XNAS:SUBK Suffolk Bancorp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q


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

For the Quarterly Period Ended June 30, 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 August 1, 2012
 
 
 
 

 
 
 
SUFFOLK BANCORP
Form 10-Q
For the Quarterly Period Ended June 30, 2012

Table of Contents


   
Page
 
PART I
 
     
Item 1
Financial Statements
 
     
 
Condensed Consolidated Statements of Condition as of June 30, 2012 (unaudited) and December 31, 2011
2
     
 
Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)
3
     
 
Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)
4
     
 
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2012 and 2011 (unaudited)
5
     
 
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 (unaudited)
6
     
 
Notes to the Unaudited Condensed Consolidated Financial Statements
7
     
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
31
     
Item 3
Quantitative and Qualitative Disclosures About Market Risk
41
     
Item 4
Controls and Procedures
41
     
 
PART II
 
     
Item 1
Legal Proceedings
44
     
Item 1A
Risk Factors
44
     
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
45
     
Item 3
Defaults upon Senior Securities
45
     
Item 4
Mine Safety Disclosures
46
     
Item 5
Other Information
46
     
Item 6
Exhibits
46
     
 
Signatures
47
 
 
 
1

 
 
 
Item 1 – Financial Statements
SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION
AS OF JUNE 30, 2012 (unaudited) AND DECEMBER 31, 2011
(In thousands of dollars except for share data)
 
   
June 30, 2012
   
December 31, 2011
 
ASSETS
           
Cash and Cash Equivalents:
           
   Cash and Non-interest Bearing Deposits Due From Banks
  $ 65,407     $ 73,651  
   Interest Bearing Deposits Due From Banks
    278,531       98,908  
   Federal Funds Sold
    1,150       -  
Total Cash and Cash Equivalents
    345,088       172,559  
Federal Reserve Bank, Federal Home Loan Bank and Other Stock
    2,376       2,536  
Investment Securities:
               
   Available for Sale, at Fair Value
    307,719       299,204  
   Held to Maturity (Fair Value of $8,920 and $10,161, respectively)
    8,095       9,315  
Total Investment Securities
    315,814       308,519  
Loans, Net of Unearned Discount
    848,225       969,654  
          Allowance for Loan Losses
    29,227       39,958  
Net Loans
    818,998       929,696  
Loans Held-for-Sale
    7,500       -  
Premises and Equipment, Net
    27,743       27,984  
Deferred Taxes
    16,916       18,465  
Income Tax Receivable
    6,760       5,421  
Other Real Estate Owned
    2,172       1,800  
Accrued Interest and Loan Fees Receivable
    5,256       6,885  
Prepaid FDIC Assessment
    1,046       1,843  
Goodwill and Other Intangibles
    2,437       2,437  
Other Assets
    6,296       6,082  
    TOTAL ASSETS
  $ 1,558,402     $ 1,484,227  
                 
LIABILITIES & STOCKHOLDERS' EQUITY
               
Demand Deposits
  $ 569,742     $ 525,379  
Saving, N.O.W. & Money Market Deposits
    551,822       531,544  
Time Certificates of $100,000 or More
    176,253       168,140  
Other Time Deposits
    83,949       86,809  
     Total Deposits
    1,381,766       1,311,872  
Unfunded Pension Liability
    20,286       18,212  
Capital Leases
    4,726       4,737  
Accrued Interest Payable
    325       348  
Other Liabilities
    12,195       12,498  
    TOTAL LIABILITIES
    1,419,298       1,347,667  
                 
Commitments and Contingent Liabilities
               
                 
STOCKHOLDERS' EQUITY
               
Common Stock (par value $2.50; 15,000,000 shares authorized;
               
   13,732,084 shares issued; 9,726,814 shares outstanding)
    34,330       34,330  
Surplus
    24,101       24,010  
Retained Earnings
    96,671       91,303  
Treasury Stock at Par (4,005,270 shares)
    (10,013 )     (10,013 )
Accumulated Other Comprehensive Loss, Net of Tax
    (5,985 )     (3,070 )
    TOTAL STOCKHOLDERS' EQUITY
    139,104       136,560  
    TOTAL LIABILITIES & STOCKHOLDERS' EQUITY
  $ 1,558,402     $ 1,484,227  
See accompanying notes to condensed consolidated financial statements.
 
