XNAS:SUBK Suffolk Bancorp Quarterly Report 10-Q/A Filing - 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q/A

 

 

Amendment No. 1

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

Commission file number 000-13580

 

 

SUFFOLK BANCORP

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

New York State   11-2708279
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
4 West Second Street,
Riverhead, New York
  11901
(Address of Principal Executive Offices)   (Zip Code)

(631) 208-2400

(Registrant’s Telephone Number, Including Area Code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No  ¨

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

 

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

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

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

9,726,814 SHARES OF COMMON STOCK OUTSTANDING AS OF May 1, 2012

 

 

 


Table of Contents

EXPLANATORY NOTE

Suffolk Bancorp (“Suffolk”) is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q for the period ended March 31, 2012 in order to correct for errors that occurred during the electronic compilation of data via EDGAR and in XBRL interactive data formats. These errors were not material in nature or amount and only affected captions, format, and certain quantitative detail.


Table of Contents

SUFFOLK BANCORP AND SUBSIDIARIES

TABLE OF CONTENTS

 

Item 1 – Financial Statements

     2   

CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
AS OF MARCH 31, 2012 (unaudited) AND DECEMBER 31, 2011

     2   

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

     3   

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

     4   

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

     5   

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

     6   

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     7   
  

(1)    Basis of Presentation

     7   
  

(2)    Recent Accounting Pronouncements

     7   
  

(3)    Fair Value

     8   
  

(4)    Investment Securities

     11   
  

(5)    Loans

     13   
  

(6)    Allowance for Loan Losses

     13   
  

(7)    Retirement Plan

     22   
  

(8)    Stock-based Compensation

     23   
  

(9)    Income Taxes

     24   
  

(10)  Regulatory Matters

     24   
  

(11)  Legal Proceedings

     25   

Item  2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     26   
   Recent Developments      26   
  

Basic Performance and Current Activities

     26   
   Net Income (Loss)      27   
   Interest Income      27   
   Interest Expense      27   
   Net Interest Income      27   
   Other Expense      29   
   Capital Resources      29   
   Credit Risk      30   
   Critical Accounting Policies, Judgments and Estimates      31   
   Allowance for Loan Losses      31   
   Non-Performing Loans      33   
   Deferred Tax Assets and Liabilities      35   
   Investment Securities      35   
Item 3 - Quantitative and Qualitative Disclosures about Market Risk      36   
   Market Risk      36   
   Business Risks and Uncertainties      36   

Item 4 – Controls and Procedures

     36   
   Material Weaknesses In Internal Control      36   

PART II

     39   

Item 1 – Legal Proceedings

     39   

Item 1A – Risk Factors

     39   

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

     41   

Item 6 – Exhibits

     41   
   SIGNATURES      41   


Table of Contents

Item 1 – Financial Statements

SUFFOLK BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CONDITION

AS OF MARCH 31, 2012 (unaudited) AND DECEMBER 31, 2011

(In thousands of dollars except for share data)

 

      March 31,
2012
    December 31,
2011
 

ASSETS

    

Cash and Cash Equivalents

    

Non-interest Bearing Deposits

   $ 35,509      $ 73,651   

Interest Bearing Deposits

     176,795        98,908   

Federal Funds Sold

     1,150        —     
  

 

 

   

 

 

 

Total Cash and Cash Equivalents

     213,454        172,559   
  

 

 

   

 

 

 

Federal Reserve Bank, Federal Home Loan Bank, and Other Stock

     2,536        2,536   
  

 

 

   

 

 

 

Investment Securities:

    

Available for Sale, at Fair Value

     287,539        299,204   

Held to Maturity (Fair Value of $9,988 and $10,161, respectively) Obligations of States & Political Subdivisions

     9,194        9,315   
  

 

 

   

 

 

 

Total Investment Securities

     296,733        308,519   
  

 

 

   

 

 

 

Total Loans, Net of Unearned Discount

     939,736        969,654   

Allowance for Loan Losses

     40,008        39,958   
  

 

 

   

 

 

 

Net Loans

     899,728        929,696   

Premises & Equipment, Net

     27,854        27,984   

Deferred Taxes, Net

     19,552        18,465   

Income Tax Receivable

     4,721        5,421   

Other Real Estate Owned, Net

     1,800        1,800   

Accrued Interest and Loan Fees Receivable

     6,133        6,885   

Prepaid FDIC Assessment

     1,508        1,843   

Goodwill and Other Intangibles

     2,414        2,437   

Other Assets

     6,222        6,082   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 1,482,655      $ 1,484,227   
  

 

 

   

 

 

 

LIABILITIES & STOCKHOLDERS’ EQUITY

    

Demand Deposits

   $ 508,075      $ 525,379   

Saving, N.O.W. & Money Market Deposits

     537,681        531,544   

Time Certificates of $100,000 or More

     179,983        168,140   

Other Time Deposits

     85,537        86,809   
  

 

 

   

 

 

 

Total Deposits

     1,311,276        1,311,872   
  

 

 

   

 

 

 

Unfunded Pension Liability

     19,003        18,212   

Capital Leases

     4,719        4,737   

Accrued Interest Payable

     348        348   

Other Liabilities

     11,382        12,498   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     1,346,728        1,347,667   
  

 

 

   

 

 

 

Commitment and Contingent Liabilities

    

STOCKHOLDERS’ EQUITY

    

Common Stock (par value $2.50; 15,000,000 shares authorized;
9,726,814 and 9,712,070 shares outstanding, respectively)

     34,330        34,330   

Surplus

     24,037        24,010   

Retained Earnings

     92,471        91,303   

Treasury Stock at Par (4,005,270 shares)

     (10,013     (10,013

Accumulated Other Comprehensive Loss, Net of Tax

     (4,898     (3,070
  

 

 

   

 

 

 

TOTAL STOCKHOLDERS’ EQUITY

     135,927        136,560   
  

 

 

   

 

 

 

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY

   $ 1,482,655      $ 1,484,227   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

Page 2


Table of Contents

SUFFOLK BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Unaudited, in thousands of dollars except for share and per share data)

 

     2012      2011  

INTEREST INCOME

     

Loans and Loan Fees

   $ 12,394       $ 16,448   

United States Treasury Securities

     —           70   

Obligations of States & Political Subdivisions (tax-exempt)

     1,521         1,896   

Obligations of States & Political Subdivisions (taxable)

     5         15   

Collateralized Mortgage Obligations

     1,194         1,628   

Mortgage-Backed Securities

     7         8   

U.S. Government Agency Obligations

     —           154   

Federal Funds Sold & Interest Due from Banks

     77         16   

Dividends

     46         84   
  

 

 

    

 

 

 

Total Interest Income

     15,244         20,319   
  

 

 

    

 

 

 

INTEREST EXPENSE

     

Saving, N.O.W. & Money Market Deposits

     317         634   

Time Certificates of $100,000 or more

     439         582   

Other Time Deposits

     280         357   

Interest on Borrowings

     —           339   
  

 

 

    

 

 

 

Total Interest Expense

     1,036         1,912   
  

 

 

    

 

 

 

Net Interest Income

     14,208         18,407   

Provision for Loan Losses

     —           19,971   
  

 

 

    

 

 

 

Net Interest Income (Loss) After Provision for Loan Losses

     14,208         (1,564
  

 

 

    

 

 

 

OTHER INCOME

     

Service Charges on Deposit Accounts

     950         1,005   

Other Service Charges, Commissions & Fees

     750         667   

Fiduciary Fees

     201         225   

Other Operating Income

     354         324   
  

 

 

    

 

 

 

Total Other Income

     2,255         2,221   
  

 

 

    

 

 

 

OTHER EXPENSE

     

Employee Compensation Expense

     8,584         7,545   

Net Occupancy Expense

     1,454         1,534   

Equipment Expense

     512         482   

Outside Services

     1,146         888   

FDIC Assessments

     70         1,131   

Other Real Estate Owned Expense

     47         140   

Other Operating Expense

     2,792         2,053   
  

 

 

    

 

 

 

Total Other Expense

     14,605         13,773   
  

 

 

    

 

 

 

Income (Loss) Before Income Tax Expense (Benefit)

     1,858         (13,116

Income Tax Expense (Benefit)

     690         (5,542
  

 

 

    

 

 

 

NET INCOME (LOSS)

   $ 1,168       $ (7,574
  

 

 

    

 

 

 

Average: Common Shares Outstanding

     9,726,814         9,705,888   

Dilutive Stock Options

     —           —     
  

 

 

    

 

 

 

Average Total

     9,726,814         9,705,888   

EARNINGS (LOSS) PER COMMON SHARE

     

Basic

   $ 0.12       $ (0.78

Diluted

   $ 0.12       $ (0.78

See accompanying notes to condensed consolidated financial statements.

