UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2012
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 0-24753
ECB Bancorp, Inc.
(Exact name of registrant as specified in its charter)
North Carolina | 56-2090738 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
Post Office Box 337, Engelhard, North Carolina 27824
(Address of principal executive offices) (Zip Code)
(252) 925-5501
(Registrants 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 Exchange Act 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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
On August 10, 2012, there were 2,849,841 outstanding shares of Registrants common stock.
Index
Begins on Page |
||||||
Part 1 Financial Information |
||||||
Item 1. |
Financial Statements: |
|||||
Consolidated Balance Sheets at June 30, 2012 (unaudited) and December 31, 2011 |
3 | |||||
Consolidated Results of Operations for Three and Six Months Ended June 30, 2012 and 2011 (unaudited) |
4 | |||||
5 | ||||||
6 | ||||||
Consolidated Statements of Cash Flows for Six Months Ended June 30, 2012 and 2011 (unaudited) |
7 | |||||
8 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
39 | ||||
Item 3. |
56 | |||||
Item 4. |
56 | |||||
Item 1. |
57 | |||||
Item 1A. |
57 | |||||
Item 2. |
57 | |||||
Item 3. |
57 | |||||
Item 4. |
57 | |||||
Item 5. |
57 | |||||
Item 6. |
57 | |||||
58 | ||||||
59 | ||||||
Certifications |
2
ECB BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 2012 and December 31, 2011
(Dollars in thousands, except per share data)
June 30, 2012 |
December 31, 2011* |
|||||||
(unaudited) | ||||||||
Assets |
||||||||
Non-interest bearing deposits and cash |
$ | 16,890 | $ | 18,363 | ||||
Interest bearing deposits |
61 | 63 | ||||||
Overnight investments |
7,670 | 6,305 | ||||||
|
|
|
|
|||||
Total cash and cash equivalents |
24,621 | 24,731 | ||||||
|
|
|
|
|||||
Investment securities |
||||||||
Available-for-sale, at market value (cost of $346,271 and $338,685 at June 30, 2012 and December 31, 2011, respectively) |
350,779 | 339,450 | ||||||
Loans held for sale |
3,059 | 2,866 | ||||||
Loans |
506,257 | 496,542 | ||||||
Allowance for loan losses |
(10,780 | ) | (12,092 | ) | ||||
|
|
|
|
|||||
Loans, net |
495,477 | 484,450 | ||||||
|
|
|
|
|||||
Real estate and repossessions acquired in settlement of loans, net |
7,661 | 6,573 | ||||||
Federal Home Loan Bank common stock, at cost |
3,899 | 3,456 | ||||||
Bank premises and equipment, net |
26,111 | 26,289 | ||||||
Accrued interest receivable |
5,030 | 5,308 | ||||||
Bank owned life insurance |
11,981 | 11,778 | ||||||
Other assets |
15,648 | 16,376 | ||||||
|
|
|
|
|||||
Total |
$ | 944,266 | $ | 921,277 | ||||
|
|
|
|
|||||
Liabilities and Shareholders Equity |
||||||||
Deposits |
||||||||
Demand, noninterest bearing |
$ | 146,326 | $ | 135,732 | ||||
Demand, interest bearing |
305,298 | 270,119 | ||||||
Savings |
58,562 | 55,517 | ||||||
Time |
285,302 | 336,277 | ||||||
|
|
|
|
|||||
Total deposits |
795,488 | 797,645 | ||||||
|
|
|
|
|||||
Accrued interest payable |
469 | 519 | ||||||
Short-term borrowings |
42,101 | 11,679 | ||||||
Long-term obligations |
18,000 | 25,500 | ||||||
Other liabilities |
4,948 | 5,491 | ||||||
|
|
|
|
|||||
Total liabilities |
861,006 | 840,834 | ||||||
|
|
|
|
|||||
Shareholders equity |
||||||||
Preferred stock, Series A |
17,536 | 17,454 | ||||||
Common stock, par value $3.50 per share |
9,974 | 9,974 | ||||||
Capital surplus |
25,857 | 25,873 | ||||||
Warrants |
878 | 878 | ||||||
Retained earnings |
26,360 | 25,926 | ||||||
Accumulated other comprehensive income |
2,655 | 338 | ||||||
|
|
|
|
|||||
Total shareholders equity |
83,260 | 80,443 | ||||||
|
|
|
|
|||||
Total |
$ | 944,266 | $ | 921,277 | ||||
|
|
|
|
|||||
Common shares outstanding |
2,849,841 | 2,849,841 | ||||||
Common shares authorized |
50,000,000 | 50,000,000 | ||||||
Preferred shares outstanding |
17,949 | 17,949 | ||||||
Preferred shares authorized |
2,000,000 | 2,000,000 | ||||||
Non-voting common shares authorized |
2,000,000 | 2,000,000 |
* | Derived from audited consolidated financial statements. |
See accompanying notes to consolidated financial statements.
3
ECB BANCORP, INC. AND SUBSIDIARY
Consolidated Results of Operations
For the three and six months ended June 30, 2012 and 2011 (unaudited)
(Dollars in thousands, except per share data)
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Interest income: |
||||||||||||||||
Interest and fees on loans |
$ | 6,404 | $ | 7,329 | $ | 12,773 | $ | 14,686 | ||||||||
Interest on investment securities: |
||||||||||||||||
Interest exempt from federal income taxes |
249 | 117 | 484 | 245 | ||||||||||||
Taxable interest income |
1,774 | 2,163 | 3,656 | 4,100 | ||||||||||||
Dividend income |
14 | 9 | 25 | 18 | ||||||||||||
Other interest income |
4 | 14 | 6 | 21 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total interest income |
8,445 | 9,632 | 16,944 | 19,070 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Interest expense: |
||||||||||||||||
Deposits: |
||||||||||||||||
Demand accounts |
390 | 505 | 796 | 1,062 | ||||||||||||
Savings |
60 | 74 | 155 | 127 | ||||||||||||
Time |
1,166 | 1,790 | 2,436 | 3,601 | ||||||||||||
Short-term borrowings |
95 | 73 | 176 | 142 | ||||||||||||
Long-term obligations |
76 | 145 | 195 | 325 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total interest expense |
1,787 | 2,587 | 3,758 | 5,257 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income |
6,658 | 7,045 | 13,186 | 13,813 | ||||||||||||
Provision for loan losses |
866 | 1,273 | 866 | 5,203 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net interest income after provision for loan losses |
5,792 | 5,772 | 12,320 | 8,610 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Noninterest income: |
||||||||||||||||
Service charges on deposit accounts |
945 | 828 | 1,802 | 1,593 | ||||||||||||
Other service charges and fees |
518 | 330 | 847 | 574 | ||||||||||||
Mortgage origination fees |
376 | 452 | 782 | 778 | ||||||||||||
Net gain on sale of securities |
279 | 858 | 324 | 884 | ||||||||||||
Income from bank owned life insurance |
102 | 74 | 203 | 148 | ||||||||||||
Other operating (expense) income |
1 | (3 | ) | 2 | (7 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total noninterest income |
2,221 | 2,539 | 3,960 | 3,970 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Noninterest expenses: |
||||||||||||||||
Salaries |
2,865 | 2,826 | 5,784 | 5,390 | ||||||||||||
Retirement and other employee benefits |
815 | 784 | 1,918 | 1,460 | ||||||||||||
Occupancy |
518 | 522 | 1,048 | 1,005 | ||||||||||||
Equipment |
603 | 513 | 1,193 | 1,072 | ||||||||||||
Professional fees |
343 | 271 | 562 | 542 | ||||||||||||
Supplies |
41 | 78 | 115 | 129 | ||||||||||||
Telephone |
184 | 189 | 382 | 358 | ||||||||||||
FDIC insurance |
203 | 201 | 407 | 527 | ||||||||||||
Other outside services |
92 | 162 | 192 | 343 | ||||||||||||
Data processing and related expenses |
346 | 83 | 742 | 153 | ||||||||||||
Net cost of real estate and repossessions acquired in settlement of loans |
463 | 79 | 1,147 | 97 | ||||||||||||
Other operating expenses |
784 | 949 | 1,685 | 1,825 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total noninterest expenses |
7,257 | 6,657 | 15,175 | 12,901 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) before income taxes |
756 | 1,654 | 1,105 | (321 | ) | |||||||||||
Income tax expense (benefit) |
168 | 509 | 140 | (382 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
588 | 1,145 | 965 | 61 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Preferred stock dividends |
225 | 224 | 449 | 448 | ||||||||||||
Accretion of discount |
41 | 41 | 82 | 82 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) available to common shareholders |
$ | 322 | $ | 880 | $ | 434 | ($ | 469 | ) | |||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) per common sharebasic |
$ | 0.11 | $ | 0.31 | $ | 0.15 | ($ | 0.16 | ) | |||||||
|
|
|
|
|
|
|
|
|||||||||
Net income (loss) per common sharediluted |
$ | 0.11 | $ | 0.31 | $ | 0.15 | ($ | 0.16 | ) | |||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average common shares outstandingbasic |
2,849,841 | 2,849,841 | 2,849,841 | 2,849,841 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average common shares outstandingdiluted |
2,849,841 | 2,849,841 | 2,849,841 | 2,849,841 | ||||||||||||
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
ECB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income (unaudited)
For the three and six months ended June 30, 2012 and 2011
(Dollars in thousands)
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Net income |
$ | 588 | $ | 1,145 | $ | 965 | $ | 61 | ||||||||
Other comprehensive income: |
||||||||||||||||
Unrealized gains on available for sale securities arising during the period |
3,093 | 4,404 | 4,067 | 4,247 | ||||||||||||
Tax related to unrealized gains |
(1,175 | ) | (1,696 | ) | (1,551 | ) | (1,635 | ) | ||||||||
Reclassification to realized gains |
(279 | ) | (858 | ) | (324 | ) | (884 | ) | ||||||||
Tax related to realized gains |
107 | 330 | 125 | 340 | ||||||||||||
Defined benefit pension plan: |
||||||||||||||||
Prior service cost |
| | | 7 | ||||||||||||
Net loss arising during period |
| | | (116 | ) | |||||||||||
Tax related to defined benefit pension plan |
| | | 42 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other comprehensive income |
1,746 | 2,180 | 2,317 | 2,001 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total comprehensive income |
$ | 2,334 | $ | 3,325 | $ | 3,282 | $ | 2,062 | ||||||||
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
ECB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders Equity
Six months ended June 30, 2012 and 2011 (unaudited)
(Dollars in thousands, except per share data)
Preferred stock, Series A |
Common Stock |
Common stock warrants |
Capital surplus |
Retained earnings |
Accumulated other comprehensive income |
Total | ||||||||||||||||||||||||||
Number | Amount | |||||||||||||||||||||||||||||||
Balance January 1, 2011 |
$ | 17,288 | 2,849,841 | $ | 9,974 | $ | 878 | $ | 25,852 | $ | 28,554 | $ | (1,652 | ) | $ | 80,894 | ||||||||||||||||
Other comprehensive income |
| | | | | | 2,001 | 2,001 | ||||||||||||||||||||||||
Net income |
| | | | | 61 | 61 | |||||||||||||||||||||||||
Stock based compensation |
| | | | 11 | | 11 | |||||||||||||||||||||||||
Preferred stock accretion |
82 | | | | | (82 | ) | | | |||||||||||||||||||||||
Cash dividends on preferred stock |
| | | | | (448 | ) | | (448 | ) | ||||||||||||||||||||||
Cash dividends ($0.07 per share) |
| | | | | (199 | ) | | (199 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance June 30, 2011 |
$ | 17,370 | 2,849,841 | $ | 9,974 | $ | 878 | $ | 25,863 | $ | 27,886 | $ | 349 | $ | 82,320 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, Series A |
Common Stock |
Common stock warrants |
Capital surplus |
Retained earnings |
Accumulated other comprehensive income |
Total | ||||||||||||||||||||||||||
Number | Amount | |||||||||||||||||||||||||||||||
Balance January 1, 2012 |
$ | 17,454 | 2,849,841 | $ | 9,974 | $ | 878 | $ | 25,873 | $ | 25,926 | $ | 338 | $ | 80,443 | |||||||||||||||||
Other comprehensive income |
| | | | | | 2,317 | 2,317 | ||||||||||||||||||||||||
Net income |
| | | | | 965 | | 965 | ||||||||||||||||||||||||
Stock based compensation |
| | | | (16 | ) | | (16 | ) | |||||||||||||||||||||||
Preferred stock accretion |
82 | | | | | (82 | ) | | | |||||||||||||||||||||||
Cash dividends on preferred stock |
| | | | | (449 | ) | | (449 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance June 30, 2012 |
$ | 17,536 | 2,849,841 | $ | 9,974 | $ | 878 | $ | 25,857 | $ | 26,360 | $ | 2,655 | $ | 83,260 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
6
ECB BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Six months ended June 30, 2012 and 2011 - (unaudited)
(Dollar amounts in thousands)
Six months ended June 30, |
||||||||
2012 | 2011 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 965 | $ | 61 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation |
757 | 724 | ||||||
Amortization of premium on investment securities, net |
2,502 | 1,408 | ||||||
Provision for loan losses |
866 | 5,203 | ||||||
Gain on sale of securities |
(324 | ) | (884 | ) | ||||
Stock based compensation (benefit) |
(16 | ) | 11 | |||||
Decrease in accrued interest receivable |
278 | 736 | ||||||
Impairment of real estate and repossessions acquired in settlement of loans |
683 | | ||||||
Loss on sale of real estate and repossessions acquired in settlement of loans |
142 | 26 | ||||||
Income from Bank owned life insurance |
(203 | ) | (148 | ) | ||||
Originations of mortgage loans held for sale |
(31,210 | ) | (29,425 | ) | ||||
Proceeds from sale of loans held for sale |
31,017 | 32,117 | ||||||
Decrease in other assets |
728 | 1,697 | ||||||
Increase (decrease) in accrued interest payable |
(50 | ) | 17 | |||||
Decrease in other liabilities, net |
(1,969 | ) | (1,993 | ) | ||||
|
|
|
|
|||||
Net cash provided by operating activities |
4,166 | 9,550 | ||||||
|
|
|
|
|||||
Cash flows from investing activities: |
||||||||
Proceeds from sales of investment securities classified as available-for-sale |
74,073 | 56,536 | ||||||
Proceeds from maturities of investment securities classified as available-for-sale |
24,049 | 25,908 | ||||||
Purchases of investment securities classified as available-for-sale |
(107,886 | ) | (104,492 | ) | ||||
Purchases of premises and equipment |
(579 | ) | (828 | ) | ||||
Purchase (sale) of Federal Home Loan Bank common stock |
(443 | ) | 539 | |||||
Proceeds from disposal of real estate and repossessions acquired in settlement of loans and real estate held for sale |
909 | 1,449 | ||||||
Net loan (originations) repayments |
(14,715 | ) | 17,953 | |||||
|
|
|
|
|||||
Net cash used by investing activities |
(24,592 | ) | (2,935 | ) | ||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Net increase (decrease) in deposits |
(2,157 | ) | 26,833 | |||||
Net increase (decrease) in borrowings |
22,922 | (4,798 | ) | |||||
Dividends paid to common shareholders |
| (199 | ) | |||||
Dividends paid on preferred stock |
(449 | ) | (448 | ) | ||||
|
|
|
|
|||||
Net cash provided by financing activities |
20,316 | 21,388 | ||||||
|
|
|
|
|||||
Increase (decrease) in cash and cash equivalents |
(110 | ) | 28,003 | |||||
Cash and cash equivalents at beginning of period |
24,731 | 20,166 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of period |
$ | 24,621 | $ | 48,169 | ||||
|
|
|
|
|||||
Cash paid during the period: |
||||||||
Interest |
$ | 3,808 | $ | 5,240 | ||||
Taxes |
| | ||||||
Supplemental disclosures of noncash financing and investing activities: |
||||||||
Unrealized gains on available-for-sale securities, net of deferred taxes |
$ | 2,317 | $ | 2,068 | ||||
Transfer from loans to real estate and repossessions acquired in settlement of loans |
2,822 | 3,989 | ||||||
Transfer from long-term to short-term borrowings |
7,500 | 7,000 |
See accompanying notes to consolidated financial statements.
7
ECB BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Basis of Presentation
The consolidated financial statements include the accounts of ECB Bancorp, Inc. (Bancorp) and its wholly-owned subsidiary, The East Carolina Bank (the Bank) (Bancorp and the Bank are collectively referred to hereafter as the Company). The Bank has one wholly-owned subsidiary, ECB Financial Services, Inc., which formerly provided courier services to the Bank but is currently inactive. All intercompany transactions and balances are eliminated in consolidation. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of income and expenses for the periods presented. Actual results could differ from those estimates.
Management makes a number of estimates and assumptions relating to reported amounts of assets, liabilities, revenues and expenses in the preparation of the financial statements and disclosures. Estimates and assumptions that are most significant to the Company are related to the determination of the allowance for loan losses, asset impairment valuation, postretirement and benefit plan accounting and income taxes.
All adjustments considered necessary for a fair presentation of the results for the interim periods presented have been included (such adjustments are normal and recurring in nature). The notes to consolidated financial statements in Bancorps annual report on Form 10-K should be referenced when reading these unaudited interim financial statements. Operating results for the period ended June 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any other period.
Loans
Loans are generally stated at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses and any deferred fees or costs. Loan origination fees net of certain direct loan origination costs are deferred and amortized as a yield adjustment over the contractual life of the related loans using the level-yield method.
Impaired loans are defined as those which management believes it is probable we will not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms have been modified in a troubled debt restructuring.
Interest on loans is recorded based on the principal amount outstanding. The Company ceases accruing interest on loans (including impaired loans) when, in managements judgment, the collection of interest appears doubtful or the loan is past due 90 days or more. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Management may return a loan classified as nonaccrual to accrual status when the obligation has been brought current, has performed in accordance with its contractual terms over an extended period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Troubled debt restructurings (TDRs) are loans in which the borrower is experiencing financial difficulty at the time of restructure, and the Company has granted an economic concession to the borrower. Prior to modifying a borrowers loan terms, the Company performs an evaluation of the borrowers financial condition and ability to service under the potential modified loan terms. The types of concessions generally granted are extensions of the loan maturity date, reductions in the original contractual interest rate and forgiveness of principal. The Company measures the impairment loss of a TDR using the methodology for individually impaired loans. If a loan is accruing at the time of modification, the loan remains on accrual status and is subject to the Companys charge-off and nonaccrual policies. If a loan is on nonaccrual before it is determined to be a TDR then the loan remains on nonaccrual. TDRs may be returned to accrual status if there has been at least a six month sustained period of repayment performance by the borrower.
Allowance for Loan Losses
The allowance for loan losses (AFLL) is established through provisions for losses charged against income. Loan amounts deemed to be uncollectible are charged against the AFLL, and subsequent recoveries, if any, are credited to the allowance. The AFLL represents managements estimate of the amount necessary to absorb estimated probable losses in the loan portfolio. Managements periodic evaluation of the adequacy of the allowance is based on individual loan reviews, past loan loss experience, economic conditions in the Companys market areas, the fair value and adequacy of underlying collateral, and the growth and loss attributes of the loan portfolio. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Thus, future changes to the AFLL may be necessary based on the impact of changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Companys AFLL. Such agencies may require the Company to recognize adjustments to the AFLL based on their judgments about information available to them at the time of their examination.
8
In evaluating the allowance for loan losses, the Company prepares an analysis of its current loan portfolio through the use of historical loss rates, homogeneous risk analysis grouping to include probabilities for loss in each group by risk grade, estimation of years to impairment in each homogeneous grouping, analysis of internal credit processes, past due loan portfolio performance and overall economic conditions, both regionally and nationally.
Historical loss calculations for each homogeneous risk group are based on a three year average loss ratio calculation with the most recent quarters loss history included in the model. The impact is to more quickly recognize and increase the loss history in a respective grouping. For those groups with little or no loss history, management increases the historical factor through a positive adjustment to more accurately represent current economic conditions and their potential impact on that particular loan group.
Homogeneous loan groups are assigned risk factors based on their perceived loss potential, current economic conditions and on their respective risk ratings. The probability of loss is increased as the risk grade increases within each risk grouping to more accurately reflect the Banks exposure in that particular group of loans. The Bank utilizes a system of eight possible risk ratings. The risk ratings are established based on perceived probability of loss. Most loans risk rated substandard, doubtful and loss are removed from their homogeneous group and individually analyzed for impairment. Some smaller loans risk rated substandard, doubtful and loss with balances less than $100 thousand are not removed from their homogeneous group and individually analyzed for impairment. Other groups of loans based on loan size may be selected for impairment review. Loans are considered impaired if, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is based on either the fair value of the underlying collateral, the present value of the future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, or the estimated market value of the loan. In measuring the fair value of the collateral, management uses a comparison to the recent selling price of similar assets, which is consistent with those that would be utilized by unrelated third parties.
A portion of the Banks AFLL is not allocated to any specific category of loans. This general portion of the allowance reflects the elements of imprecision and estimation risk inherent in the calculation of the overall allowance. Due to the subjectivity involved in determining the overall allowance, including the portion determined through general qualitative and quantitative internal and external factors, the general portion may fluctuate from period to period based on managements evaluation of the factors affecting the assumptions used in calculating the allowance, including historical loss experience, current and expected economic conditions and geographic conditions. While the Company believes that our management uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the AFLL, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the final determination. Because these factors and managements assumptions are subject to change, the allocation is not necessarily indicative of future loan portfolio performance.
Unsecured loans are charged-off in full against the Companys AFLL as soon as the loan becomes uncollectible. Unsecured loans are considered uncollectible when no regularly scheduled monthly payment has been made within three months, the loan matured over 90 days ago and has not been renewed or extended or the borrower files for bankruptcy. Secured loans are considered uncollectible when the liquidation of collateral is deemed to be the most likely source of repayment. Once secured loans reach 90 days past due, they are placed into non-accrual status. If the loan is deemed to be collateral dependent, the principal balance is written down immediately to reflect the current market valuation based on current independent appraisal. Included in the write-down is the estimated expense to liquidate the property and typically an additional allowance for the foreclosure discount.
Subsequent Events
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued.
(2) Net Income Per Common Share
Basic net income per common share is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. For purposes of basic net income per common share, restricted stock is considered contingently issuable and is not included in the weighted average number of common shares outstanding.
Diluted net income per common share is computed by assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. Restricted stock is considered outstanding for purposes of diluted net income per common share. The amount of compensation cost attributed to future services and not yet recognized is considered proceeds using the treasury stock method. Restricted stock had no dilutive effect on earnings per common share for the six or three-month periods ended June 30, 2012 and June 30, 2011 as there were no shares outstanding during these periods.
9
In computing diluted net income per common share, it is assumed that all dilutive stock options are exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and the number of shares bought back is added to the number of weighted average common shares outstanding during the period. The sum is used as the denominator to calculate diluted net income per common share for the Company. Diluted weighted average shares outstanding did not increase for the six and three months ended June 30, 2012 or June 30, 2011 as there was no dilutive impact of options for the periods. There were 3,500 options outstanding for both the six and three months ended June 30, 2012, that were not included in the computation of diluted net income per share because the exercise price was above the average market value of the Companys stock for the periods. As of June 30, 2012, the warrant, covering approximately 145 thousand shares, issued to the U.S. Treasury Department was not included in the computation of net income per share for either the six or three-month period because its exercise price exceeded the average market price of the companys stock for the periods. For the six month period ending June 30, 2011, the warrant, covering approximately 145 thousand shares, issued to the U.S. Treasury Department and 28,513 options were not included in the computation of diluted earnings per common share as the effect would have been anti-dilutive. For the three month period ending June 30, 2011, the warrant, covering approximately 145 thousand shares, issued to the U.S. Treasury Department and 28,513 options were not included in the computation of diluted earnings per common share because the exercise price exceeded the average market price of the Companys stock for that period.
10
The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Net Income (Loss) Per Common Share for the six months ended June 30.
Six months ended June 30,
2012 (dollars in thousands, except per share data) |
||||||||||||
Income (Numerator) |
Shares (Denominator) |
Per Share Amount |
||||||||||
Basic net income per common share |
$ | 434 | 2,849,841 | $ | 0.15 | |||||||
|
|
|||||||||||
Effect of dilutive securities |
| | ||||||||||
|
|
|
|
|||||||||
Diluted net income per common share |
$ | 434 | 2,849,841 | $ | 0.15 | |||||||
|
|
|
|
|
|
Six months ended June 30,
2011 (dollars in thousands, except per share data) |
||||||||||||
Income (Numerator) |
Shares (Denominator) |
Per Share Amount |
||||||||||
Basic net loss per common share |
$ | (469 | ) | 2,849,841 | $ | (0.16 | ) | |||||
|
|
|||||||||||
Effect of dilutive securities |
| | ||||||||||
|
|
|
|
|||||||||
Diluted net loss per common share |
$ | (469 | ) | 2,849,841 | $ | (0.16 | ) | |||||
|
|
|
|
|
|
The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Net Income Per Common Share for the three months ended June 30.
Three months ended June 30,
2012 (dollars in thousands, except per share data) |
||||||||||||
Income (Numerator) |
Shares (Denominator) |
Per Share Amount |
||||||||||
Basic net income per common share |
$ | 322 | 2,849,841 | $ | 0.11 | |||||||
|
|
|||||||||||
Effect of dilutive securities |
| | ||||||||||
|
|
|
|
|||||||||
Diluted net income per common share |
$ | 322 | 2,849,841 | $ | 0.11 | |||||||
|
|
|
|
|
|
Three months ended June 30,
2011 (dollars in thousands, except per share data) |
||||||||||||
Income (Numerator) |
Shares (Denominator) |
Per Share Amount |
||||||||||
Basic net income per common share |
$ | 880 | 2,849,841 | $ | 0.31 | |||||||
|
|
|||||||||||
Effect of dilutive securities |
| | ||||||||||
|
|
|
|
|||||||||
Diluted net income per common share |
$ | 880 | 2,849,841 | $ | 0.31 | |||||||
|
|
|
|
|
|
11
(3) Comprehensive Income
Comprehensive income is defined as the change in equity during a period for non-owner transactions and is divided into net income (loss) and other comprehensive income. Other comprehensive income includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards. The components of comprehensive income for the periods have been presented in the consolidated statements of comprehensive income.
(4) Recent Accounting Pronouncements
The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of financial information by the Company.
In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03. The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control. The other criteria to assess effective control were not changed. The amendments were effective for the Company on January 1, 2012 and had no effect on the Companys financial statements.
ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments were effective for the Company beginning January 1, 2012 and are included in Note 9.
The Comprehensive Income topic of the ASC was amended in June 2011 by ASU 2011-05. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders equity and requires consecutive presentation of the statement of net income and other comprehensive income. The amendments were applicable to the Company on January 1, 2012 and have been applied retrospectively. In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements. Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates future requirements.
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 Companys financial position, results of operations and cash flows.