 
 
 
 
2

 
 
 
SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(Unaudited, in thousands of dollars except for share and per share data)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
INTEREST INCOME
                       
Loans and Loan Fees
  $ 12,927     $ 15,940     $ 25,321     $ 32,388  
United States Treasury Securities
    -       25       -       95  
U.S. Government Agency Obligations
    4       139       4       293  
Obligations of States & Political Subdivisions
    1,526       1,877       3,052       3,788  
Collateralized Mortgage Obligations
    1,199       1,502       2,393       3,130  
Mortgage-Backed Securities
    19       8       26       16  
Corporate Bonds
    16       -       16       -  
Federal Funds Sold & Due from Banks
    137       45       214       61  
Dividends
    17       60       63       144  
    Total Interest Income
    15,845       19,596       31,089       39,915  
                                 
INTEREST EXPENSE
                               
Saving, N.O.W. & Money Market Deposits
    303       549       620       1,183  
Time Certificates of $100,000 or more
    406       523       845       1,105  
Other Time Deposits
    258       321       538       678  
Interest on Borrowings
    -       315       -       654  
   Total Interest Expense
    967       1,708       2,003       3,620  
                                 
   Net Interest Income
    14,878       17,888       29,086       36,295  
  (Credit) Provision for Loan Losses
    (2,400 )     3,217       (2,400 )     23,188  
   Net Interest Income After (Credit) Provision for Loan Losses
    17,278       14,671       31,486       13,107  
                                 
NON-INTEREST INCOME
                               
Service Charges on Deposit Accounts
    1,000       1,006       1,950       2,011  
Other Service Charges, Commissions & Fees
    846       976       1,596       1,643  
Fiduciary Fees
    208       206       409       431  
Net Gain on Sale of Securities Available for Sale
    4       1,645       -       1,645  
Other Operating Income
    343       270       701       594  
    Total Non-Interest Income
    2,401       4,103       4,656       6,324  
                                 
OPERATING EXPENSES
                               
Total Employee Compensation
    8,875       7,772       17,459       15,317  
Net Occupancy Expense
    1,276       1,422       2,730       2,956  
Equipment Expense
    491       463       1,003       945  
Outside Services
    1,047       1,400       2,193       2,288  
FDIC Assessments
    478       855       548       1,986  
OREO Expense (Income)
    12       (29 )     59       111  
Prepayment Fee on Borrowing
    -       1,028       -       1,028  
Other Operating Expense
    1,960       2,119       4,752       4,172  
    Total Operating Expenses
    14,139       15,030       28,744       28,803  
                                 
Income (Loss) Before Income Tax Expense (Benefit)
    5,540       3,744       7,398       (9,372 )
Income Tax Expense (Benefit)
    1,340       474       2,030       (5,068 )
NET INCOME (LOSS)
  $ 4,200     $ 3,270     $ 5,368     $ (4,304 )
                                 
Average:     Common Shares Outstanding
    9,726,814       9,723,360       9,726,814       9,714,672  
                            Dilutive Stock Options
    -       -       -       -  
Average Total
    9,726,814       9,723,360       9,726,814       9,714,672  
EARNINGS (LOSS) PER COMMON SHARE    Basic
  $ 0.43     $ 0.34     $ 0.55     $ (0.44 )
Diluted
  $ 0.43     $ 0.34     $ 0.55     $ (0.44 )
                                 
See accompanying notes to condensed consolidated financial statements.
 
 
 
3

 
 
 
SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(Unaudited, in thousands of dollars)
 
   
Three Months
   
Six Months
 
   
2012
   
2011
   
2012
   
2011
 
Net Income (Loss)
  $ 4,200     $ 3,270     $ 5,368     $ (4,304 )
Other Comprehensive Income (Loss), Net of Taxes and Reclassification Adjustments:
               
(Decrease) Increase in Unrealized Gain on Securities Available for Sale Arising During the Period, Net of Taxes
    (1,087 )     927       (2,660 )     2,026  
Post-Retirement Plan Benefit Obligation, Net of Taxes
    -       -       (255 )     (89 )
Total Other Comprehensive Income (Loss), Net of Taxes
    (1,087 )     927       (2,915 )     1,937  
Total Comprehensive Income (Loss)
  $ 3,113     $ 4,197     $ 2,453     $ (2,367 )
                                 
See accompanying notes to condensed consolidated financial statements.   
 
