

 

    

 

 

    

 

 

 

Total loans with no related allowance recorded

   $ 24,059       $ 24,059       $ —     
  

 

 

    

 

 

    

 

 

 

Impaired loans with an allowance recorded

        

Loans secured by real estate

        

Construction, land development and other land loans

   $ 13,811       $ 13,811       $ 7,365   

Secured by multi-family residential properties

     1,989         1,989         75   

Secured by non-farm, non-residential properties

     9,727         9,727         2,467   

Commercial and industrial

     791         791         359   
  

 

 

    

 

 

    

 

 

 

Total loans with an allowance recorded

   $ 26,318       $ 26,318       $ 10,266   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

        

Loans secured by real estate

        

Construction, land development and other land loans

   $ 18,490       $ 18,490       $ 7,365   

Secured by 1-4 family residential properties

     —           —           —     

Secured by multi-family residential properties

     2,884         2,884         75   

Secured by non-farm, non-residential properties

     27,698         27,698         2,467   

Commercial and industrial

     1,305         1,305         359   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 50,377       $ 50,377       $ 10,266   
  

 

 

    

 

 

    

 

 

 

 

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At December 31, 2011, the carrying amount of impaired loans consisted of the following:

 

     December 31, 2011  
     Carrying
Amount
     Unpaid
Principal
Balance
     Related
Allowances
 
     (Dollars in Thousands)  

Impaired loans with no related allowance recorded

        

Loans secured by real estate

        

Construction, land development and other land loans

   $ 7,005       $ 7,005       $ —     

Secured by 1-4 family residential properties

     186         186         —     

Secured by multi-family residential properties

     2,884         2,884         —     

Secured by non-farm, non-residential properties

     24,411         24,411         —     

Commercial and industrial

     100         100         —     
  

 

 

    

 

 

    

 

 

 

Total loans with no related allowance recorded

   $ 34,586       $ 34,586       $ —     
  

 

 

    

 

 

    

 

 

 

Impaired loans with an allowance recorded

        

Loans secured by real estate

        

Construction, land development and other land loans

   $ 12,669       $ 12,669       $ 6,800   

Secured by non-farm, non-residential properties

     13,159         13,159         3,775   

Commercial and industrial

     1,502         1,502         509   
  

 

 

    

 

 

    

 

 

 

Total loans with an allowance recorded

   $ 27,330       $ 27,330       $ 11,084   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

        

Loans secured by real estate

        

Construction, land development and other land loans

   $ 19,674       $ 19,674       $ 6,800   

Secured by 1-4 family residential properties

     186         186         —     

Secured by multi-family residential properties

     2,884         2,884         —     

Secured by non-farm, non-residential properties

     37,570         37,570         3,775   

Commercial and industrial

     1,602         1,602         509   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 61,916       $ 61,916       $ 11,084   
  

 

 

    

 

 

    

 

 

 

The average net investment in impaired loans and interest income recognized and received on impaired loans as of June 30, 2012 and December 31, 2011 were as follows:

 

     June 30, 2012  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Received
 
     (Dollars in Thousands)  

Loans secured by real estate

        

Construction, land development and other land loans

   $ 19,514       $ 339       $ 315   

Secured by 1–4 family residential properties

     107         —           —     

Secured by multi-family residential properties

     2,884         —           —     

Secured by non-farm, non-residential properties

     31,475         597         582   

Commercial and industrial

     1,376         16         17   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 55,356       $ 952       $ 914   
  

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Received
 
     (Dollars in Thousands)  

Loans secured by real estate

        

Construction, land development and other land loans

   $ 12,173       $ 649       $ 687   

Secured by 1–4 family residential properties

     37         —           —     

Secured by multi-family residential properties

     3,313         —           1,587   

Secured by non-farm, non-residential properties

     32,572         1,429         —     

Commercial and industrial

     1,634         140         141   
  

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 49,729       $ 2,218       $ 2,415   
  

 

 

    

 

 

    

 

 

 

Loans on which the accrual of interest has been discontinued amounted to $17,532,838 and $16,502,314 at June 30, 2012 and December 31, 2011, respectively. If interest on those loans had been accrued, such income would have approximated $713,200 and $1,459,843 for the six months ended June 30, 2012 and for the twelve months ended December 31, 2011, respectively. Interest income actually recorded on those loans amounted to $12,211 and $35,519 for the six months ended June 30, 2012 and for the twelve months ended December 31, 2011, respectively. Accruing loans past due 90 days or more amounted to $1,660,876 and $2,331,718 for the six months ended June 30, 2012 and for the twelve months ended December 31, 2011, respectively.

