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First Community Bancshares 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
FORM 10-Q
Table of Contents

 

 

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 quarter ended September 30, 2011

Commission file number 000-19297

 

 

FIRST COMMUNITY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Nevada   55-0694814

(State or other jurisdiction of

incorporation)

 

(IRS Employer

Identification No.)

P.O. Box 989

Bluefield, Virginia

  24605-0989
(Address of principal executive offices)   ( Zip Code)

(276) 326-9000

(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.     x   Yes    ¨  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).     x   Yes    ¨  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” “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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    x  No

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

Class – Common Stock, $1.00 Par Value; 17,846,314 shares outstanding as of November 4, 2011

 

 

 


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

FORM 10-Q

For the quarter ended September 30, 2011

INDEX

 

PART I.

 

FINANCIAL INFORMATION

  

    Item 1.

 

Financial Statements

  
 

Condensed Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010

     3   
 

Condensed Consolidated Statements of Income for the Three- and Nine-Month Periods Ended September 30, 2011 and 2010 (Unaudited)

     4   
 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)

     5   
 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)

     6   
 

Notes to Consolidated Financial Statements

     7   

    Item 2.

 

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

     34   

    Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     48   

    Item 4.

 

Controls and Procedures

     50   

PART II.

 

OTHER INFORMATION

  

    Item 1.

 

Legal Proceedings

     50   

    Item 1A.

 

Risk Factors

     50   

    Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     50   

    Item 3.

 

Defaults Upon Senior Securities

     51   

    Item 4.

 

Reserved

     51   

    Item 5.

 

Other Information

     51   

    Item 6.

 

Exhibits

     51   

SIGNATURES

     54   

EXHIBIT INDEX

     55   

 

- 2 -


Table of Contents
ITEM 1. Financial Statements

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

     September 30,     December 31,  
     2011     2010  
(Dollars in Thousands)    (Unaudited)        

Assets

    

Cash and due from banks

   $ 38,776      $ 28,816   

Federal funds sold

     103,179        81,526   

Interest-bearing balances with banks

     6,365        1,847   
  

 

 

   

 

 

 

Total cash and cash equivalents

     148,320        112,189   

Securities available-for-sale

     449,387        480,064   

Securities held-to-maturity

     3,342        4,637   

Loans held for sale

     3,575        4,694   

Loans held for investment, net of unearned income

     1,374,656        1,386,206   

Less allowance for loan losses

     26,407        26,482   
  

 

 

   

 

 

 

Net loans held for investment

     1,348,249        1,359,724   

Premises and equipment, net

     54,860        56,244   

Other real estate owned

     5,942        4,910   

Interest receivable

     6,264        7,675   

Goodwill

     83,832        84,914   

Other intangible assets

     4,576        5,725   

Other assets

     111,745        123,462   
  

 

 

   

 

 

 

Total assets

   $ 2,220,092      $ 2,244,238   
  

 

 

   

 

 

 

Liabilities

    

Deposits:

    

Noninterest-bearing

   $ 233,683      $ 205,151   

Interest-bearing

     1,356,808        1,415,804   
  

 

 

   

 

 

 

Total deposits

     1,590,491        1,620,955   

Interest, taxes and other liabilities

     20,030        21,318   

Securities sold under agreements to repurchase

     139,510        140,894   

FHLB borrowings

     150,000        175,000   

Other indebtedness

     15,941        16,193   
  

 

 

   

 

 

 

Total Liabilities

     1,915,972        1,974,360   
  

 

 

   

 

 

 

Stockholders’ Equity

    

Preferred stock, par value undesignated; 1,000,000 shares authorized; no shares issued or outstanding at September 30, 2011, or December 31, 2010

     —          —     

Series A preferred stock, $0.01 par value; 25,000 shares authorized; 18,921 shares issued at September 30, 2011, and no shares issued at December 31, 2010

     18,921        —     

Common stock, $1 par value; 50,000,000 shares authorized; 18,082,822 shares issued at September 30, 2011, and 18,082,822 issued at December 31, 2010, and 213,308 and 216,487 shares in treasury, respectively

     18,083        18,083   

Additional paid-in capital

     188,243        189,239   

Retained earnings

     92,498        81,486   

Treasury stock, at cost

     (5,651     (6,740

Accumulated other comprehensive loss

     (7,974     (12,190
  

 

 

   

 

 

 

Total stockholders’ equity

     304,120        269,878   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 2,220,092      $ 2,244,238   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

- 3 -


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(Dollars In Thousands, Except Share and Per Share Data)    2011     2010      2011     2010  

Interest Income

         

Interest and fees on loans held for investment

   $ 20,084      $ 21,440       $ 60,633      $ 63,791   

Interest on securities — taxable

     1,711        2,895         6,094        10,411   

Interest on securities — nontaxable

     1,180        1,451         4,004        4,271   

Interest on deposits in banks

     75        54         244        134   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest income

     23,050        25,840         70,975        78,607   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest Expense

         

Interest on deposits

     2,998        4,872         10,151        15,480   

Interest on borrowings

     2,318        2,371         7,061        7,369   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     5,316        7,243         17,212        22,849   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     17,734        18,597         53,763        55,758   

Provision for loan losses

     1,920        3,810         6,611        11,071   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     15,814        14,787         47,152        44,687   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest Income

         

Wealth management income

     868        909         2,692        2,806   

Service charges on deposit accounts

     3,404        3,457         9,788        9,796   

Other service charges and fees

     1,426        1,244         4,293        3,775   

Insurance commissions

     1,523        1,663         5,027        5,253   

Total impairment losses on securities

     (210 )                 (737 )      (185

Portion of loss recognized in other comprehensive income

                                         
  

 

 

   

 

 

    

 

 

   

 

 

 

Net impairment losses recognized in earnings

     (210 )      -         (737 )      (185

Net gains on sale of securities

     178        2,574         5,238        4,025   

Other operating income

     877        1,091         2,627        2,950   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

     8,066        10,938         28,928        28,420   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest Expense

         