 
 
4

 
 
 
SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(Unaudited, in thousands of dollars)
 
   
Six Months Ended June 30,
 
   
2012
   
2011
 
Common Stock
           
Balance, January 1
  $ 34,330     $ 34,236  
Stock appreciation rights and stock options exercised
    -       12  
Stock dividend reinvestment
    -       83  
Ending Balance
    34,330       34,331  
Surplus
               
Balance, January 1
    24,010       23,368  
Stock-based compensation
    91       -  
Stock appreciation rights and stock options exercised
    -       65  
Stock dividend reinvestment
    -       580  
Ending Balance
    24,101       24,013  
Retained Earnings
               
Balance, January 1
    91,303       91,450  
Net income (loss)
    5,368       (4,304 )
Stock appreciation rights and stock options exercised
    -       (69 )
Ending Balance
    96,671       87,077  
Treasury Stock
               
Balance, January 1
    (10,013 )     (10,005 )
Stock appreciation rights and stock options exercised
    -       (8 )
Ending Balance
    (10,013 )     (10,013 )
Accumulated Other Comprehensive Loss, Net of Tax
               
Balance, January 1
    (3,070 )     (2,229 )
Other comprehensive (loss) income
    (2,915 )     1,937  
Ending Balance
    (5,985 )     (292 )
Total Stockholders' Equity
  $ 139,104     $ 135,116  
                 
See accompanying notes to condensed consolidated financial statements.
 
 
 
 
 
5

 
 
 
SUFFOLK BANCORP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(Unaudited, in thousands of dollars)
 
   
For the Six Months ended June 30,
 
   
2012
   
2011
 
NET INCOME (LOSS)
  $ 5,368     $ (4,304 )
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
               
      TO NET CASH PROVIDED BY OPERATING ACTIVITIES
               
      (Credit) Provision for Loan Losses
    (2,400 )     23,188  
      Depreciation and Amortization
    1,296       1,310  
      Stock Based Compensation
    91       -  
      Net Amortization of Premiums
    896       1,277  
      Deferred Tax Expense
    3,368       -  
      (Increase) Decrease in Income Tax Receivable
    (1,339 )     4,078  
      Decrease in Accrued Interest and Loan Fees Receivable
    1,629       329  
      Increase in Other Assets
    (213 )     (9,281 )
      Decrease in Prepaid FDIC Assessment
    797       2,213  
      Increase in Unfunded Pension Liability
    2,074       1,583  
      Decrease in Accrued Interest Payable
    (23 )     (181 )
      Decrease in Other Liabilities
    (560 )     (1,350 )
      Gain on Sale of Securities Available for Sale - Net
    -       (1,645 )
        Net Cash Provided by Operating Activities
    10,984       17,217  
CASH FLOWS FROM INVESTING ACTIVITIES
               
      Principal Payments on Investment Securities
    14,867       17,071  
      Proceeds from Sale of Investment Securities; Available for Sale
    -       42,527  
      Maturities of Investment Securities - Available for Sale
    32,123       20,605  
      Purchases of Investment Securities - Available for Sale
    (60,879 )     (3,287 )
      Maturities of Investment Securities - Held to Maturity
    1,957       3,772  
      Purchases of Investment Securities -  Held to Maturity
    (740 )     (1,715 )
      Decrease in Federal Reserve Bank, Federal Home Loan Bank and Other Stock
    160       1,647  
      Loan Repayments - Net
    105,227       51,380  
      Purchases of Premises and Equipment - Net
    (1,053 )     (743 )
      Proceeds from Sale of Other Real Estate Owned
    -       3,919  
        Net Cash Provided by Investing Activities
    91,662       135,176  
CASH FLOWS FROM FINANCING ACTIVITIES
               
      Net Increase in Deposit Accounts
    69,894       12,455  
      Decrease in Short-Term Borrowings - Net
    -       (40,000 )
      Decrease  in Capital Lease Payable
    (11 )        
      Dividends Paid to Stockholders
    -       (1,454 )
      Proceeds from Stock Dividend Reinvestment
    -       663  
         Net Cash Provided by (Used in) Financing Activities
    69,883       (28,336 )
                 