 

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Table of Contents

Troubled Debt Restructurings:

Loans are considered restructured loans if concessions have been granted to borrowers that are experiencing financial difficulty. The concessions granted generally involve the modification of terms of the loan, such as changes in payment schedule or interest rate, which generally would not otherwise be considered. Restructured loans can involve loans remaining on nonaccrual, moving to nonaccrual or continuing on accrual status, depending on the individual facts and circumstances of the borrower. Nonaccrual restructured loans are included and treated with all other nonaccrual loans. In addition, all accruing restructured loans are being reported as troubled debt restructurings. Generally, restructured loans remain on nonaccrual until the customer has attained a sustained period of repayment performance under the modified loan terms (generally a minimum of six months). However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and whether the loan should be returned to or maintained on nonaccrual status. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains on nonaccrual. Based on the above, the Company had $1,844,536 and $1,821,696 of non-accruing loans that were restructured and remained on nonaccrual status at June 30, 2012 and December 31, 2011, respectively. In addition, the Company had $1,735,471 and $2,488,060 of restructured loans that were restored to accrual status based on a sustained period of repayment performance at June 30, 2012 and December 31, 2011, respectively.

The following table provides the number of loans modified in a troubled debt restructuring by loan portfolio during the periods ended June 30, 2012 and December 31, 2011, as well as the recorded investment and unpaid principal balance as of June 30, 2012 and December 31, 2011.

 

     June 30, 2012      December 31, 2011  
     Number
of Loans
     Pre-
Modification
Outstanding
Principal
Balance
     Post-
Modification
Principal
Balance
     Number
of Loans
     Pre-
Modification
Outstanding
Principal
Balance
     Post-
Modification
Principal
Balance
 
    

(Dollars in Thousands)

 

Loans secured by real estate:

                 

Construction, land development and other land loans

     9       $ 3,182       $ 1,736         9       $ 3,182       $ 2,488   

Secured by non-farm, non-residential properties

     4         2,620         1,776         3         2,583         1,747   

Commercial loans

     2         80         68         2         80         75   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     15       $ 5,882       $ 3,580         14       $ 5,845       $ 4,310   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Number
of Loans
     Recorded
Investment
            Number
of Loans
     Recorded
Investment
        

Troubled debt restructurings that subsequently defaulted

                 

Troubled debt restructurings:

                 

Secured by non-farm, non-residential properties

     1       $ 1,311            —         $ —        
  

 

 

    

 

 

       

 

 

    

 

 

    

Restructured loan modifications may include payment schedule modifications, interest rate concessions, maturity date extensions, modification of note structure, principal reduction or some combination of these concessions. During the periods ended June 30, 2012 and December 31, 2011, restructured loan modifications of loans secured by real estate, commercial and industrial loans primarily included maturity date extensions and payment schedule modifications.

The change in troubled debt restructuring as of June 30, 2012 was as follows:

 

     June 30,
2012
     December 31,
2011
     Change  
     (Dollars in Thousands)  

Loans secured by real estate:

        

Construction, land development and other land loans

   $ 1,736       $ 2,488       $ (752

Secured by non-farm, non-residential properties

     1,776         1,747         29   

Commercial and industrial loans

     68         75         (7
  

 

 

    

 

 

    

 

 

 

Total

   $ 3,580       $ 4,310       $ (730
  

 

 

    

 

 

    

 

 

 

All loans $500,000 and over modified in a troubled debt restructuring are evaluated for impairment. The nature and extent of impairment of restructured loans, including those that have experienced a subsequent payment default, is considered in the determination of an appropriate level of allowance for loan losses. This evaluation resulted in an allowance for loan losses of $865,434 and $494,352 as of June 30, 2012 and December 31, 2011, respectively.

 

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Table of Contents
9. SHORT-TERM BORROWINGS

Short-term borrowings consist of federal funds purchased and securities sold under repurchase agreements. Federal funds purchased generally mature within one to four days. There were no federal funds purchased outstanding at June 30, 2012 or December 31, 2011. There were no treasury tax and loan deposits outstanding at June 30, 2012 and December 31, 2011.

Securities sold under repurchase agreements, which are secured borrowings, generally are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The Company monitors the fair value of the underlying securities on a daily basis. Securities sold under repurchase agreements at June 30, 2012 and December 31, 2011 were $714,355 and $355,787, respectively.