12
(5) Investment Securities
The following is a summary of the securities portfolio by major classification:
June 30, 2012 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Securities available-for-sale: |
||||||||||||||||
Obligations of states and political subdivisions |
$ | 36,655 | $ | 1,181 | $ | (57 | ) | $ | 37,779 | |||||||
Mortgage-backed securities |
131,169 | 1,831 | (201 | ) | 132,799 | |||||||||||
SBA-backed securities |
137,445 | 2,270 | (113 | ) | 139,602 | |||||||||||
Corporate bonds |
41,002 | 337 | (740 | ) | 40,599 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 346,271 | $ | 5,619 | $ | (1,111 | ) | $ | 350,779 |
December 31, 2011 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
Securities available-for-sale: |
||||||||||||||||
Government-sponsored enterprises and FFCB bonds |
$ | 1,003 | $ | 29 | $ | | $ | 1,032 | ||||||||
Obligations of states and political subdivisions |
27,855 | 863 | | 28,718 | ||||||||||||
Mortgage-backed securities |
130,949 | 1,460 | (117 | ) | 132,292 | |||||||||||
SBA-backed securities |
146,195 | 774 | (332 | ) | 146,637 | |||||||||||
Corporate bonds |
32,683 | 88 | (2,000 | ) | 30,771 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 338,685 | $ | 3,214 | $ | (2,449 | ) | $ | 339,450 |
Gross realized gains and losses on sales of securities for the three and six-month periods ended June 30, 2012 and June 30, 2011 were as follows:
Six months ended June 30, (Dollars in thousands) |
||||||||
2012 | 2011 | |||||||
Gross realized gains |
$ | 433 | $ | 971 | ||||
Gross realized losses |
(109 | ) | (87 | ) | ||||
|
|
|
|
|||||
Net realized gains |
$ | 324 | $ | 884 | ||||
|
|
|
|
Three months ended June 30, (Dollars in thousands) |
||||||||
2012 | 2011 | |||||||
Gross realized gains |
$ | 362 | $ | 945 | ||||
Gross realized losses |
(83 | ) | (87 | ) | ||||
|
|
|
|
|||||
Net realized gains |
$ | 279 | $ | 858 | ||||
|
|
|
|
Analysis of Certain Investments in Debt and Equity Securities for Other Than Temporary Impairment
The following tables set forth the amount of unrealized losses at June 30, 2012 and December 31, 2011 (that is, the amount by which cost or amortized cost exceeds fair value), and the related fair value of investments with unrealized losses, none of which are
13
considered to be other-than-temporarily impaired. The tables are segregated into investments that have been in a continuous unrealized-loss position for less than 12 months from those that have been in a continuous unrealized-loss position for 12 months or longer.
June 30, 2012 | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or longer | Total | ||||||||||||||||||||||
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Obligations of states and political subdivisions |
$ | 5,032 | $ | 57 | $ | | $ | | $ | 5,032 | $ | 57 | ||||||||||||
Mortgage-backed securities |
20,968 | 201 | | | 20,968 | 201 | ||||||||||||||||||
SBA-backed securities |
19,996 | 113 | | | 19,996 | 113 | ||||||||||||||||||
Corporate bonds |
15,356 | 252 | 8,173 | 488 | 23,529 | 740 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 61,352 | $ | 623 | $ | 8,173 | $ | 488 | $ | 69,525 | $ | 1,111 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011 | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or longer | Total | ||||||||||||||||||||||
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Mortgage-backed securities |
$ | 25,011 | $ | 81 | $ | 2,880 | $ | 36 | $ | 27,891 | $ | 117 | ||||||||||||
SBA-backed securities |
62,543 | 332 | | | 62,543 | 332 | ||||||||||||||||||
Corporate bonds |
11,824 | 485 | 13,755 | 1,515 | 25,579 | 2,000 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 99,378 | $ | 898 | $ | 16,635 | $ | 1,551 | $ | 116,013 | $ | 2,449 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
14
As of June 30, 2012 and December 31, 2011, management concluded that the unrealized losses presented above, which consisted of twenty-five securities at June 30, 2012 and fifty securities at December 31, 2011, are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Bank has the intent to hold these investments for a time necessary to recover their cost and it is not likely that the Bank would be required to sell prior to recovery. The twenty-five securities at June 30, 2012 were comprised of three obligations of states and political subdivisions, five mortgage-backed securities, ten corporate bonds and seven SBA-backed securities. The fifty securities at December 31, 2011 were comprised of twelve mortgage-backed securities, twelve corporate bonds and twenty-six SBA-backed securities. The losses above are on debt securities that have contractual maturity dates and are primarily related to market interest rates. All unrealized losses on investment securities are not considered to be other-than-temporary, because they are related to changes in interest rates, lack of liquidity and demand in the general investment market and do not affect the expected cash flows of the underlying collateral or the issuer. The Banks mortgage-backed securities are all backed by government sponsored enterprises or agencies. The Bank does not own any private label mortgage-backed securities.
At June 30, 2012 and December 31, 2011, the balance of Federal Home Loan Bank (FHLB) of Atlanta stock held by the Bank was $3.9 million and $3.5 million, respectively. The FHLB paid a dividend for the first quarter of 2012 with an annualized rate of 1.51%. The dividend rate was equal to average three-month LIBOR for the period of January 1, 2012 to March 31, 2012 plus 1.00%, and was applicable to capital stock held during that period. Management believes that its investment in FHLB stock was not other-than-temporarily impaired as of June 30, 2012 or December 31, 2011. However, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not also cause a decrease in the value of the FHLB stock held by the Bank.
The aggregate amortized cost and fair value of the available-for-sale securities portfolio at June 30, 2012 by remaining contractual maturity are as follows:
Amortized Cost |
Fair Value |
|||||||
(Dollars in thousands) | ||||||||
Obligations of states and political subdivisions: |
||||||||
Due in one through five years |
$ | 1,605 | 1,704 | |||||
Due in five through ten years |
20,196 | 20,930 | ||||||
Due after ten years |
14,854 | 15,145 | ||||||
Mortgage-backed securities: |
||||||||
Due in one through five years |
1,044 | 1,044 | ||||||
Due in five through ten years |
27,230 | 27,488 | ||||||
Due after ten years |
102,896 | 104,267 | ||||||
SBA-backed securities: |
||||||||
Due in five through ten years |
5,190 | 5,224 | ||||||
Due after ten years |
132,255 | 134,378 | ||||||
Corporate bonds: |
||||||||
Due in one through five years |
23,326 | 23,271 | ||||||
Due in five through ten years |
17,675 | 17,328 | ||||||
|
|
|
|
|||||
Total securities |
$ | 346,271 | $ | 350,779 | ||||
|
|
|
|
15
Securities with an amortized cost of $186.6 million at June 30, 2012 are pledged as collateral. Of this total, securities with an amortized cost of $60.8 million and fair value of $62.3 million are pledged as collateral for FHLB advances.
The aggregate amortized cost and fair value of the available-for-sale securities portfolio at December 31, 2011 by remaining contractual maturity are as follows:
Amortized Cost |
Fair Value |
|||||||
(Dollars in thousands) | ||||||||
Government-sponsored enterprises and FFCB bonds: |
||||||||
Due in one through five years |
$ | 3 | $ | 28 | ||||
Due in five through ten years |
1,000 | 1,004 | ||||||
Obligations of states and political subdivisions: |
||||||||
Due in one year or less |
250 | 252 | ||||||
Due in one through five years |
961 | 1,033 | ||||||
Due in five through ten years |
11,768 | 12,083 | ||||||
Due after ten years |
14,876 | 15,350 | ||||||
Mortgage-backed securities: |
||||||||
Due in five through ten years |
7,415 | 7,490 | ||||||
Due after ten years |
123,534 | 124,802 | ||||||
SBA-backed securities: |
||||||||
Due in five through ten years |
2,967 | 3,007 | ||||||
Due after ten years |
143,228 | 143,630 | ||||||
Corporate bonds: |
||||||||
Due in one year through five years |
13,338 | 13,081 | ||||||
Due in five through ten years |
19,345 | 17,690 | ||||||
|
|
|
|
|||||
Total securities |
$ | 338,685 | $ | 339,450 | ||||
|
|
|
|
Securities with an amortized cost of $197.6 million at December 31, 2011 were pledged as collateral. Of this total, securities with an amortized cost of $47.4 million and fair value of $48.0 million were pledged as collateral for FHLB advances.
16
(6) Loans
Loans at June 30, 2012 and December 31, 2011 classified by type are as follows:
June 30, 2012 |
December 31, 2011 |
|||||||
Real estate loans: |
||||||||
Construction and land development |
$ | 63,041 | $ | 67,232 | ||||
Secured by farmland |
27,677 | 29,947 | ||||||
Secured by residential properties |
107,545 | 110,238 | ||||||
Secured by nonfarm, nonresidential properties |
198,221 | 203,287 | ||||||
Consumer installment |
6,028 | 6,485 | ||||||
Credit cards and related plans |
1,723 | 1,660 | ||||||
Commercial and all other loans: |
||||||||
Commercial and industrial |
54,989 | 45,649 | ||||||
Loans to finance agricultural production |
36,840 | 21,524 | ||||||
All other loans |
10,237 | 10,587 | ||||||
|
|
|
|
|||||
506,301 | 496,609 | |||||||
Less deferred fees and costs, net |
44 | 67 | ||||||
|
|
|
|
|||||
$ | 506,257 | $ | 496,542 | |||||
|
|
|
|
|||||
Included in the above: |
||||||||
Nonaccrual loans |
$ | 18,204 | $ | 15,973 | ||||
Restructured loans 1 |
10,439 | 10,138 |
1. | Restructured loans include loans restructured and still accruing. The Company is not committed to advance additional funds on restructured loans. |
There were no loans outstanding that were past due ninety days or more that were still accruing at June 30, 2012 or December 31, 2011.
The Company, through its normal lending activity, originates and maintains loans receivable that are substantially concentrated in the Eastern region of North Carolina, where its offices are located. The Companys policy calls for collateral or other forms of repayment assurance to be received from the borrower at the time of loan origination. Such collateral or other form of repayment assurance is subject to changes in economic value due to various factors beyond the control of the Company, and such changes could be significant.
The Banks loan policies and procedures establish the basic guidelines governing its lending operations. The guidelines address the type of loans that the Bank seeks, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans or credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrowers total outstanding indebtedness to the Bank, including any indebtedness as a guarantor. The policies are reviewed and approved at least annually by the Board of Directors of the Bank. The Bank supplements its own supervision of the loan underwriting and approval process with periodic loan reviews by independent, outside professionals experienced in loan review. On an annual basis, the Board of Directors of the Bank determines officers lending authority. Authorities may include loans, letters of credit, overdrafts, uncollected funds and such other authorities as determined by the Board of Directors.
Responsibility for loan underwriting resides with the Chief Credit Officer position. This position is responsible for loan underwriting and approval. This is accomplished through individual lender approval authorities with supervision by Credit Policy Officers who review and approve loans which exceed the lenders authority. Also, all Special Mention and Classified loans are reviewed quarterly. Detailed, written action plans are updated by the lenders and those plans are reviewed by a joint committee consisting of Regional Managers, Credit Policy Officers, CCO, Commercial Banking Manager and Special Assets Manager.
17
The following describe the risk characteristics relevant to each of the portfolio segments.
Real Estate Loans. Our real estate loan classification includes all loans secured by real estate. Real estate loans include loans made to purchase, construct or improve residential or commercial real estate, and for real estate development purposes. However, many of our real estate loans, while secured by real estate, were made for various other commercial, agricultural and consumer purposes (which may or may not be related to our real estate collateral). This generally reflects our efforts to reduce credit risk by taking real estate as primary or additional collateral, whenever possible, without regard to loan purpose. Substantially all of our real estate loans are secured by real property located in or near our banking markets. We make long-term residential mortgage loans through our mortgage department. These loans are held for sale and we generally hold these loans for a short period of time of approximately ten days. This allows us to make long-term residential loans available to our customers and generate fee income but avoid most risks associated with those loans.
Construction and land development loans involve special risks because loan funds are advanced on the security of houses or other improvements that are under construction and are of uncertain value before construction is complete. For that reason, it is more difficult to evaluate accurately the total loan funds required to complete a project and the related loan-to-value ratios. To reduce these risks, we generally limit loan amounts to 85% of the projected as built appraised values of our collateral on completion of construction. For larger projects, we include amounts for contingencies in our construction cost estimates. We generally require a qualified permanent financing commitment from an outside lender unless we have agreed to convert the construction loan to permanent financing ourselves.
Loans secured by farmland are made to agricultural customers for the purpose of acquisition or improvement of farmland. The loans are typically secured by land which is cultivated for primarily row- crop production and related interests, such as grain elevator facilities and farming operations buildings. Repayment of loans secured by farmland may depend on successful crop production or other farm related operations.
Residential loans may be made at fixed or variable interest rates, and they generally have maturities that do not exceed five years and provide for payments based on amortization schedules of less than twenty years. Loans with a maturity of more than five years or that is based on an amortization schedule of more than five years generally will include contractual provisions that allow us to call the loan in full, or provide for a balloon payment in full, at the end of a period of no more than five years.
Nonfarm and nonresidential loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Repayment of commercial real estate loans may depend on the successful operation of income producing properties, a business, or a real estate project and, therefore, may, to a greater extent than in the case of other loans, be subject to the risk of adverse conditions in the economy generally or in the real estate market in particular.
Consumer Installment Loans, Credit Cards and Related Plans. Our consumer installment loans consist primarily of loans for various consumer purposes, as well as the outstanding balances of non-real estate secured consumer revolving credit accounts. A majority of these loans are secured by liens on various personal assets of the borrowers, but they also may be made on an unsecured basis. Consumer loans generally are made at fixed interest rates and with maturities or amortization schedules that generally do not exceed five years. Consumer installment loans involve greater risks than other loans, particularly in the case of loans that are unsecured or secured by depreciating assets. When damage or depreciation reduces the value of our collateral below the unpaid balance of a defaulted loan, repossession may not result in repayment of the entire outstanding loan balance. The resulting deficiency may not warrant further substantial collection efforts against the borrower. In connection with consumer lending in general, the success of our loan collection efforts is highly dependent on the continuing financial stability of our borrowers, and our collection of consumer installment loans may be more likely to be adversely affected by a borrowers job loss, illness, personal bankruptcy or other change in personal circumstances than is the case with other types of loans.
Commercial and Industrial and Agricultural Loans. Our commercial and industrial loan and loans to finance agriculture includes loans to small- and medium-sized businesses and individuals for working capital, equipment purchases and various other business and agricultural purposes. These loans generally are secured by business assets, such as inventory, accounts receivable, equipment or similar assets, but they also may be made on an unsecured basis. Commercial and industrial loans typically are made on the basis of the borrowers ability to make repayment from business cash flow. As a result, the ability of borrowers to repay commercial loans may be substantially dependent on the success of their businesses, and the collateral for commercial loans may depreciate over time and cannot be appraised with as much precision as real estate.
18
At June 30, 2012 and December 31, 2011, included in mortgage, commercial, and residential loans were loans collateralized by owner-occupied residential real estate of approximately $49.5 million and $53.2 million, respectively.
Loans with a book value of approximately $25.0 million at June 30, 2012 are pledged as eligible collateral for FHLB advances. Loans with a book value of approximately $25.8 million at December 31, 2011 were pledged as eligible collateral for FHLB advances.
19
(7) Credit Quality of Loans and Allowance for Loan Losses
The following tables summarize the balances by loan category of the allowance for loan losses with changes arising from charge-offs, recoveries and provision expense for the six months ending June 30, 2012 and 2011, and the three months ending June 30, 2012 and 2011:
Allowance for Loan Losses
As of and for the Six Months Ended June 30, 2012
Allowance for Credit Losses | Real Estate Construction and Land Development |
Real Estate Secured by Farmland |
Real Estate Secured by Residential Properties |
Real Estate Secured by Nonfarm Nonresidential |
Consumer Installment |
Credit Cards and Related Plans |
Commercial and Industrial |
Loans to Finance Agricultural Production |
All Other Loans |
General Qualitative & Quantitative Portion |
Total | |||||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Beginning balance |
$ | 3,655 | $ | 15 | $ | 2,418 | $ | 1,740 | $ | 46 | $ | 18 | $ | 555 | $ | 115 | $ | 26 | $ | 3,504 | $ | 12,092 | ||||||||||||||||||||||
Charge-offs |
(913 | ) | | (278 | ) | (892 | ) | (43 | ) | (17 | ) | (421 | ) | | (99 | ) | | (2,663 | ) | |||||||||||||||||||||||||
Recoveries |
337 | | 47 | 2 | 13 | 3 | 12 | | 71 | | 485 | |||||||||||||||||||||||||||||||||
Provisions |
176 | (2 | ) | 202 | 200 | 134 | 65 | 505 | (14 | ) | 41 | (441 | ) | 866 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance |
$ | 3,255 | $ | 13 | $ | 2,389 | $ | 1,050 | $ | 150 | $ | 69 | $ | 651 | $ | 101 | $ | 39 | $ | 3,063 | $ | 10,780 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance: individually evaluated for impairment |
$ | 575 | $ | | $ | 617 | $ | 180 | $ | | $ | | $ | 20 | $ | | $ | | $ | | $ | 1,392 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance: collectively evaluated for impairment |
$ | 2,680 | $ | 13 | $ | 1,772 | $ | 870 | $ | 150 | $ | 69 | $ | 631 | $ | 101 | $ | 39 | $ | 3,063 | $ | 9,388 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Loans |
||||||||||||||||||||||||||||||||||||||||||||
Ending Balance |
$ | 62,944 | $ | 27,627 | $ | 107,695 | $ | 198,007 | $ | 6,160 | $ | 1,723 | $ | 55,005 | $ | 36,856 | $ | 10,240 | $ | | $ | 506,257 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance: individually evaluated for impairment |
$ | 8,797 | $ | 356 | $ | 7,614 | $ | 15,093 | $ | | $ | | $ | 417 | $ | | $ | | $ | | $ | 32,277 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance: collectively evaluated for impairment |
$ | 54,147 | $ | 27,271 | $ | 100,081 | $ | 182,914 | $ | 6,160 | $ | 1,723 | $ | 54,588 | $ | 36,856 | $ | 10,240 | $ | | $ | 473,980 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
As of and for the Three Months Ended June 30, 2012
Allowance for Credit Losses | Real Estate Construction and Land Development |
Real Estate Secured by Farmland |
Real Estate Secured by Residential Properties |
Real Estate Secured by Nonfarm Nonresidential |
Consumer Installment |
Credit Cards and Related Plans |
Commercial and Industrial |
Loans to Finance Agricultural Production |
All Other Loans |
General Qualitative & Quantitative Portion |
Total | |||||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Beginning balance |
$ | 3,100 | $ | 15 | $ | 2,486 | $ | 1,565 | $ | 150 | $ | 68 | $ | 505 | $ | 122 | $ | 28 | $ | 3,346 | $ | 11,385 | ||||||||||||||||||||||
Charge-offs |
(694 | ) | | (176 | ) | (654 | ) | (2 | ) | (14 | ) | (64 | ) | | (47 | ) | | (1,651 | ) | |||||||||||||||||||||||||
Recoveries |
111 | | 20 | 1 | 12 | 3 | 2 | | 31 | | 180 | |||||||||||||||||||||||||||||||||
Provisions |
738 | (2 | ) | 59 | 138 | (10 | ) | 12 | 208 | (21 | ) | 27 | (283 | ) | 866 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance |
$ | 3,255 | $ | 13 | $ | 2,389 | $ | 1,050 | $ | 150 | $ | 69 | $ | 651 | $ | 101 | $ | 39 | $ | 3,063 | $ | 10,780 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance: individually evaluated for impairment |
$ | 575 | $ | | $ | 617 | $ | 180 | $ | | $ | | $ | 20 | $ | | $ | | $ | | $ | 1,392 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance: collectively evaluated for impairment |
$ | 2,680 | $ | 13 | $ | 1,772 | $ | 870 | $ | 150 | $ | 69 | $ | 631 | $ | 101 | $ | 39 | $ | 3,063 | $ | 9,388 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Loans |
||||||||||||||||||||||||||||||||||||||||||||
Ending Balance |
$ | 62,944 | $ | 27,627 | $ | 107,695 | $ | 198,007 | $ | 6,160 | $ | 1,723 | $ | 55,005 | $ | 36,856 | $ | 10,240 | $ | | $ | 506,257 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance: individually evaluated for impairment |
$ | 8,797 | $ | 356 | $ | 7,614 | $ | 15,093 | $ | | $ | | $ | 417 | $ | | $ | | $ | | $ | 32,277 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance: collectively evaluated for impairment |
$ | 54,147 | $ | 27,271 | $ | 100,081 | $ | 182,914 | $ | 6,160 | $ | 1,723 | $ | 54,588 | $ | 36,856 | $ | 10,240 | $ | | $ | 473,980 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Allowance for Loan Losses
As of and for the Six Months Ended June 30, 2011
Allowance for Credit Losses | Real Estate Construction and Land Development |
Real Estate Secured by Farmland |
Real Estate Secured by Residential Properties |
Real Estate Secured by Nonfarm Nonresidential |
Consumer Installment |
Credit Cards and Related Plans |
Commercial and Industrial |
Loans to Finance Agricultural Production |
All Other Loans |
General Qualitative & Quantitative Portion |
Total | |||||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Beginning balance |
$ | 6,168 | $ | 28 | $ | 3,450 | $ | 1,007 | $ | 12 | $ | 21 | $ | 882 | $ | 18 | $ | 139 | $ | 1,522 | $ | 13,247 | ||||||||||||||||||||||
Charge-offs |
(1,917 | ) | | (704 | ) | (43 | ) | (15 | ) | (9 | ) | (338 | ) | | (122 | ) | | (3,148 | ) | |||||||||||||||||||||||||
Recoveries |
6 | | 2 | | 2 | 1 | 78 | | 57 | | 146 | |||||||||||||||||||||||||||||||||
Provisions |
3,210 | 5 | 1,491 | 168 | 31 | 175 | | (3 | ) | 100 | 26 | 5,203 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance |
$ | 7,467 | $ | 33 | $ | 4,239 | $ | 1,132 | $ | 30 | $ | 188 | $ | 622 | $ | 15 | $ | 174 | $ | 1,548 | $ | 15,448 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance: individually evaluated for impairment |
$ | 1,931 | $ | | $ | 1,124 | $ | 585 | $ | | $ | 170 | $ | 249 | $ | | $ | | $ | | $ | 4,059 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance: collectively evaluated for impairment |
$ | 5,536 | $ | 33 | $ | 3,115 | $ | 547 | $ | 30 | $ | 18 | $ | 373 | $ | 15 | $ | 174 | $ | 1,548 | $ | 11,389 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Loans |
||||||||||||||||||||||||||||||||||||||||||||
Ending Balance |
$ | 84,291 | $ | 33,641 | $ | 117,458 | $ | 211,556 | $ | 5,191 | $ | 2,422 | $ | 47,780 | $ | 23,715 | $ | 16,633 | $ | | $ | 542,687 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance: individually evaluated for impairment |
$ | 16,331 | $ | | $ | 8,762 | $ | 5,508 | $ | | $ | 200 | $ | 511 | $ | | $ | | $ | | $ | 31,312 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance: collectively evaluated for impairment |
$ | 67,960 | $ | 33,641 | $ | 108,696 | $ | 206,048 | $ | 5,191 | $ | 2,222 | $ | 47,269 | $ | 23,715 | $ | 16,633 | $ | | $ | 511,375 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan Losses
As of and for the Three Months Ended June 30, 2011
Allowance for Credit Losses | Real Estate Construction and Land Development |
Real Estate Secured by Farmland |
Real Estate Secured by Residential Properties |
Real Estate Secured by Nonfarm Nonresidential |
Consumer Installment |
Credit Cards and Related Plans |
Commercial and Industrial |
Loans to Finance Agricultural Production |
All Other Loans |
General Qualitative & Quantitative Portion |
Total | |||||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Beginning balance |
$ | 7,587 | $ | 29 | $ | 4,002 | $ | 1,118 | $ | 16 | $ | 189 | $ | 1,132 | $ | 15 | $ | 130 | $ | 1,001 | $ | 15,219 | ||||||||||||||||||||||
Charge-offs |
(644 | ) | | (255 | ) | (43 | ) | (6 | ) | | (84 | ) | | (56 | ) | | (1,088 | ) | ||||||||||||||||||||||||||
Recoveries |
6 | | 1 | | | 1 | 15 | | 21 | | 44 | |||||||||||||||||||||||||||||||||
Provisions |
518 | 4 | 491 | 57 | 20 | (2 | ) | (441 | ) | | 79 | 547 | 1,273 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance |
$ | 7,467 | $ | 33 | $ | 4,239 | $ | 1,132 | $ | 30 | $ | 188 | $ | 622 | $ | 15 | $ | 174 | $ | 1,548 | $ | 15,448 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance: individually evaluated for impairment |
$ | 1,931 | $ | | $ | 1,124 | $ | 585 | $ | | $ | 170 | $ | 249 | $ | | $ | | $ | | $ | 4,059 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance: collectively evaluated for impairment |
$ | 5,536 | $ | 33 | $ | 3,115 | $ | 547 | $ | 30 | $ | 18 | $ | 373 | $ | 15 | $ | 174 | $ | 1,548 | $ | 11,389 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Loans |
||||||||||||||||||||||||||||||||||||||||||||
Ending Balance |
$ | 84,291 | $ | 33,641 | $ | 117,458 | $ | 211,556 | $ | 5,191 | $ | 2,422 | $ | 47,780 | $ | 23,715 | $ | 16,633 | $ | | $ | 542,687 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance: individually evaluated for impairment |
$ | 16,331 | $ | | $ | 8,762 | $ | 5,508 | $ | | $ | 200 | $ | 511 | $ | | $ | | $ | | $ | 31,312 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Ending Balance: collectively evaluated for impairment |
$ | 67,960 | $ | 33,641 | $ | 108,696 | $ | 206,048 | $ | 5,191 | $ | 2,222 | $ | 47,269 | $ | 23,715 | $ | 16,633 | $ | | $ | 511,375 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Loans are closely monitored by management for changes in quality. This monitoring includes assessing the appropriateness of the credit quality indicator in relation to the risk of the loan. Management uses the following indicators to grade the risk of each loan based on a system of eight possible ratings. These indicators are included in the Companys loan policy which is reviewed and updated at least annually.
Pass: Include loans that are risk rated one through three. The primary source of repayment for pass loans is very likely to be sufficient, with secondary sources readily available; strong financial position; minimal risk; profitability, liquidity and capitalization are better than industry norms.
Weak Pass: Include loans that are risk rated four. The asset quality for weak pass assets is generally acceptable. Primary source of loan repayment is acceptable and secondary sources are likely to be realized, if needed; acceptable business credit, but borrowers operations, cash flow, or financial condition evidence more than average risk; requires above average levels of supervision and attention from Loan Officer. The source of increased risk has been identified, can be effectively managed/corrected, and the increased risk is not significant to warrant a more severe rating.
