XNAS:PEBK Peoples Bancorp of NC Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
     
 
FORM 10-Q
 
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended:     March 31, 2012
 
OR
 
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
PEOPLES BANCORP OF NORTH CAROLINA, INC.
(Exact name of registrant as specified in its charter)
 
North Carolina
(State or other jurisdiction of incorporation or organization)
 
000-27205
56-2132396
(Commission File No.)
(IRS Employer Identification No.)
 
518 West C Street, Newton, North Carolina
28658
(Address of principal executive offices)
(Zip Code)
 
(828) 464-5620
(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, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large Accelerate Filer
   
Accelerated Filer
   
Non-Accelerated Filer
   
 
Smaller Reporting Company
X
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act).
 
Yes
   
No
  X  
 
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
5,544,160 shares of common stock, outstanding at April 30, 2012.
 
 
 
 

 
 
 
INDEX
         
PART I.
FINANCIAL INFORMATION
PAGE(S)
 
         
Item 1.
 
Financial Statements
   
         
   
Consolidated Balance Sheets at March 31, 2012 (Unaudited) and
   
   
December 31, 2011 (Audited)
3
 
         
   
Consolidated Statements of Earnings for the three months ended March
   
   
31, 2012 and 2011 (Unaudited)
4
 
         
   
Consolidated Statements of Comprehensive Income for the three months
   
   
ended March 31, 2012 and 2011 (Unaudited)
5
 
         
   
Consolidated Statements of Cash Flows for the three months ended March
   
   
31, 2012 and 2011 (Unaudited)
6-7
 
         
   
Notes to Consolidated Financial Statements (Unaudited)
8-22
 
         
Item 2.
 
Management's Discussion  and Analysis of Financial Condition
   
   
and Results of Operations
23-36
 
         
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
37
 
         
Item 4T.
 
Controls and Procedures
38
 
         
PART II.
OTHER INFORMATION
   
         
Item 1.
 
Legal Proceedings
39
 
Item 1A.
 
Risk Factors
39
 
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
39
 
Item 3.
 
Defaults upon Senior Securities
39
 
Item 5.
 
Other Information
39
 
Item 6.
 
Exhibits
39-42
 
Signatures
 
43
 
Certifications
 
44-46
 
 
 
 
Statements made in this Form 10-Q, other than those concerning historical information, should be considered forward-looking statements pursuant to the safe harbor provisions of the Securities Exchange Act of 1934 and the Private Securities Litigation Act of 1995.  These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management and on the information available to management at the time that this Form 10-Q was prepared.  These statements can be identified by the use of words like “expect,”  “anticipate,” “estimate,” and “believe,” variations of these words and other similar expressions.  Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements.  Factors that could cause actual results to differ materially include, but are not limited to, (1) competition in the markets served by Peoples Bank, (2) changes in the interest rate environment, (3) general national, regional or local economic conditions may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and the possible impairment of collectibility of loans, (4) legislative or regulatory changes, including changes in accounting standards, (5) significant changes in the federal and state legal and regulatory environments and tax laws, (6) the impact of changes in monetary and fiscal policies, laws, rules and regulations and (7) other risks and factors identified in other filings with the Securities and Exchange Commission, including but not limited to those described in Peoples Bancorp of North Carolina, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2011.
 
 

 
2

 
 
 
PART I.
FINANCIAL INFORMATION
     
Item 1.
Financial Statements
 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES
         
Consolidated Balance Sheets
         
(Dollars in thousands)
 
March 31,
December 31,
Assets
2012
2011
 
(Unaudited)
(Audited)
         
Cash and due from banks, including reserve requirements
$ 23,944   22,532  
of $9,601 and $8,492
         
Interest bearing deposits
  24,160   6,704  
Cash and cash equivalents
  48,104   29,236  
           
           
Investment securities available for sale
  299,303   321,388  
Other investments
  6,205   5,712  
Total securities
  305,508   327,100  
           
Mortgage loans held for sale
  6,256   5,146  
           
Loans
  658,343   670,497  
Less allowance for loan losses
  (16,612 ) (16,604 )
Net loans
  641,731   653,893  
           
Premises and equipment, net
  16,629   16,896  
Cash surrender value of life insurance
  12,937   12,835  
Other real estate
  8,020   7,576  
Accrued interest receivable and other assets
  14,142   14,381  
Total assets
$ 1,053,327   1,067,063  
           
Liabilities and Shareholders' Equity
         
           
Deposits:
         
Non-interest bearing demand
$ 149,628   136,878  
NOW, MMDA & savings
  355,688   366,133  
Time, $100,000 or more
  176,428   193,045  
Other time
  126,055   131,055  
Total deposits
  807,799   827,111  
           
Securities sold under agreements to repurchase
  43,479   39,600  
FHLB borrowings
  70,000   70,000  
Junior subordinated debentures
  20,619   20,619  
Accrued interest payable and other liabilities
  7,024   6,706  
Total liabilities
  948,921   964,036  
           
Commitments
         
           
Shareholders' equity:
         
           
Series A preferred stock, $1,000 stated value; authorized
         
5,000,000 shares; issued and outstanding
         
25,054 shares in 2012 and 2011
  24,793   24,758  
Common stock, no par value; authorized 20,000,000 shares;
         
issued and outstanding 5,544,160 shares in 2012 and 2011
  48,298   48,298  
Retained earnings
  27,817   26,895  
Accumulated other comprehensive income
  3,498   3,076  
Total shareholders' equity
  104,406   103,027  
           
Total liabilities and shareholders' equity
$ 1,053,327   1,067,063  
           
See accompanying Notes to Consolidated Financial Statements.
         