           Net Increase in Cash and  Cash Equivalents
    172,529       124,057  
                 
           Cash and Cash Equivalents Beginning of Year
    172,559       41,149  
           Cash and Cash Equivalents End of Year
  $ 345,088     $ 165,206  
Supplemental Disclosures
               
      Cash Paid During the Year for:
               
        Interest
  $ 2,026     $ 3,801  
        Income Taxes
  $ -     $ 197  
Loans Transferred to Held For Sale
  $ 22,757     $ -  
Loans Transferred to Other Real Estate Owned
  $ 372     $ -  
                 
See accompanying notes to condensed consolidated financial statements.
 
 
 
 
 
6

 
 
SUFFOLK BANCORP AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(1)  
Summary of Significant Accounting Policies

The unaudited interim condensed consolidated financial statements include the accounts of Suffolk Bancorp (“Suffolk”) and its wholly owned subsidiary, Suffolk County National Bank and its subsidiaries (the “Bank”). Suffolk and the Bank are collectively referred to hereafter as the “Company.” All material intercompany accounts and transactions have been eliminated in consolidation. The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and predominant practices within the banking industry. They do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. For further information, please refer to the audited consolidated financial statements and footnotes thereto included in the Company’s 2011 Annual Report on Form 10-K.  The following footnotes describe the Company’s most significant accounting policies. The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results of operations to be expected for the remainder of the year.

Loans and Loan Interest Income Recognition - Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned discounts, deferred loan fees and costs and an allowance for loan losses.  Unearned discounts on installment loans are credited to income using methods that result in a level yield.  Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the respective term of the loan without anticipating prepayments.

Interest income is accrued on the unpaid principal balance.  Recognition of interest income is discontinued when reasonable doubt exists as to whether principal or interest due can be collected. For all classes of loans, loans generally no longer accrue interest when over 90 days past due unless the loan is well-secured and in process of collection. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current-year interest income. Interest received on such loans is applied against principal or interest, according to management’s judgment as to the collectability of the principal, until qualifying for return to accrual status.  Loans start accruing interest again when they become current as to principal and interest, and when, in the opinion of management, the loans can be collected in full.  For all classes of loans, an impaired loan is defined as a loan for which it is probable that the lender will not collect all amounts due under the contractual terms of the loan. Loans for which the terms have been modified and for which the borrower is experiencing financial difficulties and the Company has granted a concession are considered troubled-debt restructurings and are classified as impaired. For impaired, accruing loans, interest income is recognized on an accrual basis with cash offsetting the recorded accruals upon receipt. Interest received on non-accrual, impaired loans is applied against principal or interest according to management’s judgment as to the collectibility of the principal.

Allowance for Loan Losses - The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and recoveries, and decreased by charge-offs of loans.  For all classes of loans, when a loan, in full or in part, is deemed uncollectible, it is charged against the allowance. This happens when it is past due and the borrower has not shown the ability or intent to make the loan current, or the borrower does not have sufficient assets to pay the debt, or the value of the collateral is less than the balance of the loan and is not considered likely to improve soon.  The allowance for loan losses is determined by continuous analysis of the loan portfolio. That analysis includes changes in the size and composition of the portfolio, the Company’s own historical loan losses, industry-wide losses, current and anticipated economic trends, and details about individual loans. It also includes estimates of the actual value of collateral, other possible sources of repayment and estimates that are susceptible to significant changes due to changes in appraisal values of collateral, national and regional economic conditions and other factors. All loans over $250,000 in the commercial, commercial real estate and construction loan classes rated substandard or worse and all troubled- debt restructurings are evaluated individually for impairment. All other loans are evaluated as homogeneous pools. In assessing the adequacy of the allowance, the Company reviews its loan portfolio by separate classes which have similar risk and collateral characteristics; e.g., commercial, commercial real estate, construction, residential mortgages, home equity, and consumer loans.
 