Special Mention: Include loans that are risk rated five. A special mention asset is considered to be high risk due to potential weaknesses that deserve managements close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Companys credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.
Substandard: Include loans that are risk rated six through eight. Loans rated as substandard are considered to be very high risk. A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
The following tables present loans as of June 30, 2012 and December 31, 2011 classified by risk type:
Credit Quality Indicators
As of June 30, 2012
Pass | Weak Pass | Special Mention |
Substandard | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Real EstateConstruction and Land Development Loans |
$ | 27,929 | $ | 19,992 | $ | 5,682 | $ | 9,341 | $ | 62,944 | ||||||||||
Real EstateSecured by Farmland |
21,265 | 3,326 | 2,680 | 356 | 27,627 | |||||||||||||||
Real EstateSecured by Residential Properties |
59,344 | 29,079 | 10,488 | 8,784 | 107,695 | |||||||||||||||
Real EstateSecured by Nonfarm Nonresidential |
87,857 | 71,532 | 19,611 | 19,007 | 198,007 | |||||||||||||||
Consumer Installment |
4,071 | 1,741 | 284 | 64 | 6,160 | |||||||||||||||
Credit Cards and Related Plans |
871 | 580 | 270 | 2 | 1,723 | |||||||||||||||
Commercial and Industrial |
29,978 | 19,737 | 3,627 | 1,663 | 55,005 | |||||||||||||||
Loans to Finance Agriculture Production |
28,582 | 7,917 | 357 | | 36,856 | |||||||||||||||
All Other Loans |
5,826 | 4,390 | 24 | | 10,240 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 265,723 | $ | 158,294 | $ | 43,023 | $ | 39,217 | $ | 506,257 | ||||||||||
|
|
|
|
|
|
|
|
|
|
22
Credit Quality Indicators
As of December 31, 2011
Pass | Weak Pass | Special Mention |
Substandard | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Real EstateConstruction and Land Development Loans |
$ | 27,833 | $ | 23,237 | $ | 4,853 | $ | 11,204 | $ | 67,127 | ||||||||||
Real EstateSecured by Farmland |
22,008 | 4,430 | 3,452 | | 29,890 | |||||||||||||||
Real EstateSecured by Residential Properties |
60,121 | 31,146 | 12,302 | 6,805 | 110,374 | |||||||||||||||
Real EstateSecured by Nonfarm Nonresidential |
90,099 | 75,384 | 18,663 | 18,917 | 203,063 | |||||||||||||||
Consumer Installment |
4,025 | 2,212 | 254 | 129 | 6,620 | |||||||||||||||
Credit Cards and Related Plans |
850 | 529 | 279 | 3 | 1,661 | |||||||||||||||
Commercial and Industrial |
25,133 | 16,146 | 2,686 | 1,714 | 45,679 | |||||||||||||||
Loans to Finance Agriculture Production |
16,473 | 3,290 | 584 | 1,192 | 21,539 | |||||||||||||||
All Other Loans |
3,171 | 7,393 | 25 | | 10,589 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 249,713 | $ | 163,767 | $ | 43,098 | $ | 39,964 | $ | 496,542 | ||||||||||
|
|
|
|
|
|
|
|
|
|
The following tables summarize the past due loans by category as of June 30, 2012 and December 31, 2011:
Past Due Loans
As of June 30, 2012
30-59 Days Past Due |
60-89 Days Past Due |
Greater than 90 Days |
Total Past Due |
Current | Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Real Estate Construction and Land Development |
$ | 178 | $ | 76 | $ | 5,271 | $ | 5,525 | $ | 57,419 | $ | 62,944 | ||||||||||||
Real Estate Secured by Farmland |
| 156 | 200 | 356 | 27,271 | 27,627 | ||||||||||||||||||
Real Estate Secured by Residential Properties |
211 | 222 | 2,312 | 2,745 | 104,950 | 107,695 | ||||||||||||||||||
Real Estate Secured by Nonfarm Nonresidential |
2,430 | 210 | 6,401 | 9,041 | 188,966 | 198,007 | ||||||||||||||||||
Consumer Installment |
20 | 2 | 7 | 29 | 6,131 | 6,160 | ||||||||||||||||||
Credit Cards and Related Plans |
2 | | | 2 | 1,721 | 1,723 | ||||||||||||||||||
Commercial and Industrial |
101 | | 151 | 252 | 54,753 | 55,005 | ||||||||||||||||||
Loans to Finance Agricultural Production |
| | | | 36,856 | 36,856 | ||||||||||||||||||
All Other Loans |
| | | | 10,240 | 10,240 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 2,942 | $ | 666 | $ | 14,342 | $ | 17,950 | $ | 488,307 | $ | 506,257 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Non-Accrual Loans Included in above Total |
$ | 1,941 | $ | 529 | $ | 14,342 | $ | 16,812 | $ | 1,392 | $ | 18,204 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
23
Past Due Loans
As of December 31, 2011
30-59 Days Past Due |
60-89 Days Past Due |
Greater than 90 Days |
Total Past Due |
Current | Total | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Real Estate Construction and Land Development |
$ | 447 | $ | 198 | $ | 6,142 | $ | 6,787 | $ | 60,340 | $ | 67,127 | ||||||||||||
Real Estate Secured by Farmland |
| | | | 29,890 | 29,890 | ||||||||||||||||||
Real Estate Secured by Residential Properties |
1,055 | 993 | 1,278 | 3,326 | 107,048 | 110,374 | ||||||||||||||||||
Real Estate Secured by Nonfarm Nonresidential |
2,357 | | 4,446 | 6,803 | 196,260 | 203,063 | ||||||||||||||||||
Consumer Installment |
65 | | 22 | 87 | 6,533 | 6,620 | ||||||||||||||||||
Credit Cards and Related Plans |
2 | 2 | | 4 | 1,657 | 1,661 | ||||||||||||||||||
Commercial and Industrial |
294 | | 205 | 499 | 45,180 | 45,679 | ||||||||||||||||||
Loans to Finance Agricultural Production |
| | | | 21,539 | 21,539 | ||||||||||||||||||
All Other Loans |
| | | | 10,589 | 10,589 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 4,220 | $ | 1,193 | $ | 12,093 | $ | 17,506 | $ | 479,036 | $ | 496,542 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Non-Accrual Loans Included in above Total |
$ | 1,426 | $ | 588 | $ | 12,093 | $ | 14,107 | $ | 1,866 | $ | 15,973 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
24
The following tables summarize impaired loans as of June 30, 2012, June 30, 2011 and December 31, 2011. The recorded investment balance includes the loan balance, deferred fees that have yet to be recognized and accrued interest. The deferred fees that have yet to be recognized are not material amounts.
Impaired Loans
Balance at June 30, 2012 |
Six Months Ended June 30, 2012 |
Three Months Ended June 30, 2012 |
||||||||||||||||||||||||||
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
Average Recorded Investment |
Interest Income Recognized |
||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||||||
Real Estate Construction and Land Development |
$ | 5,750 | $ | 7,219 | $ | | $ | 5,791 | $ | 49 | $ | 5,552 | $ | 22 | ||||||||||||||
Real Estate Secured by Farmland |
356 | 356 | | 119 | 3 | 237 | 2 | |||||||||||||||||||||
Real Estate Secured by Residential Properties |
2,180 | 2,329 | | 1,830 | 28 | 2,074 | 14 | |||||||||||||||||||||
Real Estate Secured by Nonfarm Nonresidential |
11,682 | 12,835 | | 8,227 | 93 | 9,303 | 40 | |||||||||||||||||||||
Consumer Installment |
| | | | | | | |||||||||||||||||||||
Credit Cards and Related Plans |
| | | | | | | |||||||||||||||||||||
Commercial and Industrial |
219 | 217 | | 300 | 12 | 296 | 9 | |||||||||||||||||||||
Loans to Finance Agricultural Production |
| | | 293 | 9 | | | |||||||||||||||||||||
All Other Loans |
| | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total impaired loans with no related allowance |
$ | 20,187 | $ | 22,956 | $ | | $ | 16,560 | $ | 194 | $ | 17,462 | $ | 87 | ||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||||||
Real Estate Construction and Land Development |
$ | 3,055 | $ | 3,472 | $ | 575 | $ | 3,321 | $ | 28 | $ | 2,738 | $ | 11 | ||||||||||||||
Real Estate Secured by Farmland |
| | | | | | | |||||||||||||||||||||
Real Estate Secured by Residential Properties |
5,444 | 5,431 | 617 | 5,286 | 80 | 5,441 | 38 | |||||||||||||||||||||
Real Estate Secured by Nonfarm Nonresidential |
3,430 | 3,423 | 180 | 7,622 | 87 | 6,468 | 27 | |||||||||||||||||||||
Consumer Installment |
| | | | | | | |||||||||||||||||||||
Credit Cards and Related Plans |
| | | | | | | |||||||||||||||||||||
Commercial and Industrial |
199 | 199 | 20 | 124 | 5 | 67 | 2 | |||||||||||||||||||||
Loans to Finance Agricultural Production |
| | | | | | | |||||||||||||||||||||
All Other Loans |
| | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total impaired loans with related allowance recorded |
$ | 12,128 | $ | 12,525 | $ | 1,392 | $ | 16,353 | $ | 200 | $ | 14,714 | $ | 78 | ||||||||||||||
Total |
||||||||||||||||||||||||||||
Construction and Land Development |
$ | 8,805 | $ | 10,691 | $ | 575 | $ | 9,112 | $ | 77 | $ | 8,290 | $ | 33 | ||||||||||||||
Residential |
7,624 | 7,760 | 617 | 7,116 | 108 | 7,515 | 52 | |||||||||||||||||||||
Commercial |
15,886 | 17,030 | 200 | 16,685 | 209 | 16,371 | 80 | |||||||||||||||||||||
Consumer |
| | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total impaired loans |
$ | 32,315 | $ | 35,481 | $ | 1,392 | $ | 32,913 | $ | 394 | $ | 32,176 | $ | 165 |
Impaired Loans
Balance at June 30, 2011 |
Six Months Ended June 30, 2011 |
Three Months Ended June 30, 2011 |
||||||||||||||||||||||||||
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
Average Recorded Investment |
Interest Income Recognized |
Average Recorded Investment |
Interest Income Recognized |
||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||||||
Real Estate Construction and Land Development |
$ | 7,995 | $ | 11,610 | $ | | $ | 7,819 | $ | 82 | $ | 7,105 | $ | 33 | ||||||||||||||
Real Estate Secured by Farmland |
| | | | | | | |||||||||||||||||||||
Real Estate Secured by Residential Properties |
3,860 | 4,222 | | 3,846 | 38 | 3,855 | 22 | |||||||||||||||||||||
Real Estate Secured by Nonfarm Nonresidential |
2,501 | 2,544 | | 1,517 | 24 | 2,183 | 17 | |||||||||||||||||||||
Consumer Installment |
| | | | | |||||||||||||||||||||||
Credit Cards and Related Plans |
| | | | | | | |||||||||||||||||||||
Commercial and Industrial |
175 | 449 | | 366 | 7 | 298 | 2 | |||||||||||||||||||||
Loans to Finance Agricultural Production |
| | | | | | | |||||||||||||||||||||
All Other Loans |
| | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total impaired loans with no related allowance |
$ | 14,531 | $ | 18,825 | $ | | $ | 13,548 | $ | 151 | $ | 13,441 | $ | 74 | ||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||||||
Real Estate Construction and Land Development |
$ | 8,267 | $ | 9,996 | $ | 1,931 | $ | 8,206 | $ | 86 | $ | 8,791 | $ | 40 | ||||||||||||||
Real Estate Secured by Farmland |
| | | | | | | |||||||||||||||||||||
Real Estate Secured by Residential Properties |
5,042 | 4,901 | 1,124 | 3,912 | 39 | 4,904 | 28 | |||||||||||||||||||||
Real Estate Secured by Nonfarm Nonresidential |
3,011 | 3,076 | 585 | 3,245 | 51 | 3,089 | 24 | |||||||||||||||||||||
Consumer Installment |
| | | | | | | |||||||||||||||||||||
Credit Cards and Related Plans |
201 | 200 | 170 | 200 | 6 | 200 | 3 | |||||||||||||||||||||
Commercial and Industrial |
301 | 300 | 249 | 404 | 8 | 358 | 2 | |||||||||||||||||||||
Loans to Finance Agricultural Production |
| | | | | | | |||||||||||||||||||||
All Other Loans |
| | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total impaired loans with related allowance recorded |
$ | 16,822 | $ | 18,473 | $ | 4,059 | $ | 15,967 | $ | 190 | $ | 17,342 | $ | 97 | ||||||||||||||
Total |
||||||||||||||||||||||||||||
Construction and Land Development |
$ | 16,262 | $ | 21,606 | $ | 1,931 | $ | 16,025 | $ | 168 | $ | 15,896 | $ | 73 | ||||||||||||||
Residential |
8,902 | 9,123 | 1,124 | 7,758 | 77 | 8,759 | 50 | |||||||||||||||||||||
Commercial |
5,988 | 6,369 | 834 | 5,532 | 90 | 5,928 | 45 | |||||||||||||||||||||
Consumer |
201 | 200 | 170 | 200 | 6 | 200 | 3 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total impaired loans |
$ | 31,353 | $ | 37,298 | $ | 4,059 | $ | 29,515 | $ | 341 | $ | 30,783 | $ | 171 |
25
Impaired Loans
As of December 31, 2011
Recorded Investment |
Unpaid Principal Balance |
Related Allowance |
||||||||||
(Dollars in thousands) | ||||||||||||
With no related allowance recorded: |
||||||||||||
Real Estate Construction and Land Development |
$ | 6,280 | $ | 11,137 | $ | | ||||||
Real Estate Secured by Farmland |
| | | |||||||||
Real Estate Secured by Residential Properties |
2,135 | 2,611 | | |||||||||
Real Estate Secured by Nonfarm Nonresidential |
7,075 | 7,484 | | |||||||||
Consumer Installment |
| | | |||||||||
Credit Cards and Related Plans |
| | | |||||||||
Commercial and Industrial |
379 | 500 | | |||||||||
Loans to Finance Agricultural Production |
1,109 | 1,110 | | |||||||||
All Other Loans |
| | | |||||||||
|
|
|
|
|
|
|||||||
Total impaired loans with no related allowance |
$ | 16,978 | $ | 22,842 | $ | | ||||||
With an allowance recorded: |
||||||||||||
Real Estate Construction and Land Development |
$ | 3,806 | $ | 3,794 | $ | 637 | ||||||
Real Estate Secured by Farmland |
| | | |||||||||
Real Estate Secured by Residential Properties |
3,391 | 3,382 | 480 | |||||||||
Real Estate Secured by Nonfarm Nonresidential |
6,976 | 6,957 | 1,181 | |||||||||
Consumer Installment |
| | | |||||||||
Credit Cards and Related Plans |
| | | |||||||||
Commercial and Industrial |
186 | 186 | 165 | |||||||||
Loans to Finance Agricultural Production |
| | | |||||||||
All Other Loans |
| | | |||||||||
|
|
|
|
|
|
|||||||
Total impaired loans with related allowance recorded |
$ | 14,359 | $ | 14,319 | $ | 2,463 | ||||||
Total |
||||||||||||
Construction and Land Development |
$ | 10,086 | $ | 14,931 | $ | 637 | ||||||
Residential |
5,526 | 5,993 | 480 | |||||||||
Commercial |
15,725 | 16,237 | 1,346 | |||||||||
Consumer |
| | | |||||||||
|
|
|
|
|
|
|||||||
Total impaired loans |
$ | 31,337 | $ | 37,161 | $ | 2,463 |
26
The following table presents nonaccrual loans as of June 30, 2012 and December 31, 2011 by loan category:
Nonaccrual Loans
June 30, 2012 |
December 31, 2011 |
|||||||
(Dollars in thousands) | ||||||||
Real Estate Construction and Land Development |
$ | 5,716 | $ | 6,795 | ||||
Real Estate Secured by Farmland |
356 | | ||||||
Real Estate Secured by Residential Properties |
2,620 | 2,113 | ||||||
Real Estate Secured by Nonfarm Nonresidential |
9,328 | 6,767 | ||||||
Consumer Installment |
7 | 22 | ||||||
Credit Cards and Related Plans |
| | ||||||
Commercial and Industrial |
177 | 276 | ||||||
Loans to Finance Agricultural Production |
| | ||||||
All Other Loans |
| | ||||||
|
|
|
|
|||||
Total |
$ | 18,204 | $ | 15,973 | ||||
|
|
|
|
Interest income not recognized due to loans being on nonaccrual status during the three and six month period ended June 30, 2012 was approximately $250 thousand and $451 thousand, respectively. Interest income not recognized due to loans being on nonaccrual status during the three and six month period ended June 30, 2011 was approximately $217 thousand and $408 thousand, respectively.
Troubled Debt Restructurings
Loans which management identifies as impaired generally will be nonperforming loans or restructured loans (also known as troubled debt restructurings or TDRs). As a result of adopting the amendments in ASU 2011-02, the Company reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they are considered TDRs under the amended guidance. The Company identified no loans as TDRs which the allowance for loan losses had previously been measured under a general allowance methodology. TDRs are treated as impaired loans in determining the adequacy of the allowance for loan loss.
For the three and six months ended June 30, 2012 the following table presents a breakdown of the types of concessions made by loan class. The recorded investment balances presented are balances at the time of concessions.
Three Months ended June 30, 2012 | Six Months ended June 30, 2012 | |||||||||||||||||||||||
Number of Loans |
Pre-Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
Number of Loans |
Pre-Modification Outstanding Recorded Investment |
Post- Modification Outstanding Recorded Investment |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Below market interest rate: |
||||||||||||||||||||||||
Real Estate Secured by Residential Properties |
| $ | | $ | | 1 | $ | 1,943 | $ | 1,943 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total below market interest rate |
| $ | | $ | | 1 | $ | 1,943 | $ | 1,943 | ||||||||||||||
Extended payment terms: |
||||||||||||||||||||||||
Real Estate construction and land development |
1 | $ | 503 | $ | 503 | 1 | $ | 503 | $ | 503 | ||||||||||||||
Commercial and Industrial |
1 | 18 | 18 | 1 | 18 | 18 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Extended Payment Terms |
2 | $ | 521 | $ | 521 | 2 | $ | 521 | $ | 521 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
2 | $ | 521 | $ | 521 | 3 | $ | 2,464 | $ | 2,464 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
27
The following table presents the successes and failures of the types of modifications within the previous twelve months as of June 30, 2012. The recorded investment balances presented are as of June 30, 2012.
Paid in Full | Paying as Restructured |
Converted to Non-accrual |
Foreclosure/Default | |||||||||||||||||||||||||||||
Number of Loans |
Recorded Investment |
Number of Loans |
Recorded Investment |
Number of Loans |
Recorded Investment |
Number of Loans |
Recorded Investment |
|||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Below market interest rate |
| $ | | 3 | $ | 3,202 | 1 | $ | 617 | | $ | | ||||||||||||||||||||
Extended payment terms |
| | 8 | 1,858 | | | | | ||||||||||||||||||||||||
Forgiveness of principal |
| | | | | | | | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
| | 11 | $ | 5,060 | 1 | 617 | | | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There was one loan with a recorded investment of $617 thousand that is included in the table above that was placed on non-accrual in a prior period. While the loan was not ninety days past due, it was moved into nonaccrual status due to payment concerns. There were no loans that were restructured during the twelve months ending on June 30, 2012 as a result of payment default.
(8) Benefit Plans
Postretirement Benefits
The Company has a postretirement benefit plan whereby the Company pays postretirement health care benefits for certain of its retirees that have met minimum age and service requirements. Net periodic postretirement benefit cost for the six- and three-month periods ended June 30, 2012 and 2011 includes the following components.
Six months ended June 30, (Dollars in thousands) |
||||||||
2012 | 2011 | |||||||
Components of net periodic cost: |
||||||||
Service cost |
$ | 4 | $ | 4 | ||||
Interest cost |
18 | 18 | ||||||
Prior service cost |
| | ||||||
Amortization of (gain) loss |
6 | | ||||||
|
|
|
|
|||||
Net periodic postretirement benefit cost |
$ | 28 | $ | 22 | ||||
|
|
|
|
Three months ended June 30, (Dollars in thousands) |
||||||||
2012 | 2011 | |||||||
Components of net periodic cost: |
||||||||
Service cost |
$ | 2 | $ | 2 | ||||
Interest cost |
9 | 9 | ||||||
Prior service cost |
| | ||||||
Amortization of (gain) loss |
3 | | ||||||
|
|
|
|
|||||
Net periodic postretirement benefit cost |
$ | 14 | $ | 11 |
28
The Company expects to contribute $56 thousand to its postretirement benefit plan in 2012. No contributions were made in the first six months of 2012. For additional information related to the plan, refer to the Companys Form 10-K for the year ended December 31, 2011.
Stock Option and Restricted Option Plans
On June 7, 2012, the stockholders of the Company approved amendments to the Companys 2008 Omnibus Equity Plan (the Plan) that would increase by 190,100 the number of shares reserved under the Plan, permit nonemployee directors of the Company to participate in the Plan and increase the types of awards available for approval under the Plan. These types of awards may include restricted stock units, stock appreciation rights or similar forms of equity compensation that are valued by reference to the Companys common stock.
During the six months ended June 30, 2012, 25,013 stock options were forfeited. During the three months ended June 30, 2012, 5,457 stock options were forfeited. There was no other activity during the quarter.
29
(9) Fair Value Of Financial Instruments
Fair value estimates are made by management at a specific point in time, based on relevant information about the financial instrument and the market. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Companys entire holdings of a particular financial instrument nor are potential taxes and other expenses that would be incurred in an actual sale considered. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions and/or the methodology used could significantly affect the estimates disclosed. Similarly, the fair values disclosed could vary significantly from amounts realized in actual transactions.
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Companys financial instruments as of June 30, 2012 and December 31, 2011. For short-term financial assets such as cash and cash equivalents, accrued interest receivable and loans held for sale the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, savings deposits, short-term borrowing and accrued interest payable the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.
The fair value of investment securities available-for-sale are recorded at fair value utilizing Level 1, Level 2 and Level 3 inputs and is described in more detail below.
The fair value of net loans is based on estimated cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. This does not include consideration of liquidity that market participants would use to value such loans. The estimated fair values of time deposits and long-term obligations are based on estimated cash flows discounted at market interest rates.
The fair value of off-balance sheet financial instruments is considered immaterial. These off-balance sheet financial instruments are commitments to extend credit and are either short-term in nature or subject to immediate repricing.
30
The following table presents the carrying values and estimated fair values of the Companys financial instruments at June 30, 2012 and December 31, 2011:
June 30, 2012 | ||||||||||||||||||||
Carrying Amount |
Fair Value Measurements Using | |||||||||||||||||||
(Dollars in thousands) | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 24,621 | $ | 24,621 | $ | 24,621 | $ | | $ | | ||||||||||
Investment securities |
350,779 | 350,779 | 161,317 | 187,624 | 1,838 | |||||||||||||||
FHLB stock |
3,899 | 3,899 | | 3,899 | | |||||||||||||||
Accrued interest receivable |
5,030 | 5,030 | | 5,030 | | |||||||||||||||
Net loans |
495,477 | 492,950 | | | 492,950 | |||||||||||||||
Loans held for sale |
3,059 | 3,059 | | 3,059 | | |||||||||||||||
Liabilities |
||||||||||||||||||||
Demand, noninterest bearing deposits |
$ | 146,326 | $ | 146,326 | $ | | $ | 146,326 | $ | | ||||||||||
Demand, interest-bearing deposits |
305,298 | 305,298 | | 305,298 | | |||||||||||||||
Savings deposits |
58,562 | 58,562 | | 58,562 | | |||||||||||||||
Time deposits |
285,302 | 291,019 | | 291,019 | | |||||||||||||||
Accrued interest payable |
469 | 469 | | 469 | | |||||||||||||||
Short-term borrowing |
42,101 | 42,101 | | 42,101 | | |||||||||||||||
Long-term borrowing |
18,000 | 18,710 | | 18,710 | |
December 31, 2011 | ||||||||||||||||||||
Carrying Amount |
Fair Value | Fair Value Measurements Using | ||||||||||||||||||
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | |||||||||||||||||
Assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 24,731 | $ | 24,731 | $ | 24,731 | $ | | $ | | ||||||||||
Investment securities |
339,450 | 339,450 | 151,714 | 186,094 | 1,642 | |||||||||||||||
FHLB stock |
3,456 | 3,456 | | 3,456 | | |||||||||||||||
Accrued interest receivable |
5,308 | 5,308 | | 5,308 | | |||||||||||||||
Net loans |
484,450 | 482,851 | | | 482,851 | |||||||||||||||
Loans held for sale |
2,866 | 2,866 | | 2,866 | | |||||||||||||||
Liabilities |
||||||||||||||||||||
Demand, noninterest bearing deposits |
$ | 135,732 | $ | 135,732 | $ | | $ | 135,732 | $ | | ||||||||||
Demand, interest-bearing deposits |
270,119 | 270,119 | | 270,119 | | |||||||||||||||
Savings deposits |
55,517 | 55,517 | | 55,517 | | |||||||||||||||
Time deposits |
336,277 | 343,374 | | 343,374 | | |||||||||||||||
Accrued interest payable |
519 | 519 | | 519 | | |||||||||||||||
Short-term borrowing |
11,679 | 11,679 | | 11,679 | | |||||||||||||||
Long-term borrowing |
25,500 | 26,296 | | 26,296 | |
Fair Value Hierarchy
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 | Valuation is based upon quoted prices for identical instruments traded in active markets. |
Level 2 | Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. |
Level 3 | Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. |
31
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
There were no changes to the techniques used to measure fair value during the period.
Following is a description of valuation methodologies used for assets recorded at fair value.
Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the securitys credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Mortgage Banking Activity
The Company enters into interest rate lock commitments and commitments to sell mortgages. At June 30, 2012 and December 31, 2011, the amount of fair value associated with these interest rate lock commitments was $131 thousand and $76 thousand, respectively, which is included in other assets. Fair value associated with the interest rate lock commitments are classified as Level 3 measurements due to the use of significant management judgment and estimation. Forward loan sale commitments have been deemed insignificant for both periods.
Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment using one of several methods, including collateral value, market price and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2012, the majority of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. The fair values of impaired loans are generally based on judgment and therefore are considered to be level 3 assets.
Real Estate and Repossessions Acquired in Settlement of Loans
Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or managements estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3. The fair values of foreclosed assets are generally based on judgment and therefore are considered to be level 3 assets.