 
 
 
3

 
 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES
 
         
Consolidated Statements of Earnings
 
         
Three months ended March 31, 2012 and 2011
 
         
(Dollars in thousands, except per share amounts)
 
         
 
2012
2011
 
(Unaudited)
(Unaudited)
         
Interest income:
       
Interest and fees on loans
$ 8,425   9,614  
Interest on investment securities:
         
U.S. Government sponsored enterprises,
         
           including mortgage-backed securities   1,070   1,082  
State and political subdivisions
  800   805  
Other
  67   57  
Total interest income
  10,362   11,558  
           
Interest expense:
         
NOW, MMDA & savings deposits
  344   717  
Time deposits
  1,032   1,404  
FHLB borrowings
  690   744  
Junior subordinated debentures
  113   100  
Other
  39   79  
Total interest expense
  2,218   3,044  
           
Net interest income
  8,144   8,514  
           
Provision for loan losses
  2,049   2,950  
           
Net interest income after provision for loan losses
  6,095   5,564  
           
Non-interest income:
         
Service charges
  1,188   1,255  
Other service charges and fees
  599   582  
Gain on sale of securities
  527   1,075  
Mortgage banking income
  226   187  
Insurance and brokerage commissions
  135   108  
Loss on sale and write-down of
         
other real estate
  (189 ) (250 )
Miscellaneous
  894   645  
Total non-interest income
  3,380   3,602  
           
Non-interest expense:
         
Salaries and employee benefits
  3,841   3,667  
Occupancy
  1,301   1,365  
Other
  2,129   2,368  
Total non-interest expense
  7,271   7,400  
           
Earnings before income taxes
  2,204   1,766  
           
Income tax expense
  545   405  
           
Net earnings
  1,659   1,361  
           
Dividends and accretion of preferred stock
  348   348  
           
Net earnings available to common shareholders
$ 1,311   1,013  
           
Basic net earnings per common share
$ 0.24   0.18  
Diluted net earnings per common share
$ 0.24   0.18  
Cash dividends declared per common share
$ 0.07   0.02  
           
See accompanying Notes to Consolidated Financial Statements.
         
 
 
 
4

 
 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES
         
Consolidated Statements of Comprehensive Income
         
Three Months Ended March 31, 2012 and 2011
         
(Dollars in thousands)
         
 
2012
2011
 
(Unaudited)
(Unaudited)
         
Net earnings
$ 1,659   1,361  
           
Other comprehensive income (loss):
         
Unrealized holding gains on securities
         
available for sale
  1,216   473  
Reclassification adjustment for gains on sales
         
and write-downs of securities available for sale
         
included in net earnings
  (527 ) (1,075 )
Unrealized holding losses on derivative
         
financial instruments qualifying as cash flow
         
hedges
  -      (384 )
           
Total other comprehensive income (loss),
         
before income taxes
  689   (986 )
           
Income tax expense (benefit) related to other
         
comprehensive income (loss):
         
           
Unrealized holding gains on securities
         
available for sale
  472   185  
Reclassification adjustment for gains on sales
         
of securities available for sale
         
included in net earnings
  (205 ) (419 )
Unrealized holding losses on derivative
         
financial instruments qualifying as cash flow
         
hedges
  -      (150 )
           
Total income tax expense (benefit) related to
         
other comprehensive income (loss)
  267   (384 )
           
Total other comprehensive income (loss),
         
net of tax
  422   (602 )
           
Total comprehensive income
$ 2,081   759  
           
See accompanying Notes to Consolidated Financial Statements.
         
 
 
 
5

 
 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES
         
Consolidated Statements of Cash Flows
         
Three Months Ended March 31, 2012 and 2011
         
(Dollars in thousands)
         
 
2012
2011
 
(Unaudited)
(Unaudited)
         
Cash flows from operating activities:
       
Net earnings
$ 1,659   1,361  
Adjustments to reconcile net earnings to
         
net cash provided by operating activities:
         
Depreciation, amortization and accretion
  2,195   1,537  
Provision for loan losses
  2,049   2,950  
Gain on sale of investment securities
  (527 ) (1,075 )
Loss on sale of other real estate
  57   97  
Write-down of other real estate
  132   250  
Restricted stock expense
  4   7  
Change in:
         
Mortgage loans held for sale
  (1,110 ) 1,399  
Cash surrender value of life insurance
  (102 ) (60 )
Other assets
  (245 ) 474  
Other liabilities
  318   181  
           
Net cash provided by operating activities
  4,430   7,121  
           
Cash flows from investing activities:
         
Purchases of investment securities available for sale
  (12,437 ) (39,988 )
Proceeds from calls, maturities and paydowns of investment securities
         
available for sale
  13,638   9,881  
Proceeds from sales of investment securities available for sale
  20,437   30,440  
Purchases of other investments
  (493 ) (215 )
Net change in loans
  8,800   9,457  
Purchases of premises and equipment
  (266 ) (340 )
Proceeds from sale of other real estate
  893   2,472  
           
Net cash provided by investing activities
  30,572   11,707  
           
Cash flows from financing activities:
         
Net change in deposits
  (19,312 ) 268  
Net change in demand notes payable to U.S. Treasury
  -      (757 )
Net change in securities sold under agreement to repurchase
  3,879   4,352  
Proceeds from FHLB borrowings
  25,400   5,000  
Repayments of FHLB borrowings
  (25,400 ) (5,000 )
Restricted stock payout
  -      9  
Cash dividends paid on Series A preferred stock
  (313 ) (313 )
Cash dividends paid on common stock
  (388 ) (111 )
           
Net cash (used) provided by financing activities
  (16,134 ) 3,448  
           
Net change in cash and cash equivalent
  18,868   22,276  
           
Cash and cash equivalents at beginning of period
  29,236   23,977  
           
Cash and cash equivalents at end of period
$ 48,104   46,253  
 
 
 