 

Page 3


Table of Contents

SUFFOLK BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Unaudited, in thousands of dollars)

 

     2012     2011  

Net Income (Loss)

   $ 1,168      $ (7,574

Other Comprehensive (Loss) Income, Net of Taxes:

    

(Decrease) Increase in Unrealized Gain on Securities Available for Sale Arising During the Period, Net of Taxes of $(1,079) and $751, Respectively

     (1,573     1,099   

Post-Retirement Plan Benefit Obligation

     (255     (89
  

 

 

   

 

 

 

Total Other Comprehensive (Loss) Income, Net of Taxes

     (1,828     1,010   
  

 

 

   

 

 

 

Total Comprehensive (Loss), March 31

   $ (660   $ (6,564
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

Page 4


Table of Contents

SUFFOLK BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Unaudited, in thousands of dollars)

 

     2012     2011  

Common Stock

    

Balance, January 1

   $ 34,330      $ 34,236   

Stock Appreciation

    

Rights and Stock Options Exercised

     —          12   

Stock Dividend Reinvestment, net

     —          45   
  

 

 

   

 

 

 

Balance, March 31

     34,330        34,293   
  

 

 

   

 

 

 

Surplus

    

Balance, January 1

     24,010        23,368   

Stock Option Expense

     27        —     

Stock Appreciation

    

Rights and Stock Options Exercised

     —          65   

Stock Dividend Reinvestment, net

     —          355   
  

 

 

   

 

 

 

Balance, March 31

     24,037        23,788   
  

 

 

   

 

 

 

Retained Earnings

    

Balance, January 1

     91,303        91,450   

Net Income (Loss)

     1,168        (7,574

Stock Appreciation

    

Rights and Stock Options Exercised

     —          (70
  

 

 

   

 

 

 

Balance, March 31

     92,471        83,806   
  

 

 

   

 

 

 

Treasury Stock

    

Balance, January 1

     (10,013     (10,005

Stock Appreciation

    

Rights and Stock Options Exercised

     —          (8
  

 

 

   

 

 

 

Balance, March 31

     (10,013     (10,013
  

 

 

   

 

 

 

Accumulated Other Comprehensive Loss, Net of Tax

    

Balance, January 1

     (3,070     (2,229

Other Comprehensive (Loss) Income

     (1,828     1,010   
  

 

 

   

 

 

 

Balance, March 31

     (4,898     (1,219
  

 

 

   

 

 

 

Total Stockholders Equity, March 31

   $ 135,927      $ 130,655   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

Page 5


Table of Contents

SUFFOLK BANCORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Unaudited, in thousands of dollars)

 

     2012     2011  

NET INCOME (LOSS)

   $ 1,168      $ (7,574

ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES

    

Provision for Loan Losses

     —          19,971   

Depreciation and Amortization

     648        656   

Stock Option Expense

     27        —     

Net Amortization of Premiums and Accretion of Discounts

     504        641   

Decrease in Income Taxes Receivable

     700        2,478   

Decrease (Increase) in Accrued Interest and Loan Fees Receivable

     752        (921

Increase in Other Assets

     (140     (6,503

Decrease in Prepaid FDIC Assessment

     335        —     

Decrease in Other Intangibles

     23        —     

Decrease in Unfunded Pension Liability

     791        791   

Decrease in Capital Lease Payable

     (18     —     

Decrease in Accrued Interest Payable

     —          (30

Decrease in Other Liabilities

     (1,373     (1,932
  

 

 

   

 

 

 

Net Cash Provided By Operating Activities

     3,417        7,577   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Principal Payments on Investment Securities

     8,100        9,097   

Maturities of Investment Securities - Available for Sale

     30,406        1,000   

Purchases of Investment Securities - Available for Sale

     (30,000     (3,287

Maturities of Investment Securities - Held to Maturity

     143        222   

Purchases of Investment Securities - Held to Maturity

     (25     —     

Loan Repayments - Net

     29,968        12,638   

Purchases of Premises and Equipment - Net

     (518     (326

Proceeds from Sale of Other Real Estate Owned

     —          2,457   
  

 

 

   

 

 

 

Net Cash Provided By Investing Activities

     38,074        21,801   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Net (Decrease) Increase in Deposit Accounts

     (596     12,644   

Dividends Paid to Stockholders

     —          (1,454

Proceeds from Stock Dividend Reinvestment

     —          400   
  

 

 

   

 

 

 

Net Cash (Used in) Provided By Financing Activities

     (596     11,590   
  

 

 

   

 

 

 

Net Increase in Cash and Cash Equivalents

     40,895        40,968   

Cash and Cash Equivalents Beginning of Period

     172,559        41,149   
  

 

 

   

 

 

 

Cash and Cash Equivalents End of Period

   $ 213,454      $ 82,117   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash Received During the Year for Interest

   $ 17,057      $ 19,398   
  

 

 

   

 

 

 

Cash Paid During the Year for:

    

Interest

   $ 1,249      $ 1,942   

Income Taxes

     —          191   
  

 

 

   

 

 

 

Total Cash Paid During Year for Interest & Income Taxes

   $ 1,249      $ 2,133   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

Page 6


Table of Contents

SUFFOLK BANCORP AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated financial statements of Suffolk Bancorp (“Suffolk”) and its consolidated subsidiaries, primarily Suffolk County National Bank (the “Bank”), have been prepared to reflect all adjustments (consisting solely of normally recurring accruals) necessary for a fair presentation of the financial condition and results of operations for the periods presented. Certain information and footnotes normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted. Notwithstanding, management believes that the disclosures are adequate to prevent the information from misleading the reader, particularly when the accompanying condensed consolidated financial statements are read in conjunction with the audited consolidated financial statements and notes thereto included in the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011.

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

Certain prior period amounts have been reclassified to conform to the current period’s presentation.

(2) Recent Accounting Pronouncements

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-03, Transfers and Servicing (Topic 860), “Reconsideration of Effective Control for Repurchase Agreements,” which amends the authoritative accounting guidance under ASC Topic 860 “Transfers and Servicing.” The amendments in this update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this update are effective for the first interim or annual period beginning on or after December 15, 2011, and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. Adoption of this update did not have a material effect on Suffolk’s results of operations or financial condition.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820), “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” which amends the authoritative accounting guidance under ASC Topic 820 “Fair Value Measurement” to more closely align U.S. GAAP with International Financial Reporting Standards (“IFRS”). This standard requires the disclosure of: (1) the reason for the measurement for both recurring and nonrecurring fair value measurements; (2) all transfers between levels of the fair value hierarchy must be separately reported and described; (3) for all Level 2 and Level 3 fair value measurements, a description of the valuation technique(s) and the inputs used in those measurements; (4) for Level 3 measurements, the quantitative information about the significant unobservable inputs used in those measurements; (5) a description of the valuation processes used in Level 3 fair value measurements, as well as narrative descriptions about those measurement’s sensitivity to changes in unobservable inputs if such changes would significantly alter the fair value measurement; and (6) expanded disclosure of the categorization by level of the fair value hierarchy for the items that are not measured at fair value in the balance sheet, but for where the estimated fair value is required to be disclosed (e.g. portfolio loans and deposits). This new guidance was effective prospectively beginning January 1, 2012 and it did not have a material effect on Suffolk’s condensed consolidated financial statements upon implementation. The new disclosures of the fair value levels of Suffolk’s assets and liabilities are set forth in Note 3.

In June 2011, the FASB issued ASU No. 2011-05, Topic 220, “Presentation of Comprehensive Income,” in order to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income. This standard eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. This update requires all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. Regardless of which presentation method an entity chooses, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s), where the components of net income and the components of other comprehensive income are presented. This new guidance was effective retrospectively for all annual and interim periods presented beginning January 1, 2012 and Suffolk now presents a separate condensed consolidated statement of comprehensive income. In October 2011, the FASB decided to defer the presentation of reclassification adjustments pending further consideration.

 

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Table of Contents

In September 2011 the FASB issued ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment,” to give both public and nonpublic entities the option to qualitatively determine whether they can bypass the two-step goodwill impairment test under FASB ASC 350-20, Intangibles – Goodwill and Other. Under the new guidance, if an entity chooses to perform a qualitative assessment and determines that it is more likely than not (a more than 50 percent likelihood) that the fair value of a reporting unit is less than its carrying amount, it would then perform Step 1 of the annual goodwill impairment test in ASC 350-20 and, if necessary, proceed to Step 2. Otherwise, no further evaluation would be necessary. The amended guidance is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011, although early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. Suffolk adopted ASU 2011-08 effective in the third quarter of 2011. Adoption of this update did not have an effect on Suffolk’s results of operations or financial condition.

(3) Fair Value

Suffolk records investments available for sale, other real estate owned (“OREO”), mortgage servicing rights and impaired loans at fair value. Fair value measurement is determined based on the assumptions that market participants would use in pricing the asset or liability in an exchange. The definition of fair value includes the exchange price which is the price in an orderly transaction between market participants to sell an asset or transfer a liability in the principal market for the asset or liability. Market participant assumptions include assumptions about risk, the risk inherent in a particular valuation technique used to measure fair value and/or the risk inherent in the inputs to the valuation technique, as well as the effect of credit risk on the fair value of liabilities. Suffolk uses three levels of the fair value inputs to measure assets, as described below.

Basis of Fair Value Measurement:

Level 1 – Valuations based on quoted prices in active markets for identical investments.

Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 2 inputs include: (i) quoted prices for similar investments in active markets; (ii) quoted prices for identical investments traded in non-active markets (i.e., dealer or broker markets); and (iii) inputs other than quoted prices that are observable or inputs derived from or corroborated by market data for substantially the full term of the investment.

Level 3 – Valuations based on inputs that are unobservable, supported by little or no market activity, and significant to the overall fair value measurement.

The following table presents the carrying amounts and fair values of Suffolk’s financial instruments. FASB ASC 825, “Financial Instruments,” defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation: (in thousands)

 

     Level in
Fair Value
Hierarchy
     March 31, 2012      December 31, 2011  
        Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Cash & cash equivalents

     Level 1       $ 213,454       $ 213,454       $ 172,559       $ 172,559   

Total loans

     Level 2         939,736         968,654         969,654         1,000,028   

Accrued interest and loan fees receivable

     Level 2         6,133         6,133         6,885         6,885   

Deposits

     Level 2         1,311,276         1,313,522         1,311,872         1,314,190   

Accrued interest payable

     Level 2         348         348         348         348   

Fair value estimates are made at a specific point in time and may be based on judgments regarding losses expected in the future, risk, and other factors that are subjective in nature. The methods and assumptions used to produce the fair value estimates follow.