32
Assets recorded at fair value on a recurring basis
June 30, 2012 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Investment Securities Available-for-Sale |
||||||||||||||||
Obligations of states and political subdivisions |
$ | 37,779 | $ | 3,903 | $ | 33,876 | $ | | ||||||||
Mortgage-backed securities |
132,799 | 19,463 | 113,336 | | ||||||||||||
SBA-backed securities |
139,602 | 137,951 | 1,651 | | ||||||||||||
Corporate bonds |
40,599 | | 38,761 | 1,838 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Securities |
350,779 | 161,317 | 187,624 | 1,838 | ||||||||||||
Interest rate lock commitments |
131 | | | 131 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets at fair value |
$ | 350,910 | $ | 161,317 | $ | 187,624 | $ | 1,969 | ||||||||
|
|
|
|
|
|
|
|
December 31, 2011 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Investment Securities Available-for-Sale |
||||||||||||||||
Government-sponsored enterprises and FFCB bonds |
$ | 1,032 | $ | | $ | 1,032 | $ | | ||||||||
Obligations of states and political subdivisions |
28,718 | 6,752 | 21,966 | | ||||||||||||
Mortgage-backed securities |
132,292 | | 132,292 | | ||||||||||||
SBA-backed securities |
146,637 | 144,962 | 1,675 | | ||||||||||||
Corporate bonds |
30,771 | | 29,129 | 1,642 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Securities |
339,450 | 151,714 | 186,094 | 1,642 | ||||||||||||
Interest rate lock commitments |
76 | | | 76 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets at fair value |
$ | 339,526 | $ | 151,714 | $ | 186,094 | $ | 1,718 | ||||||||
|
|
|
|
|
|
|
|
33
Assets recorded at fair value on a nonrecurring basis
June 30, 2012 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Impaired Loans |
||||||||||||||||
Real estateconstruction and land development |
$ | 6,128 | $ | | $ | | $ | 6,128 | ||||||||
Real estatesecured by residential properties |
5,240 | | | 5,240 | ||||||||||||
Real estatesecured by nonfarm nonresidential properties |
7,324 | | | 7,324 | ||||||||||||
Commercial and industrial |
179 | | | 179 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total impaired loans |
18,871 | | | 18,871 | ||||||||||||
Real estate and repossessions acquired in settlement of loans |
||||||||||||||||
Total real estate and repossessions acquired in settlement of loans |
7,661 | | | 7,661 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets at fair value |
$ | 26,532 | $ | | $ | | $ | 26,532 | ||||||||
|
|
|
|
|
|
|
|
December 31, 2011 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
(Dollars in thousands) | ||||||||||||||||
Impaired Loans |
||||||||||||||||
Real estateconstruction and land development |
$ | 9,169 | $ | | $ | | $ | 9,169 | ||||||||
Real estatesecured by residential properties |
3,893 | | | 3,893 | ||||||||||||
Real estatesecured by nonfarm nonresidential properties |
8,805 | | | 8,805 | ||||||||||||
Commercial and industrial |
196 | | | 196 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total impaired loans |
22,063 | | | 22,063 | ||||||||||||
Real estate and repossessions acquired in settlement of loans |
||||||||||||||||
Real estate and repossessions acquired in settlement of loans |
6,573 | | | 6,573 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets at fair value |
$ | 28,636 | $ | | $ | | $ | 28,636 | ||||||||
|
|
|
|
|
|
|
|
34
As of June 30, 2012 there were $6.7 million of Level 2 investment securities available for sale that were reported as Level 1 as of December 31, 2011. These obligations of states and political subdivisions were transferred from Level 1 to Level 2 during the first six months of 2012 because the December 31, 2011 pricing was based on the Companys actual trades for the securities at initial purchase while the June 30, 2012 pricing was through a pricing system.
During the first six months of 2012 and 2011 there were no investment securities transferred in or out of Level 3. The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three and six month periods of 2012 and 2011.
Corporate Bonds |
Interest Rate Lock Commitments |
Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Balance, December 31, 2011 |
$ | 1,642 | $ | 76 | $ | 1,718 | ||||||
Total gains or losses (realized/unrealized): |
||||||||||||
Included in earnings |
| 35 | 35 | |||||||||
Included in other comprehensive income |
147 | | 147 | |||||||||
Purchases, issuances, and settlements |
| | | |||||||||
Transfers in to/out of Level 3 |
| | | |||||||||
|
|
|
|
|
|
|||||||
Balance, Mach 31, 2012 |
$ | 1,789 | $ | 111 | $ | 1,900 | ||||||
Total gains or losses (realized/unrealized): |
||||||||||||
Included in earnings |
| 20 | 20 | |||||||||
Included in other comprehensive income |
49 | | 49 | |||||||||
Purchases, issuances, and settlements |
| | | |||||||||
Transfers in to/out of Level 3 |
| | | |||||||||
|
|
|
|
|
|
|||||||
Balance, June 30, 2012 |
$ | 1,838 | $ | 131 | $ | 1,969 |
Corporate Bonds |
Interest Rate Lock Commitments |
Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Balance, December 31, 2010 |
$ | 1,716 | $ | 101 | $ | 1,817 | ||||||
Total gains or losses (realized/unrealized): |
||||||||||||
Included in earnings |
| (6 | ) | (6 | ) | |||||||
Included in other comprehensive income |
(392 | ) | | (392 | ) | |||||||
Purchases, issuances, and settlements |
| | | |||||||||
Transfers in to/out of Level 3 |
| | | |||||||||
|
|
|
|
|
|
|||||||
Balance, Mach 31, 2011 |
$ | 1,324 | $ | 95 | $ | 1,419 | ||||||
Total gains or losses (realized/unrealized): |
||||||||||||
Included in earnings |
| (25 | ) | (25 | ) | |||||||
Included in other comprehensive income |
167 | | 167 | |||||||||
Purchases, issuances, and settlements |
| | | |||||||||
Transfers in to/out of Level 3 |
| | | |||||||||
|
|
|
|
|
|
|||||||
Balance, June 30, 2011 |
$ | 1,491 | $ | 70 | $ | 1,561 |
35
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of June 30, 2012, the significant unobservable inputs used in the fair value measurements were as follows:
Level 3 Assets with Significant |
Fair Value At 6/30/2012 |
Valuation Technique |
Significant Unobservable Inputs |
Significant Unobservable Input Value | ||||||
Corporate Bonds |
$ | 965 | Fundamental Analysis | Spread | +550 BBB | |||||
Pricing Model | Bank Paper | |||||||||
Yield | 9.89% | |||||||||
Corporate Bonds |
873 | Fundamental Analysis | Spread | +650 LIBOR | ||||||
Pricing Model | Index | |||||||||
Yield | 6.96% | |||||||||
Interest Rate Lock Commitments |
131 | Pricing Model | Weighted average Closing Ratio | 90% | ||||||
Impaired Loans |
18,871 | Discounted appraisals (1) | Appraisal adjustments (2) | 5% to 85% | ||||||
OREO |
7,661 | Discounted appraisals (1) | Appraisal adjustments (2) | 5% to 70% |
(1) | Fair value is generally based on appraisals of the underlying collateral but is also based on discounted cash flows for some loans. |
(2) | Appraisals may be adjusted by management for customized discounting criteria, estimated sales costs, and proprietary qualitative adjustments. |
The significant unobservable inputs used in the fair value measurement of the Companys Corporate Bonds are the yield expected to be earned on the bonds and the spread. The yield is applied to a discounted cash flow in order to arrive at a price and corresponding market value. A discount margin represents a spread over the floating rate index. Spread represents an additional yield that is applied over a comparable security or curve (such as the treasury curve). Yield of the comparable or curve plus the spread in basis points is equal to the yield or discount rate applied in a discounted cash flow in order to arrive at a price and corresponding market value. The spread is based on various factors such as liquidity, earning history and capital ratios.
The significant unobservable input used in the fair value measurement of the Companys interest rate lock commitments (IRLC) is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. Generally the fair value of an IRLC is positive if the prevailing interest rate is lower than the IRLC rate. The fair value would be negative if the prevailing rate was higher. When a higher percentage of loans are estimated to close, the increase in the closing ratio will result in a positive effect to fair value. The closing ratio is dependent upon the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock.
Impaired loans and real estate and repossessions acquired in settlement of loans classified as Level 3 are based on managements judgment and estimation.
36
(10) U.S. Treasurys Troubled Asset Relief Program (TARP) Capital Purchase Program
On January 16, 2009, we issued Series A Preferred Stock in the amount of $17,949,000 and a warrant to purchase 144,984 shares of our common stock to the U.S. Treasury as a participant in the TARP Capital Purchase Program. The Series A Preferred Stock qualifies as Tier 1 capital for purposes of regulatory capital requirements and will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. Until the U.S. Treasury ceases to own our securities sold under the TARP Capital Purchase Program, the compensation arrangements for our senior executive officers must comply in all respects with the U.S. Emergency Economic Stabilization Act of 2008 and the rules and regulations thereunder.
(11) Regulatory Matters
Bancorps and the Banks actual capital ratios for purposes of bank regulatory capital guidelines are presented in the following table:
Ratio required to be well capitalized under prompt corrective action provisions |
Minimum ratio required for capital adequacy purposes |
Bancorps Ratio |
Banks Ratio |
|||||||||||||
As of June 30, 2012: |
||||||||||||||||
Tier 1 Capital (to Average Assets) |
³5.00 | % | ³3.00 | % | 8.25 | % | 8.25 | % | ||||||||
Tier 1 Capital (to Risk Weighted Assets) |
³6.00 | % | ³4.00 | % | 12.09 | 12.09 | ||||||||||
Total Capital (to Risk Weighted Assets) |
³10.00 | % | ³8.00 | % | 13.35 | 13.35 | ||||||||||
As of December 31, 2011: |
||||||||||||||||
Tier 1 Capital (to Average Assets) |
³5.00 | % | ³3.00 | % | 8.25 | % | 8.25 | % | ||||||||
Tier 1 Capital (to Risk Weighted Assets) |
³6.00 | % | ³4.00 | % | 12.59 | 12.59 | ||||||||||
Total Capital (to Risk Weighted Assets) |
³10.00 | % | ³8.00 | % | 13.85 | 13.85 | ||||||||||
As of June 30, 2011: |
||||||||||||||||
Tier 1 Capital (to Average Assets) |
³5.00 | % | ³3.00 | % | 8.39 | % | 8.39 | % | ||||||||
Tier 1 Capital (to Risk Weighted Assets) |
³6.00 | % | ³4.00 | % | 12.20 | 12.20 | ||||||||||
Total Capital (to Risk Weighted Assets) |
³10.00 | % | ³8.00 | % | 13.46 | 13.46 |
37
During April 2011, the Banks Board of Directors adopted a resolution at the request of the Federal Deposit Insurance Corporation to the effect that the Bank, through its management, will take various actions designed to address issues related to the Banks operations. The Resolution provides that, among other things, the Bank will (1) establish and continue to maintain an adequate reserve for loan losses, and review the adequacy of the reserve with the Board prior to each quarter-end and make appropriate provisions to the reserve; (2) in order to maintain sufficient capital levels, establish and document a prudent policy regarding cash dividends the Bank pays to Bancorp, document an analysis of amounts to be paid by each quarter-end prior to payment, and not pay any cash dividend to Bancorp without seeking the prior approval of the FDIC and N.C. Commissioner of Banks; (3) implement various recommendations regarding risk management policies and practices for the Banks funds management and investment functions; (4) provide for the internal audit program to include a review and coverage of activities sufficient to determine compliance with the Banks policies, applicable laws and regulations and sound banking principles, and identification of audit personnel who periodically report directly to the Board; (5) correct or eliminate various credit administration weaknesses and establish an effective credit administration function, and ascertain that all necessary supporting documentation is obtained and evaluated before loans are extended; and (6) correct violations of and ensure further compliance with applicable laws, rules and regulations.
38
ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
Statements in this Report and its exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts, may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, risk factors discussed in our Annual Report on Form 10-K and in other documents we file with the Securities and Exchange Commission from time to time. Copies of those reports are available through our Internet website at www.myecb.com or directly through the Commissions website at www.sec.gov. Forward-looking statements in this Report may be identified by terms such as may, will, should, could, expects, plans, intends, anticipates, feels, believes, estimates, predicts, forecasts, potential or continue, or similar terms or the negative of these terms, or other statements concerning opinions or judgments of our management about future events. Factors that could influence the accuracy of those forward-looking statements include, but are not limited to, (a) pressures on our earnings, capital and liquidity resulting from current and future conditions in the credit and equity markets, (b) continued or unexpected increases in credit losses in our loan portfolio, (c) continued adverse conditions in the economy and in the real estate market in our banking markets (particularly those conditions that affect our loan portfolio, the abilities of our borrowers to repay their loans, and the values of collateral that secures our loans), (d) the financial success or changing strategies of our customers, (e) actions of government regulators, or changes in laws, regulations or accounting standards, that adversely affect our business, (f) changes in the interest rate environment and the level of market interest rates that reduce our net interest margins and/or the values of loans we make and securities we hold, (g) changes in competitive pressures among depository and other financial institutions or in our ability to compete effectively against other financial institutions in our banking markets; (h) weather and similar conditions, particularly the effect of hurricanes on our banking and operations facilities and on our customers and the communities in which we do business; and (i) other developments or changes in our business that we do not expect. Although we believe that the expectations reflected in the forward-looking statements in this Report are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. All forward-looking statements attributable to us are expressly qualified in their entirety by the cautionary statements in this paragraph. We have no obligation, and we do not intend, to update these forward-looking statements.
Executive Summary
ECB Bancorp, Inc. is a bank holding company headquartered in Engelhard, North Carolina. Our wholly owned subsidiary, The East Carolina Bank (the Bank), is a state-chartered community bank that was founded in 1919. For the purpose of this discussion, we, us and our refers to the Bank and the bank holding company as a single, consolidated entity unless the context otherwise indicates.
As of June 30, 2012, we had consolidated assets of approximately $944.3 million, total loans of approximately $506.3 million, total deposits of approximately $795.5 million and shareholders equity of approximately $83.3 million. For the three months ended June 30, 2012, we had income available to common shareholders of $322 thousand or $0.11 basic and diluted earnings per share, compared to income available to common shareholders of $880 thousand, or $0.31 basic and diluted earnings per share for the three months ended June 30, 2011. For the six months ended June 30, 2012, we had net income available to common shareholders of $434 thousand or $0.15 basic and diluted income per share, compared to a loss attributable to common shareholders of $469 thousand or $0.16 basic and diluted loss per share for the six months ended June 30, 2011.
39
Critical Accounting Policies
The Companys accounting policies are in accordance with accounting principles generally accepted in the United States and with general practices within the banking industry. Our significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-K Annual Report for the fiscal year ended December 31, 2011. Management makes a number of estimates and assumptions relating to reported amounts of assets, liabilities, revenues and expenses in the preparation of the financial statements and disclosures. Estimates and assumptions that are most significant to the Company are related to the determination of the allowance for loan losses, asset impairment valuations, postretirement and benefit plan accounting and income taxes.
We consider our policy regarding the allowance for loan losses to be our most critical accounting policy, because it requires managements most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and, therefore, the provision for loan losses and results of operations. We have developed policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to our loan portfolio. Our assessments may be impacted in future periods by changes in economic conditions, the results of regulatory examinations, and the discovery of information with respect to borrowers that is not currently known to management. For additional discussion concerning our allowance for loan losses and related matters, see Asset Quality and Nonperforming Assets. Other real estate acquired through the settlement of loans is carried at fair value less cost to sell. Management relies on outside appraisals and estimates of costs of disposal in determining this value. The actual disposal value could vary from this fair value estimate.
The determination of retirement plans and other postretirement benefit plans requires the use of estimates and judgments related to the amount and timing of expected future cash out-flows for benefit payments and cash in-flows for maturities. Our retirement plans and other postretirement benefit plans are actuarially determined based on assumptions on the discount rate and the health care cost trend rate. Changes in estimates and assumptions related to mortality rates and future health care costs could have a material impact to our financial condition or results of operations. The discount rate is used to determine the present value of future benefit obligations and the net periodic benefit cost. The discount rate used to value the future benefit obligation as of each year-end is the rate used to determine the periodic benefit cost in the following year.
Management seeks strategies that minimize the tax effect of implementing their business strategies. As such, judgments are made regarding the ultimate consequence of long-term tax planning strategies, including the likelihood of future recognition of deferred tax benefits. The Companys tax returns are subject to examination by both Federal and State authorities. Such examinations may result in the assessment of additional taxes, interest and penalties. As a result, the ultimate outcome, and the corresponding financial statement impact, can be difficult to predict with accuracy.
Comparison of the Results of Operations for the Three- and Six-Month Periods Ended June 30, 2012 and 2011
The following table summarizes components of income and expense and the changes in those components for the three- and six-month periods ended June 30, 2012 as compared to the same periods in 2011.
Condensed Consolidated Results of Operations
(Dollars in thousands)
For the Three Months Ended June 30, 2012 |
Changes from the Prior Year |
For the Six Months Ended June 30, 2012 |
Changes from the Prior Year |
|||||||||||||||||||||
Amount | % | Amount | % | |||||||||||||||||||||
Total interest income |
$ | 8,445 | $ | (1,187 | ) | (12.3 | ) | $ | 16,944 | $ | (2,126 | ) | (11.1 | ) | ||||||||||
Total interest expense |
1,787 | (800 | ) | (30.9 | ) | 3,758 | (1,499 | ) | (28.5 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net interest income |
6,658 | (387 | ) | (5.5 | ) | 13,186 | (627 | ) | (4.5 | ) | ||||||||||||||
Provision for loan losses |
866 | (407 | ) | (32.0 | ) | 866 | (4,337 | ) | (83.4 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net interest income after |
||||||||||||||||||||||||
Provision for loan losses |
5,792 | 20 | 0.3 | 12,320 | 3,710 | 43.1 | ||||||||||||||||||
Noninterest income |
2,221 | (318 | ) | (12.5 | ) | 3,960 | (10 | ) | (0.3 | ) | ||||||||||||||
Noninterest expense |
7,257 | 600 | 9.0 | 15,175 | 2,274 | 17.6 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before income taxes |
756 | (898 | ) | (54.3 | ) | 1,105 | 1,426 | (444.2 | ) | |||||||||||||||
Income tax provision |
168 | (341 | ) | (67.0 | ) | 140 | 522 | (136.6 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
588 | (557 | ) | (48.6 | ) | 965 | 904 | 1,482.0 | ||||||||||||||||
Preferred stock dividend and accretion of discount |
266 | 1 | 0.4 | 531 | 1 | 0.2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income available to common shareholders |
$ | 322 | $ | (558 | ) | (63.4 | ) | $ | 434 | $ | 903 | (192.5 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
40
Net Interest Income
Net interest income (the difference between the interest earned on assets, such as loans and investment securities and the interest paid on liabilities, such as deposits and other borrowings) is our primary source of operating income. Net interest income for the three months ended June 30, 2012 was $6.7 million, a decrease of $387 thousand or 5.5% when compared to net interest income of $7.0 million for the three months ended June 30, 2011. For the six months ended June 30, 2012, net interest income was $13.2 million, a decrease of $627 thousand or 4.5% when compared to net interest income of $13.8 million for the same period in 2011.
The level of net interest income is determined primarily by the average balances (volume) of interest-earning assets and interest-bearing liabilities and the various rate spreads between our interest-earning assets and our interest-bearing liabilities. Changes in net interest income from period to period result from increases or decreases in the volume of interest-earning assets and interest-bearing liabilities, increases or decreases in the average interest rates earned and paid on such assets and liabilities, the ability to manage the interest-earning asset portfolio (which includes loans), and the availability of particular sources of funds, such as noninterest bearing deposits.
Interest income decreased $1.2 million or 12.3% for the three months ended June 30, 2012 compared to the same three months of 2011. Interest income decreased $2.1 million or 11.1% for the six months ended June 30, 2012 compared to the same six months in 2011. The decreases for the three and six months ended June 30, 2012 are due to the decreases in the rates earned on our average earning assets and a decrease in the volume of these earning assets. The tax equivalent yield on average earning assets decreased 48 basis points for the quarter ended June 30, 2012 to 4.08% from 4.56% for the same period in 2011. For the first six months of 2012, the yield on average earning assets, on a tax-equivalent basis, decreased 45 basis points to 4.13% compared to 4.58% for the six months ended June 30, 2011. Management attributes the decrease in the yield on our earning assets to the continued low level of market interest rates and the decline in volume of higher yielding loans which were replaced by lower yielding securities. Yields on our taxable securities decreased approximately 78 and 67 basis points for the three- and six-month periods ending June 30, 2012, respectively, as compared to the same periods last year as securities sold, called or matured have been replaced with lower yielding securities.
Our average cost of funds during the second quarter of 2012 was 1.02%, a decrease of 40 basis points when compared to 1.42% for the second quarter of 2011. Average rates paid on bank certificates of deposit decreased 26 basis points from 1.83% for the quarter ended June 30, 2011 to 1.57% for the quarter ended June 30, 2012, while our average cost of borrowed funds decreased 76 basis points during the second quarter of 2012 compared to the same period in 2011. Total interest expense decreased $800 thousand or 30.9% during the second quarter of 2012 compared to the same period in 2011, primarily the result of decreased market rates paid on these liabilities. For the six months ended June 30, 2012, our cost of funds was 1.08%, a decrease of 38 basis points when compared to 1.46% for the same period in 2011. Average rates paid on bank certificates of deposit decreased 27 basis points from 1.86% to 1.59% for the first six months of 2012, while our cost of borrowed funds decreased 72 basis points compared to the same period a year ago. Total interest expense decreased $1.5 million or 28.5% during the six months of 2012 compared to the same period in 2011, primarily the result of decreased market rates paid on these liabilities. The volume of average interest-bearing liabilities decreased approximately $23.3 million for the six months of 2012 compared with the same period in 2011.
The banking industry uses two key ratios to measure profitability of net interest income: net interest rate spread and net interest margin. The net interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest-bearing liabilities. The net interest rate spread does not consider the impact of non-interest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is defined as net interest income as a percentage of total average earning assets and takes into account the positive effects of investing non-interest bearing deposits in earning assets.
Our annualized net interest margin, on a tax-equivalent basis, for the three months ended June 30, 2012 was 3.23% compared to 3.35% in the second quarter of 2011, while our net interest spread decreased 7 basis points during the same period. For the six months ended June 30, 2012, our net interest margin, on a tax-equivalent basis, was 3.22% compared to 3.33% in the six months of 2011 while our net interest spread decreased 7 basis points.
Average interest-bearing liabilities, as a percentage of interest-earning assets, for the quarters ended June 30, 2012 and 2011 were 83.7% and 85.8%, respectively. For the six months ended June 30, 2012, average interest-bearing liabilities as a percentage of interest-earning assets were 83.8% compared to 86.1% for the six months ended June 30, 2011.
41
Average Consolidated Balance Sheets and Net Interest Analysis Fully on Tax Equivalent Basis
For the three months ended
June 30, 2012 | June 30, 2011 | |||||||||||||||||||||||
Average Balance |
Yield/ Rate (5) |
Income/ Expense |
Average Balance |
Yield/ Rate (5) |
Income/ Expense |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||
Loansnet (1) |
$ | 488,307 | 5.26 | % | $ | 6,404 | $ | 530,303 | 5.54 | % | $ | 7,329 | ||||||||||||
Taxable securities |
314,301 | 2.28 | % | 1,788 | 284,997 | 3.06 | % | 2,172 | ||||||||||||||||
Non-taxable securities (2) |
33,457 | 4.52 | % | 377 | 11,555 | 6.15 | % | 177 | ||||||||||||||||
Other investments |
6,229 | 0.26 | % | 4 | 25,123 | 0.22 | % | 14 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest-earning assets |
842,294 | 4.08 | % | $ | 8,573 | 851,978 | 4.56 | % | $ | 9,692 | ||||||||||||||
Cash and due from banks |
13,344 | 12,160 | ||||||||||||||||||||||
Bank premises and equipment, net |
26,267 | 26,677 | ||||||||||||||||||||||
Other assets |
39,973 | 36,272 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 921,878 | $ | 927,087 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||||||||||
Interest-bearing deposits |
$ | 646,656 | 1.00 | % | $ | 1,616 | $ | 685,641 | 1.39 | % | $ | 2,369 | ||||||||||||
Short-term borrowings |
40,291 | 0.95 | % | 95 | 17,544 | 1.67 | % | 73 | ||||||||||||||||
Long-term obligations |
18,000 | 1.69 | % | 76 | 27,500 | 2.11 | % | 145 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest-bearing liabilities |
704,947 | 1.02 | % | 1,787 | 730,685 | 1.42 | % | 2,587 | ||||||||||||||||
Non-interest-bearing deposits |
129,466 | 110,824 | ||||||||||||||||||||||
Other liabilities |
5,419 | 5,358 | ||||||||||||||||||||||
Shareholders equity |
82,046 | 80,220 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and Shareholders equity |
$ | 921,878 | $ | 927,087 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income and net interest margin (FTE) (3) |
3.23 | % | $ | 6,786 | 3.35 | % | $ | 7,105 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Interest rate spread (FTE) (4) |
3.06 | % | 3.14 | % | ||||||||||||||||||||
|
|
|
|
(1) | Average loans include non-accruing loans, net of allowance for loan losses and loans held for sale. |
(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $128 thousand and $60 thousand for periods ended June 30, 2012 and 2011, respectively. |
(3) | Net interest margin is computed by dividing net interest income by average total earning assets. |
(4) | Interest rate spread equals the average yield on total earning assets minus the average rate paid on total interest-bearing liabilities. |
(5) | Annualized |
42
For the six months ended
June 30, 2012 | June 30, 2011 | |||||||||||||||||||||||
Average Balance |
Yield/ Rate (5) |
Income/ Expense |
Average Balance |
Yield/ Rate (5) |
Income/ Expense |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||
Loansnet (1) |
$ | 484,947 | 5.31 | % | $ | 12,773 | $ | 538,722 | 5.50 | % | $ | 14,686 | ||||||||||||
Taxable securities |
317,912 | 2.33 | % | 3,681 | 276,360 | 3.00 | % | 4,118 | ||||||||||||||||
Non-taxable securities (2) |
32,796 | 4.51 | % | 733 | 12,098 | 6.19 | % | 371 | ||||||||||||||||
Other investments |
4,803 | 0.25 | % | 6 | 18,181 | 0.23 | % | 21 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest-earning assets |
840,458 | 4.13 | % | $ | 17,193 | 845,361 | 4.58 | % | $ | 19,196 | ||||||||||||||
Cash and due from banks |
13,231 | 12,736 | ||||||||||||||||||||||
Bank premises and equipment, net |
26,301 | 26,725 | ||||||||||||||||||||||
Other assets |
39,724 | 35,363 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 919,714 | $ | 920,185 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||||||||||
Interest-bearing deposits |
$ | 648,781 | 1.05 | % | $ | 3,387 | $ | 682,103 | 1.42 | % | $ | 4,790 | ||||||||||||
Short-term borrowings |
34,536 | 1.03 | % | 176 | 15,447 | 1.85 | % | 142 | ||||||||||||||||
Long-term obligations |
21,049 | 1.87 | % | 195 | 30,141 | 2.17 | % | 325 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total interest-bearing liabilities |
704,366 | 1.08 | % | 3,758 | 727,691 | 1.46 | % | 5,257 | ||||||||||||||||
Non-interest-bearing deposits |
128,092 | 106,402 | ||||||||||||||||||||||
Other liabilities |
5,625 | 5,650 | ||||||||||||||||||||||
Shareholders equity |
81,631 | 80,442 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and Shareholders equity |
$ | 919,714 | $ | 920,185 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income and net interest margin (FTE) (3) |
3.22 | % | $ | 13,435 | 3.33 | % | $ | 13,939 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Interest rate spread (FTE) (4) |
3.05 | % | 3.12 | % | ||||||||||||||||||||
|
|
|
|
(1) | Average loans include non-accruing loans, net of allowance for loan losses and loans held for sale. |
(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $249 thousand and $126 thousand for periods ended June 30, 2012 and 2011, respectively. |
(3) | Net interest margin is computed by dividing net interest income by average total earning assets. |
(4) | Interest rate spread equals the average yield on total earning assets minus the average rate paid on total interest-bearing liabilities. |
(5) | Annualized |
The following table presents the relative impact on net interest income of average outstanding balances (volume) of earning assets and interest-bearing liabilities and the rates earned and paid by us on such assets and liabilities. Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amount of the change in each category.