6

 
 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES
         
Consolidated Statements of Cash Flows, continued
         
Three Months Ended March 31, 2012 and 2011
         
(Dollars in thousands)
         
         
 
2012
2011
 
(Unaudited)
(Unaudited)
         
Supplemental disclosures of cash flow information:
       
Cash paid during the year for:
       
Interest
$ 2,709   3,076  
Income taxes
$ 540   -     
           
Noncash investing and financing activities:
         
Change in unrealized gain on investment securities
         
 available for sale, net
$ (422 ) 368  
Change in unrealized gain on derivative financial
         
 instruments, net
$ -      234  
Transfer of loans to other real estate and repossessions
$ 1,635   2,991  
Financed portion of sale of other real estate
$ 322   487  
Accretion of Series A preferred stock
$ 35   35  
           
           
See accompanying Notes to Consolidated Financial Statements.
         
           
 
 
 
7

 
 
 
PEOPLES BANCORP OF NORTH CAROLINA, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(1)
    Summary of Significant Accounting Policies

The consolidated financial statements include the financial statements of Peoples Bancorp of North Carolina, Inc. and its wholly-owned subsidiaries, Peoples Bank (the “Bank”) and Community Bank Real Estate Solutions, LLC, along with the Bank’s wholly-owned subsidiaries, Peoples Investment Services, Inc. and Real Estate Advisory Services, Inc. ("REAS")  (collectively called the “Company”).  All significant intercompany balances and transactions have been eliminated in consolidation.

The consolidated financial statements in this report are unaudited.  In the opinion of management, all adjustments (none of which were other than normal accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included.  Management of the Company has made a number of estimates and assumptions relating to reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”).  Actual results could differ from those estimates.

The Company’s accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition.  Many of the Company’s accounting policies require significant judgment regarding valuation of assets and liabilities and/or significant interpretation of the specific accounting guidance.  A description of the Company’s significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Company’s 2011 Annual Report to Shareholders which is Appendix A to the Proxy Statement for the May 3, 2012 Annual Meeting of Shareholders.
 
Management of the Company has made a number of estimates and assumptions relating to reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with GAAP.  Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements
In April 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2011-02, A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. ASU No. 2011-02 provides additional guidance for determining what constitutes a troubled debt restructuring.  ASU No. 2011-02 is effective for interim and annual periods ending after June 15, 2011.  The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

In May 2011, 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 International Financial Reporting Standards (“IFRS”).  ASU No. 2011-04 is intended to result in convergence between GAAP and IFRS requirements for measurement of and disclosures about fair value. The amendments are not expected to have a significant impact on companies applying GAAP.  ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011.  The adoption of this guidance did not have a material impact on the Company’s results of operations, financial position or disclosures.

In June 2011, FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income.  ASU No. 2011-05 requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements.  It eliminates the option to present components of other comprehensive income as part of the statement of changes in shareholders’ equity.  ASU  No. 2011-05 does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. This standard is effective for interim and annual periods beginning after December 15, 2011.  Because ASU No. 2011-05 impacts presentation only, it has no impact on the Company’s results of operations or financial position.

In December 2011, FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.  ASU No. 2011-12 defers the effective date of the requirement to present separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income.  This deferral is temporary until  FASB reconsiders the operational concerns and needs of financial statement users.  FASB has not yet established a timetable for its reconsideration.  Entities are still required to present reclassification adjustments within other
 
 
8

 
 
comprehensive income either on the face of the statement that reports other comprehensive income or in the notes to the financial statements.  The requirement to present comprehensive income in either a single continuous statement or two consecutive condensed statements remains for both annual and interim reporting.  Because ASU No. 2011-12 impacts presentation only, it will have no impact on the Company’s results of operations or financial position.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company's results of operations, financial position or disclosures.

(2)
    Investment Securities

Investment securities available for sale at March 31, 2012 and December 31, 2011 are as follows:
 
(Dollars in thousands)
             
 
March 31, 2012
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair Value
Mortgage-backed securities
$ 193,998   2,016   471   195,543
U.S. Government
               
sponsored enterprises
  3,193   94   -      3,287
State and political subdivisions
  92,842   3,709   75   96,476
Corporate bonds
  1,542   18   -      1,560
Trust preferred securities
  1,250   -      -      1,250
Equity securities
  748   439   -      1,187
Total
$ 293,573   6,276   546   299,303
                 
(Dollars in thousands)
               
 
December 31, 2011
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated Fair Value
Mortgage-backed securities
$ 213,378   1,371   1,056   213,693
U.S. Government
               
sponsored enterprises
  7,429   265   -      7,694
State and political subdivisions
  92,996   4,157   56   97,097
Corporate bonds
  546   -      3   543
Trust preferred securities
  1,250   -      -      1,250
Equity securities
  748   363   -      1,111
Total
$ 316,347   6,156   1,115   321,388
 
The current fair value and associated unrealized losses on investments in securities with unrealized losses at March 31, 2012 and December 31, 2011 are summarized in the tables below, with the length of time the individual securities have been in a continuous loss position.
 
(Dollars in thousands)
               
 
March 31, 2011
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Mortgage-backed securities
$ 60,846   435   3,063   36   63,909   471
State and political subdivisions
  5,767   75   -      -      5,767   75
Total
$ 66,613   510   3,063   36   69,676   546
                         
(Dollars in thousands)
               
 
 
 
9

 
 
 
(Dollars in thousands)
                     
 
December 31, 2011
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Mortgage-backed securities
$ 95,122   991   4,125   65   99,247   1,056
State and political subdivisions
  4,444   56   -   -   4,444   56
Corporate bonds
  542   3   -   -   542   3
Total
$ 100,108   1,050   4,125   65   104,233   1,115
 
At March 31, 2012, unrealized losses in the investment securities portfolio relating to debt securities totaled $546,000.  The unrealized losses on these debt securities arose due to changing interest rates and are considered to be temporary.  From the March 31, 2012 tables above, seven out of 138 securities issued by state and political subdivisions contained unrealized losses and 27 out of 98 securities issued by U.S. Government sponsored enterprises, including mortgage-backed securities, contained unrealized losses.  These unrealized losses are considered temporary because of acceptable investment grades on each security and the repayment sources of principal and interest are government backed.