Salaries and employee benefits

     8,409        8,753         26,223        25,209   

Occupancy expense of bank premises

     1,476        1,573         4,691        4,852   

Furniture and equipment expense

     862        926         2,686        2,748   

Amortization of intangible assets

     250        260         770        769   

FDIC premiums and assessments

     348        718         1,640        2,129   

Prepayment penalties on FHLB advances

                          471             

Other operating expense

     4,715        5,199         15,380        14,392   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expense

     16,060        17,429         51,861        50,099   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     7,820        8,296         24,219        23,008   

Income tax expense

     2,502        1,743         7,422        6,046   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

     5,318        6,553         16,797        16,962   

Dividends on preferred stock

     286                   417        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income available to common shareholders

   $ 5,032      $ 6,553       $ 16,380      $ 16,962   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic earnings per common share

   $ 0.28      $ 0.37       $ 0.92      $ 0.95   

Diluted earnings per common share

   $ 0.28      $ 0.37       $ 0.91      $ 0.95   

Cash dividends per common share

   $ 0.10      $ 0.10       $ 0.30      $ 0.30   

Weighted average basic shares outstanding

     17,896,534        17,808,348         17,886,902        17,787,233   

Weighted average diluted shares outstanding

     19,205,634        17,832,882         18,533,364        17,812,895   

See Notes to Consolidated Financial Statements.

 

- 4 -


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

     Nine Months Ended  
     September 30,  
(Dollars In Thousands)    2011     2010  

Operating activities:

    

Net income

   $ 16,797      $ 16,962   

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

    

Provision for loan losses

     6,611        11,071   

Depreciation and amortization of premises and equipment

     3,030        3,050   

Intangible amortization

     770        769   

Net investment amortization and accretion

     1,047        542   

Net (gain) loss on the sale of property, plant, and equipment

     (91     341   

Net gain on the sale of securities

     (5,238     (4,025

Mortgage loans originated for sale

     (29,482     (28,101

Proceeds from sales of mortgage loans

     31,132        36,856   

Gain on sales of loans

     (531     (565

Equity-based compensation expense

     25        51   

Deferred income tax expense (benefit)

     2,618        (1,965

Decrease in interest receivable

     1,411        711   

FHLB debt prepayment fees

     471        —     

Net impairment losses recognized in earnings

     737        185   

Other operating activities, net

     5,041        12,912   
  

 

 

   

 

 

 

Net cash provided by operating activities

     34,348        48,794   
  

 

 

   

 

 

 

Investing activities:

    

Proceeds from sales of securities available-for-sale

     191,397        142,936   

Proceeds from maturities and calls of securities available-for-sale

     29,624        66,227   

Proceeds from maturities and calls of securities held-to-maturity

     1,300        1,544   

Purchase of securities available-for-sale

     (180,501     (208,720

Proceeds from (originations of) loans and leases

     3,771        (14,401

Proceeds from (investment in) the redemption of FHLB stock

     1,098        (982

Cash provided by (invested in) acquisitions, net

     1,586        (667

Purchase of property, plant, and equipment

     (2,169     (2,374

Proceeds from sales of property, plant, and equipment

     565        37   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     46,671        (16,400

Financing activities:

    

Net increase in noninterest-bearing deposits

     28,532        7,923   

Net (decrease) increase in interest-bearing deposits

     (58,996     3,340   

Net decrease in FHLB and other borrowings

     (25,252     (7,715

FHLB debt prepayment fees

     (471     —     

Net decrease in securities sold under agreement to repurchase

     (1,384     (221

Proceeds from the exercise of stock options

     32        30   

Net proceeds from the issuance of preferred stock

     18,802        —     

Excess tax benefit from stock-based compensation

     5        9   

Repurchase of treasury stock

     (514     —     

Preferred dividends paid

     (274     —     

Common dividends paid

     (5,368     (5,337
  

 

 

   

 

 

 

Net cash used in financing activities

     (44,888     (1,971
  

 

 

   

 

 

 

Increase in cash and cash equivalents

     36,131        30,423   

Cash and cash equivalents at beginning of period

     112,189        101,341   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 148,320      $ 131,764   
  

 

 

   

 

 

 

Supplemental information — noncash items

    

Transfer of loans to other real estate

   $ 7,511      $ 5,807   

See Notes to Consolidated Financial Statements.

 

- 5 -


Table of Contents

FIRST COMMUNITY BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

 

     Preferred
Stock
     Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  
(Dollars in Thousands)                                             

Balance January 1, 2010

   $ —         $ 18,083       $ 190,967      $ 66,760      $ (9,891   $ (13,652   $ 252,267   

Comprehensive income:

                

Net income

     —           —           —          16,962        —          —          16,962   

Other comprehensive income — see note 9

     —           —           —          —          —          9,305        9,305   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     —           —           —          16,962        —          9,305        26,267   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common dividends declared and paid

     —           —           —          (5,337     —          —          (5,337

Issuance of vested shares — 800 shares

     —           —           (25     —          25        —          —     

Equity-based compensation expense

     —           —           51        —          —          —          51   

Retirement plan contribution — 66,006 shares issued

     —           —           (1,130     —          2,055        —          925   

Option exercises — 2,631 shares

     —           —           (52     —          82        —          30   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2010

   $ —         $ 18,083       $ 189,811      $ 78,385      $ (7,729   $ (4,347   $ 274,203   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance January 1, 2011

   $ —         $ 18,083       $ 189,239      $ 81,486      $ (6,740   $ (12,190   $ 269,878   

Comprehensive income:

                

Net income

     —           —           —          16,797        —          —          16,797   

Other comprehensive income — see note 9

     —           —           —          —          —          4,216        4,216   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     —           —           —          16,797        —          4,216        21,013   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common dividends declared and paid

     —           —           —          (5,368     —          —          (5,368

Preferred dividends declared

     —           —           —          (417     —          —          (417

Issuance of preferred stock

     18,921         —           (119     —          —          —          18,802   

Issuance of vested shares

     —           —           (22     —          22        —          —     

Equity-based compensation expense

     —           —           17        —          8        —          25   

Retirement plan contribution — 47,570 shares issued

     —           —           (812     —          1,481        —          669   

Purchase of treasury shares — 48,310 shares at $10.58 per share

     —           —           —          —          (514     —          (514

Option exercises — 2,969 shares

     —           —           (60     —          92        —          32   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2011

   $ 18,921       $ 18,083       $ 188,243      $ 92,498      $ (5,651   $ (7,974   $ 304,120   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

- 6 -


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. General

Unaudited Consolidated Financial Statements

The accompanying unaudited consolidated financial statements of First Community Bancshares, Inc. and subsidiaries (“First Community” or the “Company”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments, including normal recurring accruals, necessary for a fair presentation have been made. All significant intercompany balances and transactions have been eliminated in consolidation. These results are not necessarily indicative of the results of consolidated operations that might be expected for the full calendar year.