At June 30, 2012, the Bank had $7.8 million in available federal fund lines from correspondent banks.

 

10. LONG-TERM DEBT

The Company uses FHLB advances as an alternative to funding sources with similar maturities, such as certificates of deposit or other deposit programs. These advances generally offer more attractive rates when compared to other mid-term financing options. They are also flexible, allowing the Company to quickly obtain the necessary maturities and rates that best suit its overall asset/liability strategy. At June 30, 2012, there were no advances outstanding and no investment securities or mortgage loans pledged to secure these borrowings. At December 31, 2011, investment securities and mortgage loans amounting to $22.6 million were pledged to secure these borrowings in the amount of $20.0 million.

At June 30, 2012, the Bank had $181.0 million in available credit from the FHLB.

 

11. INCOME TAXES

The Company files a consolidated income tax return with the federal government and the state of Alabama. ALC files a Mississippi state income tax return on its Mississippi branches. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and the states in which it files for the years ended December 31, 2008 though 2011.

As of June 30, 2012, the Company had no unrecognized tax benefits related to Federal or state income tax matters and does not anticipate any material increase or decrease in unrecognized tax benefits relative to any tax positions taken prior to June 30, 2012. As of June 30, 2012, the Company had accrued no interest and no penalties related to uncertain tax positions.

The consolidated tax provision differed from the amount computed by applying the federal statutory income tax rate of 34.0%, as described in the following table:

 

     June 30,
2012
    June 30,
2011
 
     (Dollars in Thousands)  

Income tax (benefit) expense at federal statutory rate

   $ (77   $ 779   

Increase (decrease) resulting from:

    

Tax-exempt interest

     (175     (202

State income tax (benefit) expense, net of federal income tax benefit

     (24     43   

Low income housing tax credits

     —          —     

Other

     (84     (52
  

 

 

   

 

 

 

Total

   $ (360   $ 568   
  

 

 

   

 

 

 

 

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Table of Contents
12. SEGMENT REPORTING

Under ASC Topic 280 Segment Reporting, certain information is disclosed for the two reportable operating segments of the Company. The reportable segments were determined using the internal management reporting system. These segments are composed of the Company’s and the Bank’s significant subsidiaries. The accounting policies for each segment are the same as those described in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the period ended December 31, 2011. The segment results include certain overhead allocations and intercompany transactions that were recorded at current market prices. All intercompany transactions have been eliminated to determine the consolidated balances. The results for the two reportable segments of the Company are included in the following table:

 

     FUSB     ALC      All Other      Eliminations     Consolidated  
     (Dollars in Thousands)  

For the three months ended June 30, 2012:

  

Net interest income

   $ 4,946      $ 3,620       $ 5       $ —        $ 8,571   

Provision for loan losses

     20        448         —           —          468   

Total non-interest income

     957        334         1,666         (1,626     1,331   

Total non-interest expense

     4,707        2,696         219         (182     7,440   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     1,176        810         1,452         (1,444     1,994   

Provision for income taxes

     308        314         1         —          623   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 868      $ 496       $ 1,451       $ (1,444   $ 1,371   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Other significant items:

            

Total assets

   $ 604,227      $ 82,382       $ 72,921       $ (156,245   $ 603,285   

Total investment securities

     112,545        —           75         —          112,620   

Total loans, net

     347,404        75,549         —           (67,542     355,411   

Investment in subsidiaries

     1,286        —           67,645         (68,926     5   

Fixed asset addition

     58        17         —           —          75   

Depreciation and amortization expense

     141        39         —           —          180   

Total interest income from external customers

     5,153        4,595         —           —          9,748   

Total interest income from affiliates

     975        —           5         (980     —     

For the six months ended June 30, 2012:

            

Net interest income

   $ 9,932      $ 7,180       $ 9       $ —        $ 17,121   

Provision for loan losses

     1,523        1,160         —           —          2,683   

Total non-interest income

     1,970        658         644         (667     2,605   

Total non-interest expense

     11,703        5,563         369         (365     17,270   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     (1,324     1,115         284         (302     (227

Provision for (benefit from) income taxes

     (796     433         3         —          (360
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ (528   $ 682       $ 281       $ (302   $ 133   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Other significant items:

            

Fixed asset addition

   $ 112      $ 177       $ —         $ —        $ 289   

Depreciation and amortization expense

     282        78         —           —          360   

Total interest income from external customers

     10,594        9,164       &nbs