The amortized cost and estimated fair value of investment securities available for sale at March 31, 2012, by contractual maturity, are shown below. Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

(Dollars in thousands)
     
 
Amortized
Cost
 
Estimated Fair
Value
Due within one year
$ 5,303   5,367
Due from one to five years
  14,000   14,298
Due from five to ten years
  67,926   70,602
Due after ten years
  11,598   12,306
Mortgage-backed securities
  193,998   195,543
Equity securities
  748   1,187
Total
$ 293,573   299,303
 
Proceeds from sales of securities available for sale during three months ended March 31, 2012 were $20.4 million and resulted in gross gains of $527,000.  Proceeds from sales of securities available for sale during the three months ended March 31, 2011 were $30.4 million and resulted in gross gains of $1.1 million.

Securities with a fair value of approximately $82.7 million and $83.6 million at March 31, 2012 and December 31, 2011, respectively, were pledged to secure public deposits and for other purposes as required by law.
 
 
 
10

 

 
(3)
    Loans

Major classifications of loans at March 31, 2012 and December 31, 2011 are summarized as follows:

(Dollars in thousands)
     
 
March 31, 2012
 
December 31, 2011
Real estate loans
     
     Construction and land development
$ 90,838   93,812
     Single-family residential
  260,037   267,051
     Commercial
  212,124   214,415
     Multifamily and farmland
  4,453   4,793
          Total real estate loans
  567,452   580,071
         
Commercial loans (not secured by real estate)
  62,020   60,646
Consumer loans (not secured by real estate)
  10,277   10,490
All other loans (not secured by real estate)
  18,594   19,290
         
     Total loans
  658,343   670,497
         
Less allowance for loan losses
  16,612   16,604
         
     Total net loans
$ 641,731   653,893
 
The Bank grants loans and extensions of credit primarily within the Catawba Valley region of North Carolina, which encompasses Catawba, Alexander, Iredell and Lincoln counties and also in Mecklenburg, Union and Wake counties of North Carolina.  Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate, the value of which is dependent upon the real estate market.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following tables present an age analysis of past due loans, by loan type, as of March 31, 2012 and December 31, 2011:

March 31, 2012
                     
(Dollars in thousands)
                     
 
Loans 30-89
Days Past
Due
 
Loans 90 or More Days
Past Due
 
Total Past
Due
Loans
 
Total
Current
Loans
 
Total Loans
 
Accruing
Loans 90 or
More Days
Past Due
Real estate loans
                     
     Construction and land development
$ 3,969   3,226   7,195   83,643   90,838   -   
     Single-family residential
  14,413   4,138   18,551   241,486   260,037   1,023
     Commercial
  1,118   376   1,494   210,630   212,124   -   
     Multifamily and farmland
  -      -      -      4,453   4,453   -   
          Total real estate loans
  19,500   7,740   27,240   540,212   567,452   1,023
                         
Commercial loans (not secured by real estate)
  681   87   768   61,252   62,020   -   
Consumer loans (not secured by real estate)
  96   36   132   10,145   10,277   -   
All other loans (not secured by real estate)
  -      -      -      18,594   18,594   -   
     Total loans
$ 20,277   7,863   28,140   630,203   658,343   1,023
 
 
 
11

 
 
 
December 31, 2011
                     
(Dollars in thousands)
                     
 
Loans 30-89
Days Past
Due
 
Loans 90 or
More Days
Past Due
 
Total Past
Due
Loans
 
Total
Current
Loans
 
Total Loans
 
Accruing
Loans 90 or More Days
Past Due
Real estate loans
                     
     Construction and land development
$ 10,033   3,338   13,371   80,441   93,812   -   
     Single-family residential
  16,536   6,189   22,725   244,326   267,051   2,709
     Commercial
  1,002   958   1,960   212,455   214,415   -   
     Multifamily and farmland
  13   -      13   4,780   4,793   -   
          Total real estate loans
  27,584   10,485   38,069   542,002   580,071   2,709
                         
Commercial loans (not secured by real estate)
  576   9   585   60,061   60,646   -   
Consumer loans (not secured by real estate)
  116   36   152   10,338   10,490   -   
All other loans (not secured by real estate)
  -      -      -      19,290   19,290   -   
     Total loans
$ 28,276   10,530   38,806   631,691   670,497   2,709
 
The following table presents the Company’s non-accrual loans as of March 31, 2012 and December 31, 2011:

(Dollars in thousands)
     
 
March 31, 2012
 
December 31, 2011
Real estate loans
     
     Construction and land development
$ 16,204   13,257
     Single-family residential
  5,480   5,522
     Commercial
  1,758   2,451
     Multifamily and farmland
  -      -   
          Total real estate loans
  23,442   21,230
         
Commercial loans (not secured by real estate)
  473   403
Consumer loans (not secured by real estate)
  66   152
     Total
$ 23,981   21,785
 