The allowance for loan losses consists of specific and general components.  The specific component relates to loans that are individually classified as impaired.  Specific reserves are established based on an analysis of the most probable sources of repayment and liquidation of collateral. Impaired loans that are collateral dependent are reviewed based on their collateral and the estimated time required to recover the Company’s investment in the loan, as well as the cost of doing so, and the estimate of the recovery. Non-collateral dependent impaired loans are reviewed based on the present value of estimated future cash flows using the loan’s effective interest rate. While every non-performing loan is evaluated individually, not every loan requires a specific reserve. Specific reserves fluctuate based on changes in the underlying loans, anticipated
 
 
 
7

 
 
 
sources of repayment, and charge-offs.  The general component covers non-classified loans and is based on historical loss experience for each loan class from a trailing six-quarter period adjusted for current qualitative and environmental factors that reflect changes in the collectibility of the loan class not captured by historical loss data. These factors augment actual loss experience and help estimate the probability of loss within the loan portfolio based on emerging or inherent risk trends. These qualitative factors are applied as an adjustment to historical loss rates and require judgments that cannot be subjected to exact mathematical calculation. There are no formulas for translating them into a specific basis point adjustment of the Company’s historical loss rate for a pool of loans having similar risk characteristics. These adjustments reflect management’s overall estimate of the extent to which current losses on a pool of loans will differ from historical loss experience. These adjustments are subjective estimates and management reviews them on a quarterly basis. Troubled debt restructurings are also considered impaired with impairment generally measured at the present value of estimated future cash flows using the loan’s effective rate at inception or using the fair value of collateral, less estimated costs to sell, if repayment is expected solely from the collateral.

Loans Held-For-Sale – Loans held-for-sale are carried at the lower of aggregate cost or fair value. Changes in fair value of loans held-for-sale are recognized in earnings.  
 
Dividend Restriction - Banking regulations and the Bank's agreement with the Office of the Comptroller of the Currency (“OCC”) require maintaining certain capital levels and impose limitations on dividends paid by the Bank to the Company and by the Company to stockholders.  This is discussed further in "Regulatory Matters" in the Notes to the Consolidated Financial Statements.

Reclassifications - Items in the prior period financial statements were reclassified to conform to the current 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 in the first quarter of 2012 did not have a material effect on the Company’s condensed consolidated 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 nonrecurring fair value measurements; (2) all transfers between levels of the fair value hierarchy, which 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, 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 the Company’s condensed consolidated financial statements upon implementation in the first quarter of 2012. The new disclosures of the fair value levels of the Company’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 the Company now presents a separate condensed consolidated statement of
 
 
 
8

 
 
 
comprehensive income. In October 2011, the FASB decided to defer the presentation of reclassification adjustments pending further consideration.

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. The Company adopted ASU 2011-08 effective in the third quarter of 2011. Adoption of this update did not have an effect on the Company's condensed consolidated results of operations or financial condition.

(3)  
Fair Value

The Company 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. The Company 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 the Company’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)
 
 
 
 
9

 
 
 
   
Level in
   
June 30, 2012
   
December 31, 2011
 
   
Fair Value
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Heirarchy
   
Amount
   
Value
   
Amount
   
Value
 
Cash and due from banks
 
Level 1
    $ 343,938     $ 343,938     $ 172,559     $ 172,559  
Cash equivalents
 
Level 2
      1,150       1,150       -       -  
Federal Reserve Bank, Federal Home Loan Bank and Other Stock
    N/A       2,376       N/A       2,536       N/A  
Investment securities held to maturity
 
Level 2
      8,095       8,920       9,315       10,161  
Investment  securities available for sale
 
Level 2/3 (1)
      307,719       307,719       299,204       299,204  
Loans Held for Sale
 
Level 2
      7,500       7,500       -       -  
Loans, net of allowance
 
Level 2
      818,998       847,550       929,696       960,070  
Accrued interest and loan fees receivable
 
Level 2
      5,256       5,256       6,885       6,885  
Non-maturity Deposits
 
Level 2
      1,121,564       1,121,564       1,056,923       1,056,923  
Time Deposits
 
Level 2
      260,202       262,336       254,949       257,267  
Accrued interest payable
 
Level 2
      325       325       348       348  
                                       
(1) See table that follows for Level 2 and 3 components.
                                     
 
 
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. Certificates of deposit are valued using a replacement cost of funds approach.

Fair values are estimated for portfolios of loans with similar characteristics. Loans are segregated by class. 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.

The fair value of loans held-for-sale is based upon binding contracts from third party investors.