Short-term financial instruments are valued at the carrying amounts included in the condensed consolidated statements of condition, which are reasonable estimates of fair value due to the relatively short term nature of the instruments. This approach applies to cash and cash equivalents; accrued interest and loan fees receivable; non-interest-bearing demand deposits; N.O.W., money market, and saving accounts; and accrued interest payable.

 

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Fair values are estimated for portfolios of loans with similar characteristics. Loans are segregated by type. The fair value of performing loans was calculated by discounting scheduled cash flows through their estimated maturity using estimated market discount rates that reflect the credit and interest rate risk of the loan. Estimated maturity is based on the Bank’s history of repayments for each type of loan and an estimate of the effect of the current economy. Fair value for significant non-performing loans is based on recent external appraisals of collateral, if any. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the associated risk. Assumptions regarding credit risk, cash flows, and discount rates are made using available market information and specific borrower information.

Other assets measured at fair value on a non-recurring basis were as follows: (in thousands)

 

            Fair Value Measurements Using  

Description

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

Impaired loans

   $ 127,957       $ —         $ —         $ 127,957   

Other real estate owned

     1,800         —           —           1,800   

Mortgage servicing rights (1)

     1,600         —           —           1,600   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 131,357       $ —         $ —         $ 131,357   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Mortgage servicing rights are measured at fair value on a recurring basis.

 

            Fair Value Measurements Using  

Description

   December 31, 2011      Active Markets for
Identical Assets
Quoted Prices
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Impaired loans

   $ 118,613       $ —         $ —         $ 118,613   

Other real estate owned

     1,800         —           —           1,800   

Mortgage servicing rights (1)

     1,623         —           —           1,623   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 122,036       $ —         $ —         $ 122,036   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Mortgage servicing rights are measured at fair value on a recurring basis.

Impaired loans are evaluated and valued at the time the loan is identified as impaired. The loans are measured based on the value of the collateral securing these loans, or techniques that are not based on market activity for loans that are not collateral dependent and require management’s judgment. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. The value of real estate collateral is determined based on appraisals by qualified licensed appraisers hired by Suffolk. The value of business equipment may be based on an appraisal by qualified licensed appraisers hired by Suffolk if significant, or may be valued based on the equipment’s net book value on the business’ financial statements. Inventory and accounts receivable collateral may be valued based on independent field examiner review or aging reports, if significant. Reviews by field examiners may be conducted based on the loan exposure and reliance on this type of collateral. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

 

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The following tables summarize the valuation of financial instruments measured at fair value on a recurring basis in the condensed consolidated statements of condition at March 31, 2012 and December 31, 2011, including the additional requirement to segregate classifications to correspond to the major security type classifications utilized for disclosure purposes: (in thousands)

 

            Fair Value Measurements Using  

Description

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

Obligations of states and political subdivisions

   $ 168,254       $ —         $ 168,254       $ —     

Collateralized mortgage obligations

     118,861         —           111,153         7,708   

Mortgage-backed securities

     424         —           424         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 287,539       $ —         $ 279,831       $ 7,708   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no transfers between, into and/or out of Levels 1, 2, or 3 during the quarter ended March 31, 2012.

 

            Fair Value Measurements Using  

Description

   December 31, 2011      Active Markets for
Identical Assets
Quoted Prices
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Obligations of states and political subdivisions

   $ 171,992       $ —         $ 171,992       $ —     

Collateralized mortgage obligations

     126,770         —           118,776         7,994   

Mortgage-backed securities

     442         —           442         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 299,204       $ —         $ 291,210       $ 7,994   
  

 

 

    

 

 

    

 

 

    

 

 

 

The types of instruments valued based on quoted market prices in active markets include most U.S. government debt and agency debt securities. Such instruments are generally classified within level 1 and level 2 of the fair value hierarchy. Suffolk does not adjust the quoted price for such instruments.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include state and municipal obligations, mortgage-backed securities and collateralized mortgage obligations. Such instruments are generally classified within level 2 of the fair value hierarchy.

FASB ASC 820, “Fair Value Measurements and Disclosures,” provides additional guidance in determining fair values when the volume and level of activity for the asset or liability have significantly decreased, particularly when there is no active market or where the price inputs being used represent distressed sales. It also provides guidelines for making fair value measurements more consistent with principles, reaffirming the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets become inactive.

The fair value of certificates of deposit less than $250,000 is calculated by discounting cash flows with applicable origination rates. At March 31, 2012, the fair value of certificates of deposit less than $250,000 totaling $159,985,000 had a carrying value of $158,288,000. The fair value of certificates of deposit of $250,000 or more totaling $107,780,000 had a carrying value of $107,232,000 at the same date.

The fair value of commitments to extend credit was estimated by either discounting cash flows or using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the current creditworthiness of the counterparties.

The estimated fair value of written financial guarantees and letters of credit is based on fees currently charged for similar agreements. The contractual amounts of these commitments were $18,773,000 and $19,842,000 at March 31, 2012 and December 31, 2011, respectively. The fees charged for the commitments were not material in amount.

 

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(4) Investment Securities

The amortized cost, estimated fair values, and gross unrealized gains and losses of Suffolk’s investment securities available for sale and held to maturity at March 31, 2012 and December 31, 2011, respectively, were: (in thousands)

 

     March 31, 2012           December 31, 2011  
     Amortized
Cost
     Fair
Value
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
          Amortized
Cost
     Fair
Value
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
 

Available for sale:

                           

Obligations of states and political subdivisions

   $ 156,090       $ 168,254       $ 12,164       $ —             $ 156,663       $ 171,992       $ 15,329       $ —     

Collateralized mortgage obligations

     113,731         118,861         5,884         (754          122,155         126,770         5,768         (1,153

Mortgage-backed securities

     376         424         48         —               391         442         51         —     
  

 

 

    

 

 

    

 

 

    

 

 

        

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

     270,197         287,539         18,096         (754          279,209         299,204         21,148         (1,153
  

 

 

    

 

 

    

 

 

    

 

 

        

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity:

                           

Obligations of states and political subdivisions

     9,194         9,988         794         —               9,315         10,161         846         —     
  

 

 

    

 

 

    

 

 

    

 

 

        

 

 

    

 

 

    

 

 

    

 

 

 

Balance at end of period

     9,194         9,988         794         —               9,315         10,161         846         —     
  

 

 

    

 

 

    

 

 

    

 

 

        

 

 

    

 

 

    

 

 

    

 

 

 

Total Investment Securities

   $ 279,391       $ 297,527       $ 18,890       $ (754        $ 288,524       $ 309,365       $ 21,994       $ (1,153
  

 

 

    

 

 

    

 

 

    

 

 

        

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost, maturities, and approximate fair value of Suffolk’s investment securities at March 31, 2012 were as follows: (in thousands)

 

     Available for Sale           Held to Maturity           Total  
     U.S. Treasury
Securities
     U.S.
Govt. Agency
Debt
     Obligations of
States & Political
Subdivisions
          Obligations of
States & Political
Subdivisions
          Total
Amortized
Cost
     Total
Fair Value
 

Maturity (in years) (1)

   Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
          Amortized
Cost
     Fair
Value
                    

Within 1

   $ —         $ —         $ —         $ —         $ 896       $ 912           $ 2,282       $ 2,290           $ 3,178       $ 3,202   

After 1 but within 5

     —           —           —           —           57,584         61,911             3,921         4,201           $ 61,505       $ 66,112   

After 5 but within 10

     —           —           —           —           96,206         103,920             2,991         3,497           $ 99,197       $ 107,417   

After 10

     —           —           —           —           1,404         1,511             —           —             $ 1,404       $ 1,511   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

        

 

 

    

 

 

        

 

 

    

 

 

 

Subtotal

     —           —           —           —           156,090         168,254             9,194         9,988           $ 165,284       $ 178,242   

Collateralized mortgage obligations

     —           —           —           —           113,731         118,861             —           —             $ 113,731       $ 118,861   

Mortgage-backed securities

     —           —           —           —           376         424             —           —             $ 376       $ 424   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

        

 

 

    

 

 

        

 

 

    

 

 

 

Total

   $ —         $ —         $ —         $ —         $ 270,197       $ 287,539           $ 9,194       $ 9,988           $ 279,391       $ 297,527   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

        

 

 

    

 

 

        

 

 

    

 

 

 

 

(1) Maturities shown are stated maturities. Securities backed by mortgages are expected to have substantial periodic prepayments resulting in weighted average lives considerably less than what would be surmised from the table above.

As a member of the Federal Reserve System, the Bank owns Federal Reserve Bank stock with a book value of $712,000. The stock has no maturity and there is no public market for the investment.

As a member of the Federal Home Loan Bank of New York (“FHLB”), the Bank owns 17,442 shares of FHLB stock with a book value of $1,744,000. The stock has no maturity and there is no public market for the investment. The stock continues to pay dividends and has not placed restrictions on redemptions and as such, was not deemed impaired as of March 31, 2012.

At March 31, 2012 and December 31, 2011, investment securities carried at $216,850,000 and $201,207,000, respectively, were pledged to secure trust deposits and public funds on deposit.