At each reporting period, the Bank determines which loans are impaired.  Accordingly, the Bank’s impaired loans are reported at their estimated fair value on a non-recurring basis.  An allowance for each impaired loan, which is generally collateral-dependent, is calculated based on the fair value of its collateral.  The fair value of the collateral is based on appraisals performed by REAS, a subsidiary of the Bank.  REAS is staffed by certified appraisers that also perform appraisals for other companies.   Factors including the assumptions and techniques utilized by the appraiser are considered by management.  If the recorded investment in the impaired loan exceeds the measure of fair value of the collateral, a valuation allowance is recorded as a component of the allowance for loan losses.  Impaired loans under $250,000 are not individually evaluated for impairment, with the exception of the Bank’s troubled debt restructured (“TDR”) loans in the residential mortgage loan portfolio, which are individually evaluated for impairment.  Accruing impaired loans amounted to $32.2 million, $19.1 million and $30.6 million at March 31, 2012, March 31, 2011 and December 31, 2011, respectively.  Interest income recognized on accruing impaired loans was $422,000, $301,000 and $1.7 million for the three months ended March 31, 2012, the three months ended March 31, 2011 and the year ended December 31, 2011, respectively.  No interest income is recognized on non-accrual impaired loans subsequent to their classification as impaired.
 
 
 
12

 
 
The following tables present the Company’s impaired loans as of March 31, 2012 and December 31, 2011:

March 31, 2012
               
(Dollars in thousands)
                   
 
Unpaid Contractual Principal
Balance
 
Recorded Investment
With No Allowance
 
Recorded Investment
With
Allowance
 
Recorded Investment
in Impaired
Loans
 
Related
Allowance
 
Average Outstanding Impaired
Loans
Real estate loans
                     
     Construction and land development
$ 30,523   15,798   5,747   21,545   3,303   15,152
     Single-family residential
  29,793   649   28,502   29,151   1,506   27,253
     Commercial
  4,179   1,399   2,663   4,062   57   4,538
     Multifamily and farmland
  -      -      -      -      -      206
          Total impaired real estate loans
  64,495   17,846   36,912   54,758   4,866   47,149
                         
Commercial loans (not secured by real estate)
  1,173   408   736   1,144   25   1,135
Consumer loans (not secured by real estate)
  73   28   41   69   1   110
     Total impaired loans
$ 65,741   18,282   37,689   55,971   4,892   48,394
                         
                         
December 31, 2011
               
(Dollars in thousands)
                   
 
Unpaid Contractual Principal
Balance
 
Recorded Investment
With No Allowance
 
Recorded Investment
With
Allowance
 
Recorded Investment
in Impaired
Loans
 
Related
Allowance
 
Average Outstanding Impaired
Loans
Real estate loans
                       
     Construction and land development
$ 28,721   14,484   6,098   20,582   3,264   17,848
     Single-family residential
  26,382   969   24,719   25,688   1,427   25,102
     Commercial
  7,717   3,845   3,139   6,984   77   4,518
     Multifamily and farmland
  209   -      209   209   1   214
          Total impaired real estate loans
  63,029   19,298   34,165   53,463   4,769   47,682
                         
Commercial loans (not secured by real estate)
  1,111   -      1,083   1,083   26   1,485
Consumer loans (not secured by real estate)
  157   -      152   152   2   140
     Total impaired loans
$ 64,297   19,298   35,400   54,698   4,797   49,307
 
Changes in the allowance for loan losses for the three months ended March 31, 2012 and the year ended December 31, 2011 were as follows:
 
Three months ended March 31, 2012
                     
(Dollars in thousands)
                         
   
Real Estate Loans
                 
   
Construction
and Land Development
 
Single-
Family Residential
 
Commercial
 
Multifamily
and
 Farmland
 
Commercial
 
Consumer
and All
Other
 
Unallocated
 
Total
 
Allowance for loan losses:
                               
Beginning balance
$ 7,182   5,357   1,731   13   1,029   255   1,037   16,604  
 
Charge-offs
  (1,851 ) (278 ) (71 ) -   (239 ) (157 ) -   (2,596 )
 
Recoveries
  118   2   374   -   5   56   -   555  
 
Provision
  1,431   200   (600 ) -   209   96   713   2,049  
Ending balance
$ 6,880   5,281   1,434   13   1,004   250   1,750   16,612  
                                     
Ending balance: individually
                                 
evaluated for impairment
$ 967   1,356   -   -   -   -   -   2,323  
Ending balance: collectively
                                 
 evaluated for impairment
  5,913   3,925   1,434   13   1,004   250   1,750   14,289  
Ending balance
$ 6,880   5,281   1,434   13   1,004   250   1,750   16,612  
                                     
Loans:
                                   
Ending balance
$ 90,838   260,037   212,124   4,453   62,020   28,871   -   658,343  
                                     
Ending balance: individually
                                 
evaluated for impairment
$ 21,045   23,963   3,357   -   408   28   -   48,801  
Ending balance: collectively
                                 
 evaluated for impairment
$ 69,793   236,074   208,767   4,453   61,612   28,843   -   609,542  
 
 
 
13

 
 
 
Year ended December 31, 2011
                     
(Dollars in thousands)
                           
   
Real Estate Loans
                 
   
Construction
and Land Development
 
Single-
Family Residential
 
Commercial
 
Multifamily
and
 Farmland
 
Commercial
 
Consumer
and All
Other
 
Unallocated
 
Total
 
Allowance for loan losses:
                               
Beginning balance
$ 5,774   6,097   1,409   17   1,174   430   592   15,493  
 
Charge-offs
  (7,164 ) (2,925 ) (1,271 ) -   (314 ) (586 ) -   (12,260 )
 
Recoveries
  241   201   24   -   121   152   -   739  
 
Provision
  8,331   1,984   1,569   (4 ) 48   259   445   12,632  
Ending balance
$ 7,182   5,357   1,731   13   1,029   255   1,037   16,604  
                                     