43
Change in Interest Income and Expense on Tax Equivalent Basis
For the three months ended June 30, 2012 and 2011
Increase (Decrease) in interest income and expense due to changes in:
2012 compared to 2011 | ||||||||||||
Volume (1) | Rate (1) | Net | ||||||||||
(Dollars in thousands) | ||||||||||||
Loans |
$ | (566 | ) | $ | (359 | ) | $ | (925 | ) | |||
Taxable securities |
195 | (579 | ) | (384 | ) | |||||||
Non-taxable securities (2) |
291 | (91 | ) | 200 | ||||||||
Other investments |
(11 | ) | 1 | (10 | ) | |||||||
|
|
|
|
|
|
|||||||
Interest income |
(91 | ) | (1,028 | ) | (1,119 | ) | ||||||
Interest-bearing deposits |
(116 | ) | (637 | ) | (753 | ) | ||||||
Short-term borrowings |
74 | (52 | ) | 22 | ||||||||
Long-term obligations |
(45 | ) | (24 | ) | (69 | ) | ||||||
|
|
|
|
|
|
|||||||
Interest expense |
(87 | ) | (713 | ) | (800 | ) | ||||||
|
|
|
|
|
|
|||||||
Net interest income |
$ | (4 | ) | $ | (315 | ) | $ | (319 | ) | |||
|
|
|
|
|
|
(1) | The combined rate/volume variance for each category has been allocated equally between rate and volume variances. |
(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $128 thousand and $60 thousand for periods ended June 30, 2012 and 2011, respectively. |
For the six months ended June 30, 2012 and 2011
Increase (Decrease) in interest income and expense due to changes in:
2012 compared to 2011 | ||||||||||||
Volume (1) | Rate (1) | Net | ||||||||||
(Dollars in thousands) | ||||||||||||
Loans |
$ | (1,441 | ) | $ | (472 | ) | $ | (1,913 | ) | |||
Taxable securities |
550 | (987 | ) | (437 | ) | |||||||
Non-taxable securities (2) |
549 | (187 | ) | 362 | ||||||||
Other investments |
(16 | ) | 1 | (15 | ) | |||||||
|
|
|
|
|
|
|||||||
Interest income |
(358 | ) | (1,645 | ) | (2,003 | ) | ||||||
Interest-bearing deposits |
(204 | ) | (1,199 | ) | (1,403 | ) | ||||||
Short-term borrowings |
136 | (102 | ) | 34 | ||||||||
Long-term obligations |
(91 | ) | (39 | ) | (130 | ) | ||||||
|
|
|
|
|
|
|||||||
Interest expense |
(159 | ) | (1,340 | ) | (1,499 | ) | ||||||
|
|
|
|
|
|
|||||||
Net interest income |
$ | (199 | ) | $ | (305 | ) | $ | (504 | ) | |||
|
|
|
|
|
|
(1) | The combined rate/volume variance for each category has been allocated equally between rate and volume variances. |
(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $249 thousand and $126 thousand for periods ended June 30, 2012 and 2011, respectively. |
44
Provision for Loan Losses
The provision for loan losses charged to operations during both the three and six months ended June 30, 2012 was $0.9 million. The provision for loan losses charged to operations during the three and six months ended June 30, 2011 was $1.3 million and $5.2 million, respectively. The decrease for the three and six-month periods reflects decrease in total loans outstanding, reduced charge-off levels for the six month period, and adjustments for loan loss migrations within the portfolio as previously announced. The Bank had net charge-offs of $1.5 million for the quarter ended June 30, 2012 compared to net charge-offs of $1.1 million during the second quarter of 2011. For the six-month periods ended June 30, 2012 and 2011, the Bank had net charge-offs of $2.2 million and $3.1 million, respectively. We use the results of our allowance for loan loss model to estimate the dollar amount of provision expense needed to maintain the adequacy of our allowance for loan losses. Our management analyzes the adequacy of the allowance on a monthly basis and adjustments to the provision expense are made as necessary. Additional information regarding our allowance for loan losses is contained in this discussion under the caption Asset Quality.
Noninterest Income
Noninterest income, principally charges and fees assessed for the use of our services, is a significant contributor to net income. The following table presents the components of noninterest income for the three- and six-month periods ended June 30, 2012 and 2011.
For the Three Months Ended June 30, 2012 |
Changes from the Prior Year |
For the Six Months Ended June 30, 2012 |
Changes from the Prior Year |
|||||||||||||||||||||
Amount | % | Amount | % | |||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Service charges on deposit accounts |
$ | 945 | $ | 117 | 14.1 | $ | 1,802 | $ | 209 | 13.1 | ||||||||||||||
Other service charges and fees |
518 | 188 | 57.0 | 847 | 273 | 47.6 | ||||||||||||||||||
Mortgage origination fees |
376 | (76 | ) | (16.8 | ) | 782 | 4 | 0.5 | ||||||||||||||||
Net gain on sale of securities |
279 | (579 | ) | (67.5 | ) | 324 | (560 | ) | (63.3 | ) | ||||||||||||||
Income from bank owned life insurance |
102 | 28 | 37.8 | 203 | 55 | 37.2 | ||||||||||||||||||
Other operating expense |
1 | 4 | (133.3 | ) | 2 | 9 | (128.6 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total noninterest income |
$ | 2,221 | $ | (318 | ) | (12.5 | ) | $ | 3,960 | $ | (10 | ) | (0.3 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income decreased $318 thousand or 12.5% to $2.2 million for the second quarter of this year compared to $2.5 million for the same period in 2011. For the six months ended June 30, 2012 noninterest income decreased $10 thousand or 0.3% to $4.0 million compared to $4.0 million for the same period in 2011. The decrease in noninterest income in the second quarter of 2012 as compared to the same quarter of 2011 is primarily due to a decrease in net gain on sale of securities of $579 thousand. The year to date decrease in noninterest income is primarily the result of a decrease in net gains on the sale of securities of $560 thousand which was offset by increases in service charges on deposit accounts and other service charges and fees. Service charges on deposit accounts increased $117 thousand and $209 thousand, respectively, for the three and six months ended June 30, 2012 as compared to the same periods in 2011 mainly due to an increase in cardholder fees. Other service charges and fees increased $188 thousand and $273 thousand, respectively, for the three and six months ended June 30, 2012 as compared to the same periods in 2011. The primary reason for the increase is an increase in merchant processing fees. Mortgage loan origination fees decreased $76 thousand and increased $4 thousand, respectively, for the three and six months ended June 30, 2012 as compared to the same periods in 2011. Income from bank owned life insurance increased $28 thousand and increased $55 thousand, respectively, for the three and six months ended June 30, 2012 as compared to the same periods in 2011 due to the Bank increasing the investment in bank owned life insurance late in 2011.
45
Noninterest Expense
Noninterest expense increased 9.0% and 17.6%, respectively, for the three and six months ended June 30, 2012, as compared to the same periods in 2011. The following table presents the components of noninterest expense for the three and six months ended June 30, 2012 and dollar and percentage changes from the prior year.
For
the Three Months Ended June 30, 2012 |
Changes from the Prior Year |
For
the Six Months Ended June 30, 2012 |
Changes from the Prior Year |
|||||||||||||||||||||
Amount | % | Amount | % | |||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Salaries |
$ | 2,865 | $ | 39 | 1.4 | $ | 5,784 | $ | 394 | 7.3 | ||||||||||||||
Retirement and other employee benefits |
815 | 31 | 4.0 | 1,918 | 458 | 31.4 | ||||||||||||||||||
Occupancy |
518 | (4 | ) | (0.8 | ) | 1,048 | 43 | 4.3 | ||||||||||||||||
Equipment |
603 | 90 | 17.5 | 1,193 | 121 | 11.3 | ||||||||||||||||||
Professional fees |
343 | 72 | 26.6 | 562 | 20 | 3.7 | ||||||||||||||||||
Supplies |
41 | (37 | ) | (47.4 | ) | 115 | (14 | ) | (10.9 | ) | ||||||||||||||
Communications/Data lines |
184 | (5 | ) | (2.6 | ) | 382 | 24 | 6.7 | ||||||||||||||||
FDIC deposit insurance |
203 | 2 | 1.0 | 407 | (120 | ) | (22.8 | ) | ||||||||||||||||
Other outside services |
92 | (70 | ) | (43.2 | ) | 192 | (151 | ) | (44.0 | ) | ||||||||||||||
Data processing and related expenses |
346 | 263 | 316.9 | 742 | 589 | 385.0 | ||||||||||||||||||
Net cost of real estate and repossessions acquired in settlement of loans |
463 | 384 | 486.1 | 1,147 | 1,050 | 1,082.5 | ||||||||||||||||||
Other operating expenses |
784 | (165 | ) | (17.4 | ) | 1,685 | (140 | ) | (7.7 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total noninterest expenses |
$ | 7,257 | $ | 600 | 9.0 | $ | 15,175 | $ | 2,274 | 17.6 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Salary expense for the three and six months ended June 30, 2012 increased $39 thousand and $394 thousand, respectively, compared to the same prior year periods. During 2011, we continued to expand the Banks infrastructure to support asset growth as outlined in our five-year strategic plan and implemented several initiatives to improve our customer service delivery. While the following initiatives took place in 2011 their full impact was not reflected in the first six months of 2011. A portion of the increase in salary expense can be attributed to the successful implementation of a fully staffed and functioning Customer Care Center that manages various communication channels and contact points for the customer. This allows customers to utilize phone, email, website and online banking to receive immediate responses to questions they have regarding their Bank accounts or other services offered by the Bank. The Customer Care Center is part of the Banks continued development of its Customer Experience strategy designed to focus on improving the experience customers have, whether it be interacting with a branch or the many banking channels offered to maintain their banking relationship with ECB. We also made staff additions to our Agriculture Lending business unit during 2011 as we continue to expand our presence and expertise to capture attractive lending opportunities within our eastern North Carolina footprint. Expansion of our Bank support infrastructure came in several forms during 2011, the Bank added additional staff in the areas of Information Technology, Risk Management, Asset Review, Human Resources, Training, Marketing and Special Assets. As of June 30, 2012, we had 249 full time equivalent employees and operated 25 full service banking offices and one mortgage loan origination office. As of June 30, 2011, we had 246 full time equivalent employees and operated 25 full service banking offices and one mortgage loan origination office.
Employee related benefits expense for the three and six months ended June 30, 2012 increased $31 thousand and $458 thousand, respectively, compared to the same prior year periods. The increase is associated with the increase in salaries mentioned above and an increase in supplemental employee retirement plan expense, as a result of a change in the discount rate, during the six month period.
Occupancy expense for the three and six months ended June 30, 2012 decreased $4 thousand and increased $43 thousand, respectively, compared to the same prior year periods. The increase for the six month period is related to increase in janitorial services expense.
Equipment expense for the three and six months ended June 30, 2012 increased $90 thousand and $121 thousand, respectively, compared to the same prior year periods. The increases are related to an increase in equipment and software maintenance expense.
Professional fees, which include consulting, audit and legal fees, increased $72 thousand for the three months ended June 30, 2012 compared to the same period of 2011 and increased $20 thousand when compared on a year to date basis to the prior year period. Consulting expense during the second quarter decreased $59 thousand and, on a year to date basis, consulting expense decreased $24 thousand in 2012 when compared to the same period in 2011. Audit and accounting fees in the second quarter of 2012 increased $88 thousand from the prior year period and for the six-month period ended June 30, 2012 audit fees increased $10 thousand over the prior year six-month period. Legal expense during the second quarter of 2012 increased $43 thousand and, on a year to date basis, legal expense increased $34 thousand as of June 30, 2012 when compared to the same period in 2011.
46
FDIC deposit insurance expenses increased $2 thousand for the three months ended June 30, 2012 compared to the three months ended June 30, 2011. For the six-month period ended June 30, 2012, FDIC deposit insurance expense decreased $120 thousand over the six-month period ended June 30, 2011. The decrease for the six-month period was due to a change made by the FDIC in its assessment calculations in 2011.
Other outside services expense for the three and six months ended June 30, 2012 decreased $70 thousand and $151 thousand, respectively, compared to the same prior year periods.
Data processing services expense, which primarily consist of check and deposit item processing, nightly update of loan, deposit and general ledger balances, ATM/ EFT network management and On-line Banking, for the three months ended June 30, 2012 was $346 thousand compared to $83 thousand for the three months ended June 30, 2011. Data processing services expense for the six months ended June 30, 2012 was $742 thousand compared to $153 thousand for the six months ended June 30, 2011. In May of 2011, the Bank outsourced all of its core bank data processing under agreement with InfoTech Alliance Bank Services (ITA) using the FIS integrated HORIZON banking system. Prior to the core system conversion in May, the Bank only outsourced its item processing through ITA while maintaining an in-house core processing system, ATM/EFT network and On-line Banking package. During the three and six month periods ending June 30, 2011, expense related to our On-line Banking totaled approximately $84 thousand and $139 thousand, respectively, and was included in Other Outside Services. Our second quarter 2011 and year-to-date expense as of June 30, 2011 for our ATM/EFT network management totaled approximately $66 thousand and $132 thousand, respectively, and was included in Other Operating Expense. In addition, the Bank implemented a number of ancillary systems including an advanced data reporting interface, customer relationship management system, fraud monitoring system, teller system, and real-time online banking among others. These additional systems also added to the increase in data processing services expense in the three and six month periods ending June 30, 2012 when compared to 2011.
Net cost of real estate and repossessions acquired in the settlement of loans expense for the three and six months ended June 30, 2012 increased $0.4 million and $1.1million compared to the same prior year period. The increases are mainly attributable to impairments of real estate.
Income Taxes
Income tax expense for the three months ended June 30, 2012 and 2011 was $168 thousand and $509 thousand, respectively, resulting in effective tax rates of 22.2% and 30.8%, respectively. For the six-month period ending June 30, 2012, there was a tax expense of $140 thousand compared to an income tax benefit of $382 thousand for the same period of 2011, which resulted in effective tax rates of 12.7% and 119.0%, respectively.
Deferred tax assets are recognized for temporary deductible differences and operating loss and tax credit carryforwards. A valuation allowance is established when it is more likely than not that all or some portion of the deferred tax asset will not be realized. Evaluating the need for and amount of a valuation allowance requires judgment and analysis of the positive and negative evidence. Included in our analysis, which receives significant weight, is the 3-year cumulative loss test. The cumulative loss test calculates the cumulative pre-tax income (loss) over the preceding twelve quarter period. If the Company is in a cumulative loss position, management performs an evaluation of the positive and negative evidence to determine whether a valuation allowance is necessary. As of June 30, 2012, the Company did not pass the cumulative loss test by $2.9 million. Management has evaluated, among other factors, projected future earnings, credit quality trends, taxable temporary differences and the cause and probability of recurrence of those circumstances leading to current taxable losses in evaluating the need for a valuation allowance.
As of June 30, 2012, our recorded net deferred tax asset was $6.8 million and at this time management has concluded that the net deferred tax asset is fully realizable. The Company will continue to monitor deferred tax assets closely to evaluate whether we will be able to realize the full benefit of our net deferred tax asset and need for valuation allowance. Significant negative trends in credit quality, losses from operations, or significant deviations from forecasted future financial results could impact our ability to realize the deferred tax asset in the future.
Financial Condition
Balance Sheet
Our total assets were $944.3 million at June 30, 2012, $921.3 million at December 31, 2011 and $941.5 million at June 30, 2011. Short-term borrowing growth funded our year-over-year asset growth. For the twelve months ended June 30, 2012, our loans declined $36.4 million or 6.7% while our deposits declined by approximately $17.3 million or 2.1%. Year-over-year, our earning assets declined by $9.1 million primarily through reductions in loans and overnight investment which were offset by additions to our available-for-sale investment securities portfolio. For the six months ended June 30, 2012, our loans outstanding increased $9.7 million and deposits decreased by $2.2 million.
47
Loans
As of June 30, 2012, total loans were $506.3 million, up 2.0% from total loans of $496.5 million at December 31, 2011 and down 6.7% from total loans of $542.7 million at June 30, 2011. The decline in loans year-over-year and the limited growth for the six months ending June 30, 2012 can be attributed to continued weak economic conditions. Loans as of June 30, 2012 were up $14.9 million or 3.0% compared to March 31, 2012 which is attributed to an increase of $15.1 in loans to finance agricultural production.
Asset Quality
At June 30, 2012, our allowance for loan losses as a percentage of loans was 2.13%, down from 2.85% at June 30, 2011 and 2.44% at December 31, 2011. The decrease can be attributable to a significant decline in the outstanding balance of construction and land development loans. Additionally, the overall risk grade of the remaining loans within these segments has improved. Given the significance of historical loss rates attributable to these loan segments, the declining loan balances and improved average risk grades had a substantial impact on our general reserves. Also, growth in loans during the second quarter of 2012 was driven by an increase in loans to finance agriculture production which have 0% loss rates over the last two years. In evaluating the allowance for loan losses, we prepare an analysis of our current loan portfolio through the use of historical loss rates, homogeneous risk analysis grouping to include probabilities for loss in each group by risk grade, estimation of years to impairment in each homogeneous grouping, analysis of internal credit processes, past due loan portfolio performance and overall economic conditions, both regionally and nationally.
Historical loss calculations for each homogeneous risk group are based on a three year average loss ratio calculation with the most recent quarters loss history included in the model. The impact is to more quickly recognize and increase the loss history in a respective grouping. For those groups with little or no loss history, management increases the historical factor through a positive adjustment to more accurately represent current economic conditions and their potential impact on that particular loan group.
48
Homogeneous loan groups are assigned risk factors based on their perceived loss potential, current economic conditions and on their respective risk ratings. The probability of loss is increased as the risk grade increases within each risk grouping to more accurately reflect the Banks exposure in that particular group of loans. The Bank utilizes a system of eight possible risk ratings. The risk ratings are established based on perceived probability of loss. Most loans risk rated substandard, doubtful and loss are removed from their homogeneous group and individually analyzed for impairment. Some smaller loans risk rated substandard, doubtful and loss with balances less than $100 thousand are not removed from their homogeneous group and individually analyzed for impairment. Other groups of loans based on loan size may be selected for impairment review. Loans are considered impaired if, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is based on either the fair value of the underlying collateral, the present value of the future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, or the estimated market value of the loan. In measuring the fair value of the collateral, management uses a comparison to the recent selling price of similar assets, which is consistent with those that would be utilized by unrelated third parties.
A portion of the Banks allowance for loan losses is not allocated to any specific category of loans. This general portion of the allowance reflects the elements of imprecision and estimation risk inherent in the calculation of the overall allowance. Due to the subjectivity involved in determining the overall allowance, including the portion determined through general qualitative and quantitative internal and external factors, the general portion may fluctuate from period to period based on managements evaluation of the factors affecting the assumptions used in calculating the allowance, including historical loss experience, current and expected economic conditions and geographic conditions. While we believe that our management uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the final determination. Because these factors and managements assumptions are subject to change, the allocation is not necessarily indicative of future loan portfolio performance.
Unsecured loans are charged-off in full against the Banks allowance for loan losses as soon as the loan becomes uncollectible. Unsecured loans are considered uncollectible when no regularly scheduled monthly payment has been made within three months, the loan matured over 90 days ago and has not been renewed or extended or the borrower files for bankruptcy. Secured loans are considered uncollectible when the liquidation of collateral is deemed to be the most likely source of repayment. Once secured loans reach 90 days past due, they are placed into non-accrual status. If the loan is deemed to be collateral dependent, the principal balance is written down immediately to reflect the current market valuation based on current independent appraisal. Included in the write-down is the estimated expense to liquidate the property and typically an additional allowance for the foreclosure discount.
49
Net charge-offs for the first six months of 2012 totaled $2.2 million compared to net charge-offs of $3.0 million during the first six months of 2011. The provision for loan losses charged to operations for the six months ended June 30, 2012 and 2011 was $0.9 million and $5.2 million, respectively. The following table presents an analysis of the changes in the allowance for loan losses for the six months ended June 30, 2012 and 2011.
Analysis of Changes in Allowance for Loan Losses
For the six months Ended June 30, |
||||||||
2012 | 2011 | |||||||
(Dollars in thousands) | ||||||||
Total loans outstanding at end of period-gross |
$ | 506,257 | $ | 542,687 | ||||
|
|
|
|
|||||
Average loans outstanding-gross |
$ | 494,162 | $ | 551,356 | ||||
|
|
|
|
|||||
Allowance for loan losses at beginning of period |
$ | 12,092 | $ | 13,247 | ||||
Loans charged off: |
||||||||
Real estate |
(2,083 | ) | (2,664 | ) | ||||
Installment loans |
(43 | ) | (15 | ) | ||||
Credit cards and related plans |
(17 | ) | (9 | ) | ||||
Demand deposit overdraft program |
(99 | ) | (92 | ) | ||||
Commercial and all other loans |
(421 | ) | (368 | ) | ||||
|
|
|
|
|||||
Total charge-offs |
(2,663 | ) | (3,148 | ) | ||||
|
|
|
|
|||||
Recoveries of loans previously charged off: |
||||||||
Real estate |
386 | 8 | ||||||
Installment loans |
13 | 2 | ||||||
Credit cards and related plans |
3 | 1 | ||||||
Demand deposit overdraft program |
71 | 57 | ||||||
Commercial and all other loans |
12 | 78 | ||||||
|
|
|
|
|||||
Total recoveries |
485 | 146 | ||||||
|
|
|
|
|||||
Net charge offs |
(2,178 | ) | (3,002 | ) | ||||
|
|
|
|
|||||
Provision for loan losses |
866 | 5,203 | ||||||
|
|
|
|
|||||
Allowance for loan losses at end of period |
$ | 10,780 | $ | 15,448 | ||||
|
|
|
|
For the six months Ended June 30, |
||||||||
2012 | 2011 | |||||||
Ratios |
||||||||
Annualized net charge offs to average loans during the period |
0.88 | % | 1.09 | % | ||||
Allowance for loan losses to loans at period end |
2.13 | % | 2.85 | % | ||||
Allowance for loan losses to nonperforming loans at period end |
38 | % | 61 | % | ||||
Allowance for loan losses to impaired loans at period end |
33.4 | % | 49.3 | % |
The ratio of annualized net charge-offs to average loans decreased to 0.88% at June 30, 2012 from 1.09% at June 30, 2011 mainly due to a decrease in real estate related charge-offs. The decrease in the allowance for loan losses to loans to 2.13% at June 30, 2012 from 2.85% at June 30, 2011 reflects the decrease in our historical loss rate as our charge-offs have decreased during the most recent six months ending June 30, 2012. The ratio of our allowance for loan losses to nonperforming loans decreased to 38% as of June 30, 2012 compared to 61% as of June 30, 2011.
This reduction in percent of reserve to non- performing loans resulted from a general improvement of loan quality and the resulting reduction in loan loss reserves that we felt were prudent based on our evaluation of the loan portfolio. The portion of loan reserves represented by the general portion of our loan portfolio reserves contracted from June 30, 2011 to June 30, 2012. This reduction was the direct result of a decline in Classified and Special Mention loans during the twelve month period ended June 30, 2012. Furthermore, the loan portfolio contracted over the twelve months ended June 30, 2012; however the agricultural segment of the portfolio grew. The agricultural segment of our loan portfolio has historically shown a very low charge off history versus other segments of credit in the portfolio. This growth in our strongest segment in the portfolio also contributed to the lower percentage of reserve indicated for our general reserve allowance.
As we have indicated in past discussions we are constantly reviewing and analyzing our assumptions for qualitative calculations related to our general reserve calculations. In the course of these reviews during the last several quarters we have modified some of the time frames the model uses in estimating probable losses from the credit quality migration. In the second quarter we made two adjustments to slightly shorten the loan loss migration periods which our model uses to estimate probable losses. These adjustments also had the effect of slightly reducing the general portion of reserves required in our loan loss reserve.
Construction, land and development (CLD) loans made up 12.4% of the Banks loan portfolio as of June 30, 2012 down from 15.5% as of June 30, 2011. This sector of the economy has been particularly impacted by declines in housing activity, and has had a disproportionate impact on the credit quality of the Bank. The tables below show trends of CLD loans, along with ratios relating to their relative credit quality for June 30, 2012 and June 30, 2011.
50
CLD Loans | All Other Loans | Total | ||||||||||||||||||
Balance | % of Total | Balance | % of Total | Loans | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Balances at June 30, 2012 |
$ | 62,944 | 12.4 | % | $ | 443,313 | 87.6 | % | $ | 506,257 | ||||||||||
Impaired loans |
8,797 | 27.3 | % | 23,480 | 72.7 | % | 32,277 | |||||||||||||
Allocated Reserves |
3,255 | 42.2 | % | 4,462 | 57.8 | % | 7,717 | |||||||||||||
YTD Net Charge-offs |
576 | 26.4 | % | 1,602 | 73.6 | % | 2,178 | |||||||||||||
Nonperforming loans (NPL) |
7,513 | 26.2 | % | 21,130 | 73.8 | % | 28,643 | |||||||||||||
NPL as % of loans |
11.9 | % | 4.8 | % | 5.7 | % |
While balances of CLD loans make up 12.4% of the Banks loan portfolio at June 30, 2012, they represent 27.3% and 26.4% of the Banks impaired loans and YTD net charge-offs, respectively. CLD loans represent 26.2% of the Banks nonperforming loans and 42.2% of the Banks allocated reserves are allocated to CLD loans on June 30, 2012.