Assets measured at fair value on a non-recurring basis were as follows: (in thousands)
 
 
Fair Value Measurements Using
 
         
Significant
 
         
Unobservable
 
         
Inputs
 
Description
 
June 30, 2012
   
(Level 3)
 
             
Impaired loans
  $ 84,688     $ 84,688  
Other real estate owned
    2,172       2,172  
Mortgage servicing rights
    1,623       1,623  
 Total
  $ 88,483     $ 88,483  
                 
 
 
 
 
10

 
 
 
Fair Value Measurements Using
 
         
Significant
 
         
Unobservable
 
         
Inputs
 
Description
 
December 31, 2011
   
(Level 3)
 
             
Impaired loans
  $ 118,613     $ 118,613  
Other real estate owned
    1,800       1,800  
Mortgage servicing rights
    1,623       1,623  
 Total
  $ 122,036     $ 122,036  
                 
 
 

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 the Company. The value of business equipment may be based on an appraisal by qualified licensed appraisers hired by the Company 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.

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 June 30, 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
 
                   
         
Significant Other
   
Significant
 
         
Observable Inputs
   
Observable Inputs
 
Description
 
June 30, 2012
   
(Level 2)
   
(Level 3)
 
U.S. Government Agency Securities
  $ 5,034     $ 5,034     $ -  
Obligations of states and political subdivisions
    167,589       167,589       -  
Collateralized mortgage obligations
    110,814       103,389       7,425  
Mortgage-backed securities
    16,927       16,927       -  
Corporate Bonds
    7,355       7,355       -  
Total
  $ 307,719     $ 300,294     $ 7,425  
                         
 
 
There were no transfers between, into and/or out of Levels 1, 2, or 3 during the quarter ended June 30, 2012.
 
 
Fair Value Measurements Using
 
                   
         
Significant Other
   
Significant
 
         
Observable Inputs
   
Observable Inputs
 
Description
 
December 31, 2011
   
(Level 2)
   
(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  
                         
 
 
 
 
11

 
 
 
The types of instruments valued based on quoted market prices in active markets include most U.S. Treasury securities. Such instruments are generally classified within level 1 and level 2 of the fair value hierarchy. The Company 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 U.S. Government agency securities, state and municipal obligations, mortgage-backed securities, collateralized mortgage obligations and corporate bonds. Such instruments are generally classified within level 2 of the fair value hierarchy.
 
The types of instruments valued based on significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability are generally classified within level 3 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 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 fees charged for commitments to extend credit were not material in amount.

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 $18,520,000 and $19,841,000 at June 30, 2012 and December 31, 2011, respectively. The fees charged for the commitments were not material in amount.

(4)  
Investment Securities

The amortized cost, fair values and gross unrealized gains and losses of the Company’s investment securities available for sale and held to maturity at June 30, 2012 and December 31, 2011 were: (in thousands)
 
 
   
June 30, 2012
   
December 31, 2011
 
         
Gross
   
Gross
   
Estimated
         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
   
Cost
   
Gains
   
Losses
   
Value
 
Available for sale:
                                               
U.S. government agency securities
  $ 5,043     $ -     $ (9 )   $ 5,034     $ -     $ -     $ -     $ -  
Obligations of states and political subdivisions
    156,216       11,376       (3 )     167,589       156,663       15,329       -       171,992  
Collateralized mortgage obligations
    106,730       4,749       (665 )     110,814       122,155       5,768       (1,153 )     126,770  
Mortgage-backed securities
    16,908       21       (2 )     16,927       391       51       -       442  
Corporate Bonds
    7,308       49       (2 )     7,355       -       -       -       -  
Balance at end of period
    292,205       16,195       (681 )     307,719       279,209       21,148       (1,153 )     299,204  
Held to maturity:
                                                               
Obligations of states and political subdivisions
    8,095       825       -       8,920       9,315       846       -       10,161  
Total investment securities
  $ 300,300     $ 17,020     $ (681 )   $ 316,639     $ 288,524     $ 21,994     $ (1,153 )   $ 309,365  
                                                                 
 
 
Proceeds from the sale of securities available for sale were $42.5 million for the three and six months ended June 30, 2011, resulting in net gains of $1.6 million. There were no such sales for the three and six months ended June 30, 2012.