Ending balance: individually
                                 
evaluated for impairment
$ 1,250   1,289   -   -   -   -   -   2,539  
Ending balance: collectively
                                 
 evaluated for impairment
  5,932   4,068   1,731   13   1,029   255   1,037   14,065  
Ending balance
$ 7,182   5,357   1,731   13   1,029   255   1,037   16,604  
                                     
Loans:
                                   
Ending balance
$ 93,812   267,051   214,415   4,793   60,646   29,780   -   670,497  
                                     
Ending balance: individually
                                 
evaluated for impairment
$ 20,280   20,661   3,845   -   -   -   -   44,786  
Ending balance: collectively
                                 
 evaluated for impairment
$ 73,532   246,390   210,570   4,793   60,646   29,780   -   625,711  
 
The Company utilizes an internal risk grading matrix to assign a risk grade to each of its loans.  Loans are graded on a scale of 1 to 9.  These risk grades are evaluated on an ongoing basis.  A description of the general characteristics of the nine risk grades is as follows:

·  
Risk Grade 1 – Excellent Quality: Loans are well above average quality and a minimal amount of credit risk exists.  CD or cash secured loans or properly margined actively traded stock or bond secured loans would fall in this grade.
·  
Risk Grade 2 – High Quality: Loans are of good quality with risk levels well within the Company’s range of acceptability.  The organization or individual is established with a history of successful performance though somewhat susceptible to economic changes.
·  
Risk Grade 3 – Good Quality: Loans of average quality with risk levels within the Company’s range of acceptability but higher than normal. This may be a new organization or an existing organization in a transitional phase (e.g. expansion, acquisition, market change).
·  
Risk Grade 4 – Management Attention: These loans have very high risk and servicing needs but still are acceptable. Evidence of marginal performance or deteriorating trends are evident.  These are not problem credits presently, but may be in the future if the borrower is unable to change its present course.
·  
Risk Grade 5 – Watch: These loans are currently performing satisfactorily, but there are potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Company’s position at some future date.  This frequently results from deviating from prudent lending practices, for instance over-advancing on collateral.
·  
Risk Grade 6 – Substandard: A Substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or the collateral pledged (if there is any).  There is a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  There is a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
·  
Risk Grade 7 – Low Substandard: These loans have the general characteristics of a Grade 6 Substandard loan, with heightened potential concerns.  The exact amount of loss is not yet known because neither the liquidation value of the collateral nor the borrower’s predicted repayment ability is known with confidence.
·  
Risk Grade 8 – Doubtful: Loans classified as Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.  Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.
·  
Risk Grade 9 – Loss: Loans classified as Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted.  This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off
 
 
 
14

 
 
 
 
this worthless loan even though partial recovery may be realized in the future.  Loss is a temporary grade until the appropriate authority is obtained to charge the loan off.
 
The following tables present the credit risk profile of each loan type based on internally assigned risk grade as of March 31, 2012 and December 31, 2011.

March 31, 2012
                       
(Dollars in thousands)
                       
 
Real Estate Loans
               
 
Construction
and Land Development
 
Single-
Family Residential
 
Commercial
 
Multifamily
and
 Farmland
 
Commercial
 
Consumer
 
All Other
 
Total
                               
1- Excellent Quality
$ 195   26,054   -   -   797   1,290   -   28,336
2- High Quality
  4,829   61,918   24,270   46   9,766   4,169   2,683   107,681
3- Good Quality
  27,569   93,117   129,046   3,114   36,218   4,140   15,905   309,109
4- Management Attention
  26,675   48,119   46,445   363   13,621   372   6   135,601
5- Watch
  14,503   11,550   2,981   726   614   98   -   30,472
6- Substandard
  17,067   19,279   9,382   204   1,004   208   -   47,144
7- Low Substandard
  -   -   -   -   -   -   -   -
8- Doubtful
  -   -   -   -   -   -   -   -
9- Loss
  -   -   -   -   -   -   -   -
      Total
$ 90,838   260,037   212,124   4,453   62,020   10,277   18,594   658,343
 
 
December 31, 2011
                       
(Dollars in thousands)
                       
 
Real Estate Loans
               
 
Construction and Land Development
 
Single-
Family Residential
 
Commercial
 
Multifamily
and
 Farmland
 
Commercial
 
Consumer
 
All Other
 
Total
                               
1- Excellent Quality
$ 197   25,474   -   -   715   1,344   -   27,730
2- High Quality
  5,183   64,817   25,506   50   8,801   4,070   2,774   111,201
3- Good Quality
  27,675   100,388   136,137   3,448   36,585   4,259   16,509   325,001
4- Management Attention
  28,138   50,253   40,312   358   12,882   429   7   132,379
5- Watch
  15,923   11,767   2,795   728   622   89   -   31,924
6- Substandard
  16,696   14,352   9,665   209   1,041   154   -   42,117
7- Low Substandard
  -   -   -   -   -   -   -   -
8- Doubtful
  -   -   -   -   -   -   -   -
9- Loss
  -   -   -   -   -   145   -   145
      Total
$ 93,812   267,051   214,415   4,793   60,646   10,490   19,290   670,497
 
At March 31, 2012, TDR loans amounted to $25.6 million, including $617,000 in performing TDR loans.  Effective March 31, 2012, performing TDR balances reflect current year TDR loans only, in accordance with GAAP.  Previously reported TDR amounts reflect cumulative TDR loans from prior periods in addition to current year TDR loans.  At December 31, 2011, TDR loans amounted to $44.1 million, including $15.1 million in performing TDR loans.   The terms of these loans have been renegotiated to provide a reduction in principal or interest as a result of the deteriorating financial position of the borrower.
 
 
15

 
 
The following table presents an analysis of TDR loans by loan type as of March 31, 2012 and December 31, 2011.