 

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The table below indicates the length of time individual securities have been held in a continuous unrealized loss position at the date indicated: (in thousands)

 

As of March 31, 2012

          Less than 12 months      12 months or longer      Total  

Type of securities

   Number of
Securities
     Fair
Value
     Unrealized
losses
     Fair
value
     Unrealized
losses
     Fair
value
     Unrealized
losses
 

Collateralized Mortgage Obligations

     2       $ —         $ —         $ 7,708       $ 754       $ 7,708       $ 754   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011

          Less than 12 months      12 months or longer      Total  

Type of securities

   Number of
Securities
     Fair
Value
     Unrealized
losses
     Fair
value
     Unrealized
losses
     Fair
value
     Unrealized
losses
 

Collateralized Mortgage Obligations

     2       $ —         $ —         $ 7,994       $ 1,153       $ 7,994       $ 1,153   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. All of the Company’s investment securities classified as available-for-sale or held-to-maturity are evaluated for OTTI under SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities.”

In determining OTTI under the ASC 320 model, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on information available to management at a point in time. An OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.

When an OTTI occurs under the model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors shall be recognized in other comprehensive income, net of applicable tax benefit. The previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of the investment.

The unrealized losses in Suffolk’s collateralized mortgage obligations at March 31, 2012 were caused by changes in interest rates, a significant widening of credit spreads across markets for these securities, and illiquidity in the financial markets for these instruments. These securities include two non-agency private label issues held at a continuous, unrealized loss for twelve months or longer and are either super-senior or senior in tranche structure. Each of these securities has some level of credit enhancement, and none are collateralized by sub-prime loans. With the assistance of a third party, management reviews the characteristics of these securities periodically, including levels of delinquency and foreclosure, projected losses at various degrees of severity, and credit enhancement and coverage. Based on the aforementioned periodic analysis, it was determined that no securities had additional impairment at March 31, 2012.

The following table summarizes the two non-agency, private label collateralized mortgage obligation securities, by year of vintage with OTTI, credit ratings and related credit losses recognized in earnings at March 31, 2012. Management determined the estimated fair values for each security based on discounted cash flow analyses using the Intex Desktop Valuation model. Management explicitly calculates the credit component utilizing conditional default and loss severity vectors with the Intex model. Management relies on FASB ASC paragraph 820-10-55-5 to provide guidance on the discount rates to be used when a market is not active. According to the standard, the discount rate should take into account all of the following factors:

 

   

The time value of money (risk-free rate)

 

   

Price for bearing the uncertainty in the cash flows (risk premium)

 

   

Other case-specific factors that would be considered by market participants, including a liquidity adjustment.

 

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Weighted average key assumptions utilized in the valuations were as follows:

 

   

Discount Rate – 10.5%

 

   

Voluntary Prepayments – 16.2%

 

   

Conditional Default Rates – 10.1% for the first 24 months, then trending downward in a linear fashion for the following 12 months, then to zero through approximately 17 years.

 

   

Loss Severity – 54.8% trending downward to terminal loss severities of 23%, in a linear fashion, at 2.5% per year.

 

      Year of
Vintage
     Total
Fair
     Total
Amortized
     Total OTTI
Related to
Credit Loss at
 

(in thousands)

   2006      Value      Cost      Mar. 31, 2012  

Rating:

           

Total Non-Agency

           

CMOs

           

CCC and Below

   $ 7,708       $ 7,708       $ 8,462       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Non-Agency

           

CMO’s

   $ 7,708       $ 7,708       $ 8,462       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The significant unobservable inputs used in the fair value measurements of Suffolk’s collateralized mortgage obligations are voluntary prepayment rates, conditional default rates and loss severity in the event of default. Significant increases or decreases in any of those inputs in isolation would result in a significantly higher or lower fair value measurement. Generally, a change in the assumption used for the conditional default rates is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for voluntary prepayment rates.

(5) Loans

The following table categorizes total loans (net of unearned discount) at March 31, 2012 and December 31, 2011: (dollars in thousands)

 

     March 31,
2012
    % of
Total
Loans
    December 31,
2011
    % of
Total
Loans
 

Commercial, financial, and agricultural

   $ 211,184        22.5   $ 206,652        21.3

Commercial real estate

     412,722        43.9        428,646        44.2   

Real estate construction loans

     48,284        5.1        49,704        5.1   

Residential mortgages (1st and 2nd liens)

     152,318        16.2        160,619        16.6   

Home equity loans

     77,015        8.2        79,684        8.2   

Consumer loans

     37,815        4.0        43,831        4.5   

Other loans

     423        0.1        543        0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Loans

     939,761        100.0     969,679        100.0

Unearned discount

     (25       (25  

Allowance for loan losses

     (40,008       (39,958  
  

 

 

     

 

 

   

Balance at end of period

   $ 899,728        $ 929,696     
  

 

 

     

 

 

   

(6) Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the un-collectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

 

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A loan is impaired when, based on current information and events, it is probable that Suffolk will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Generally, troubled debt restructurings are initially classified as non-accrual until sufficient time has passed to assess whether the restructured loan will continue to perform. Generally, Suffolk returns a troubled-debt restructuring to accrual status upon six months of performance under the new terms.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Commercial and commercial real estate loans over $250,000 are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of homogeneous loans with smaller individual balances, such as consumer and residential real estate loans, are evaluated collectively for impairment, and accordingly, are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be “collateral-dependent,” the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, Suffolk determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers non impaired loans and is based on historical loss experience, adjusted for qualitative factors. The historical loss experience is determined by portfolio segment, and is based on the actual loss history experienced by Suffolk over the historical loan loss period which is a rolling twelve month period. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio segment. These qualitative factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified:

 

   

Commercial, financial & agricultural loans

 

   

Commercial real estate mortgages

 

   

Real estate — construction loans

 

   

Residential mortgages (1st and 2nd liens)

 

   

Home equity loans

 

   

Consumer loans

In addition, qualitative factors are considered for areas of concern that cannot be fully quantified in the allocation based on historical net charge-off ratios. Qualitative factors include:

 

   

Economic outlook

 

   

Trends in delinquency and problem loans

 

   

Changes in loan volume and nature of terms of loans

 

   

Effects of changes in lending policy

 

   

Experience, ability, and depth of lending management and staff

 

   

Concentrations of credit

 

   

Board and loan review oversight

 

   

Changes in value of underlying collateral

 

   

Competition, regulation, and other external factors

For performing loans, an estimate of adequacy is made by applying qualitative factors specific to the portfolio to the period-end balances. Consideration is also given to the type and collateral of the loans with particular attention paid to commercial real estate construction loans, due to the inherent risk of this type of loan. Allocated and general reserves are available for any identified loss.

 

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Delinquent, non-performing, and classified loans have trended upward in recent quarters. These are primary factors in the determination of the allowance.

At March 31, 2012, non-performing loans, including non-accrual loans and loans contractually past due 90 days or more with regard to payment of principal and/or interest, totaled $83,152,000 as compared to $80,760,000 at December 31, 2011. When compared to total loans, non-performing loans rose to 8.8 percent at March 31, 2012, up from 8.3 percent at December 31, 2011. An increase in commercial non-accrual loans was primarily responsible for the growth in total non-accrual loans at March 31, 2012.

The following table presents information about the allowance for loan losses: (in thousands of dollars)

 

     For the Three Months Ended  
     March 31, 2012     March 31, 2011  

Balance, January 1,

   $ 39,958      $ 28,419   

Loans charged-off:

    

Commercial, financial & agricultural loans

     337        727   

Commercial real estate mortgages

     —          —     

Real estate — construction loans

     —          —     

Residential mortgages (1st and 2nd liens)

     395        48   

Home equity loans

     61        70   

Consumer loans

     32        57   

Other loans

     —          —     
  

 

 

   

 

 

 

Total Charge-offs

   $ 825      $ 902   
  

 

 

   

 

 

 

Loans recovered after charge-off:

    

Commercial, financial & agricultural loans

   $ 855      $ 37   

Commercial real estate mortgages

       —     

Real estate — construction loans

     —          —     

Residential mortgages (1st and 2nd liens)

     1        —     

Home equity loans

     —          —     

Consumer loans

     19        14   

Other loans

     —          —     
  

 

 

   

 

 

 

Total recoveries

   $ 875      $ 51   
  

 

 

   

 

 

 

Net (recoveries) charge-offs

     (50     851   

Reclass to Allowance for Contingent Liabilities

     —          —     

Provision for loan losses

     —          19,971   
  

 

 

   

 

 

 

Balance, End of Period

   $ 40,008      $ 47,539   
  

 

 

   

 

 

 

Further information pertaining to the allowance for loan losses at March 31, 2012 is as follows: (in thousands)

 

     Commercial,
financial, and
agricultural
     Commercial
real estate
     Real estate
construction
loans
     Residential
mortgages (1st
and 2nd liens)
     Home
equity
loans
     Consumer
loans
     Total  

Allowance for loan losses:

                    

Ending balance (total allowance)

   $ 25,598       $ 11,029       $ 623       $ 2,007       $ 451       $ 300       $ 40,008   

Ending balance: individually evaluated for impairment

     6,935         1,288         —           —           —           —         $ 8,223   

Ending balance: collectively evaluated for impairment

     18,663         9,741         623         2,007         451         300       $ 31,785   

Loan balances:

                    

Ending balance (loan portfolio) (1)

   $ 211,184       $ 412,722       $ 48,284       $ 152,318       $ 77,015       $ 37,790       $ 939,313   

Ending balance: individually evaluated for impairment

     30,388         65,791         18,576         8,506         4,013         683       $ 127,957   

Ending balance: collectively evaluated for impairment

     180,796         346,931         29,708         143,812         73,002         37,107       $ 811,356   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Other loans of $423, not included here, consist primarily of advances under lines of credit.