The consolidated balance sheet as of December 31, 2010, has been derived from the audited consolidated financial statements included in the Company’s 2010 Annual Report on Form 10-K (the “2010 Form 10-K”). Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been omitted in accordance with standards for the preparation of interim consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2010 Form 10-K.

A more complete and detailed description of First Community’s significant accounting policies is included within Note 1 of Item 8, “Financial Statements and Supplementary Data” in the Company’s 2010 Form 10-K. Further discussion of the Company’s application of critical accounting policies is included within the “Application of Critical Accounting Policies” section of Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included herein.

The Company operates within two business segments — community banking and insurance services. Insurance services are comprised of agencies that sell property and casualty and life and health insurance policies and arrangements. All other operations, including commercial and consumer banking, lending activities, and wealth management are included within the banking segment.

Earnings Per Share

Basic earnings per share are determined by dividing net income available to common shareholders by the weighted average number of shares outstanding. Diluted earnings per share are determined by dividing net income by the weighted average shares outstanding, which includes the dilutive effect of stock options, warrants, contingently issuable shares, and convertible preferred shares. Basic and diluted net income per common share calculations follow:

 

     For the Three Months      For the Nine Months  
     Ended September 30,      Ended September 30,  
(In Thousands, Except Share and Per Share Data)    2011      2010      2011      2010  

Net income

   $ 5,318       $ 6,553       $ 16,797       $ 16,962   

Dividends on preferred stock

     286         —           417         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 5,032       $ 6,553       $ 16,380       $ 16,962   

Weighted average shares outstanding

     17,896,534         17,808,348         17,886,902         17,787,233   

Diluted shares for stock options

     3,551         11,630         5,643         12,758   

Contingently issuable shares

     —           12,904         —           12,904   

Convertible preferred shares

     1,305,549         —           640,819         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average dilutive shares outstanding

     19,205,634         17,832,882         18,533,364         17,812,895   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.28       $ 0.37       $ 0.92       $ 0.95   

Diluted earnings per share

   $ 0.28       $ 0.37       $ 0.91       $ 0.95   

For the three- and nine-month periods ended September 30, 2011, options and warrants to purchase 480,045 and 480,221 shares, respectively, of common stock were outstanding but were not included in the computation of diluted earnings per

 

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common share because they would have an anti-dilutive effect. Likewise, options and warrants to purchase 491,189 shares of common stock were excluded from the three- and nine-month periods’ ended September 30, 2010, computation of diluted earnings per common share because their effect would be anti-dilutive.

Series A Preferred Stock

On May 20, 2011, the Company completed a private placement of 18,921 shares of its Series A Preferred Stock. The shares carry a 6% dividend rate and are non-cumulative. Each share is convertible into 69 shares of the Company’s common stock at any time and mandatorily convert after five years. The Company may redeem the shares at face value after the third anniversary.

Recent Accounting Pronouncements

Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 310, “Receivables”. New authoritative accounting guidance under ASC Topic 310 amends prior guidance to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables by providing additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The Company adopted the provisions of the new authoritative accounting guidance under ASC Topic 310 during the fourth quarter of 2010. Other than the additional disclosures, the adoption of the new guidance had no significant impact on the Company’s financial statements.

In April 2011, FASB issued Accounting Standard Update (“ASU”) 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring,” which clarifies when creditors should classify loan modifications as troubled debt restructurings. The guidance is effective for interim and annual periods beginning on or after June 15, 2011, and is applied retrospectively to restructurings at the beginning of the year of adoption. The guidance on measuring the impairment of a receivable restructured in a troubled restructuring is effective on a prospective basis. The Company adopted the new guidance during the third quarter of 2011 and the new disclosures are presented in Note 5 to the Consolidated Financial Statements.

In April 2011, FASB issued ASU 2011-03, “Reconsideration of Effective Control for Repurchase Agreements,” which simplifies the accounting for financial assets transferred under repurchase agreements and similar arrangements by eliminating the transferor’s ability criteria from the assessment of effective control over those assets as well as the related implementation guidance. The guidance is effective for interim and annual periods beginning on or after December 15, 2011, and is applied on a prospective basis. The Company is currently assessing the impact on its financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in the U.S. GAAP and IFRS,” which was issued primarily to provide largely identical guidance about fair value measurement and disclosure requirements for International Financial Reporting Standards (“IFRS”) and U.S. GAAP. The new standards do not extend the use of fair value but rather provide guidance about how fair value should be determined where it already is required or permitted under IFRS or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS. Public companies are required to apply the standard prospectively for interim and annual periods beginning after December 15, 2011. The Company is currently assessing the impact on its financial statements.

In June 2011, FASB issued ASU 2011-05, “Presentation of Comprehensive Income,” which revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in ASC 220 and requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. The guidance does not change the items that must be reported in other comprehensive income. The guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company is currently assessing the impact on its financial statements.

In September 2011, FASB issued ASU 2011-08, “Testing Goodwill for Impairment,” which simplifies how an entity tests goodwill for impairment. The guidance permits an entity to first assess qualitative factors to determine whether it is necessary to perform additional impairment testing. The guidance is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company is currently assessing the impact on its financial statements.