CLD Loans | All Other Loans | Total | ||||||||||||||||||
Balance | % of Total | Balance | % of Total | Loans | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Balances at June 30, 2011 |
$ | 84,291 | 15.5 | % | $ | 458,396 | 84.5 | % | $ | 542,687 | ||||||||||
Impaired loans |
16,331 | 52.2 | % | 14,981 | 47.8 | % | 31,312 | |||||||||||||
Allocated Reserves |
7,466 | 53.7 | % | 6,434 | 46.3 | % | 13,900 | |||||||||||||
YTD Net Charge-offs |
1,911 | 63.7 | % | 1,091 | 36.3 | % | 3,002 | |||||||||||||
Nonperforming loans (NPL) |
12,415 | 49.2 | % | 12,801 | 50.8 | % | 25,216 | |||||||||||||
NPL as % of loans |
14.7 | % | 2.8 | % | 4.6 | % |
While balances of CLD loans made up 15.5% of the Banks loan portfolio at June 30, 2011, they represented 52.2% and 63.7% of the Banks impaired loans and YTD net charge-offs, respectively. CLD loans represented 49.2% of the Banks nonperforming loans and 53.7% of the Banks allocated reserves were allocated to CLD loans on June 30, 2011.
Nonperforming Assets
The following table summarizes our nonperforming assets and past due loans at the dates indicated.
June 30, 2012 |
December 31, 2011 |
|||||||
(Dollars in thousands) | ||||||||
Non-accrual loans |
$ | 18,204 | $ | 15,973 | ||||
Loans past due 90 days or more still accruing |
| | ||||||
Restructured loans |
10,439 | 9,596 | ||||||
Other real estate owned & repossessions |
7,661 | 6,573 | ||||||
Other nonperforming assets (1) |
1,427 | 1,427 | ||||||
|
|
|
|
|||||
Total |
$ | 37,731 | $ | 33,569 | ||||
|
|
|
|
(1) | The other nonperforming asset of $1.4 million represents the movement of a foreclosed participation loan into a separate LLC for liability purposes. It is a single purpose LLC set up specifically by the lending group to handle the disposition of the property. Proper approvals for this arrangement had to be obtained in advance from the NC Commissioner of Banks. |
Nonperforming assets consist of loans not accruing interest, loans past due ninety days and still accruing interest, restructured debt and real estate acquired in settlement of loans and other repossessed collateral. It is our policy to place loans on non-accrual status when any portion of principal or interest becomes 90 days past due, or earlier if full collection of principal and interest becomes doubtful. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction to the remaining principal balance so long as doubt exists as to the ultimate collection of the principal. Loans are removed from nonaccrual status when they become current as to both principal and interest and when the collectability of principal or interest is no longer doubtful. Nonperforming assets were $37.7 million and $33.6 million, or 4.00% and 3.64% of total assets at June 30, 2012 and December 31, 2011, respectively. On June 30, 2012 and
51
December 31, 2011 our nonperforming loans (consisting of non-accruing loans, loans past due ninety days and still accruing interest and restructured loans) amounted to approximately $28.6 million and $25.6 million, respectively. We had $7.7 million in other real estate owned and repossessions at June 30, 2012 compared to $6.6 million at December 31, 2011. We also had $1.4 million in other nonperforming assets at both June 30, 2012 and December 31, 2011 as described above.
Loans Considered Impaired
We review our nonperforming loans and other groups of loans based on loan size or other factors for impairment. At June 30, 2012, we had loans totaling $32.3 million (which includes $27.6 million in nonperforming loans) which were considered to be impaired compared to $31.3 million at December 31, 2011. As discussed under the caption Asset Quality, loans are considered impaired if, based on current information, circumstances or events, it is probable that the Bank will not collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. However, treating a loan as impaired does not necessarily mean that we expect to incur a loss on that loan, and our impaired loans include loans that currently are performing in accordance with their terms. For example, if we believe it is probable that a loan will be collected, but not according to its original agreed upon payment schedule, we may treat that loan as impaired even though we expect that the loan will be repaid or collected in full. As indicated in the table below, when we believe a loss is probable on a non-collateral dependent impaired loan, a portion of our reserve is allocated to that probable loss. If the loan is deemed to be collateral dependent, the principal balance is written down immediately to reflect the current market valuation based on a current independent appraisal.
The following table sets forth the number and volume of loans, net of previous charge-offs, that were considered impaired, and their associated reserve allocation, if any, at June 30, 2012. Twenty-six non-accrual loans with a total balance of approximately $888 thousand and three restructured loans with a balance of $111 thousand were not removed from their homogeneous group and individually analyzed for impairment because their individual loan balances were less than $100 thousand.
Number of Loans |
Loan Balances Outstanding |
Allocated Reserves |
||||||||||
(Dollars in millions) | ||||||||||||
Non-accrual loans |
43 | $ | 17.3 | $ | 0.5 | |||||||
Restructured loans |
18 | 10.3 | 0.8 | |||||||||
|
|
|
|
|
|
|||||||
Total nonperforming loans |
61 | $ | 27.6 | $ | 1.3 | |||||||
|
|
|
|
|
|
|||||||
Other impaired loans with allocated reserves |
9 | 3.1 | 0.1 | |||||||||
Other impaired loans without allocated reserves |
4 | 1.6 | | |||||||||
|
|
|
|
|
|
|||||||
Total impaired loans |
74 | $ | 32.3 | $ | 1.4 | |||||||
|
|
|
|
|
|
Investment Securities and Other Assets
The composition of our securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of income. Our securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for investing available funds, furnishing liquidity and supplying securities to pledge as required collateral for certain deposits and borrowed funds. We use two categories to classify our securities: held-to-maturity and available-for-sale. Currently, none of our investments are classified as held-to-maturity. While we have no plans to liquidate a significant amount of our securities, the securities classified as available-for-sale may be sold to meet liquidity needs should management deem it to be in our best interest.
Our investment securities totaled $350.8 million at June 30, 2012, $339.5 million at December 31, 2011 and $298.1 million at June 30, 2011. Additions to the investment securities portfolio depend to a large extent on the availability of investable funds that are not otherwise needed to satisfy loan demand. Investable funds not otherwise utilized are temporarily invested as federal funds sold or as interest-bearing balances at other banks, the level of which is affected by such considerations as near-term loan demand and liquidity needs.
At June 30, 2012, the securities portfolio had unrealized net gains of approximately $4.5 million, which are reported in accumulated other comprehensive income on the consolidated statement of changes in shareholders equity, net of tax. Our securities portfolio at June 30, 2012 consisted of U.S. government sponsored agencies, collateralized mortgage obligations (CMOs), mortgage-backed securities (MBS), corporate bonds and municipal securities.
52
We currently have the ability to hold our available-for-sale investment securities to maturity. However, should conditions change, we may sell unpledged securities. We consider the overall quality of the securities portfolio to be high. As of June 30, 2012, we owned securities from issuers in which the aggregate amortized cost from such issuers exceeded 10% of our common shareholders equity. As of June 30, 2012 the amortized cost and market value of the securities from such issuers were as follows:
Amortized Cost |
Fair Value |
|||||||
(Dollars in thousands) | ||||||||
Federal National Mortgage Corporation |
$ | 84,191 | $ | 85,272 | ||||
Federal Home Loan Mortgage Corporation |
31,664 | 31,933 | ||||||
Government National Mortgage Association |
15,314 | 15,594 | ||||||
Goldman Sachs Group |
7,339 | 7,172 | ||||||
Morgan Stanley |
8,372 | 8,017 | ||||||
North Carolina |
8,839 | 8,977 | ||||||
Small Business Administration |
137,445 | 139,602 | ||||||
Wake County, North Carolina |
8,200 | 8,325 |
At June 30, 2012, we held $12.0 million in bank owned life insurance, compared to $11.8 million and $9.1 million at December 31, 2011 and June 30, 2011, respectively.
Deposits and Other Borrowings
Deposits
Deposits totaled $795.5 million as of June 30, 2012 compared to deposits of $797.6 million at December 31, 2011 and down 2.1% compared to deposits of $812.8 million at June 30, 2011. We attribute our deposit decline during the twelve months ended June 30, 2012 to allowing higher priced Time deposits to roll off while focusing on core transaction accounts. We believe that we can improve our core deposit funding by improving our branching network and providing more convenient opportunities for customers to bank with us.
Other Borrowings
Short-term borrowings include sweep accounts and advances from the Federal Home Loan Bank of Atlanta (the FHLB) having maturities of one year or less. Our short-term borrowings totaled $42.1 million at June 30, 2012, compared to $11.7 million on December 31, 2011, a net increase of $30.4 million. The increase is mainly the result of managements decision to allow higher priced time deposits to roll off without being replaced.
The following table details the maturities and rates of our borrowings from the FHLB, as of June 30, 2012
Borrow Date |
Type | Principal | Term | Rate | Maturity | |||||||
(Dollars in thousands) | ||||||||||||
March 12, 2008 |
Fixed rate | 7,500 | 5 years | 3.54 | March 12, 2013 | |||||||
August 17, 2010 |
Fixed rate | 3,000 | 4 years | 1.49 | August 18, 2014 | |||||||
August 17, 2010 |
Fixed rate | 4,500 | 5 years | 1.85 | August 17, 2015 | |||||||
August 17, 2010 |
Fixed rate | 2,500 | 6 years | 2.21 | August 17, 2016 | |||||||
August 20, 2010 |
Fixed rate | 2,000 | 3 years | 1.09 | August 20, 2013 | |||||||
August 20, 2010 |
Fixed rate | 3,000 | 4 years | 1.48 | August 20, 2014 | |||||||
August 20, 2010 |
Fixed rate | 3,000 | 5 years | 1.83 | August 20, 2015 | |||||||
September 1, 2010 |
Fixed rate | 2,000 | 2 years | 0.66 | September 4, 2012 | |||||||
June 11, 2012 |
Fixed rate | 21,000 | 1 month | 0.22 | July 11, 2012 | |||||||
June 29, 2012 |
Fixed rate | 7,000 | 1 year | 0.38 | June 28, 2013 |
Total Borrowings: $ 55,500 Composite rate: 1.18%
Long-Term Obligations
Long-term obligations consist of advances from FHLB with maturities greater than one year. Our long-term borrowing from the FHLB totaled $18.0 million on June 30, 2012, compared to $25.5 million in FHLB advances on December 31, 2011 and $27.5 million on June 30, 2011. The decrease of $7.5 million in long-term FHLB advances as of June 30, 2012, compared to December 31, 2011 is the result of FHLB advances being reclassed to short-term borrowing because the current time to maturity is less than a year.
53
Liquidity
Liquidity refers to our continuing ability to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses and provide funds for payment of dividends, debt service and other operational requirements. Liquidity is immediately available from five major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) lines for the purchase of federal funds from other banks; (d) lines of credit established at the FHLB, less existing advances; and (e) our investment securities portfolio. All our debt securities are of investment grade quality and, if the need arises, can be promptly liquidated on the open market or pledged as collateral for short-term borrowing.
Consistent with our general approach to liquidity management, loans and other assets of the Bank are funded primarily using local core deposits, retail repurchase agreements and the Banks capital position. To date, these core funds, supplemented by FHLB advances, institutional deposits obtained through the internet and brokered deposits, have been adequate to fund loan demand in our market areas, while maintaining the desired level of immediate liquidity and an investment securities portfolio available for both immediate and secondary liquidity purposes. It is anticipated that funding sources in the future will include continued use of brokered deposits and institutional deposits obtained through the Internet.
54
We are a member of the FHLB. Membership, along with a blanket collateral commitment of our one-to-four family residential mortgage loan portfolio, as well as our commercial real estate loan portfolio, provided us the ability to draw up to $188.9 million, $184.3 million and $188.3 million of advances from the FHLB at June 30, 2012, December 31, 2011 and June 30, 2011, respectively. At June 30, 2012, we had outstanding FHLB advances totaling $53.5 million compared to $34.5 million and $36.0 million at December 31, 2011 and June 30, 2011, respectively.
As a requirement for membership, we invest in stock of the FHLB in the amount of 1% of our outstanding residential loans or 5% of our outstanding advances from the FHLB, whichever is greater. That stock is pledged as collateral for any FHLB advances drawn by us. At June 30, 2012, we owned 38,991 shares of the FHLBs $100 par value capital stock, compared to 34,558 and 40,320 shares at December 31, 2011 and June 30, 2011, respectively. No ready market exists for such stock, which is carried at cost.
We also had unsecured federal funds lines in the aggregate amount of $36.0 million available to us at June 30, 2012 under which we can borrow funds to meet short-term liquidity needs. At June 30, 2012, we had no borrowings outstanding under these federal funds lines. Another source of funding is loan participations sold to other commercial banks (in which we retain the servicing rights). We believe that our liquidity sources are adequate to meet our operating needs.
Net cash provided by operations during the six months ended June 30, 2012 totaled $4.2 million, compared to net cash provided by operations of $9.5 million for the same period in 2011. Net cash used in investing activities increased to $24.6 million for the six months ended June 30, 2012, as compared to $2.9 million for the same period in 2011. Net cash provided by financing activities was $20.3 million for the first half of 2012, compared to net cash provided of $21.4 million for the same period in 2011. Cash and cash equivalents at June 30, 2012 were $24.6 million compared to $48.2 million at June 30, 2011.
As discussed in Note 11, during April 2011, the Banks Board of Directors adopted a resolution at the request of the Federal Deposit Insurance Corporation to the effect that, among other things, the Bank will not pay any cash dividend to us without the approval of the FDIC and N.C. Commissioner of Banks. Dividends we receive from the Bank are our primary source of funds with which we can pay dividends on our outstanding common and preferred stock. As a result, if the Banks regulators declined to permit the Bank to dividend funds to us, we would be unable to pay dividends on our common and preferred stock.
Capital Resources
Shareholders Equity
As of June 30, 2012, our total shareholders equity was $83.3 million (consisting of common shareholders equity of $65.7 million and preferred stock of $17.5 million) compared with total shareholders equity of $80.4 million as of December 31, 2011 (consisting of common shareholders equity of $62.9 million and preferred stock of $17.5 million). Common shareholders equity increased by approximately $2.8 million to $65.7 million at June 30, 2012 from $62.9 million at December 31, 2011. We generated net income of $1.0 million, experienced an increase in net unrealized gains on available-for-sale securities of $2.3 million, and recognized stock based compensation benefit of $16 thousand on incentive stock awards. We declared dividends and accretion of discount of $531 thousand on preferred shares during the first six months of 2012.
We are subject to various regulatory capital requirements administered by our federal banking regulators. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by these regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines involving quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by the FDIC to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets (each as defined in the regulations). As a bank holding company, we also are subject, on a consolidated basis, to the capital adequacy guidelines of the Federal Reserve Board. The capital requirements of the Federal Reserve Board are similar to those of the FDIC governing the Bank. As of June 30, 2012, we and the Bank met all capital adequacy requirements to which we are subject.
As of June 30, 2012, we experienced a decrease in our capital ratios when compared to the periods ending December 31, 2011 and June 30, 2011. This decrease is primarily due to an increase in our risk weighted assets when compared to the December 31, 2011 period and primarily due to a decrease in Tier 1 capital when compared to the June 30, 2011 period.
Based on the most recent notification from the FDIC, the Bank is well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Banks category.
55
Our and the Banks actual capital ratios are presented in the following table:
Ratio required to be well capitalized under prompt corrective action provisions |
Minimum ratio required for capital adequacy purposes |
Our Ratio |
Banks Ratio |
|||||||||||||
As of June 30, 2012: |
||||||||||||||||
Tier 1 Capital (to Average Assets) |
³ | 5.00 | % | ³ | 3.00 | % | 8.25 | % | 8.25 | % | ||||||
Tier 1 Capital (to Risk Weighted Assets) |
³ | 6.00 | % | ³ | 4.00 | % | 12.09 | 12.09 | ||||||||
Total Capital (to Risk Weighted Assets) |
³ | 10.00 | % | ³ | 8.00 | % | 13.35 | 13.35 | ||||||||
As of December 31, 2011: |
||||||||||||||||
Tier 1 Capital (to Average Assets) |
³ | 5.00 | % | ³ | 3.00 | % | 8.25 | % | 8.25 | % | ||||||
Tier 1 Capital (to Risk Weighted Assets) |
³ | 6.00 | % | ³ | 4.00 | % | 12.59 | 12.59 | ||||||||
Total Capital (to Risk Weighted Assets) |
³ | 10.00 | % | ³ | 8.00 | % | 13.85 | 13.85 | ||||||||
As of June 30, 2011: |
||||||||||||||||
Tier 1 Capital (to Average Assets) |
³ | 5.00 | % | ³ | 3.00 | % | 8.39 | % | 8.39 | % | ||||||
Tier 1 Capital (to Risk Weighted Assets) |
³ | 6.00 | % | ³ | 4.00 | % | 12.20 | 12.20 | ||||||||
Total Capital (to Risk Weighted Assets) |
³ | 10.00 | % | ³ | 8.00 | % | 13.46 | 13.46 |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk reflects the risk of economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods.
Our market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of our loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. We do not maintain a trading account nor are we subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of our asset/liability management function.
Management does not believe there has been any significant change in the overall analysis of financial instruments considered market risk sensitive, as measured by the factors of contractual maturities, average interest rates and estimated fair values, since the analysis prepared and presented in conjunction with the Form 10-K Annual Report for the fiscal year ended December 31, 2011.
Item 4. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the Exchange Act). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that we are able to record, process, summarize and report in a timely manner the information required to be disclosed in reports we file under the Exchange Act.
We review our disclosure controls and procedures, including our internal control over financial reporting, on an ongoing basis and may from time to time make changes aimed at enhancing their effectiveness. In connection with the above evaluation of our disclosure controls and procedures, no change in our internal control over financial reporting was identified that occurred during the quarterly period ended June 30, 2012, and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
56
None.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K above are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
An Exhibit Index listing exhibits that are being filed or furnished with, or incorporated by reference into, this Report appears immediately following the signature page and is incorporated herein by reference.
57
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ECB BANCORP, INC. (Registrant) | ||||||
Date: August 14, 2012 | By: | /s/ A. Dwight Utz | ||||
A. Dwight Utz | ||||||
(President & CEO) | ||||||
Date: August 14, 2012 | By: | /s/ Thomas M. Crowder | ||||
Thomas M. Crowder | ||||||
(Executive Vice President & CFO) |
58
Exhibit Number |
Description | |
10.01 | Amended ECB Bancorp, Inc. 2008 Omnibus Equity Plan* | |
31.01 | Certification of Chief Executive Officer required by Rule 13a-14(a) (furnished herewith) | |
31.02 | Certification of Chief Financial Officer required by Rule 13a-14(a) (furnished herewith) | |
32.01 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith) | |
32.02 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (furnished herewith) | |
101.0 | The following materials from the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Results of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss); (iv) the Consolidated Statement of Changes in Shareholders Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements. ** |
* | Management contract or compensatory plan, contract or arrangement. |
** | Furnished, not filed. |
59
Exhibit 10.01
ECB BANCORP, INC.
2008 OMNIBUS EQUITY PLAN
As amended on June 7, 2012
ARTICLE 1
PURPOSE AND EFFECTIVE DATE
1.1 Purpose. The purpose of this 2008 Omnibus Equity Plan of ECB Bancorp, Inc. (ECB), is to promote ECBs long-term financial success and increase stockholder value by providing officers and employees the opportunity to acquire an ownership interest in ECB and enabling ECB and its related entities to attract and retain the services of those officers and employees upon whom the successful conduct of its business depends.
1.2 Effective Date. This Plan shall be effective when it is adopted by ECBs Board of Directors and thereafter approved by the affirmative vote of ECBs stockholders in accordance with applicable rules and procedures, including those in Internal Revenue Code Section 422 and Treasury Regulation Section 1.422-3. Any award granted under this Plan before stockholder approval shall be null and void if stockholders do not approve the Plan within 12 months after the Plans adoption by ECBs Board of Directors. Subject to Article 11, the Plan shall continue until the tenth anniversary of the date it is approved by ECBs Board of Directors.
ARTICLE 2
DEFINITIONS
When used in this Plan, the following words, terms, and phrases have the meanings given in this Article 2 unless another meaning is expressly provided elsewhere in this document or is clearly required by the context. When applying these definitions and any other word, term, or phrase used in this Plan, the form of any word, term, or phrase shall include any and all of its other forms.
2.1 Award means a grant of (a) the right under Article 6 to purchase ECB common stock at a stated price during a specified period of time (an Option), which Option may be (i) an Incentive Stock Option that on the date of the Award is identified as an Incentive Stock Option, satisfies the conditions imposed under Internal Revenue Code Section 422, and is not later modified in a manner inconsistent with Internal Revenue Code Section 422 or (ii) a Nonqualified Stock Option, meaning any Option that is not an Incentive Stock Option, (b) Restricted Stock, meaning shares of ECB common stock granted to a Participant contingent upon satisfaction of conditions described in Article 7, or (c) Performance Shares, meaning shares of ECB common stock granted to a Participant contingent upon satisfaction of conditions described in Article 8.
2.2 Award Agreement means the written or electronic agreement between ECB and each Participant containing the terms and conditions of an Award and the manner in which it will or may be settled if earned. If there is a conflict between the terms of this Plan and the terms of the Award Agreement, the terms of this Plan shall govern.
2.3 Covered Employee means those Employees, including Officers, whose compensation is or likely will be subject to limited deductibility under Internal Revenue Code Section 162(m) as of the last day of any calendar year.
1
2.4 Employee means any person who, on any applicable date, is a common law employee of ECB or a Related Entity. A worker who is not classified as a common law employee but who is subsequently reclassified as a common law employee of ECB or a Related Entity for any reason and on any basis shall be treated as a common law employee solely from the date reclassification occurs. Reclassification shall not be applied retroactively for any purpose of this Plan. An Employee shall not cease to be an Employee in the case of any leave of absence approved by ECB, provided that, for purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon expiration of such leave is guaranteed by statute or contract.
2.5 Exercise Price means the amount, if any, a Participant must pay to exercise an Award.
2.6 Fair Market Value means the value of one share of ECB common stock, determined according to the following rules: (a) if ECB common stock is traded on an exchange or on an automated quotation system giving closing prices, the reported closing price on the relevant date if it is a trading day and otherwise on the next trading day, (b) if ECB common stock is traded over-the-counter with no reported closing price, the mean between the highest bid and the lowest asked prices on that quotation system on the relevant date if it is a trading day and otherwise on the next trading day, or (c) if neither clause (a) nor clause (b) applies, the fair market value as determined by the Plan Committee in good faith and, to the extent applicable, consistent with the rules and valuation methods prescribed under Internal Revenue Code Section 422 and Section 409A and related regulations, and other applicable tax rules.
2.7 Internal Revenue Code means the Internal Revenue Code of 1986, as amended or superseded after the date this Plan becomes effective under Section 1.2, and any applicable rulings or regulations issued under the Internal Revenue Code of 1986.
2.8 Participant means an Employee or Non-Employee Director to whom an award is granted, for as long as the Award remains outstanding.
2.9 Plan means this 2008 Omnibus Equity Plan, as amended from time to time.
2.10 Plan Committee means a committee of ECBs Board of Directors consisting entirely of individuals who (a) are outside directors as defined in Treasury Regulation Section 1.162-27(e)(3)(i), (b) are non-employee directors within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, (c) do not receive remuneration from ECB or any Related Entity in any capacity other than as a Director, except as permitted under Treasury Regulation Section 1.162-27(e)(3), and (d) are independent directors within the meaning of rules of The NASDAQ Stock Market, Inc. The Plan Committee shall consist of at least three individuals.
2.11 Plan Year means ECBs fiscal year.
2.12 Related Entity means an entity that is or becomes related to ECB through common ownership, as determined under Internal Revenue Code Section 414(b) or (c), but modified as permitted under Treasury Regulation Section 1.409A-1(b)(5)(iii) as to Awards to which such regulation is applicable.
2.13 ECB Bancorp, Inc., or ECB, means ECB Bancorp, Inc., a North Carolina corporation. Except for purposes of determining whether a Change in Control has occurred (according to Article 10), the term ECB Bancorp, Inc., or ECB, also means any corporation or entity that is a successor to ECB Bancorp, Inc., or substantially all of its assets, and that assumes the obligations of ECB Bancorp, Inc., under this Plan by operation of law or otherwise.
2.14 Non-Employee Director means a member of the Board of Directors of ECB or its subsidiary, The East Carolina Bank, who is not also an employee of ECB or The East Carolina Bank.
2
ARTICLE 3
PARTICIPATION
3.1 Awards to Employees. Consistent with the terms of the Plan and subject to Section 3.2, the Plan Committee alone shall decide which Employees will be granted Awards, shall specify the types of Awards granted to Employees, and shall determine the terms upon which Awards are granted and may be earned. The Plan Committee may establish different terms and conditions for each type of Award granted to an Employee, for each Employee receiving the same type of Award, and for the same Employee for each Award the Employee receives, regardless of whether the Awards are granted at the same or different times. The Plan Committee shall have exclusive authority to determine whether an Award qualifies or is intended to qualify for the exemption from the deduction limitations of Internal Revenue Code Section 162(m) for performance-based compensation.
Non-Employee Directors shall be eligible to receive Awards under the Plan on such terms, and subject to such conditions, as the Board of Directors of ECB may, from time to time, establish for their participation. All references in this Plan to employment of a Participant shall also be deemed to refer to a Non-Employee Directors service as a board member.
3.2 Conditions of Participation. By accepting an Award, each Participant agrees (a) to be bound by the terms of the Award Agreement relating to the Award and the Plan and to comply with other conditions imposed by the Plan Committee, and (b) that the Plan Committee (or ECBs Board of Directors, as appropriate) may amend the Plan and the Award Agreements without any additional consideration if necessary to comply with or avoid penalties arising under Internal Revenue Code Section 409A or any other Section of the Code, even if the amendment reduces, restricts, or eliminates rights that were granted under the Plan, the Award Agreement, or both before the amendment.
ARTICLE 4
ADMINISTRATION
4.1 Duties. The Plan Committee is responsible for administering the Plan and shall have all powers appropriate and necessary for that purpose. Consistent with the Plans objectives, ECBs Board of Directors and the Plan Committee may adopt, amend, and rescind rules and regulations relating to the Plan to protect ECBs and its Related Entities interests. Consistent with the Plans objectives, ECBs Board of Directors and the Plan Committee shall have complete discretion to make all other decisions necessary or advisable for the administration and interpretation of the Plan. Actions of ECBs Board of Directors and the Plan Committee shall be final, binding, and conclusive for all purposes and upon all persons.
4.2 Delegation of Duties. In its sole discretion, ECBs Board of Directors and the Plan Committee may delegate ministerial duties associated with the Plan to any person that it deems appropriate, including an Employee. However, neither ECBs Board of Directors nor the Plan Committee shall delegate a duty it must discharge to comply with the conditions for exemption of performance-based compensation from the deduction limitations of Section 162(m).