The amortized cost and approximate fair value of the Company’s investment securities at June 30, 2012 are shown below by expected maturity (in thousands). Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
 
12

 
 
 
   
June 30, 2012
 
   
Amortized
   
Fair
 
   
Cost
   
Value
 
Securities Available for sale:
           
  Due in one year or less
  $ 2,581     $ 2,603  
  Due from one to five years
    74,728       79,288  
  Due from five to ten years
    90,611       97,388  
  Due after ten years
    647       699  
  Subtotal
    168,567       179,978  
  Collateralized mortgage obligations
    106,730       110,814  
  Mortgage-backed securities
    16,908       16,927  
Total securities available for sale
    292,205       307,719  
Securities Held to maturity:
               
  Due in one year or less
    1,576       1,592  
  Due from one to five years
    5,981       6,742  
  Due from five to ten years
    538       586  
  Subtotal
    8,095       8,920  
Total investment securities
  $ 300,300     $ 316,639  
                 
 
 
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 15,851 shares of FHLB stock with a book value of $1,585,000. 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 June 30, 2012.

At June 30, 2012 and December 31, 2011, investment securities carried at $232,337,000 and $201,207,000, respectively, were pledged to secure trust deposits and public funds on deposit.

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)
 
 
         
Less than 12 months
   
12 months or longer
   
Total
 
As of June 30, 2012
 
Number of
         
Unrealized
         
Unrealized
         
Unrealized
 
Type of securities
 
Securities
   
Fair value
   
Losses
   
Fair value
   
Losses
   
Fair value
   
Losses
 
U.S. government agency securities
    1     $ 5,034     $ 9     $ -     $ -     $ 5,034     $ 9  
Obligations of states and political subdivisions
    4       652       3       -       -       652       3  
Collateralized mortgage obligations
    2       -       -       7,425       665       7,425       665  
Mortgage-backed securities
    1       5,186       2       -       -       5,186       2  
Corporate Bonds
    1       1,835       2       -       -       1,835       2  
Total
    9     $ 12,707     $ 16     $ 7,425     $ 665     $ 20,132     $ 681  
                                                         
           
Less than 12 months
   
12 months or longer
   
Total
 
As of December 31, 2011
 
Number of
           
Unrealized
           
Unrealized
           
Unrealized
 
Type of securities
 
Securities
   
Fair value
   
Losses
   
Fair value
   
Losses
   
Fair value
   
Losses
 
Collateralized mortgage obligations
    2     $ -     $ -     $ 7,994     $ 1,153     $ 7,994     $ 1,153  
Total
    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 ASC 320, “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 Company has the
 
 
 
 
13

 
 
 
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 is recognized in other comprehensive income, net of applicable tax benefit. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

The unrealized losses in the Company’s collateralized mortgage obligations at June 30, 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 neither 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 June 30, 2012 from that recorded at December 31, 2011.

The following tables summarize 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 June 30, 2012 and December 31, 2011. 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.

Weighted average key assumptions utilized in the valuations for June 30, 2012 were as follows:

•  
Discount Rate – 10%
•  
Voluntary Prepayments – 14.2%
•  
Conditional Default Rates – 9.2% 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 – 55.1% trending downward to terminal loss severities of 23%, in a linear fashion, at 2.5% per year.
 
 
 
                     
Total OTTI
   
Additional OTTI
   
Total OTTI
 
   
Year of
   
Total
   
Total
   
Related to
   
During the Six Month
   
Related to
 
   
Vintage
   
Fair
   
Amortized
   
Credit Loss at
   
Period Ended
   
Credit Loss at
 
(in thousands)
 
2006
   
Value
   
Cost
   
December 31, 2011
   
June 30, 2012
   
June 30, 2012
 
Rating:
                                   
Total Non-Agency
                               
   CMOs
                                   
   CCC and Below
  $ 7,425     $ 7,425     $ 8,090     $ 1,052     $ -     $ 1,052  
                                                 
Total Non-Agency
                                         
   CMO's
  $ 7,425     $ 7,425     $ 8,090     $ 1,052     $ -     $ 1,052  
                                                 
 
 
 
 
 
 
14

 
 
 
Weighted average key assumptions utilized in the valuations for December 31, 2011 were as follows:

•  
Discount Rate – 11%
•  
Voluntary Prepayments – 16.2%
•  
Conditional Default Rates – 16.2% for the first 24 months, then trending downward in a linear fashion to 9.3% for the following 12 months, then to zero through approximately 17 years.
•  
Loss Severity – 55.5% trending downward to terminal loss severities of 23%, in a linear fashion, at 2.5% per year.
 