 

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Note 2. Divestitures

In July and August 2011, the Company sold three insurance agency offices. The Company recorded net gains of $67 thousand on the sales of the offices and has the potential to recognize an additional $650 thousand over time as earn-out payments are received. Annualized revenue and income before taxes from the three offices approximate $572 thousand and $5 thousand, respectively.

Note 3. Investment Securities

As of September 30, 2011, and December 31, 2010, the amortized cost and estimated fair value of available-for-sale securities were as follows:

 

     September 30, 2011  
(In Thousands)    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
     OTTI in
AOCI*
 

States and political subdivisions

   $ 124,582       $ 5,438       $ (1   $ 130,019       $ —     

Single issue trust preferred securities

     55,631         —           (15,590     40,041         —     

Corporate FDIC insured

     13,758         17         —          13,775         —     

Mortgage-backed securities:

             

Agency

     248,480         6,051         (111     254,420         —     

Non-Agency Alt-A residential

     17,728         —           (7,130     10,598         (7,130
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     266,208         6,051         (7,241     265,018         (7,130

Equity securities

     434         216         (116     534         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 460,613       $ 11,722       $ (22,948   $ 449,387       $ (7,130
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     December 31, 2010  
(In Thousands)    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
     OTTI in
AOCI*
 

U.S. Government agency securities

   $ 10,000       $ —         $ (168   $ 9,832       $ —     

States and political subdivisions

     178,149         2,649         (4,660     176,138         —     

Trust preferred securities:

             

Single issue

     55,594         —           (14,350     41,244         —     

Pooled

     23         241         —          264         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total trust preferred securities

     55,617         241         (14,350     41,508         —     

Corporate FDIC insured

     25,282         378         —          25,660         —     

Mortgage-backed securities:

             

Agency

     209,281         7,039         (1,307     215,013         —     

Non-Agency Alt-A residential

     19,181         —           (7,904     11,277         (7,904
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     228,462         7,039         (9,211     226,290         (7,904

Equity securities

     495         206         (65     636         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 498,005       $ 10,513       $ (28,454   $ 480,064       $ (7,904
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

* Other-than-temporary impairment in accumulated other comprehensive income.

 

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As of September 30, 2011, and December 31, 2010, the amortized cost and estimated fair value of held-to-maturity securities were as follows:

 

     September 30, 2011  
(In Thousands)    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 

States and political subdivisions

   $ 3,342       $ 42       $ —         $ 3,384   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,342       $ 42       $ —         $ 3,384   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2010  
(In Thousands)    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 

States and political subdivisions

   $ 4,637       $ 67       $ —         $ 4,704   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,637       $ 67       $ —         $ 4,704   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and estimated fair value of available-for-sale securities by contractual maturity at September 30, 2011, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(In Thousands)    Amortized
Cost
     Fair Value  

Due within one year

   $ 450       $ 452   

Due after one year but within five years

     27,527         28,044   

Due after five years but within ten years

     21,740         22,833   

Due after ten years

     144,254         132,506   
  

 

 

    

 

 

 
     193,971         183,835   

Mortgage-backed securities

     266,208         265,018   

Equity securities

     434         534   
  

 

 

    

 

 

 

Total

   $ 460,613       $ 449,387   
  

 

 

    

 

 

 

The amortized cost and estimated fair value of held-to-maturity securities by contractual maturity at September 30, 2011, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(In Thousands)    Amortized
Cost
     Fair Value  

Due within one year

   $ 901       $ 913   

Due after one year but within five years

     2,441         2,471   

Due after five years but within ten years

     —           —     

Due after ten years

     —           —     
  

 

 

    

 

 

 

Total

   $ 3,342       $ 3,384   
  

 

 

    

 

 

 

The carrying value of securities pledged to secure public deposits as required by law and for other purposes was $292.32 million and $302.67 million at September 30, 2011, and December 31, 2010, respectively.

 

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The following table presents the Company’s gross gains and gross losses from the sale of securities for the three- and nine-month periods ended September 30, 2011 and 2010.

 

     For the Three  Months
Ended September 30,
    For the Nine Months
Ended September 30,
 
(In Thousands)    2011     2010     2011     2010  

Gross gains

   $ 209      $ 3,032      $ 6,889      $ 4,517   

Gross losses

     (31     (458     (1,651     (492
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gains on sales of securities

   $ 178      $ 2,574      $ 5,238      $ 4,025   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following tables reflect those investments, both available-for-sale and held-to-maturity, in a continuous unrealized loss position for less than 12 months and for 12 months or longer at September 30, 2011, and December 31, 2010.

 

     September 30, 2011  
     Less than 12 Months     12 Months or longer     Total  
(In Thousands)    Fair Value      Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair Value      Unrealized
Losses
 

States and political subdivisions

   $ —         $ —        $ 183       $ (1   $ 183       $ (1

Single issue trust preferred securities

     —           —          40,041         (15,590     40,041         (15,590

Mortgage-backed securities:

               

Agency

     31,566         (111     17         —          31,583         (111

Alt-A residential

     —           —          10,598         (7,130     10,598         (7,130
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     31,566         (111     10,615         (7,130     42,181         (7,241

Equity securities

     —           —          171         (116     171         (116
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 31,566       $ (111   $ 51,010       $ (22,837   $ 82,576       $ (22,948
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     December 31, 2010  
     Less than 12 Months     12 Months or longer     Total  
(In Thousands)    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

U.S. Government agency securities

   $ 9,832       $ (168   $ —         $ —        $ 9,832       $ (168

States and political subdivisions

     80,420         (4,660     —           —          80,420         (4,660

Single issue trust preferred securities

     —           —          41,244         (14,350     41,244         (14,350

Mortgage-backed securities:

               

Agency

     71,613         (1,307     18         —          71,631         (1,307

Alt-A residential

     —           —          11,277         (7,904     11,277         (7,904
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total mortgage-backed securities

     71,613         (1,307     11,295         (7,904     82,908         (9,211

Equity securities

     155         (55     93         (10     248         (65
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 162,020       $ (6,190   $ 52,632       $ (22,264   $ 214,652       $ (28,454
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

At September 30, 2011, the combined depreciation in value of the 24 individual securities in an unrealized loss position was approximately 5.11% of the combined reported value of the aggregate securities portfolio. At December 31, 2010, the combined depreciation in value of the 214 individual securities in an unrealized loss position was approximately 5.93% of the combined reported value of the aggregate securities portfolio.