 

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Further information pertaining to the allowance for loan losses at December 31, 2011 is as follows: (in thousands)

 

     Commercial,
financial, and
agricultural
     Commercial
real estate
     Real estate
construction
loans
     Residential
mortgages (1st
and 2nd liens)
     Home
equity
loans
     Consumer
loans
     Total  

Allowance for loan losses:

                    

Ending balance (total allowance)

   $ 25,080       $ 11,029       $ 623       $ 2,401       $ 512       $ 313       $ 39,958   

Ending balance: individually evaluated for impairment

     7,477         3,092         57         —           —           —           10,626   

Ending balance: collectively evaluated for impairment

     17,603         7,937         566         2,401         512         313         29,332   

Loan balances:

                    

Ending balance (loan portfolio) (1)

   $ 206,652       $ 428,646       $ 49,704       $ 160,619       $ 79,684       $ 43,831       $ 969,136   

Ending balance: individually evaluated for impairment

     36,559         66,402         19,251         8,345         3,897         646         135,100   

Ending balance: collectively evaluated for impairment

     170,093         362,244         30,453         152,274         75,787         43,185         834,036   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Other loans of $543, not included here, consist primarily of advances under lines of credit.

The following is a summary of current and past due loans at March 31, 2012: (in thousands)

 

     Past Due      Current      Total  
     30-59 days      60-89 days      90 days & over      Total        

Commercial:

                 

Commercial, financial, and agricultural

   $ 2,131       $ 2,489       $ 19,384       $ 24,004       $ 187,180       $ 211,184   

Commercial real estate mortgages

     2,178         1,400         44,871         48,449         364,273         412,722   

Real estate construction loans

     —           8,832         7,003         15,835         32,449         48,284   

Consumer:

                 

Residential mortgages
(1st and 2nd liens)

     3,873         454         7,197         11,524         140,794         152,318   

Home equity loans

     424         196         4,014         4,634         72,381         77,015   

Consumer loans

     122         11         683         816         36,974         37,790   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (1)

   $ 8,728       $ 13,382       $ 83,152       $ 105,262       $ 834,051       $ 939,313   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Other loans of $423, not included here, consist primarily of advances under lines of credit.

The following is a summary of current and past due loans at December 31, 2011: (in thousands)

 

     Past Due      Current      Total  
     30-59 days      60-89 days      90 days & over      Total        

Commercial:

                 

Commercial, financial, and agricultural

   $ 9,774       $ 8,574       $ 16,867       $ 35,215       $ 171,437       $ 206,652   

Commercial real estate mortgages

     4,981         4,843         45,344         55,168         373,478         428,646   

Real estate construction loans

     1,282         —           6,978         8,260         41,444         49,704   

Consumer:

                 

Residential mortgages
(1st and 2nd liens)

     3,479         1,144         7,028         11,651         148,968         160,619   

Home equity loans

     —           198         3,897         4,095         75,589         79,684   

Consumer loans

     215         78         646         939         42,892         43,831   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total (1)

   $ 19,731       $ 14,837       $ 80,760       $ 115,328       $ 853,808       $ 969,136   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Other loans of $543, not included here, consist primarily of advances under lines of credit.

 

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The following is a summary of impaired loans: (in thousands)

 

     March 31, 2012      December 31, 2011  
     Impaired
Loans with
Valuation
Reserves
     Impaired
Loans
without
Valuation
Reserves
     Total
Impaired
Loans
     Total
Valuation
Reserves
     Impaired
Loans with
Valuation
Reserves
     Impaired
Loans
without
Valuation
Reserves
     Total
Impaired
Loans
     Total
Valuation
Reserves
 

Commercial, financial & agricultural loans

   $ 15,678       $ 14,710       $ 30,388       $ 6,935       $ 15,674       $ 20,885       $ 36,559       $ 7,477   

Commercial real estate mortgages

     15,358         50,433         65,791         1,288         19,715         46,687         66,402         3,092   

Real estate construction loans

     —           18,576         18,576         —           2,207         17,044         19,251         57   

Residential mortgages
(1st & 2nd liens)

     —           8,506         8,506         —           —           8,345         8,345         —     

Home equity loans

     —           4,013         4,013         —           —           3,897         3,897         —     

Consumer loans

     —           683         683         —           —           646         646         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 31,036       $ 96,921       $ 127,957       $ 8,223       $ 37,596       $ 97,504       $ 135,100       $ 10,626   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Quarter ended
March 31, 2012
     Quarter ended
March 31, 2011
 

Average investment in impaired loans

   $ 129,209       $ 111,515   

Interest income recognized on impaired loans

   $ 771       $ 1,071   

Interest income recognized on a cash basis on impaired loans

   $ —         $ —     
  

 

 

    

 

 

 

The following is a summary of information pertaining to impaired and non-accrual loans: (in thousands)

 

     March 31, 2012      December 31, 2011  

Impaired loans without a valuation allowance

   $ 96,921       $ 97,504   

Impaired loans with a valuation allowance

     31,036         37,596   
  

 

 

    

 

 

 

Total impaired loans

   $ 127,957       $ 135,100   
  

 

 

    

 

 

 

Valuation allowance related to impaired loans

   $ 8,223       $ 10,626   

Total non-accrual loans

     83,152         80,760   

Total loans past due 90 days or more and still accruing

     —           —     

Troubled debt restructurings accruing interest

     6,977         5,479   

Troubled debt restructurings - nonaccruing

     21,291         20,996   
  

 

 

    

 

 

 

Additional interest income of approximately $1,413,000 and $4,267,000 would have been recorded during the three and twelve month periods ended March 31, 2012 and December 31, 2011, respectively, if the loans had performed in accordance with their original terms.

A total of $2,923,000 is committed to be advanced in connection with impaired loans as of March 31, 2012.

 

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The following table summarizes loan balances and allocates the allowance for loan losses by risk rating as of March 31, 2012: (in thousands)

 

     Commercial,
financial, and
agricultural
    Commercial
real estate
mortgages
    Real estate
construction
loans
    Residential
mortgages (1st
and 2nd liens)
    Home
equity
loans
    Consumer
loans (4)
    Total  

Unimpaired loans:

              

Total pass loans (1)

     153,575        275,830        9,266        143,812        73,002        37,107      $ 692,592   

Loss factor (2)

     10.60     2.97     2.43     1.40     0.62     0.81     3.96
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reserve

     16,286        8,190        225        2,007        451        300        27,459   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total special mention loans

     16,037        48,284        5,356        —          —            69,677   

Loss factor

     7.00     2.18     1.94           3.27
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reserve

     1,122        1,053        104        —          —            2,279   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total substandard loans

     11,184        22,817        15,086        —          —            49,087   

Loss factor

     11.22     2.18     1.95           4.17
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reserve

     1,255        498        294        —          —          —          2,047   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impaired loans:

              

Total substandard loans

     30,190        65,791        16,930        8,506        4,013        683        126,113   

Loss factor

     22.97     1.96     0.00 %(3)            6.52
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reserve

     6,935        1,288        —          —          —          —          8,223   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total doubtful loans

     198        —          1,646        —          —          —          1,844   

Loss factor

                 0.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reserve

     —          —          —          —          —          —          —     

Total unimpaired loans

   $ 180,796      $ 346,931      $ 29,708      $ 143,812      $ 73,002      $ 37,107      $ 811,356   

Total reserve on unimpaired loans

   $ 18,663      $ 9,741      $ 623      $ 2,007      $ 451      $ 300      $ 31,785   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Other loans of $423, not included here, consist primarily of advances under lines of credit.
(2) Loss factor calculation is specific reserve as a percentage of balance for a portfolio segment.
(3) Loss factor is driven by higher collateral positions and charge-offs taken within this portfolio segment.
(4) Net of unearned discount.

 

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The following table summarizes loan balances and allocates the allowance for loan losses by risk rating as of December 31, 2011: (in thousands)

 

     Commercial,
financial, and
agricultural
    Commercial
real estate
mortgages
    Real estate
construction
loans
    Residential
mortgages (1st
and 2nd liens)
    Home
equity
loans
    Consumer
loans (4)
    Total  

Unimpaired loans:

              

Total pass loans (1)

   $ 144,952      $ 289,856      $ 4,932      $ 152,274      $ 75,787      $ 43,185      $ 710,986   

Loss factor (2)

     10.43     2.19     1.74     1.58     0.68     0.72     3.49
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reserve

     15,121        6,359        86        2,401        512        313        24,792   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total special mention loans

     16,448        41,283        7,772        —          —          —          65,503   

Loss factor

     8.68     2.18     1.88           3.78
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reserve

     1,428        900        146        —          —          —          2,474   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total substandard loans

     8,693        31,105        17,749        —          —          —          57,547   

Loss factor

     12.12     2.18     1.88           3.59
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reserve

     1,054        678        334        —          —          —          2,066   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impaired loans:

              

Total substandard loans

     36,316        66,402        17,639        8,345        3,897        646        133,245   

Loss factor

     20.52     4.66     0.32 %(3)            7.96
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reserve

     7,452        3,092        57        —          —          —          10,601   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total doubtful loans

     243        —          1,612        —          —          —          1,855   

Loss factor

     10.29       0.00           1.35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reserve

     25        —          —          —          —          —          25   

Total unimpaired loans

   $ 170,093      $ 362,244      $ 30,453      $ 152,274      $ 75,787      $ 43,185      $ 834,036   

Total reserve on unimpaired loans

   $ 17,603      $ 7,937      $ 566      $ 2,401      $ 512      $ 313      $ 29,332   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Other loans of $543, not included here, consist primarily of advances under lines of credit.
(2) Loss factor calculation is specific reserve as a percentage of balance for a portfolio segment.
(3) Loss factor is driven by higher collateral positions and charge-offs taken within this portfolio segment.
(4) Net of unearned discount.