 
               
Total
   
Total OTTI
 
   
Year of
   
Total
   
Amort-
   
Related to
 
   
Vintage
   
Fair
   
ized
   
Credit Loss at
 
(in thousands)
 
2006
   
Value
   
Cost
   
December 31, 2011
 
Rating:
                       
Total Non-Agency
                   
   CMOs
                       
   CCC and Below
  $ 7,994     $ 7,994     $ 9,147     $ 1,052  
                                 
Total Non-Agency
                         
   CMO's
  $ 7,994     $ 7,994     $ 9,147     $ 1,052  
                                 
 
 
The significant unobservable inputs used in the fair value measurements of the Company’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) by loan class at June 30, 2012 and December 31, 2011: (dollars in thousands)
 
 
 
 
June 30, 2012
   
December 31, 2011
 
Commercial, financial, and agricultural
  $ 200,093     $ 206,652  
Commercial real estate
    364,317       428,646  
Real estate construction loans
    43,632       49,704  
Residential mortgages (1st and 2nd liens)
    146,642       160,619  
Home equity loans
    75,223       79,684  
Consumer loans
    17,915       43,831  
Other loans
    428       543  
Gross Loans
    848,250       969,679  
Unearned discounts
    (25 )     (25 )
Allowance for loan losses
    (29,227 )     (39,958 )
Balance at end of year
  $ 818,998     $ 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 uncollectibility 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.
 
 
 
 
15

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

A loan is impaired when, based on current information and events, it is probable that the Company 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, the Company 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.

All loans over $250,000 in the commercial, commercial real estate and construction loan classes rated substandard or worse and all troubled debt restructurings are evaluated individually for impairment. All other loans are evaluated as homogeneous pools. If a loan is impaired, a specific reserve is recorded 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 at the fair value of the collateral net of costs to sell.  For troubled debt restructurings that subsequently default, the Company determines the allowance amount in accordance with its 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 loan class, and is based on the actual loss history experienced by the Company over a six-quarter historical loan loss period. This actual loss experience is supplemented with other qualitative factors based on the risks present for each loan class.  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 loan classes 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

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. Specific and general reserves are available for any identified loss.

At June 30, 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 $54,079,000 as compared to $80,760,000 at December 31, 2011. When compared to total loans, non-performing loans declined to 6.4% at June 30, 2012, down from 8.3% at December 31, 2011. A decrease in commercial real estate non-accrual loans, principally due to loans sold in the second quarter, was primarily responsible for the decline in total non-accrual loans at June 30, 2012.
 
 
 
16

 
 
 
Information pertaining to the allowance for loan losses at June 30, 2012 is as follows: (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
   
Total
 
Allowance for loan losses:
                                         
Ending balance (total allowance)
  $ 16,319     $ 8,851     $ 176     $ 2,286     $ 1,406     $ 189     $ 29,227  
Ending balance: individually
                                                 
    evaluated for impairment
    3,336       281       -       930       468       4       5,019  
Ending balance: collectively
                                                       
   evaluated for impairment
    12,983       8,570       176       1,356       938       185       24,208  
Loan balances:
                                                       
Ending balance (loan portfolio) (1)
  $ 200,093     $ 364,317     $ 43,632     $ 146,642     $ 75,223     $ 17,890     $ 847,797  
Ending balance: individually
                                                 
   evaluated for impairment
    24,379       31,636       17,111       7,501       3,560       502       84,689  
Ending balance: collectively
                                                       
   evaluated for impairment
    175,714       332,681       26,521       139,141       71,663       17,388       763,108  
(1) Other loans of $428, not included here, consist primarily of advances under lines of credit.
                         
 
 
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 mortgages
   
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     $ 43,806     $ 969,111  
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       43,160       834,011  
(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 June 30, 2012: (in thousands)
 
 
   
Past Due
             
   
30 - 59 days
   
60 - 89 days
   
90 days and over
   
Total
   
Current
   
Total
 
Commercial:
                             </