The Company reviews its investment portfolio on a quarterly basis for indications of other-than-temporary impairment (“OTTI”). The analysis differs depending upon the type of investment security being analyzed. For debt securities, the Company has determined that it does not intend to sell securities that are impaired and has asserted that it is not more likely than not that the Company will have to sell impaired securities before recovery of the impairment occurs. This determination is based upon the Company’s investment strategy for the particular type of debt security and its cash flow needs, liquidity position, capital adequacy and interest rate risk position.

For non-beneficial interest debt securities, the Company analyzes several qualitative factors such as the severity and duration of the impairment, adverse conditions within the issuing industry, prospects for the issuer, performance of the security,

 

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changes in rating by rating agencies and other qualitative factors to determine if the impairment will be recovered. Non-beneficial interest debt securities consist of U. S. government agency securities, states and political subdivisions, and single issue trust preferred securities. If it is determined that there is evidence that the impairment will not be recovered, the Company performs a present value calculation to determine the amount of credit related impairment and records any credit related OTTI through earnings and the non-credit related OTTI through other comprehensive income (“OCI”). During the three- and nine-month periods ended September 30, 2011, the Company incurred no OTTI charges related to non-beneficial interest debt securities. The temporary impairment on these securities is primarily related to changes in interest rates, certain disruptions in the credit markets, destabilization in the Eurozone, and other current economic factors.

For beneficial interest debt securities, the Company reviews cash flow analyses on each applicable security to determine if an adverse change in cash flows expected to be collected has occurred. Beneficial interest debt securities consist of pooled trust preferred securities, corporate FDIC insured, and mortgage-backed securities. An adverse change in cash flows expected to be collected has occurred if the present value of cash flows previously projected is greater than the present value of cash flows projected at the current reporting date and less than the current book value. If an adverse change in cash flows is deemed to have occurred, then an OTTI has occurred. The Company then compares the present value of cash flows using the current yield for the current reporting period to the reference amount, or current net book value, to determine the credit-related OTTI. The credit-related OTTI is then recorded through earnings and the non-credit related OTTI is accounted for in OCI.

During the three- and nine-month periods ended September 30, 2011, the Company incurred credit-related OTTI charges related to beneficial interest debt securities of $210 thousand and $737 thousand, respectively. These charges were related to a non-Agency mortgage-backed security (“MBS”). During the three-month period ended September 30, 2010, the Company incurred no credit-related OTTI charges related to beneficial interest debt securities. During the nine-month period ended September 30, 2010, the Company incurred credit-related OTTI charges on beneficial interest debt securities of $134 thousand. These charges were related to two pooled trust preferred security holdings and brought the carrying value of those securities to zero.

For the non-Agency, Alt-A residential MBS, the Company models cash flows using the following assumptions: voluntary constant prepayment speed of 5, a customized constant default rate scenario that assumes approximately 23% of the remaining underlying mortgages will default, and a loss severity of 60.

The table below provides a cumulative roll forward of credit losses recognized in earnings for debt securities for which a portion of an OTTI is recognized in OCI:

 

(In Thousands)    For the Three  Months
Ended September 30, 2011
     For the Nine  Months
Ended September 30, 2011
 

Estimated credit losses, beginning balance (1)

   $ 4,778       $ 4,251   

Additions for credit losses on securities not previously OTTI

     —           —     

Additions for credit losses on securities previously OTTI

     210         737   

Reduction for increases in cash flows

     —           —     

Reduction for securities management no longer intends to hold to recovery

     —           —     

Reduction for realized losses

     —           —     
  

 

 

    

 

 

 

Estimated credit losses, ending balance

   $ 4,988       $ 4,988   
  

 

 

    

 

 

 

 

(1) The beginning balance includes credit-related losses included in OTTI charges recognized on debt securities in prior periods.

For equity securities, the Company reviews for OTTI based upon the prospects of the underlying companies, analysts’ expectations, and certain other qualitative factors to determine if impairment is recoverable over a foreseeable period of time. During the three- and nine-month periods ended September 30, 2011, the Company did not recognize any OTTI charges on equity securities. For the three months ended September 30, 2010, the Company recognized no OTTI charges on its equity securities. For the nine months ended September 30, 2010, the Company recognized OTTI charges on certain of its equity securities of $51 thousand.

As a condition to membership in the Federal Home Loan Bank (“FHLB”) system, the Company is required to subscribe to a minimum level of stock in the FHLB of Atlanta (“FHLBA”). The Company believes this ownership position provides access to relatively inexpensive wholesale and overnight funding. The Company accounts for FHLBA and Federal Reserve Bank stock as

 

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a long-term investment in other assets. At September 30, 2011, and December 31, 2010, the Company owned approximately $11.14 million and $12.24 million, respectively, in FHLBA stock, which is classified as other assets. The Company’s policy is to review for impairment of such assets at the end of each reporting period. Based on the Company’s review of publicly available information about the FHLBA and its own internal analysis, the Company believes that its FHLBA stock was not impaired as of September 30, 2011.