The following table summarizes the allowance for loan losses by loan type for the three months ended March 31, 2012: (in thousands)

 

Allowance for loan losses

   Commercial,
financial &
agricultural
loans
    Commercial
real estate
mortgages
     Real estate
contruction
loans
     Residential
mortgages
(1st and
2nd liens)
    Home
equity
loans
    Consumer
loans
    Total  

Beginning balance

   $ 25,080      $ 11,029       $ 623       $ 2,401      $ 512      $ 313      $ 39,958   

Total charge-offs

     (337     —           —           (395     (61     (32     (825

Total recoveries

     855        —           —           1        —          19        875   

Provision for loan losses

                   —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 25,598      $ 11,029       $ 623       $ 2,007      $ 451      $ 300      $ 40,008   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Credit Quality Information

The Bank utilizes an eight-grade risk-rating system for commercial loans, commercial real estate and construction loans. Loans in risk grades 1-4 are considered “pass” loans. The Bank’s risk grades are as follows:

Risk Grade 1 Excellent:

Loans secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration; or loans to any publicly held company with a current long-term debt rating of A or better.

 

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Risk Grade 2 Good:

Loans to businesses that have strong financial statements containing an unqualified opinion from a CPA firm and at least three consecutive years of profits; loans supported by un-audited financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities where there is no impediment to liquidation; loans to individuals backed by liquid personal assets, established credit history, and unquestionable character; or loans to publicly held companies with current long-term debt ratings of Baa or better.

Risk Grade 3 Satisfactory:

Loans supported by financial statements (audited or un-audited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered.

Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:

 

   

At inception, the loan was properly underwritten, did not possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory;

 

   

At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss.

 

   

The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance.

 

   

During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or

 

   

The borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted.

Risk Grade 4 Satisfactory/Monitored:

Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than satisfactory loans due to weak balance sheets, marginal earnings or cash flow, or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in a Satisfactory/Monitored loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision.

Risk Grade 5 Special Mention:

Loans which possess some credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered “potential,” not “defined,” impairments to the primary source of repayment.

Risk Grade 6 Substandard:

One or more of the following characteristics may be exhibited in loans classified Substandard:

 

   

Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss.

 

   

Loans are inadequately protected by the current net worth and paying capacity of the obligor.

 

   

The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees.

 

   

Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

 

   

Unusual courses of action are needed to maintain a high probability of repayment.

 

   

The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments.

 

   

The lender is forced into a subordinated or unsecured position due to flaws in documentation.

 

   

Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms.

 

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The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

 

   

There is a significant deterioration in market conditions to which the borrower is highly vulnerable.

Risk Grade 7 Doubtful:

One or more of the following characteristics may be present in loans classified Doubtful:

 

   

Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable.

 

   

The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

 

   

The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known.

Risk Grade 8 Loss:

Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

The Bank considers real estate, home equity and consumer loans secured by real estate (such as mobile homes) that are contractually past due 90 days or more or where legal action has commenced against the borrower to be substandard. The Bank follows the Federal Financial Institutions Examination Council (“FFIEC”) Uniform Retail Credit Classification guidelines.

The Bank reviews formally, annually, the ratings on all commercial and industrial, commercial real estate and construction loans greater than $1 million. Quarterly, the Bank engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.

The following table identifies the credit risk profile by internally assigned grade as of March 31,2012: (in thousands)

Credit Risk Profile By Internally Assigned Grade

 

     Commercial Credit Exposure      Consumer Credit Exposure         
     Commercial,
financial, and
agricultural
     Commercial
real estate
mortgages
     Real estate
construction
loans
     Residential
mortgages (1st
and 2nd liens)
     Home
equity
loans
     Consumer loans      Total  

Grade:

                    

Pass (1)

   $ 153,575       $ 275,830       $ 9,266       $ 143,812       $ 73,002       $ 37,107       $ 692,592   

Special mention

     16,037         48,284         5,356         —           —           —           69,677   

Substandard

     41,374         88,608         32,016         8,506         4,013         683         175,200   

Doubtful

     198         —           1,646         —           —           —           1,844   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 211,184       $ 412,722       $ 48,284       $ 152,318       $ 77,015       $ 37,790       $ 939,313   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Other loans of $423, not included here, consist primarily of advances under lines of credit.

 

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The following table presents the credit risk profile by internally assigned grade as of December 31, 2011: (in thousands)

Credit Risk Profile By Internally Assigned Grade

 

     Commercial Credit Exposure      Consumer Credit Exposure         
     Commercial,
financial,
and agricultural
     Commercial
real estate
mortgages
     Real estate
construction
loans
     Residential
mortgages (1st
and 2nd liens)
     Home
equity
loans
     Consumer
loans
     Total  

Grade:

                    

Pass (1)

   $ 144,952       $ 289,856       $ 4,932       $ 152,274       $ 75,787       $ 43,185       $ 710,986   

Special mention

     16,448         41,283         7,772         —           —           —           65,503   

Substandard

     45,009         97,507         35,388         8,345         3,897         646         190,792   

Doubtful

     243         —           1,612         —           —           —           1,855   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 206,652       $ 428,646       $ 49,704       $ 160,619       $ 79,684       $ 43,831       $ 969,136   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Other loans of $543, not included here, consist primarily of advances under lines of credit.

The following table summarizes loans that have been modified as troubled debt restructurings during 2012: (dollars in thousands):

 

Troubled Debt Restructurings

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

Commercial, financial, and agricultural

     9       $ 3,316       $ 3,316   

Commercial, secured by real estate

     —           —           —     

Real estate construction loans

     —           —           —     

Residential mortgages

     —           —           —     

Home Equity

     —           —           —     

Consumer

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

     9       $ 3,316       $ 3,316   
  

 

 

    

 

 

    

 

 

 

The following loans, modified as troubled debt restructurings within the last twelve months, became over 30 days past due during the twelve months ended March 31, 2012: (amount at period end, dollars in thousands)

 

Defaulted Troubled Debt Restructurings

   Number of Loans      Recorded
Principal
Balance
 

Commercial, financial, and agricultural

     1       $ 15   

Commercial, secured by real estate

     —           —     

Real estate construction loans

     —           —     

Residential mortgages

     1         494   

Home Equity

     —           —     

Consumer

     —           —     
  

 

 

    

 

 

 

Total

     2       $ 509   
  

 

 

    

 

 

 

 

(7) Retirement Plan

Suffolk accounts for its retirement plan in accordance with FASB ASC 715, “Compensation – Retirement Benefits” and FASB ASC 960, “Plan Accounting – Defined Benefit Pension Plans,” which require an employer that is a business entity and sponsors one or more single-employer defined benefit plans to recognize the funded status of a benefit plan in its statement of financial position; recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost; measure defined benefit plan assets and obligations as of the date of fiscal year-end statements of financial position (with limited exceptions); and disclose in the notes to financial statements additional information about certain effects of net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset and obligation. Plan assets and benefit obligations shall be measured as of the date of its statement of financial position and in determining the amount of net periodic benefit cost. Suffolk has adopted the provisions of the codification, which have been recorded in the accompanying consolidated statement of condition and disclosures.

 

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Suffolk presents information concerning net periodic defined benefit pension expense for the three months ended March 31, 2012 and 2011, including the following components: (in thousands)

 

     Three Months ended March 31  
     2012     2011  

Service cost

   $ 666      $ 545   

Interest cost

     555        562   

Expected return on plan assets

     (590     (560

Amortization of prior service cost

     160        244   
  

 

 

   

 

 

 

Net periodic benefit expense

   $ 791      $ 791   
  

 

 

   

 

 

 

There is no minimum required contribution for the pension plan year ending September 30, 2012. There were no additional contributions required to be made to the plan in the three months ended March 31, 2012.

(8) Stock-based Compensation

Under the terms of Suffolk’s stock option plans adopted in 1999 and 2009, options have been granted to key employees and directors to purchase shares of Suffolk’s stock. Under the Suffolk Bancorp 2009 Stock Incentive Plan (“the Plan”), there are 500,000 shares of Suffolk’s common stock reserved for issuance, of which 100,000 had been granted as of March 31, 2012. There are no shares reserved for issuance under the 1999 Stock Option Plan. Options are awarded by a committee appointed by the Board of Directors. Both plans provide that the option price shall not be less than the fair value of the common stock on the date the option is granted. All options are exercisable for a period of ten years or less. Both plans provide for but do not require the grant of stock appreciation rights that the holder may exercise instead of the underlying option. When the stock appreciation right is exercised, the underlying option is canceled. The optionee receives shares of common stock or cash with a fair market value equal to the excess of the fair value of the shares subject to the option at the time of exercise (or the portion thereof so exercised) over the aggregate option price of the shares set forth in the option agreement. The exercise of stock appreciation rights is treated as the exercise of the underlying option. Options granted prior to 2010 vest after one year. Options granted in 2011 are exercisable commencing three years from the date of grant at a rate of one third per year. Options granted in 2012 are exercisable commencing one year from the date of grant at a rate of one third per year.

On December 30, 2011, Suffolk granted an award of 30,000 non-qualified stock options at an exercise price of $10.79 per share. The stock option award was granted to the President and Chief Executive Officer as an inducement material to employment with Suffolk. The non-qualified options were not issued as part of any of Suffolk’s registered stock-based compensation plans. The options are exercisable commencing three years from the date of grant at a rate of one third per year. For the three months ended March 31, 2012, $9,000 was recognized as compensation expense. The total remaining unrecognized compensation cost of $169,000 will be expensed over the remaining vesting period of 4.75 years.