4.3 Award Agreement. As soon as administratively practical after the date an Award is made, the Plan Committee or ECBs Board of Directors shall prepare and deliver an Award Agreement to each affected Participant. The Award Agreement shall:
(a) describe the terms of the Award, including the type of Award and when and how it may be exercised or earned,
(b) state the Exercise Price, if any, associated with the Award,
3
(c) state how the Award will or may be settled,
(d) describe (i) any conditions that must be satisfied before the Award may be exercised or earned, (ii) any objective restrictions placed on the Award and any performance-related conditions and performance criteria that must be satisfied before those restrictions will be released, and (iii) any other applicable terms and conditions affecting the Award.
4.4 Restriction on Repricing. Regardless of any other provision of this Plan or an Award Agreement, neither ECBs Board of Directors nor the Plan Committee may reprice (as defined under rules of the New York Stock Exchange or The NASDAQ Stock Market) any Award unless the repricing is approved in advance by ECBs stockholders acting at a meeting.
ARTICLE 5
LIMITS ON STOCK SUBJECT TO AWARDS
5.1 Number of Authorized Shares of Stock. Subject to any adjustments required by Section 5.4, the maximum number of shares of ECB common stock that may be subject to Awards under this Plan is 390,100. ECB shall at all times during the term of this Plan reserve and keep available the number of shares of its common stock as shall be sufficient to satisfy the requirements of the Plan. The common stock issued pursuant to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise.
5.2 Award Limits and Annual Participant Limits.
(a) Award Limits. Of the total shares authorized under Section 5.1, up to a maximum of 200,000 shares may be reserved for issuance under Incentive Stock Options.
(b) Annual Participant Limits. The aggregate number of shares of ECB common stock underlying Awards granted under this Plan to any Participant in any Plan Year, regardless of whether the Awards are thereafter canceled, forfeited, or terminated, shall not exceed 15,000 shares. This annual limitation is intended to include the grant of all Awards, including but not limited to Awards representing performance-based compensation described in Internal Revenue Code Section 162(m)(4)(C).
5.3 Share Accounting. For purposes of calculating the maximum number of shares of common stock that may be issued under the Plan:
(a) When cash is used by the Participant as full payment for shares issued upon exercise of a Nonqualified Stock Option or an Incentive Stock Option or as payment for the purchase of Restricted Stock or Performance Shares, all the shares issued (including the shares, if any, withheld for tax withholding requirements) shall be counted;
(b) Any shares of common stock subject to a Stock Option which for any reason terminates or expires unexercised, or shares granted in connection with a Performance Share Award that are unearned and, thus, never issued, shall again be available for issuance under the Plan.
5.4 Adjustment in Capitalization. If, after the Effective Date, there is a stock dividend or stock split, recapitalization (including payment of an extraordinary dividend), merger, consolidation, combination, spin-off, distribution of assets to stockholders, exchange of shares or other similar corporate change affecting ECB common stock, then consistent with the applicable provisions of Internal Revenue Code Sections 162(m), 409A, 422, and 424 and associated regulations and to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under this Plan, the Plan Committee shall, in a manner the Plan Committee considers equitable, adjust (a) the number of Awards that may or will be granted to Participants during a Plan Year, (b) the aggregate number of shares of ECB
4
common stock available for Awards under Section 5.1 or subject to outstanding Awards, as well as any share-based limits imposed under this Plan, (c) the respective Exercise Price, number of shares, and other limitations applicable to outstanding or subsequently granted Awards, and (d) any other factors, limits, or terms affecting any outstanding or subsequently granted Awards.
ARTICLE 6
STOCK OPTIONS
6.1 Grant of Options. Subject to the terms of the Plan, at any time during the term of this Plan the Plan Committee may grant Incentive Stock Options and Nonqualified Stock Options to Employees. Unless an Award Agreement provides otherwise, Options awarded under this Plan are intended to satisfy the requirements for exclusion from coverage under Internal Revenue Code Section 409A to the extent Section 409A is applicable to those Options as of the date of their issuance, and all such Option Award Agreements shall be construed and administered consistent with that intention.
6.2 Exercise Price. Except as necessary to implement Section 6.7, each Option shall have an Exercise Price per share at least equal to the Fair Market Value of a share of ECB common stock on the date of grant. However, the Exercise Price per share shall be at least 110% of the Fair Market Value of a share of ECB common stock on the date of grant for any Incentive Stock Option granted to an Employee who, on the date of grant, owns (as defined in Internal Revenue Code Section 424(d)) ECB common stock possessing more than 10% of the total combined voting power of all classes of stock (or the combined voting power of any Related Entity), determined according to rules issued under Internal Revenue Code Section 422.
6.3 Exercise of Options. Subject to any terms, restrictions, and conditions specified in the Plan, and unless specified otherwise in the Award Agreement, Options shall be exercisable at the time or times specified in the Award Agreement, and they may become exercisable as to portions of the shares covered by Options at intervals during a stated period of time, but no Incentive Stock Option may be exercised more than ten years after the date on which it is granted, nor more than five years after the date on which it is granted to an Employee who on the date of grant owns (as defined in Internal Revenue Code Section 424(d)) ECB common stock possessing more than 10% of the total combined voting power of all classes of stock or the combined voting power of any Related Entity, determined under rules issued under Internal Revenue Code Section 422.
6.4 Incentive Stock Options. Despite any provision in this Plan to the contrary:
(a) no provision of this Plan relating to Incentive Stock Options shall be interpreted, amended, or altered, nor shall any discretion or authority granted under the Plan be exercised, in a manner that is inconsistent with Internal Revenue Code Section 422 or, without the consent of the affected Participant, to cause any Incentive Stock Option to fail to qualify for the federal income tax treatment provided by Internal Revenue Code Section 421;
(b) no Employee may be granted Incentive Stock Options under this Plan if the aggregate Fair Market Value (determined as of the date the Option is granted and taking into account such Option) of stock of ECB and its Related Entities with respect to which Incentive Stock Options (as defined in Section 422 of the Code) are exercisable for the first time by such Employee during any calendar year, under this and all other plans of ECB and its Related Entitles, would exceed one hundred thousand dollars ($100,000) (or other amount specified in Internal Revenue Code Section 422(d)), determined under rules issued under Internal Revenue Code Section 422;
(c) no Incentive Stock Option shall be granted to a person who is not an Employee on the grant date; and
5
(d) all Incentive Stock Options held by a Participant shall terminate upon termination of the Participants employment with either ECB or its Related Entity, provided, that such period may be extended in the Award Agreement pursuant to the following: (i) subject to the terms of Section 9.1, for an additional period not to exceed ninety (90) days upon termination of the Participants employment with ECB or its Related Entities other than as a result of death or disability; (ii) for an additional period not to exceed one (1) year upon termination of the Participants employment with ECB or its Related Entities as a result of death; and (iii) for an additional period not to exceed one (1) year upon termination of the Participants employment with ECB or its Related Entities as a result of disability (within the meaning of Section 22(e)(3) of the Code and as defined in the Incentive Stock Option Agreement);
6.5 Exercise Procedures and Payment for Options. The Exercise Price associated with each Option must be paid according to procedures described in the Award Agreement. These procedures may allow either of the following payment methods: (a) payment in cash or a cash equivalent or (b) surrender by the Participant of unrestricted shares of ECB common stock he or she has owned for at least six months before the exercise date as partial or full payment of the Exercise Price, either by actual delivery of the shares or by attestation, with each share valued at the Fair Market Value of a share of ECB common stock on the exercise date. In its sole discretion the Plan Committee may withhold its approval for any method of payment for any reason, including but not limited to concerns that the proposed method of payment will result in adverse financial accounting treatment, adverse tax treatment for ECB or the Participant, or a violation of the Sarbanes-Oxley Act of 2002, as amended from time to time, and related regulations and guidance. A Participant may exercise an Option solely by sending to the Plan Committee or its designee a completed exercise notice in the form prescribed by the Plan Committee along with payment, or designation of an approved payment procedure, of the Exercise Price.
6.6 Holding Period. For so long as ECB remains a reporting company (meaning that it has a class of equity securities registered under the Exchange Act), shares of ECB common stock acquired upon exercise of an Option shall not be sold or otherwise transferred before the expiration of six (6) months from the date such Option is granted.
6.7 Substitution of Options. In ECBs discretion, persons who become Employees as a result of a transaction described in Internal Revenue Code Section 424(a) may receive Options in exchange for options granted by their former employer or the former Related Entity subject to the rules and procedures prescribed under Section 424.
6.8 Rights Associated With Options. A Participant holding an unexercised Option shall have no voting or dividend rights associated with shares underlying the unexercised Option. The Option shall be transferable solely as provided in Section 13.1. Unless otherwise specified in the Award Agreement or as otherwise specifically provided in the Plan, ECB common stock acquired upon exercise of an Option shall have all dividend and voting rights associated with ECB common stock and shall be transferable, subject to applicable federal securities laws, applicable requirements of any national securities exchange or system on which shares of ECB common stock are then listed or traded, and applicable blue sky or state securities laws.
ARTICLE 7
RESTRICTED STOCK
7.1 Award of Restricted Stock. Subject to the terms, restrictions, and conditions specified in the Plan and the associated Award Agreement, at any time during the term of this Plan the Plan Committee may award shares of Restricted Stock to Employees. Restricted Stock may be awarded at no cost or at a price per share determined by the Plan Committee, which may be less than the Fair Market Value of a share of ECB common stock on the date of grant.
7.2 Earning Restricted Stock. Subject to the terms, restrictions, and conditions specified in the Plan and the associated Award Agreement, and unless otherwise specified in the Award Agreement:
(a) terms, restrictions, and conditions imposed on Restricted Stock awarded to Participants shall lapse as described in the Award Agreement, and any Award Agreement may provide for a schedule under which terms, restrictions and conditions lapse as to portions of the shares included in an Award at intervals during a stated period of time;
6
(b) during the period in which satisfaction of the conditions imposed on Restricted Stock is to be determined, the share certificates for such Restricted Stock and any shares of ECB common stock issuable as a dividend or other distribution on the Restricted Stock shall be held by ECB,
(c) at the end of the period in which satisfaction of the conditions imposed on Restricted Stock is to be determined, (i) the Restricted Stock, or any applicable portion thereof, shall be forfeited to the extent that terms, restrictions, and conditions described in the Award Agreement are not satisfied (with a refund, without interest, of any consideration paid by the Participant), and (ii) subject to the terms of Section 13.4, the certificates evidencing the Restricted Stock, or any applicable portion thereof, shall be released by ECB and distributed to the Participant as soon as practicable after the last day of the period in which satisfaction of the conditions imposed on Restricted Stock is to be determined to the extent that terms, restrictions, and conditions specified in the Award Agreement are satisfied. Any Restricted Stock Award relating to a fractional share of ECB common stock shall be rounded to the next whole share when settled.
7.3 Rights Associated With Restricted Stock. During the period in which satisfaction of the conditions imposed on Restricted Stock is to be determined, and unless the Restricted Stock Award Agreement specifies otherwise, Restricted Stock may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated. Except as otherwise required for compliance with the conditions for exemption of performance-based compensation from the deduction limitations of Internal Revenue Code Section 162(m) and except as otherwise required by the terms of the applicable Award Agreement, during the period in which satisfaction of the conditions imposed on Restricted Stock is to be determined each Participant to whom Restricted Stock is issued may exercise full voting rights associated with that Restricted Stock and shall be entitled to receive all dividends and other distributions on that Restricted Stock; provided, however, that if a dividend or other distribution is paid in the form of shares of ECB common stock, those shares shall also be considered Restricted Stock. The certificate evidencing such shares shall be held by ECB, and the shares shall be subject to the same restrictions on transferability and forfeitability as the shares of Restricted Stock to which the dividend or distribution relates.
7.4 Internal Revenue Code Section 83(b) Election. The Plan Committee may provide in an Award Agreement that the Award of Restricted Stock is conditioned upon the Participant making or refraining from making an election under Internal Revenue Code Section 83(b). If a Participant makes an election under Internal Revenue Code Section 83(b) concerning a Restricted Stock Award, the Participant must promptly file a copy of the election with ECB.
ARTICLE 8
PERFORMANCE SHARES
8.1 Award of Performance Shares. Subject to the terms, restrictions, and conditions specified in the Plan and the Award Agreement, at any time during the term of this Plan the Plan Committee may award Performance Shares to Employees. Performance Shares shall be earned and issued based on performance objectives set forth in the Award Agreement being met, which objectives shall consist of one or more of the criteria specified in Section 8.2 (the Performance Criteria). Determination of the specific Performance Criteria and the related measurement periods or other factors which apply to Performance Shares granted to a Participant, and of whether any or all such Performance Criteria have been achieved, shall be made by the Plan Committee, in its sole discretion, and its determinations shall be final and binding on the Participant. Performance Shares shall be awarded for issuance only after the Performance
7
Criteria have been met. Performance Shares may be awarded (a) to Covered Employees in a manner that qualifies as performance-based compensation under Internal Revenue Code Section 162(m) or (b) to Employees who are not Covered Employees in any manner reasonably determined by the Plan Committee. Unless an Award Agreement provides otherwise, Performance Shares awarded under this Plan are intended to satisfy the requirements for exclusion from coverage under Internal Revenue Code Section 409A and the respective Award Agreements shall be construed and administered consistent with that intention.
8.2 Performance Criteria.
(a) Performance Shares that are intended to qualify as performance-based compensation under Internal Revenue Code Section 162(m) may be earned based on goals or objectives specified by the Plan Committee relating to one or more or any combination of the following Performance Criteria, which may be applied solely with reference to ECB, to a Related Entity, to ECB and a Related Entity, or relatively between ECB, a Related Entity, or both and one or more unrelated entities
(1) | net earnings or net income (before or after taxes), |
(2) | earnings per share, |
(3) | deposit or asset growth, |
(4) | net operating income, |
(5) | return measures (including return on assets and equity), |
(6) | fee income, |
(7) | earnings before or after taxes, interest, depreciation and/or amortization, |
(8) | interest and/or rate spreads or margins, |
(9) | productivity ratios, |
(10) | share price, including but not limited to growth measures and total stockholder return, |
(11) | expense targets, |
(12) | credit quality, |
(13) | efficiency ratio, |
(14) | market share, |
(15) | customer satisfaction, |
(16) | net income after cost of capital, or |
(17) | any other factors the Plan Committee considers relevant and appropriate |
(b) Performance Shares awarded to Participants who are not Covered Employees may be earned based on one or more or any combination of the Performance Criteria listed in Section 8.2(a).
(c) Different Performance Criteria may be applied to individual Employees or to groups of Employees and, as specified by the Plan Committee, may be based on the results achieved (i) separately by ECB or any Related Entity, (ii) by any combination of ECB and Related Entities, or (iii) by any combination of segments, products, or divisions of ECB and Related Entities.
8
(d) The Plan Committee shall make appropriate adjustments of Performance Criteria to reflect the effect on any Performance Criteria of any stock dividend or stock split affecting ECB common stock, a recapitalization (including without limitation payment of an extraordinary dividend), merger, consolidation, combination, spin-off, distribution of assets to stockholders, exchange of shares, or similar corporate change. Also, the Plan Committee shall make a similar adjustment to any portion of a Performance Criterion that is not based on ECB common stock but that is affected by an event having an effect similar to those just described. As permitted under Internal Revenue Code Section 162(m), the Plan Committee may make appropriate adjustments of Performance Criteria to reflect a substantive change in an Employees job description or assigned duties and responsibilities.
(e) Performance Criteria shall be established in an Award Agreement as soon as administratively practicable after the criteria are established, but in the case of Covered Employees no later than the earlier of: (i) 90 days after the beginning of the applicable Performance Period and (ii) the expiration of 25% of the applicable period in which satisfaction of the applicable Performance Criteria is to be determined.
8.3 Earning Performance Shares. Except as otherwise provided in the Plan or the Award Agreement, at the end of each applicable measurement period in which satisfaction of the Performance Criteria is to be determined, the Plan Committee shall certify that the Performance Criteria have or have not been satisfied, after which the following shall occur:
(a) To the extent the Plan Committee certifies that the Performance Criteria were not satisfied, then the Award shall terminate as to all or the portion of the Performance Shares associated with Performance Criteria certified as not having been satisfied, and those Performance Shares shall never be issued;
(b) To the extent the Plan Committee certifies that the Performance Criteria have been satisfied, then all or the portion of the Performance Shares associated with Performance Criteria certified as having been satisfied shall, subject to the terms of Section 13.4, be issued to the Participant in the form a certificate for shares of ECB common stock (unless otherwise specified in the Award Agreement) on or before the later of (i) the 15th day of the third month after the end of the Participants taxable year in which the Plan Committee certifies that the related Performance Criteria are satisfied and (ii) the 15th day of the third month after the end of ECBs taxable year in which the Plan Committee certifies that the related Performance Criteria were satisfied. However, the Performance Shares may be distributed later if ECB reasonably determines that compliance with that schedule is not administratively practical and if the distribution is made as soon as practical.
8.4 Rights Associated with Performance Shares. During the measurement period in which satisfaction of the Performance Criteria is to be determined with respect to Performance Shares awarded to a Participant, (i) the Performance Shares shall remain unissued; (ii) the right to receive the Performance Shares upon issuance may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, (iii) the Participant shall have no voting rights with respect to the unissued Performance Shares, and (iv) the Participant shall have no right to receive dividends or other distributions with respect to the unissued Performance Shares.
8.5. Internal Revenue Code Section 83(b) Election. The Plan Committee may provide in an Award Agreement that the grant of any Performance Shares shall be conditioned upon the Participant making or refraining from making an election under Internal Revenue Code Section 83(b). If a Participant makes an election under Internal Revenue Code Section 83(b) concerning a Performance Share Award, the Participant must promptly file a copy of the election with ECB.
9
ARTICLE 9
TERMINATION
9.1 Termination for Cause.
(a) If a Participants employment with ECB is terminated for Cause, or if in ECBs judgment a basis for termination for Cause exists, all Awards held by the Participant that are outstanding shall be forfeited, regardless of whether the Awards are exercisable and regardless of whether the Participants employment with ECB or a Related Entity actually terminates, except that (i) Restricted Stock that is no longer subject to forfeiture, and (ii) Performance Shares for which the Performance Criteria have been met, and (iii) shares received in connection with Options that have been exercised, shall not be affected by termination for Cause.
(b) The term Cause shall mean one or more of the acts described in this Section 9.1(b):
(1) | an act of fraud, intentional misrepresentation, embezzlement, misappropriation, or conversion by the Participant of the assets or business opportunities of ECB or a Related Entity, |
(2) | conviction of the Participant of or plea by the Participant of guilty or no contest to a felony or a misdemeanor, |
(3) | violation by the Participant of the written policies or procedures of ECB or the Related Entity with which the Participant is employed, including but not limited to violation of ECBs or the Related Entitys code of ethics, |
(4) | unless disclosure is inadvertent, disclosure to unauthorized persons of any confidential information not in the public domain relating to ECBs or a Related Entitys business, including all processes, inventions, trade secrets, computer programs, technical data, drawings or designs, information concerning pricing and pricing policies, marketing techniques, plans and forecasts, new product information, information concerning methods and manner of operations, and information relating to the identity and location of all past, present, and prospective customers and suppliers, |
(5) | intentional breach of any contract (including without limitation any employment, confidentiality or inventions agreement) with or violation of any legal obligation owed to ECB or a Related Entity, |
(6) | dishonesty relating to the duties owed by the Participant to ECB or a Related Entity or any breach of a fiduciary duty held by the Participant with respect to ECB or a Related Entity, |
(7) | the Participants willful and continued refusal to substantially perform assigned duties, other than refusal resulting from sickness or illness or while suffering from an incapacity due to physical or mental illness, including a condition that does or may constitute a disability, |
(8) | the Participants willful engagement in gross misconduct materially and demonstrably injurious to ECB or a Related Entity, |
(9) | the Participants breach of any term of this Plan or an Award Agreement, |
(10) | intentional cooperation with a party attempting a Change in Control of ECB, unless ECBs Board of Directors approves or ratifies the Participants action before the Change in Control or unless the Participants cooperation is required by law, |
10
(11) | any action that constitutes cause for termination as defined in any written agreement between the Participant and ECB or a Related Entity. |
However, Cause shall not be deemed to exist merely because the Participant is absent from active employment during periods of paid time off, consistent with the applicable paid time-off policy of ECB or its Related Entity with which the Participant is employed, as the case may be, sickness or illness or while suffering from an incapacity due to physical or mental illness, including a condition that does or may constitute a disability, or other period of absence approved by ECB or its Related Entity, as the case may be. The Plan Committee shall have the sole discretion to determine whether any condition constitutes a disability for purposes of the Plan or this Section 9.1.
9.2 Termination for any Other Reason. Unless specified otherwise by the Plan Committee at the time an Award is granted and set forth in the Award Agreement, or in this Plan, and except as provided in Section 9.1, when a Participants employment terminates for any reason, the portions of the Participants outstanding Options that are unvested and unexercisable, and the portions of the Participants Restricted Stock Awards that at such time are subject to forfeiture, and the portions of the Participants Performance Share Awards that have not been earned, shall be forfeited. Options that are exercisable when termination occurs shall be forfeited if not exercised before the earlier of (a) the expiration date specified in the Award Agreement, (b) any other time (including the date of termination), or after any number of days following the date of termination, as specified in the Award Agreements pertaining to those Options.
ARTICLE 10
EFFECT OF A CHANGE IN CONTROL
10.1 Definition of Change in Control. The term Change in Control shall have the meaning given in any written agreement between the Participant and ECB or any Related Entity. However, if an Award is subject to Internal Revenue Code Section 409A, the term Change in Control shall have the meaning given in Section 409A. If an Award is not subject to Internal Revenue Code Section 409A, and if the term Change in Control is not defined in a written agreement between the Participant and ECB or a Related Entity, any of the following events occurring on or after the date this Plan becomes effective under Section 1.2 shall constitute a Change in Control:
(a) Change in Board Composition. A Change in Control shall be deemed to have occurred if individuals who constitute ECBs Board of Directors on the date this Plan becomes effective under Section 1.2 (the Incumbent Directors) cease for any reason to constitute at least a majority of the Board of Directors. A person who becomes a Director after the Effective Date of this Plan and whose election or nomination for election is approved by a vote of at least two-thirds (2/3) of the Incumbent Directors on the Board of Directors shall be deemed to be an Incumbent Director. The necessary two-thirds (2/3) approval may take the form of a specific vote on that persons election or nomination, or approval of ECBs proxy statement in which the person is named as a nominee for Director without written objection by Incumbent Directors to the nomination. A person elected or nominated as a Director of ECB initially as the result of an actual or threatened director-election contest or any other actual or threatened solicitation of proxies by or on behalf of any person other than ECBs Board of Directors shall never be deemed an Incumbent Director unless at least two-thirds (2/3) of the Incumbent Directors specifically vote to treat that person as an Incumbent Director.
11
(b) Significant Ownership Change. A Change in Control shall be deemed to have occurred if any person directly or indirectly is or becomes the beneficial owner of securities, the combined voting power which securities in the election of ECBs Directors is:
(1) | 50% or more of the combined voting power of all of ECBs outstanding securities eligible to vote for the election of ECBs Directors, |
(2) | 25% or more, but less than 50%, of the combined voting power of all of ECBs outstanding securities eligible to vote in the election of ECBs Directors, except that an event described in this paragraph (b)(2) shall not constitute a Change in Control if it is the result of any of the following acquisitions of ECBs securities: |
(A) | by ECB or a Related Entity, reducing the number of ECB securities outstanding (unless the person thereafter becomes the beneficial owner of additional securities that are eligible to vote in the election of ECBs Directors, increasing the persons beneficial ownership by more than one percent), |
(B) | by or through an employee benefit plan sponsored or maintained by ECB or a Related Entity and described (or intended to be described) in Internal Revenue Code Section 401(a), |
(C) | by or through an equity compensation plan maintained by ECB or a Related Entity, including this Plan and any program described in Internal Revenue Code Section 423, |
(D) | by an underwriter temporarily holding securities in an offering of securities, |
(E) | in a Non-Control Transaction, as defined in Section 10.1(c), or |
(F) | in a transaction (other than one described in Section 10.1(c)) in which securities eligible to vote in the election of ECBs Directors are acquired from ECB, if a majority of the Incumbent Directors approves a resolution providing expressly that the acquisition shall not constitute a Change in Control. |
(c) Merger. A Change in Control shall be deemed to have occurred upon consummation of a merger, consolidation, share exchange, or similar form of corporate transaction involving ECB or a Related Entity requiring approval of ECBs stockholders, whether for the transaction or for the issuance of securities in the transaction (a Business Combination), unless immediately after the Business Combination:
(1) | more than 50% of the total voting power of either (i) the corporation resulting from consummation of the Business Combination (the Surviving Corporation) or, if applicable, (ii) the ultimate parent corporation that directly or indirectly beneficially owns 100% of the voting securities eligible to elect directors of the Surviving Corporation (the Parent Corporation) is represented by securities that were eligible to vote in the election of ECBs Directors and that were outstanding immediately before the Business Combination (or, if applicable, represented by securities into which the ECB securities were converted in the Business Combination), and that voting power among the holders thereof is in substantially the same proportion as the voting power of securities eligible to vote in the election of ECBs Directors among the holders thereof immediately before the Business Combination, |
(2) | no person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation or any employee stock benefit trust created by the Surviving Corporation or the Parent Corporation) directly or indirectly is or becomes the beneficial owner of 25% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation), and |
12
(3) | at least a majority of the members of the Board of Directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were Incumbent Directors when the initial agreement providing for the Business Combination was approved by ECBs Board of Directors. |
A Business Combination satisfying all of the criteria specified in clauses (1), (2), and (3) of this Section 10.1(c) shall constitute a Non-Control Transaction, or
(d) Sale of Assets. A Change in Control shall be deemed to have occurred if ECBs stockholders approve a plan of complete liquidation or dissolution of ECB or a sale of all or substantially all of its assets, but in any case only if ECBs assets are transferred to an entity not owned directly or indirectly by ECB, a Related Entity or ECBs stockholders.
10.2 Effect of Change in Control. If a Change in Control occurs, the Plan Committee shall have the right in its sole discretion to
(a) accelerate the exercisability of any or all Options, despite any limitations contained in the Plan or Award Agreement,
(b) accelerate the vesting of Restricted Stock or Performance Shares, despite any limitations contained in the Plan or Award Agreement,
(c) cancel any or all outstanding Awards in exchange for the kind and amount of shares of the surviving or new corporation, cash, securities, evidences of indebtedness, other property, or any combination thereof that the holder of the Award would have received upon consummation of the Change in Control transaction (the Acquisition Consideration) had the Option, Restricted Stock or Performance Shares been exercised or converted into shares of ECB common stock before the transaction, less the applicable exercise or purchase price,
(d) cause the holders of any or all Awards to have the right during the term of the Awards to receive upon exercise of the Award the Acquisition Consideration receivable upon consummation of the transaction by a holder of the number of shares of ECB common stock that might have been obtained upon exercise or conversion of all or any portion thereof, less the applicable exercise or purchase price therefore, or to convert the Award into a stock option, restricted stock or performance shares relating to the surviving or new corporation in the transaction, or
(e) take such other action as it deems appropriate to preserve the value of the Award to the Participant.