Note 4. Loans

Loans, net of unearned income, consist of the following:

 

     September 30, 2011     December 31, 2010  
(Dollars in Thousands)    Amount      Percent     Amount      Percent  

Commercial loans

          

Construction — commercial

   $ 32,279         2.35   $ 42,694         3.08

Land development

     3,304         0.24     16,650         1.20

Other land loans

     23,001         1.67     24,468         1.77

Commercial and industrial

     92,894         6.76     94,123         6.79

Single family residential

     107,879         7.85     N/A         N/A   

Multi-family residential

     82,939         6.03     67,824         4.89

Non-farm, non-residential

     325,830         23.70     351,904         25.39

Agricultural

     1,570         0.12     1,342         0.10

Farmland

     36,605         2.66     36,954         2.67
  

 

 

    

 

 

   

 

 

    

 

 

 

Total commercial loans

     706,301         51.38     635,959         45.89

Consumer real estate loans

          

Home equity lines

     109,444         7.96     111,620         8.05

Single family residential mortgage

     461,104         33.54     549,157         39.61

Owner-occupied construction

     19,279         1.40     18,349         1.32
  

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer real estate loans

     589,827         42.90     679,126         48.98

Consumer and other loans

          

Consumer loans

     67,020         4.88     63,475         4.58

Other

     11,508         0.84     7,646         0.55
  

 

 

    

 

 

   

 

 

    

 

 

 

Total consumer and other loans

     78,528         5.72     71,121         5.13
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   $ 1,374,656         100.00   $ 1,386,206         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Loans held for sale

   $ 3,575         $ 4,694      
  

 

 

      

 

 

    

During the third quarter of 2011, the Company enhanced its loan loss methodology by further segmenting the one-to-four family residential real estate class into owner occupied and non-owner occupied segments. The enhancement in the one-to-four family residential real estate class resulted in the owner occupied portion being reported in the consumer real estate loan segment and the non-owner occupied portion being reported in the commercial loans segment.

Acquired, Impaired Loans

Loans acquired in a business combination are recorded at estimated fair value on their purchase date. Under applicable accounting standards, it is not appropriate to carryover a valuation for allowance for loan losses at the time of acquisition when the acquired loans have evidence of credit deterioration. Evidence of credit quality deterioration as of the purchase date may include measures such as credit scores, decline in collateral value, past due and non-accrual status. For acquired, impaired loans the difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference which is included in the carrying amount of the loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reversal of the nonaccretable difference with a positive impact on interest income prospectively. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life

 

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of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Acquired performing loans are recorded at fair value, including a credit component. The fair value adjustment is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. A provision for loan losses is recorded for any credit deterioration in these loans subsequent to acquisition.

The following table presents information regarding acquired, impaired loans for the three- and nine-month periods ended September 30, 2011 and 2010. The Company has estimated the cash flows to be collected on the loans and discounted those cash flows at a market rate of interest.

 

     Acquired, Impaired Loans  
     2011     2010  
(In thousands)    TriStone     Other      Total     TriStone     Other     Total  

Balance, January 1

   $ 2,814      $ 407       $ 3,221      $ 3,838      $ 4,196      $ 8,034   

Principal payments received

     (482     —           (482     (997     (224     (1,221

Accretion

     122        —           122        46        —          46   

Other

     4        —           4        463        —          463   

Charge-offs

     —          —           —          (499     —          (499
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30

   $ 2,458      $ 407       $ 2,865      $ 2,851      $ 3,972      $ 6,823   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30

   $ 2,714      $ 407       $ 3,121      $ 2,834      $ 3,972      $ 6,806   

Principal payments received

     (309     —           (309     (36     —          (36

Accretion

     53        —           53        16        —          16   

Other

     —          —           —          37        —          37   

Charge-offs

     —          —           —          —          —          —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30

   $ 2,458      $ 407       $ 2,865      $ 2,851      $ 3,972      $ 6,823   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The remaining balance of the accretable difference at September 30, 2011, and December 31, 2010, was $822 thousand and $944 thousand, respectively.

Off-Balance Sheet Financial Instruments

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk beyond the amount recognized on the balance sheet. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is not a violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparties. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties.

Standby letters of credit and written financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. To the extent deemed necessary, collateral of varying types and amounts is held to secure customer performance under certain of those letters of credit outstanding.

Financial instruments whose contract amounts represent credit risk are commitments to extend credit (including availability of lines of credit) of $206.98 million and standby letters of credit and financial guarantees written of $2.90 million at September 30, 2011. Additionally, the Company had gross notional amounts of outstanding commitments to lend related to secondary market mortgage loans of $10.42 million at September 30, 2011.

 

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Note 5. Allowance for Loan Losses and Credit Quality

The allowance for loan losses is maintained at a level that the Company believes is sufficient to absorb probable loan losses inherent in the loan portfolio. The allowance is increased by charges to earnings in the form of provision for loan losses and recoveries of prior loan charge-offs, and decreased by loans charged off. The provision is calculated to bring the allowance to a level which, according to a systematic process of measurement, reflects the amount management estimates is needed to absorb probable losses within the portfolio. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

Management performs quarterly assessments to determine the appropriate level of allowance for loan losses. Differences between actual loan loss experience and estimates are reflected through adjustments that are made by either increasing or decreasing the allowance based upon current measurement criteria. Commercial, consumer real estate, and non-real estate consumer loan portfolios are evaluated separately for purposes of determining the allowance. The specific components of the allowance include allocations to individual commercial credits and allocations to the remaining non-homogeneous and homogeneous pools of loans that have been deemed impaired. Management’s general reserve allocations are based on judgment of qualitative and quantitative factors about both macro and micro economic conditions reflected within the portfolio of loans and the economy as a whole. Factors considered in this evaluation include, but are not necessarily limited to, probable losses from loan and other credit arrangements, general economic conditions, changes in credit concentrations or pledged collateral, historical loan loss experience, and trends in portfolio volume, maturities, composition, delinquencies, and non-accruals. The allowance methodology was recently enhanced to further segment the commercial loan portfolio by risk grade. Historical loss rates for each risk grade of commercial loans are adjusted by environmental factors to estimate the amount of reserve needed by segment. While management has allocated the allowance for loan losses to various portfolio segments, the entire allowance is available for use against any type of loan loss deemed appropriate by management.

The Company enhanced its allowance for loan loss methodology during the first quarter of 2011. The enhancement included, among other things, further segmentation of the commercial loan portfolio by risk code and consideration of additional qualitative factors as outlined in the Interagency Policy Statement for Loan and Lease Losses. Under the previous methodology, qualitative adjustments were a multiple of the historical loss rate calculated by the Company for each segment, as compared to the enhanced methodology that utilizes addition to and subtraction from the historical loss rate.