Stock-based compensation for all share-based payments to employees, including grants of employee stock options, is recorded in the financial statements based on their fair values. During the three months ended March 31, 2012, $18,000 was recognized as compensation expense. The remaining unrecognized compensation cost of $687,000 will be expensed over the remaining weighted vesting period of approximately three years.

The following table presents the options granted, exercised, or expired under the 1999 Plan and the 2009 Plan during the three months ended March 31, 2012:

 

     Shares     Weighted Average Price  

Balance at December 31, 2011

     81,500      $ 22.57   

Options granted

     80,000        13.11   

Options exercised

     —          —     

Options expired or terminated

     (26,000     32.29   
  

 

 

   

 

 

 

Balance at March 31, 2012

     135,500      $ 17.73   
  

 

 

   

 

 

 

 

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The following table details contractual weighted-average lives of outstanding and exercisable options at various prices:

 

     By range of exercise prices  

from

   $ 10.79       $ 12.44       $ 28.30       $ 34.39   

to

   $ 10.79       $ 13.44       $ 32.90       $ 34.95   

Outstanding stock options

     20,000         80,000         26,000         9,500   

Weighted-average remaining life

     9.76         9.95         4.83         3.30   

Weighted-average exercise price

   $ 10.79       $ 13.11       $ 31.04       $ 34.80   

Exercisable stock options

     —           —           26,000         9,500   

Weighted-average remaining life

     —           —           4.83         3.30   

Weighted-average exercise price

   $ —         $ —         $ 31.04       $ 34.80   

 

     Weighted-average  

At all prices

   Options      price      life (yrs)  

Total outstanding

     135,500       $ 17.73         8.47   

Total exercisable

     35,500       $ 32.05         4.42   

(9) Income Taxes

Suffolk uses an asset and liability approach to accounting for income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets are recognized if it is more likely than not that a future benefit will be realized. It is management’s position that no valuation allowance is necessary against any of Suffolk’s deferred tax assets. Suffolk accounts for income taxes in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, “Income Taxes,” which prescribes the recognition and measurement criteria related to tax positions taken or expected to be taken in a tax return. Suffolk had unrecognized tax benefits including interest of approximately $38,000 as of March 31, 2012. Suffolk recognizes interest and penalties accrued relating to unrecognized tax benefits in income tax expense.

(10) Regulatory Matters

On October 25, 2010, the Bank, following discussion with the Office of the Comptroller of the Currency (the “OCC”) entered into an agreement with the OCC (the “Agreement”). The Agreement requires the Bank to take certain actions, including a review of management, the establishment of a three-year strategic plan and capital program, and the establishment of programs related to internal audit, maintaining an adequate allowance for loan losses, real property appraisal, credit risk management, credit concentrations, Bank Secrecy Act compliance and information technology.

Management and the board of directors are committed to taking all necessary actions to promptly address the requirements of the Agreement, and believe that the Bank has already made measurable progress in addressing these requirements. In connection with the foregoing, the Bank has retained legal and other resources including the services of a qualified compliance consultant to assist and advise in meeting the requirements of the Agreement.

The Bank is subject to individual minimum capital ratios (“IMCR’s”) established by the OCC requiring Tier 1 Leverage Capital equal to at least 8.00 percent of adjusted total assets; Tier 1 Risk-based Capital equal to at least 10.50 percent of risk-weighted assets; and Total Risk Based Capital equal to at least 12.00 percent of risk-weighted assets. Management believes the Bank met all three IMCR’s at March 31, 2012: Tier 1 Capital was 8.73 percent of adjusted total assets; Tier 1 Capital was 13.10 percent of risk-weighted assets; Total Risk Based Capital was 14.38 percent of risk-weighted assets. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements.

At March 31, 2012, Suffolk Bancorp’s Tier 1 capital ratio was 8.76 percent of adjusted total assets, Tier 1 capital ratio was 13.14 percent of risk-weighted assets, and Total Risk Based capital ratio was 14.42 percent of risk-weighted assets.

The ability of the Bank to pay dividends to Suffolk is subject to certain regulatory restrictions. Generally, dividends declared in a given year by a national bank are limited to its net profit, as defined by regulatory agencies, for that year, combined with its retained net income for the preceding two years, less any required transfer to surplus or to fund for the retirement of any preferred stock of which the Bank has none as of March 31, 2012. In addition, a national bank may not pay any dividends in an amount greater than its undivided profits and a national bank may not declare any dividends if such declaration would leave the Bank inadequately capitalized. Therefore, the ability of the Bank to declare dividends will depend on its future net

 

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income and capital requirements. In addition, under the Agreement the Bank is required to establish a dividend policy that will permit the declaration of a dividend only when the Bank is in compliance with its capital program and with the prior written determination of no supervisory objection by the OCC.

While subject to the Agreement, Suffolk expects that its and the Bank’s management and board of directors will be required to focus a substantial amount of time on complying with its terms. There also is no guarantee that the Bank will be able to fully comply with the Agreement. If the Bank fails to comply with the terms of the Agreement, it could be subject to further regulatory enforcement actions.

See also Note 13 of Suffolk’s December 31, 2011 Form 10-K for a complete description of the Agreement with the OCC.

(11) Legal Proceedings

On July 11, 2011 a shareholder derivative action, Robert J. Levy v. J. Gordon Huszagh, et al., No. 11 Civ. 3321 (JS), was filed in the U.S. District Court for the Eastern District of New York against certain current and former directors of Suffolk and a former officer of Suffolk. Suffolk was named as a nominal defendant. The complaint seeks damages against the individual defendants in an unspecified amount, and alleges that the individual defendants breached their fiduciary duties by making improper statements regarding the sufficiency of Suffolk’s allowance for loan losses and loan portfolio credit quality, and by failing to establish sufficient allowances for loan losses and to establish effective credit risk management policies. On September 30, 2011, Suffolk and the current and former director defendants filed a motion to dismiss the complaint.

On October 28, 2011, a separate shareholder derivative action, Susan Forbush v. Edgar F. Goodale, et al., No. 33538/11, was filed in the Supreme Court of the State of New York for the County of Suffolk, against certain current and former directors of Suffolk and a former officer of Suffolk. Suffolk was named as a nominal defendant. The complaint asserts claims that are substantially similar to those asserted in the Levy action. On February 17, 2012, the defendants filed motions to dismiss the complaint.

On October 20, 2011, a putative shareholder class action, James E. Fisher v. Suffolk Bancorp, et al., No. 11 Civ. 5114 (SJ), was filed in the U.S. District Court for the Eastern District of New York against Suffolk, its former chief executive officer, and a former chief financial officer of Suffolk. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by knowingly or recklessly making false statements about, or failing to disclose accurate information about, Suffolk’s financial results and condition, loan loss reserves, impaired assets, internal and disclosure controls, and banking practices. The complaint seeks damages in an unspecified amount on behalf of purchasers of Suffolk’s common stock between March 12, 2010 and August 10, 2011.

The foregoing matters are in their preliminary phases and it is not possible to ascertain whether there is a reasonable possibility of a loss from these matters. Therefore we have concluded that an amount for a loss contingency is not to be accrued or disclosed at this time. Suffolk believes that it has substantial defenses to the claims filed against it in these lawsuits and, to the extent that these actions proceed, Suffolk intends to defend itself vigorously.

Suffolk has been informed that the SEC’s New York regional office is conducting an informal inquiry to determine whether there have been violations of the federal securities laws in connection with Suffolk’s financial reporting. The SEC has not asserted that any federal securities law violation has occurred. Suffolk believes it is in compliance with all federal securities laws and believes it has cooperated fully with the SEC’s informal inquiry. Although the ultimate outcome of the informal inquiry cannot be ascertained at this time, based upon information that presently is available to it, Suffolk does not believe that the informal inquiry, when resolved, will have a material adverse effect on Suffolk’s results of operations or financial condition.

 

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Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the Three Month Period ended March 31, 2012 and 2011

Recent Developments

Net income for the first quarter of 2012 was $1.2 million, or $0.12 per diluted common share, compared to a net loss of $7.6 million, or $0.78 per diluted common share, a year ago.

The increase in 2012 first quarter earnings was the result of a $20.0 million reduction in the provision for loan losses. The reduction in the provision for loan losses resulted from a lower level of criticized and classified assets in the first quarter of 2012 coupled with positive results from ongoing workout activities. Somewhat offsetting the foregoing improvements were a $4.2 million (22.8 percent) reduction in net interest income and an $832 thousand (6.0 percent) increase in total operating expenses, principally due to non-recurring fees paid to Suffolk’s former independent registered public accounting firm. The reduction in net interest income resulted from a lower level of average interest-earning assets, primarily loans, coupled with a narrowing of the net interest margin in 2012 when compared to the year ago period. The reduction in the net interest margin is due to the higher level of non-accrual loans along with an increase in low-yielding overnight interest-bearing deposits in 2012.

Basic Performance and Current Activities

 

   

Capital – Suffolk’s Tier I Leverage ratio was 8.76 percent at March 31, 2012 versus 7.94 percent at March 31, 2011 and 8.85 percent at December 31, 2011. Suffolk’s Total Risk-Based Capital ratio was 14.42 percent at March 31, 2012 versus 12.32 percent at March 31, 2011 and 14.26 percent at December 31, 2011. Suffolk’s Tangible Common Equity ratio (non-GAAP financial measure) was 9.02 percent at March 31, 2012 versus 7.97 percent at March 31, 2011 and 9.05 percent at December 31, 2011.