March 31, 2012
         
(Dollars in thousands)
         
 
Number of Contracts
 
Pre-Modification Outstanding
Recorded
Investment
 
Post-Modification Outstanding Recorded
Investment
Real Estate Loans
         
     Construction and land development
25   $ 18,652   11,825
     Single-family residential
117     12,969   11,549
     Commercial
9     3,649   1,759
          Total real estate TDR loans
151     35,270   25,133
             
Commercial loans (not secured by real estate)
9     601   391
Consumer loans (not secured by real estate)
6     151   55
     Total TDR loans
166   $ 36,022   25,579
 
 
December 31, 2011
         
(Dollars in thousands)
         
 
Number of Contracts
 
Pre-Modification Outstanding
Recorded
Investment
 
Post-Modification Outstanding Recorded
Investment
Real Estate Loans
         
     Construction and land development
29   $ 19,762   12,840
     Single-family residential
241     25,541   24,846
     Commercial
15     7,200   5,013
     Multifamily and Farmland
1     322   209
          Total real estate TDR loans
286     52,825   42,908
             
Commercial loans (not secured by real estate)
21     1,711   1,083
Consumer loans (not secured by real estate)
8     124   142
     Total TDR loans
315   $ 54,660   44,133
 
(4)
    Net Earnings Per Common Share
 
Net earnings per common share is based on the weighted average number of common shares outstanding during the period while the effects of potential common shares outstanding during the period are included in diluted earnings per common share.  The average market price during the year is used to compute equivalent shares.

The reconciliation of the amounts used in the computation of both “basic earnings per common share” and “diluted earnings per common share” for the three months ended March 31, 2012 and 2011 is as follows:

For the three months ended March 31, 2012
         
 
Net Earnings Available to Common Shareholders (Dollars in thousands)
 
Common Shares
 
Per Share Amount
           
Basic earnings per common share
$ 1,311   5,544,160   $ 0.24
Effect of dilutive securities:
             
  Stock options
  -      -         
Diluted earnings per common share
$ 1,311   5,544,160   $ 0.24
 
 
 
16

 
 
 
For the three months ended March 31, 2011
         
 
Net Earnings Available to Common Shareholders (Dollars in thousands)
 
Common Shares
 
Per Share Amount
           
Basic earnings per common share
$ 1,013   5,541,542   $ 0.18
Effect of dilutive securities:
             
  Stock options
  -      1,552      
Diluted earnings per common share
$ 1,013   5,543,094   $ 0.18
 

(5)
    Stock-Based Compensation
 
The Company has an Omnibus Stock Ownership and Long Term Incentive Plan (the “1999 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, performance units, stock appreciation rights, or book value shares, may be granted to eligible directors and employees.  The 1999 Plan expired on May 13, 2009.

Under the 1999 Plan, the Company granted incentive stock options to certain eligible employees in order that they may purchase Company stock at a price equal to the fair market value on the date of the grant.  The options granted in 1999 vested over a five-year period.  Options granted subsequent to 1999 vested over a three-year period.  All options expire ten years after issuance.  The Company did not grant any options during the three months ended March 31, 2012 and 2011.

The Company granted 3,000 shares of restricted stock in 2007 at a grant date fair value of $17.40 per share. The Company granted 1,750 shares of restricted stock at a grant date fair value of $12.80 per share during the third quarter of 2008 and 2,000 shares of restricted stock at a fair value of $11.37 per share during the fourth quarter of 2008. The Company recognizes compensation expense on the restricted stock over the period of time the restrictions are in place (three years from the grant date for the grants to date).  The amount of expense recorded each period reflects the changes in the Company’s stock price during the period.  As of March 31,2012, there was no unrecognized compensation cost related to 2007 and 2008 restricted stock grants.

The Company also has an Omnibus Stock Ownership and Long Term Incentive Plan that was approved by shareholders’ on May 7, 2009 (the “2009 Plan”) whereby certain stock-based rights, such as stock options, restricted stock, performance units, stock appreciation rights, or book value shares, may be granted to eligible directors and employees.  A total of 360,000 shares are currently reserved for possible issuance under the 2009 Plan.   All rights must be granted or awarded within ten years from the May 7, 2009 effective date of the 2009 Plan.

The Company granted 29,514 shares of restricted stock in March 2012 at a grant date fair value of $7.90 per share. The Company recognizes compensation expense on the restricted stock over the period of time the restrictions are in place (five years from the grant date for the grants to date).  The amount of expense recorded each period reflects the changes in the Company’s stock price during the period.  As of March 31, 2012, there was $235,000 of total unrecognized compensation cost related to 2012 restricted stock grants.

(6)
Fair Value

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

Cash and Cash Equivalents
For cash, due from banks and interest bearing deposits, the carrying amount is a reasonable estimate of fair value.
 
 
17

 

Investment Securities Available for Sale
Fair values for investment securities are based on quoted market prices.

Other Investments
For other investments, the carrying value is a reasonable estimate of fair value.

Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at lower of aggregate cost or market value.  The cost of mortgage loans held for sale approximates the market value.

Loans
The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings. For variable rate loans, the carrying amount is a reasonable estimate of fair value.   Loans are included in the Level 3 fair value category, as the pricing of loans is more subjective than the pricing of other financial instruments.

Cash Surrender Value of Life Insurance
For cash surrender value of life insurance, the carrying value is a reasonable estimate of fair value.

Derivative Instruments
For derivative instruments, fair value is estimated as the amount that the Company would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.

Deposits
The fair value of demand deposits, interest-bearing demand deposits and savings is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.

Securities Sold Under Agreements to Repurchase
For securities sold under agreements to repurchase, the carrying value is a reasonable estimate of fair value.