The Plan Committee may provide for any of the foregoing actions in an Award Agreement in advance, may provide for any of the foregoing actions in connection with the Change in Control, or both.
For purposes of this Plan the term person shall be as defined in Section 3(a)(9) and as used in Sections 13(d)(3) and
14(d) (2) of the Securities Exchange Act of 1934, and the terms beneficial owner and beneficial ownership shall have the meaning given in the Securities and Exchange Commissions Rule 13d-3 under the Securities Exchange Act of 1934.
ARTICLE 11
AMENDMENT, MODIFICATION AND TERMINATION OF PLAN
ECB may terminate, suspend, or amend the Plan at any time without stockholder approval, unless stockholder approval is necessary to satisfy applicable requirements imposed by (a) Rule 16b-3 under the Securities Exchange Act of 1934, or any successor rule or regulation, (b) the Internal Revenue Code,
13
which requirements may include without limitation qualification of an Award as performance-based compensation under Internal Revenue Code Section 162(m) and compliance with requirements under Internal Revenue Code Section 422, or (c) any securities exchange, market, or other quotation system on or through which ECBs securities are listed or traded. However, no Plan amendment shall (a) result in the loss of a Plan Committee members status as a non-employee director, as that term is defined in Rule 16b-3 under the Securities Exchange Act of 1934 or any successor rule or regulation, (b) cause the Plan to fail to satisfy the requirements imposed by Rule 16b-3, or (c) without the affected Participants consent (and except as specifically provided otherwise in this Plan or the Award Agreement), adversely affect any Award granted before the amendment, modification, or termination. Despite any provision in the Plan, including this Article 11, to the contrary, ECB shall have the right to amend the Plan and any Award Agreements without the consent of or additional consideration to affected Participants if amendment is necessary to comply with or avoid penalties arising under Internal Revenue Code Section 409A or any other section of the Code, even if the amendment reduces, restricts, or eliminates rights granted under the Plan, the Award Agreement, or both, before the amendment.
ARTICLE 12
ISSUANCE OF SHARES AND SHARE CERTIFICATES
12.1 Issuance of Shares. ECB shall issue or cause to be issued shares of its common stock as soon as practicable upon exercise or conversion of an Award that is payable in shares of ECB common stock after compliance with the terms set forth in this Article 12. No shares shall be issued until full payment is made, if payment is required by the terms of the Award. In the case of an Option or Performance Shares, until a stock certificate evidencing the shares is issued, no right to vote or receive dividends or any other rights as a stockholder shall exist for the shares of ECB common stock to be issued. Issuance of shares of common stock shall be evidenced by a computerized or manual entry in the stock records of ECB or of a duly authorized transfer agent of ECB, which records are established to evidence the issuance of shares of ECB common stock and are binding on all parties, unless manifest error exists. Issuance may also be evidenced by the issuance of a stock certificate.
12.2 Delivery of Share Certificates. ECB shall not be required to issue any shares or deliver any certificates until all of the following conditions are fulfilled:
(a) payment in full for the shares and for any tax withholding,
(b) completion of any registration or other qualification of the shares the Plan Committee in its discretion deems necessary or advisable under any Federal or state laws or under the rulings or regulations of the Securities and Exchange Commission or any other regulating body,
(c) if ECB common stock is listed on The NASDAQ Stock Market or another exchange, admission of the shares to listing on The NASDAQ Stock Market or the other exchange,
(d) if the offer and sale of shares of ECB common stock is not registered under the Securities Act of 1933, qualification of the offer and sale under an available registration exemption under the Securities Act of 1933,
(e) obtaining any approval or other clearance from any Federal or state governmental agency the Plan Committee, in its discretion, determines to be necessary or advisable. The inability of ECB to obtain from any regulatory body having jurisdiction the authority deemed by ECBs counsel to be necessary for the lawful issuance of any shares of its common stock hereunder shall relieve ECB of any liability in respect of the nonissuance or sale of such stock as to which such requisite authority shall not have been obtained; and
14
(f) the Plan Committee is satisfied that the issuance and delivery of shares of ECB common stock under this Plan complies with applicable Federal, state, or local law, rule, regulation, or ordinance or any rule or regulation of any other regulating body, for which the Plan Committee may seek approval of ECBs counsel.
ECB shall not be required to register any Option, any common stock to be issued pursuant to the exercise of any Option, or any common stock otherwise issued pursuant to the grant of any Award, under the Securities Act of 1933or any other laws or regulations to which ECBs securities may be subject
12.3 Applicable Restrictions on Shares. Shares of ECB common stock issued may be subject to such stock transfer orders and other restrictions as the Plan Committee may determine are necessary or advisable under any applicable Federal or state securities law rules, regulations and other requirements, the rules, regulations and other requirements of The NASDAQ Stock Market or any stock exchange upon which ECB common stock is listed, and any other applicable Federal or state law. Certificates for the common stock may bear any restrictive legends the Plan Committee considers appropriate.
ARTICLE 13
MISCELLANEOUS
13.1 Assignability. Except as described in this Section or as provided in Section 13.2, an Award may not be transferred except by will or by the laws of descent and distribution, and an Award may be exercised during the Participants lifetime solely by the Participant or by the Participants guardian or legal representative. However, with the permission of the Plan Committee a Participant or a specified group of Participants may transfer Awards other than Incentive Stock Options to a revocable inter vivos trust of which the Participant is the settlor, or may transfer Awards other than Incentive Stock Options to a member of the Participants immediate family, a revocable or irrevocable trust established solely for the benefit of the Participants immediate family, a partnership or limited liability company whose only partners or members are members of the Participants immediate family, or an organization described in Internal Revenue Code Section 501(c)(3). An Award transferred to one of these permitted transferees shall continue to be subject to all of the terms and conditions that applied to the Award before the transfer and to any other rules prescribed by the Plan Committee. A permitted transferee may not retransfer an Award except by will or by the laws of descent and distribution, and the transfer by will or by the laws of descent and distribution must be a transfer to a person who would be a permitted transferee according to this Section 13.1.
13.2 Beneficiary Designation. Each Participant may name a beneficiary or beneficiaries to receive or to exercise any vested Award that is unpaid or unexercised at the Participants death. Beneficiaries may be named contingently or successively. Unless otherwise provided in the beneficiary designation, each designation made shall revoke all prior designations made by the same Participant. A beneficiary designation must be made on a form prescribed by the Plan Committee and shall not be effective until filed in writing with the Plan Committee. If a Participant has not made an effective beneficiary designation, the deceased Participants beneficiary shall be his or her surviving spouse or, if none, the deceased Participants estate. None of ECB, its Board of Directors, or the Plan Committee is required to infer a beneficiary from any other source. The identity of a Participants designated beneficiary shall be based solely on the information included in the latest beneficiary designation form completed by the Participant and shall not be inferred from any other evidence.
13.3 No Implied Rights to Awards or Continued Services. No Employee has any claim or right to be granted an Award under this Plan, and there is no obligation of uniformity of treatment of Employees under this Plan. Nothing in the Plan shall or shall be construed to guarantee that any Participant will receive a future Award. Neither this Plan nor any Award shall be construed as giving any individual any right to continue as an Employee of ECB or a Related Entity. Neither the Plan nor any Award shall constitute a contract of employment, and ECB expressly reserves to itself and all Related Entities the right at any time to terminate Employees free from liability or any claim under this Plan.
15
13.4 Tax Withholding. Each Participant shall be responsible for all federal, state, local or other taxes of any nature as shall be imposed pursuant to any law or governmental regulation or ruling on or related to any Award granted hereunder or action taken with respect thereto, or on any income which a Participant is deemed to recognize in connection with an Award. If the Committee shall determine to its reasonable satisfaction that ECB or any of its Related Entities is required to pay or withhold the whole or any part of any estate, inheritance, income, or other tax with respect to or in connection with any Award or action taken with respect thereto, then ECB or such Related Entity shall have the full power and authority to withhold and pay such tax out of any shares of common stock being purchased by or delivered to the Participant or from the Participants salary or any other funds otherwise payable to the Participant, or, prior to and as a condition of exercising an Option or the delivery of any common stock to the Participant in connection with any other Award, ECB may require that the Participant pay to it in cash or otherwise the amount of any such tax which ECB, in good faith, believes it or its Related Entity is required to withhold.
13.5 Indemnification. Each individual who is or was a member of ECBs Board of Directors or Plan Committee shall be indemnified and held harmless by ECB against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be made a party or in which he or she may be involved by reason of any action taken or not taken under the Plan as a Director of ECB or as a Plan Committee member and against and from any and all amounts paid, with ECBs approval, by him or her in settlement of any matter related to or arising from the Plan as a ECB Director or as a Plan Committee member or paid by him or her in satisfaction of any judgment in any action, suit or proceeding relating to or arising from the Plan against him or her as a ECB Director or as a Plan Committee member, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee member is liable for gross negligence or willful misconduct in the performance of his duties. In order to receive indemnification such director must give ECB an opportunity at its expense to handle and defend the matter before he or she undertakes to handle and defend it in his or her own behalf. The right of indemnification described in this Section is not exclusive and is independent of any other rights of indemnification to which the individual may be entitled under ECBs organizational documents, by contract, as a matter of law, or otherwise.
13.6 No Limitation on Compensation. Nothing in the Plan shall be construed to limit the right of ECB to establish other plans or to pay compensation to Employees in cash or property in a manner not expressly authorized under the Plan.
13.7 Governing Law. The Plan and all agreements hereunder shall be construed in accordance with and governed by the laws, other than laws governing conflict of laws, of the State of North Carolina. This Plan is not intended to be governed by the Employee Retirement Income Security Act of 1974, and the Plan shall be construed and administered in a manner that is consistent with that intention.
13.8 No Impact on Benefits. Plan Awards are not compensation for purposes of calculating a Participants rights under any employee benefit plan that does not specifically require the inclusion of Awards in benefit calculations.
13.9 Securities and Exchange Commission Rule 16b-3. The Plan is intended to comply with all applicable conditions of Securities and Exchange Commission Rule 16b-3 under the Securities Exchange Act of 1934, as that rule may be amended from time to time. All transactions involving a Participant who is subject to beneficial ownership reporting under Section 16(a) of the Securities Exchange Act of 1934 shall be subject to the conditions set forth in Rule 16b-3, regardless of whether the conditions are expressly set forth in this Plan, and any provision of this Plan that is contrary to Rule 16b-3 shall not apply to that Participant.
16
13.10 Internal Revenue Code Section 162(m). The Plan is intended to comply with applicable requirements of Section 162(m) for exemption of performance-based compensation from the deduction limitations of Section 162(m). Unless the Plan Committee expressly determines otherwise, any provision of this Plan that is contrary to those Section 162(m) exemption requirements shall not apply to an Award that is intended to qualify for the exemption for performance-based compensation. In the event the Performance Shares become subject to the Section 162(m) compensation limit (Limit) upon vesting, the Plan Committee may delay the distribution of such shares to the Participant to a date upon which the Limit is inapplicable to the Performance Shares. However, the Performance Shares shall be distributed upon the earlier of (a) the tax year in which there is a reasonable anticipation that the Limit will become inapplicable to the Performance Shares and (b) the tax year in which the Participant separates from service with ECB.
13.11 Successors. All obligations of ECB under Awards granted under this Plan are binding on any successor to ECB, whether as a result of a direct or indirect purchase, merger, consolidation, or otherwise of all or substantially all of the business or assets of ECB.
13.12 Severability. If any provision of this Plan or the application thereof to any person or circumstances is held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of this Plan or other applications, and this Plan is to be construed and enforced as if the illegal or invalid provision had not been included.
13.13 No Golden Parachute Payments. Despite any provision in this Plan or in an Award Agreement to the contrary, ECB shall not be required to make any payment under this Plan or an Award Agreement that would be a prohibited golden parachute payment within the meaning of Section 18(k) of the Federal Deposit Insurance Act or which would be a nondeductible payment within the meaning of Internal Revenue Code Section 280G.
13.14 Use of Proceeds. Proceeds from the sale of stock pursuant to Options or from the sale of Restricted Stock or Performance Shares shall constitute general funds of ECB.
13.15 Other Stock-Based Awards. The Plan Committee is authorized, subject to limitations under applicable law, to grant to Employees and Non-Employee Director whom the Plan Committee may from time to time select such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, ECB common stock or factors that may influence the value of ECB common stock, including, without limitation, restricted stock units or stock appreciation rights, The Plan Committee shall determine and provide in the Award Agreement the terms and conditions of such Awards.
17
Exhibit 31.01
CERTIFICATION
I, A. Dwight Utz, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of ECB Bancorp, Inc. (registrant); |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 14, 2012 | /s/ A. Dwight Utz | |||
A. Dwight Utz | ||||
President and Chief Executive Officer |
Exhibit 31.02
CERTIFICATION
I, Thomas M. Crowder, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of ECB Bancorp, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 14, 2012 | /s/ Thomas M. Crowder | |||
Thomas M. Crowder | ||||
Executive Vice President and Chief Financial Officer |
Exhibit 32.01
CERTIFICATIONS
(Pursuant to 18 U.S.C. Section 1350)
I, A. Dwight Utz, certify that, (i) the Form 10-Q filed by ECB Bancorp, Inc. (the Issuer) for the quarter ended June 30, 2012, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer on the dates and for the period presented therein.
Date: August 14, 2012 | /s/ A. Dwight Utz | |||
A. Dwight Utz | ||||
President and Chief Executive Officer |
Exhibit 32.02
CERTIFICATIONS
(Pursuant to 18 U.S.C. Section 1350)
I, Thomas M. Crowder, certify that, (i) the Form 10-Q filed by ECB Bancorp, Inc. (the Issuer) for the quarter ended June 30, 2012, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (ii) the information contained in that Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer on the dates and for the period presented therein.
Date: August 14, 2012 | /s/ Thomas M. Crowder | |||
Thomas M. Crowder | ||||
Executive Vice President and Chief Financial Officer |
Credit Quality of Loans and Allowance for Loan Losses (Details 1) (USD $)
In Thousands, unless otherwise specified |
Jun. 30, 2012
|
Dec. 31, 2011
|
Jun. 30, 2011
|
---|---|---|---|
Loans Credit Quality Indicators | |||
Total | $ 506,257 | $ 496,542 | $ 542,687 |
Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 265,723 | 249,713 | |
Weak Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 158,294 | 163,767 | |
Special Mention [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 43,023 | 43,098 | |
Substandard [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 39,217 | 39,964 | |
Real estate-construction and land development
|
|||
Loans Credit Quality Indicators | |||
Total | 62,944 | 67,127 | 84,291 |
Real estate-construction and land development | Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 27,929 | 27,833 | |
Real estate-construction and land development | Weak Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 19,992 | 23,237 | |
Real estate-construction and land development | Special Mention [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 5,682 | 4,853 | |
Real estate-construction and land development | Substandard [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 9,341 | 11,204 | |
Real Estate Secured by Farmland [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 27,627 | 29,890 | 33,641 |
Real Estate Secured by Farmland [Member] | Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 21,265 | 22,008 | |
Real Estate Secured by Farmland [Member] | Weak Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 3,326 | 4,430 | |
Real Estate Secured by Farmland [Member] | Special Mention [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 2,680 | 3,452 | |
Real Estate Secured by Farmland [Member] | Substandard [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 356 | ||
Real Estate Secured by Residential Properties [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 107,695 | 110,374 | 117,458 |
Real Estate Secured by Residential Properties [Member] | Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 59,344 | 60,121 | |
Real Estate Secured by Residential Properties [Member] | Weak Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 29,079 | 31,146 | |
Real Estate Secured by Residential Properties [Member] | Special Mention [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 10,488 | 12,302 | |
Real Estate Secured by Residential Properties [Member] | Substandard [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 8,784 | 6,805 | |
Real Estate Secured by Nonfarm Nonresidential [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 198,007 | 203,063 | 211,556 |
Real Estate Secured by Nonfarm Nonresidential [Member] | Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 87,857 | 90,999 | |
Real Estate Secured by Nonfarm Nonresidential [Member] | Weak Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 71,532 | 75,384 | |
Real Estate Secured by Nonfarm Nonresidential [Member] | Special Mention [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 19,611 | 18,663 | |
Real Estate Secured by Nonfarm Nonresidential [Member] | Substandard [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 19,007 | 18,917 | |
Consumer Installment [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 6,160 | 6,620 | 5,191 |
Consumer Installment [Member] | Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 4,071 | 4,025 | |
Consumer Installment [Member] | Weak Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 1,741 | 2,212 | |
Consumer Installment [Member] | Special Mention [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 284 | 254 | |
Consumer Installment [Member] | Substandard [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 64 | 129 | |
Credit Cards and Related Plans [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 1,723 | 1,661 | 2,422 |
Credit Cards and Related Plans [Member] | Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 871 | 850 | |
Credit Cards and Related Plans [Member] | Weak Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 580 | 529 | |
Credit Cards and Related Plans [Member] | Special Mention [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 270 | 279 | |
Credit Cards and Related Plans [Member] | Substandard [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 2 | 3 | |
Commercial and Industrial [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 55,005 | 45,679 | 47,780 |
Commercial and Industrial [Member] | Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 29,978 | 25,133 | |
Commercial and Industrial [Member] | Weak Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 19,737 | 16,146 | |
Commercial and Industrial [Member] | Special Mention [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 3,627 | 2,686 | |
Commercial and Industrial [Member] | Substandard [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 1,663 | 1,714 | |
Loans to Finance Agricultural Production [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 36,856 | 21,539 | 23,715 |
Loans to Finance Agricultural Production [Member] | Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 28,582 | 16,473 | |
Loans to Finance Agricultural Production [Member] | Weak Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 7,917 | 3,290 | |
Loans to Finance Agricultural Production [Member] | Special Mention [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 357 | 584 | |
Loans to Finance Agricultural Production [Member] | Substandard [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 1,192 | ||
All Other Loans [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 10,240 | 10,589 | 16,633 |
All Other Loans [Member] | Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 5,826 | 3,171 | |
All Other Loans [Member] | Weak Pass [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 4,390 | 7,393 | |
All Other Loans [Member] | Special Mention [Member]
|
|||
Loans Credit Quality Indicators | |||
Total | 24 | 25 | |
All Other Loans [Member] | Substandard [Member]
|
|||
Loans Credit Quality Indicators | |||
Total |
Benefit Plans (Details) (Postretirement Benefit Cost [Member], USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2012
|
Jun. 30, 2011
|
Jun. 30, 2012
|
Jun. 30, 2011
|
|
Postretirement Benefit Cost [Member]
|
||||
Components of net periodic cost: | ||||
Service cost | $ 2 | $ 2 | $ 4 | $ 4 |
Interest cost | 9 | 9 | 18 | 18 |
Prior service cost | ||||
Amortization of (gain) loss | 3 | 6 | ||
Net periodic postretirement benefit cost | $ 14 | $ 11 | $ 28 | $ 22 |
Benefit Plans (Tables)
|
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Jun. 30, 2012
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Benefit Plans [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net periodic postretirement benefit cost |
|
Loans (Details Textual) (USD $)
In Millions, unless otherwise specified |
6 Months Ended | |
---|---|---|
Jun. 30, 2012
|
Dec. 31, 2011
|
|
Loans (Textual) [Abstract] | ||
Long Term Residential Mortgage Loans Period | 10 days | |
Maximum Borrowing Limit Of Loan | 85.00% | |
Minimum Maturity Of Residential Loans | 20 years | |
Non Exceeding Maturity Payments Based On Amortization Schedules | 5 years | |
Loans collateralized by owner-occupied residential real estate | $ 49.5 | $ 53.2 |
Loans pledged as eligible collateral for FHLB advances | $ 25.0 | $ 25.8 |
Fair Value of Financial Instruments (Details Textual) (USD $)
|
Jun. 30, 2012
|
Dec. 31, 2011
|
---|---|---|
Fair Value of Financial Instruments [Abstract] | ||
Interest rate lock commitments | $ 131,000 | $ 76,000 |
Securities available for sale | $ 6,700,000 |
Benefit Plans (Details Textual) (USD $)
In Thousands, except Share data, unless otherwise specified |
3 Months Ended | 6 Months Ended |
---|---|---|
Jun. 30, 2012
|
Jun. 30, 2012
|
|
Benefit Plans (Textual) [Abstract] | ||
Contribute its postretirement | $ 56 | $ 56 |
Increase in reserved shares due to amendments in 2008 Omnibus equity Plan | 190,100 | |
Stock options forfeited | 5,457 | 25,013 |
No contributions, current period | $ 0 | $ 0 |
Basis of Presentation
|
6 Months Ended |
---|---|
Jun. 30, 2012
|
|
Basis of Presentation [Abstract] | |
Basis of Presentation |
(1) Basis of Presentation The consolidated financial statements include the accounts of ECB Bancorp, Inc. (“Bancorp”) and its wholly-owned subsidiary, The East Carolina Bank (the “Bank”) (Bancorp and the Bank are collectively referred to hereafter as the “Company”). The Bank has one wholly-owned subsidiary, ECB Financial Services, Inc., which formerly provided courier services to the Bank but is currently inactive. All intercompany transactions and balances are eliminated in consolidation. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of income and expenses for the periods presented. Actual results could differ from those estimates. Management makes a number of estimates and assumptions relating to reported amounts of assets, liabilities, revenues and expenses in the preparation of the financial statements and disclosures. Estimates and assumptions that are most significant to the Company are related to the determination of the allowance for loan losses, asset impairment valuation, postretirement and benefit plan accounting and income taxes. All adjustments considered necessary for a fair presentation of the results for the interim periods presented have been included (such adjustments are normal and recurring in nature). The notes to consolidated financial statements in Bancorp’s annual report on Form 10-K should be referenced when reading these unaudited interim financial statements. Operating results for the period ended June 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any other period. Loans Loans are generally stated at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses and any deferred fees or costs. Loan origination fees net of certain direct loan origination costs are deferred and amortized as a yield adjustment over the contractual life of the related loans using the level-yield method. Impaired loans are defined as those which management believes it is probable we will not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms have been modified in a troubled debt restructuring. Interest on loans is recorded based on the principal amount outstanding. The Company ceases accruing interest on loans (including impaired loans) when, in management’s judgment, the collection of interest appears doubtful or the loan is past due 90 days or more. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Management may return a loan classified as nonaccrual to accrual status when the obligation has been brought current, has performed in accordance with its contractual terms over an extended period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt. Troubled debt restructurings (“TDRs”) are loans in which the borrower is experiencing financial difficulty at the time of restructure, and the Company has granted an economic concession to the borrower. Prior to modifying a borrower’s loan terms, the Company performs an evaluation of the borrower’s financial condition and ability to service under the potential modified loan terms. The types of concessions generally granted are extensions of the loan maturity date, reductions in the original contractual interest rate and forgiveness of principal. The Company measures the impairment loss of a TDR using the methodology for individually impaired loans. If a loan is accruing at the time of modification, the loan remains on accrual status and is subject to the Company’s charge-off and nonaccrual policies. If a loan is on nonaccrual before it is determined to be a TDR then the loan remains on nonaccrual. TDRs may be returned to accrual status if there has been at least a six month sustained period of repayment performance by the borrower. Allowance for Loan Losses The allowance for loan losses (AFLL) is established through provisions for losses charged against income. Loan amounts deemed to be uncollectible are charged against the AFLL, and subsequent recoveries, if any, are credited to the allowance. The AFLL represents management’s estimate of the amount necessary to absorb estimated probable losses in the loan portfolio. Management’s periodic evaluation of the adequacy of the allowance is based on individual loan reviews, past loan loss experience, economic conditions in the Company’s market areas, the fair value and adequacy of underlying collateral, and the growth and loss attributes of the loan portfolio. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Thus, future changes to the AFLL may be necessary based on the impact of changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s AFLL. Such agencies may require the Company to recognize adjustments to the AFLL based on their judgments about information available to them at the time of their examination.
In evaluating the allowance for loan losses, the Company prepares an analysis of its current loan portfolio through the use of historical loss rates, homogeneous risk analysis grouping to include probabilities for loss in each group by risk grade, estimation of years to impairment in each homogeneous grouping, analysis of internal credit processes, past due loan portfolio performance and overall economic conditions, both regionally and nationally. Historical loss calculations for each homogeneous risk group are based on a three year average loss ratio calculation with the most recent quarter’s loss history included in the model. The impact is to more quickly recognize and increase the loss history in a respective grouping. For those groups with little or no loss history, management increases the historical factor through a positive adjustment to more accurately represent current economic conditions and their potential impact on that particular loan group. Homogeneous loan groups are assigned risk factors based on their perceived loss potential, current economic conditions and on their respective risk ratings. The probability of loss is increased as the risk grade increases within each risk grouping to more accurately reflect the Bank’s exposure in that particular group of loans. The Bank utilizes a system of eight possible risk ratings. The risk ratings are established based on perceived probability of loss. Most loans risk rated “substandard”, “doubtful” and “loss” are removed from their homogeneous group and individually analyzed for impairment. Some smaller loans risk rated “substandard”, “doubtful” and “loss” with balances less than $100 thousand are not removed from their homogeneous group and individually analyzed for impairment. Other groups of loans based on loan size may be selected for impairment review. Loans are considered impaired if, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is based on either the fair value of the underlying collateral, the present value of the future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, or the estimated market value of the loan. In measuring the fair value of the collateral, management uses a comparison to the recent selling price of similar assets, which is consistent with those that would be utilized by unrelated third parties. A portion of the Bank’s AFLL is not allocated to any specific category of loans. This general portion of the allowance reflects the elements of imprecision and estimation risk inherent in the calculation of the overall allowance. Due to the subjectivity involved in determining the overall allowance, including the portion determined through general qualitative and quantitative internal and external factors, the general portion may fluctuate from period to period based on management’s evaluation of the factors affecting the assumptions used in calculating the allowance, including historical loss experience, current and expected economic conditions and geographic conditions. While the Company believes that our management uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the AFLL, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the final determination. Because these factors and management’s assumptions are subject to change, the allocation is not necessarily indicative of future loan portfolio performance. Unsecured loans are charged-off in full against the Company’s AFLL as soon as the loan becomes uncollectible. Unsecured loans are considered uncollectible when no regularly scheduled monthly payment has been made within three months, the loan matured over 90 days ago and has not been renewed or extended or the borrower files for bankruptcy. Secured loans are considered uncollectible when the liquidation of collateral is deemed to be the most likely source of repayment. Once secured loans reach 90 days past due, they are placed into non-accrual status. If the loan is deemed to be collateral dependent, the principal balance is written down immediately to reflect the current market valuation based on current independent appraisal. Included in the write-down is the estimated expense to liquidate the property and typically an additional allowance for the foreclosure discount. Subsequent Events In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued. |