 

   

Asset Quality – Total non-accrual loans increased to $83.2 million or 8.85 percent of loans outstanding at March 31, 2012 versus $80.8 million or 8.33 percent of loans outstanding at December 31, 2011. Total accruing loans delinquent 30 days or more amounted to 2.35 percent of loans outstanding at March 31, 2012 versus 3.56 percent of loans outstanding at December 31, 2011. Net loan recoveries of $50 thousand were recorded in the first quarter of 2012 versus net charge-offs of $851 thousand in the first quarter of 2011. The allowance for loan losses totaled $40.0 million at each of March 31, 2012 and December 31, 2011, representing 4.26 percent and 4.12 percent of total loans, respectively, at such dates. The allowance for loan losses as a percentage of non-accrual loans, excluding non-accrual loans categorized as held for sale, was 48 percent and 49 percent at March 31, 2012 and December 31, 2011, respectively. Suffolk held other real estate owned of $2 million at March 31, 2012 and December 31, 2011.

 

   

Core Deposits – Core deposits totaled $1.0 billion at March 31, 2012 versus $1.1 billion at December 31, 2011. Core deposits represented 80 percent of total deposits in the quarter ended March 31, 2012 and 81 percent for the quarter ended December 31, 2011. Demand deposits decreased by 3.3 percent to $508 million at March 31, 2012 from $525 million at December 31, 2011. Demand deposits represented 39 percent of total deposits at March 31, 2012 and 40 percent at December 31, 2011.

 

   

Loans – Loans outstanding at March 31, 2012 declined by 3.1 percent to $940 million when compared to December 31, 2011.

 

   

Net Interest Margin – Net interest margin was 4.24 percent in the first quarter of 2012 versus 4.99 percent in the first quarter of 2011.

 

   

Performance Ratios – Return on average assets and return on average common stockholders’ equity were 0.31 percent and 3.44 percent, respectively, in the first quarter of 2012 and (1.86 percent) and (22.47 percent), respectively, in the comparable 2011 period.

Continuing managerial emphasis included:

 

   

Rebuilding an executive and senior management team with extensive background in the community banking sector. Following the appointment of a new Chief Executive Officer at the end of the fourth quarter of 2011, during the first quarter, Suffolk added a new Chief Financial Officer, a new Chief Lending Officer, a new Comptroller and a new head of Credit Administration, all of whom have significant industry experience. The executive team is now complete.

 

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Managing net loan charge-offs and non-performing loans. Although non-accrual loans increased slightly from year-end 2011, the Bank’s criticized and classified loan totals declined in the first quarter, versus both March 31 and December 31, 2011, as a result of more focused workout activities, securing additional collateral in certain cases, and upgrading loans where improving financial results warranted such action. Suffolk will maintain an aggressive credit remediation posture throughout 2012 on both the non-accrual and criticized and classified loan pools and management expects to see additional improvements in credit quality as the year progresses, although there can be no assurance that this will occur. The pace of these improvements, however, will depend in large part on local economic conditions. Lending staff’s first efforts continue to be directed to the management of such credits, and then to developing new business with an emphasis on the most profitable customer relationships.

 

   

Maintaining emphasis on both commercial and personal demand deposits, and non-maturity time deposits as a key part of relationships with customers while responding as necessary to demand in Suffolk’s market for certificates of deposit of all sizes. Suffolk continues its emphasis on the profitability of the whole relationship of its customers with the Bank, seeking when possible to both make loans to and obtain funding from the best qualified customers.

 

   

Managing the investment portfolio in a difficult rate environment, attempting to balance the need for current yield against the interest rate risk inherent in securities of longer maturities.

Net Income (Loss)

Net income was $1,168,000 for the first quarter of 2012, compared to a loss of ($7,574,000) posted during the same period last year. Fully-diluted earnings-per-share for the quarter was $0.12 versus a loss-per-share of ($0.78) a year ago. The key reason for the improvement versus 2011 was a decline in the provision for loan losses in the first quarter from $19,971,000 to $0, which drove a rise in net interest income (loss) after provision for loan losses to $14,208,000 in 2012 from ($1,564,000) in 2011.

Interest Income

Interest income was $15,244,000 in the first quarter of 2012, down 25.0 percent from $20,319,000 posted for the same quarter in 2011. Average loans during the first quarter of 2012 totaled $951,003,000 compared to $1,113,812,000 for the comparable 2011 period. During the first quarter of 2012, Suffolk’s earning asset yield declined to 4.54 percent on average earning assets of $1,414,426,000, down from 5.48 percent on average earning assets of $1,555,324,000 during the first quarter of 2011. Year over year, the average balance of interest bearing deposits with banks increased to $141,560,000 from $34,350,000, with an average rate earned on the balances for the three months ended March 31, 2012 of 0.22 percent.

Interest Expense

Interest expense for the first quarter of 2012 was $1,036,000, down 45.8 percent from $1,912,000 for the same period of 2011. During the first quarter of 2012, Suffolk’s cost of funds was 0.52 percent on average interest-bearing liabilities of $800,867,000, down from 0.79 percent on average interest-bearing liabilities of $970,365,000 during the first quarter of 2011. Suffolk’s cost of funds on average total deposits, including interest-free demand balances, was 0.32 percent in the first quarter of 2012 versus 0.52 percent in the comparable 2011 period.

Net Interest Income

Net interest income is the largest component of Suffolk’s earnings. It was $14,208,000 for the first quarter of 2012, down 22.8 percent from $18,407,000 during the same period of 2011. The net interest margin for the quarter, on a fully taxable-equivalent basis, was 4.24 percent compared to 4.99 percent for the same period of 2011. The reduction in net interest margin in 2012 was principally due to the higher level of non-accrual loans coupled with a significant increase in low-yielding interest bearing overnight deposits in 2012.

 

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The following table details the components of Suffolk’s net interest income for the quarter on a taxable-equivalent basis: (in thousands)

 

Quarters ended March 31,

   2012     2011  
     Average
Balance
     Interest     Average
Rate
    Average
Balance
     Interest     Average
Rate
 

INTEREST-EARNING ASSETS

              

U.S. Treasury securities

   $ 14,360       $ —          —     $ 8,077       $ 72        3.55

Collateralized mortgage obligations

     123,338         1,194        3.87        158,526         1,628        4.11   

Mortgage backed securities

     436         7        6.42        509         8        6.34   

Obligations of states and political subdivisions

     180,615         2,312        5.12        213,246         2,904        5.45   

U.S. government agency obligations

     578         8        5.54        22,407         154        2.75   

Other securities

     2,536         46        7.26        4,397         84        7.61   

Federal funds sold and interest bearing bank deposits

     141,560         77        0.22        34,350         16        0.19   

Loans, net of allowance for loan losses

              

Commercial, financial & agricultural loans

     210,851         2,955        5.61        258,536         3,717        5.75   

Commercial real estate mortgages

     420,894         6,110        5.81        440,361         6,882        6.25   

Real estate construction loans

     48,968         2        0.02        82,420         1,133        5.50   

Residential mortgages (1st and 2nd liens)

     152,638         1,877        4.92        184,762         2,793        6.05   

Home equity loans

     78,129         782        4.00        83,631         831        3.97   

Consumer loans

     39,110         668        6.83        63,498         1,092        6.88   

Other loans (overdrafts)

     413         —          —          604         —          —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest-earning assets

     1,414,426       $ 16,038        4.54     1,555,324       $ 21,314        5.48
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Cash and due from banks

     38,261             37,882        

Other non-interest-earning assets

     40,930             53,838        
  

 

 

        

 

 

      

Total assets

   $ 1,493,617           $ 1,647,044        
  

 

 

        

 

 

      

INTEREST-BEARING LIABILITIES

              

Saving, N.O.W. and money market deposits

   $ 539,614       $ 317        0.23   $ 627,944       $ 634        0.40

Time deposits

     261,253         719        1.10        299,158         939        1.26   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total saving and time deposits

     800,867         1,036        0.52        927,102         1,573        0.84   

Federal funds purchased and securities sold under agreement to repurchase

     —           —          0.55        280         —          0.55   

Other borrowings

     —           —          —          42,983         339        3.16   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest-bearing liabilities

     800,867         1,036        0.52        970,365         1,912        0.79   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Rate spread

          4.02          4.69

Non-interest-bearing deposits

     513,008             493,627        

Other non-interest-bearing liabilities

     42,929             46,344        
  

 

 

        

 

 

      

Total liabilities

     1,356,804             1,510,336        

Stockholders’ equity

     136,813             136,708        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 1,493,617           $ 1,647,044        
  

 

 

        

 

 

      

Net-interest income (taxable-equivalent basis) and effective interest rate differential

        15,002        4.24        19,402        4.99

Less: taxable-equivalent basis adjustment

        (794          (995  
     

 

 

        

 

 

   

Net-interest income

      $ 14,208           $ 18,407     
     

 

 

        

 

 

   

 

Page 28


Table of Contents

The table below presents a summary of changes in interest income, interest expense, and the resulting net interest income on a taxable-equivalent basis for the quarterly periods presented. Because of numerous, simultaneous changes in volume and rate during the period, it is not possible to allocate precisely the changes between volumes and rates. In the following table changes not due solely to volume or to rate have been allocated to these categories based on percentage changes in average volume and average rate as they compare to each other: (in thousands)

 

     In First Quarter of 2012 over First
Quarter of 2011, Changes Due to
 
     Volume     Rate     Net Change  

Interest-earning assets

      

U.S. Treasury securities

   $ 31      $ (103   $ (72

Collateralized mortgage obligations

     (345     (89    </