Initially, the qualitative factors for the consumer loan segments under the enhanced methodology were calculated by determining an equivalent rate to the prior method. As part of the continued refinement of the enhanced methodology, the adjustments historically applied to consumer loans were reviewed. As of the third quarter of 2011, it was determined that qualitative adjustments to the consumer loan segments’ loss rates should be revised downward based upon review and analysis of historical loss experience within the portfolio as the Company is now estimating fewer losses on the consumer portfolio. As a result of the downward revision, the allocation of the allowance to the consumer loan segments is 30%. Historically, net consumer charge-offs comprised 28% of total net charge-offs. The decrease in estimated losses on the consumer portfolio segment was offset by increases in estimated losses on the commercial portfolio segment. The increase is particularly in specific loss estimated on certain impaired loans as a result of new information regarding the values of underlying collateral.

As an additional enhancement to the loan loss methodology in the third quarter of 2011, the Company further segmented the one-to-four family residential real estate class into owner occupied and non-owner occupied segments, which management believes provides better granularity and segmentation of loans with similar risk characteristics. This also contributed to the overall reduction of estimated losses on non-impaired consumer loan segments in the allowance model, as losses on the Company’s non-owner occupied residential real estate loans have historically been higher than losses on owner occupied residential real estate loans. The following tables reflect the change of the segmentation in the single family residential loan class for the period ended September 30, 2011.

 

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The following tables detail the Company’s allowance for loan loss activity, by portfolio segment, for the three- and nine-month periods ended September 30, 2011 and 2010.

 

     For the Three Months Ended September 30, 2011  
(In Thousands)    Commercial     Consumer Real
Estate
    Consumer and
Other
    Total  

Allowance for credit losses:

        

Beginning balance

   $ 12,300      $ 12,641      $ 1,541      $ 26,482   

Provision for loan losses

     7,393        (4,811     (662     1,920   

Loans charged off

     (2,157     (712     (193     (3,062

Recoveries credited to allowance

     968        15        84        1,067   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (1,189     (697     (109     (1,995
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 18,504      $ 7,133      $ 770      $ 26,407   
  

 

 

   

 

 

   

 

 

   

 

 

 
     For the Three Months Ended September 30, 2010  
(In Thousands)    Commercial     Consumer Real
Estate
    Consumer and
Other
    Total  

Allowance for credit losses:

        

Beginning balance

   $ 13,649      $ 9,157      $ 2,205      $ 25,011   

Provision for loan losses

     1,853        1,667        290        3,810   

Loans charged off

     (1,994     (342     (315     (2,651

Recoveries credited to allowance

     110        16        124        250   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (1,884     (326     (191     (2,401
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 13,618      $ 10,498      $ 2,304      $ 26,420   
  

 

 

   

 

 

   

 

 

   

 

 

 
     For the Nine Months Ended September 30, 2011  
(In Thousands)    Commercial     Consumer Real
Estate
    Consumer and
Other
    Total  

Allowance for credit losses:

        

Beginning balance

   $ 12,300      $ 12,641      $ 1,541      $ 26,482   

Provision for loan losses

     10,258        (3,190     (457     6,611   

Loans charged off

     (5,324     (2,541     (680     (8,545

Recoveries credited to allowance

     1,270        223        366        1,859   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (4,054     (2,318     (314     (6,686
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 18,504      $ 7,133      $ 770      $ 26,407   
  

 

 

   

 

 

   

 

 

   

 

 

 
     For the Nine Months Ended September 30, 2010  
(In Thousands)    Commercial     Consumer Real
Estate
    Consumer and
Other
    Total  

Allowance for credit losses:

        

Beginning balance

   $ 13,802      $ 8,457      $ 2,018      $ 24,277   

Provision for loan losses

     5,936        4,249        886        11,071   

Loans charged off

     (6,577     (2,260     (919     (9,756

Recoveries credited to allowance

     457        52        319        828   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

     (6,120     (2,208     (600     (8,928
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 13,618      $ 10,498      $ 2,304      $ 26,420   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company identifies loans for potential impairment through a variety of means including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. If it is determined that it is probable that the Company will not collect all principal and interest amounts contractually due, the loan is generally deemed to be impaired.

 

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The following table presents the Company’s recorded investment in loans considered to be impaired and related information on those impaired loans for the periods ended September 30, 2011, and December 31, 2010.

 

     September 30, 2011  
                          Quarter-to-Date      Year-to-Date  
(Amounts in Thousands)    Recorded
Investment
     Related
Allowance
     Unpaid
Principal
Balance
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Loans without a related allowance

                    

Commercial loans

                    

Construction — commercial

   $ 66       $ —         $ 70       $ 73       $ 1       $ 76       $ 4   

Land development

     —           —           —           —           —           —           —     

Other land loans

     68         —           68         67         —           118         1   

Commercial and industrial

     267         —           291         314         4         746         8   

Single family residential

     4,291         —           4,385         4,380         23         4,658         68   

Multi-family residential

     546         —           564         1,059         11         1,150         26   

Non-farm, non-residential

     2,017         —           2,137         2,236         30         2,655         60   

Farmland

     475         —           475         552         —           552         —     

Consumer real estate loans

                    

Home equity lines

     940         —           978         984         17         1,061         36   

Single family residential mortgage

     6,453         —           6,600         7,030         81         7,588         168   

Owner-occupied construction

     119         —           125         125         2         126         6   

Consumer loans

     54         —           60         62         2         66         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 15,296       $ —         $ 15,753       $ 16,882       $ 171       $ 18,796       $ 381   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans with a related allowance

                    

Commercial loans

                    

Construction — commercial

   $ 265       $ 25       $ 268       $ 268       $ 2       $ 269       $ 2   

Land development

     —           —           —           —           —           —           —     

Other land loans

     112         5         112         112         1         113         4   

Commercial and industrial

     4,032         2,045         4,064         4,041         8         4,066         16   

Single family residential

     2,242         124         2,242         2,002         25         2,012         108   

Multi-family residential

     591         196         591         591         —           591         —     

Non-farm, non-residential

     6,373         2,153         6,456         6,423         98         6,430         109   

Farmland

     —           —           —           —           —           —           —     

Consumer real estate loans

                    