Federal Home Loan Bank (“FHLB”) Borrowings
The fair value of FHLB borrowings is estimated based upon discounted future cash flows using a discount rate comparable to the current market rate for such borrowings.

Junior Subordinated Debentures
Because the Company’s junior subordinated debentures were issued at a floating rate, the carrying amount is a reasonable estimate of fair value.

Commitments to Extend Credit and Standby Letters of Credit
Commitments to extend credit and standby letters of credit are generally short-term and at variable interest rates. Therefore, both the carrying value and estimated fair value associated with these instruments are immaterial.

Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include the deferred income taxes and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
 
 
18

 

GAAP establishes a framework for measuring fair value and expands disclosures about fair value measurements. There is a three-level fair value hierarchy for fair value measurements.  Level 1 inputs are quoted prices in active markets for identical assets or liabilities that a company has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability.   The following tables present the balance of securities available for sale, mortgage loans held for sale and derivatives, which are measured at fair value on a recurring basis by level within the fair value hierarchy as of March 31, 2012 and December 31, 2011.
 
(Dollars in thousands)
             
 
March 31, 2012
 
Fair Value Measurements
 
Level 1
Valuation
 
Level 2
Valuation
 
Level 3
Valuation
Mortgage-backed securities
$ 195,543   -   195,543   -
U.S. Government
               
sponsored enterprises
$ 3,287   -   3,287   -
State and political subdivisions
$ 96,476   -   96,476   -
Corporate bonds
$ 1,560   -   1,560   -
Trust preferred securities
$ 1,250   -   -   1,250
Equity securities
$ 1,187   1,187   -   -
Mortgage loans held for sale
$ 6,256   -   6,256   -
 
 
(Dollars in thousands)
             
 
December 31, 2011
 
Fair Value Measurements
 
Level 1
Valuation
 
Level 2
Valuation
 
Level 3
Valuation
Mortgage-backed securities
$ 213,693   -   208,349   5,344
U.S. Government
               
sponsored enterprises
$ 7,694   -   7,694   -
State and political subdivisions
$ 97,097   -   97,097   -
Corporate bonds
$ 543   -   543   -
Trust preferred securities
$ 1,250   -   -   1,250
Equity securities
$ 1,111   1,111   -   -
Mortgage loans held for sale
$ 5,146   -   5,146   -
 
The following is an analysis of fair value measurements of investment securities available for sale using Level 3, significant unobservable inputs, for the three months ended March 31, 2012.   Transfers out of Level 3 during the three months ended March 31, 2012 are attributable to one available for sale security reported in Level 3 at December 31, 2011 because market pricing was unavailable from the Bank's third party bond accounting provider at that time.  This security was reported in Level 2 at March 31, 2012, as the market valuation was provided by the Bank's third party bond accounting provider.
 
(Dollars in thousands)
   
 
Investment Securities Available for Sale
 
 
Level 3 Valuation
 
Balance, beginning of period
$ 6,594  
Change in book value
  -  
Change in gain/(loss) realized and unrealized
  -  
Purchases/(sales)
  -  
Transfers in and/or (out) of Level 3
  (5,344 )
Balance, end of period
$ 1,250  
       
Change in unrealized gain/(loss) for assets still held in Level 3
$ -  
 
 
 
19

 
 
The Company’s March 31, 2012 and December 31, 2011 fair value measurement for impaired loans and other real estate on a non-recurring basis is presented below:
 
(Dollars in thousands)
                 
 
Fair Value
Measurements
March 31, 2012
 
Level 1
Valuation
 
Level 2
Valuation
 
Level 3
Valuation
 
Total Gains/(Losses) for
the Three Months Ended
March 31, 2012
Impaired loans
$ 51,079   -   346   50,733   (2,506 )
Other real estate
$ 8,020   -   -   8,020   (189 )
                       
(Dollars in thousands)
                 
 
Fair Value
Measurements
December 31, 2011
 
Level 1
Valuation
 
Level 2
Valuation
 
Level 3
Valuation
 
Total Gains/(Losses) for
the Year Ended
December 31, 2011
Impaired loans
$ 49,901   -   431   49,470   (11,864 )
Other real estate
$ 7,576   -   -   7,576   (1,322 )
 
The carrying amount and estimated fair value of the Company’s financial instruments at March 31, 2012 and December 31, 2011 are as follows:
 
(Dollars in thousands)
                 
     
Fair Value Measurements at March 31, 2012
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
                 
Cash and cash equivalents
$ 48,104   48,104   -   -   48,104
Investment securities available for sale
  299,303   1,187   296,866   1,250   299,303
Other investments
  6,205   -   -   6,205   6,205
Mortgage loans held for sale
  6,256   -   6,256   -   6,256
Loans, net
  641,731   -   -   635,671   635,671
Cash surrender value of life insurance
  12,937   -   12,937   -   12,937
                     
Liabilities:
                   
Deposits
$ 807,799   -   807,139   -   807,139
Securities sold under agreements
                   
to repurchase
  43,479   -   43,479   -   43,479
FHLB borrowings
  70,000   -   75,525   -   75,525
Junior subordinated debentures
  20,619   -   20,619   -   20,619
 
 
(Dollars in thousands)
     
 
December 31, 2011
 
Carrying
Amount
 
Estimated
Fair Value
Assets:
     
Cash and cash equivalents
$ 29,236   29,236
Investment securities available for sale
  321,388   321,388
Other investments
  5,712   5,712
Mortgage loans held for sale
  5,146   5,146
Loans, net
  653,893   648,640
Cash surrender value of life insurance
  12,835   12,835
         
Liabilities:
       
Deposits and demand notes payable
$ 827,111   826,810
Securities sold under agreements
       
to repurchase
  39,600   39,600
FHLB borrowings
  70,000   75,046
Junior subordinated debentures
  20,619   20,619