Home equity lines

     338         200         339         336         —           335         —     

Single family residential mortgage

     5,969         1,210         6,048         6,198         51         6,310         114   

Owner-occupied construction

     —           —           —           —           —           —           —     

Consumer loans

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 19,922       $ 5,958       $ 20,120       $ 19,971       $ 185       $ 20,126       $ 353   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     December 31, 2010  
                          Year-to-Date  
(Amounts in Thousands)    Recorded
Investment
     Related
Allowance
     Unpaid
Principal
Balance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Loans without a related allowance

              

Commercial loans

              

Construction — commercial

   $ 285       $ —         $ 732       $ 730       $ 3   

Land development

     50         —           144         143         2   

Other land loans

     323         —           742         152         13   

Commercial and industrial

     3,518         —           5,384         6,237         10   

Multi-family residential

     2,526         —           2,673         2,680         105   

Non-farm, non-residential

     3,824         —           4,985         4,658         53   

Consumer real estate loans

              

Home equity lines

     1,302         —           1,595         1,605         38   

Single family residential mortgage

     7,992         —           10,882         9,093         330   

Owner-occupied construction

     6         —           6         6         —     

Consumer loans

     98         —           102         11         5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 19,924       $ —         $ 27,245       $ 25,315       $ 559   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans with a related allowance

              

Commercial loans

              

Construction — commercial

   $ —         $ —         $ —         $ —         $ —     

Land development

     113         5         113         114         7   

Other land loans

     —           —           —           —           —     

Commercial and industrial

     —           —           —           —           —     

Multi-family residential

     723         257         759         768         21   

Non-farm, non-residential

     1,070         158         1,140         1,151         26   

Consumer real estate loans

              

Home equity lines

     95         34         98         98         2   

Single family residential mortgage

     8,801         1,870         7,548         8,913         310   

Owner-occupied construction

     —           —           —           —           —     

Consumer loans

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,802       $ 2,324       $ 9,658       $ 11,044       $ 366   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to the risk rating of commercial loans, the level of classified commercial loans, net charge-offs, non-performing loans and general economic conditions. The Company’s loan review function generally reviews all commercial loan relationships greater than $2.00 million on an annual basis and at various times through the year. Smaller commercial and retail loans are sampled for review throughout the year by our internal loan review department. Through the loan review process, loans are identified for upgrade or downgrade in risk rating and changed to reflect current information as part of the process.

The Company utilizes a risk grading matrix to assign a risk grade to each of its loans. A description of the general characteristics of the risk grades is as follows:

 

   

Pass – This grade includes loans to borrowers of acceptable credit quality and risk. The Company further differentiates within this grade based upon borrower characteristics which include: capital strength, earnings stability, leverage, and industry.

 

   

Special Mention – This grade includes loans that require more than a normal degree of supervision and attention. These loans have all the characteristics of an adequate asset, but due to being adversely affected by economic or financial conditions have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan.

 

   

Substandard – This grade includes loans that have well defined weaknesses which make payment default or principal exposure possible, but not yet certain. Such loans are apt to be dependent upon collateral liquidation, a secondary source of repayment, or an event outside of the normal course of business to meet the repayment terms.

 

   

Doubtful – This grade includes loans that are placed on non-accrual status. These loans have all the weaknesses inherent in a “substandard’ loan with the added factor that the weaknesses are so severe that collection or liquidation in full, on the basis of current existing facts, conditions and values, is extremely unlikely, but because of certain specific pending factors, the amount of loss cannot yet be determined.

 

   

Loss – This grade includes loans that are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the asset

 

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has no recovery or salvage value, but simply that it is not practical or desirable to defer writing off all or some portion of the loan, even though partial recovery may be effected in the future.

The following tables present the Company’s investment in loans by internal credit grade indicator at September 30, 2011, and December 31, 2010.

 

     September 30, 2011  
(Amounts in Thousands)    Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  

Commercial loans

                 

Construction — commercial

   $ 30,678       $ 412       $ 1,189       $ —         $ —         $ 32,279   

Land development

     2,879         250         175         —           —           3,304   

Other land loans

     16,845         5,880         276         —           —           23,001   

Commercial and industrial

     87,209         499         2,759         2,427         —           92,894   

Single family residential

     93,622         2,543         11,714         —           —           107,879   

Multi-family residential

     79,068         985         2,886         —           —           82,939   

Non-farm, non-residential

     294,641         7,695         23,039         455         —           325,830   

Agricultural

     1,529         —           41         —           —           1,570   

Farmland

     35,004         853         748         —           —           36,605   

Consumer real estate loans

                 

Home equity lines

     104,251         1,884         3,309         —           —           109,444   

Single family residential mortgage

     425,091         7,908         28,105         —           —           461,104   

Owner-occupied construction

     18,619         130         530         —           —           19,279   

Consumer and other loans

                 

Consumer loans

     66,277         174         569         —           —           67,020   

Other

     11,497         2         9         —           —           11,508   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,267,210       $ 29,215       $ 75,349       $ 2,882       $ —         $ 1,374,656   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2010  
(Amounts in Thousands)    Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  

Commercial loans

                 

Construction — commercial

   $ 40,497       $ 663       $ 1,534       $ —         $ —         $ 42,694   

Land development

     14,458         1,226         966         —           —           16,650   

Other land loans

     16,723         6,138         1,607         —           —           24,468   

Commercial and industrial

     87,156         1,756         5,211         —           —           94,123   

Multi-family residential

     61,059         2,553         4,212         —           —           67,824   

Non-farm, non-residential

     316,026         18,942         16,936         —           —           351,904   

Agricultural

     1,318         —           24         —           —           1,342   

Farmland

     33,042         2,569         1,343         —           —           36,954   

Consumer real estate loans

                 

Home equity lines

     106,803         1,923         2,894         —           —           111,620   

Single family residential mortgage

     498,830         15,224         34,449         654         —           549,157   

Owner-occupied construction

     17,389         789         171         —           —           18,349   

Consumer and other loans

                 

Consumer loans

     62,676         306         493         —           —           63,475   

Other

     7,635         11         —           —           —           7,646   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

&