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EX-32 - EX-32 - AMERIANA BANCORPv222268_ex32.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549
 

 
FORM 10-Q
 
(Mark One)
x           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2011
 
OR
 
¨           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 
For the transition period from                to               
 
Commission File Number: 0-18392
 
AMERIANA BANCORP

(Exact name of registrant as specified in its charter)
 
Indiana
 
35-1782688
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
     
2118 Bundy Avenue, New Castle, Indiana
 
47362-1048
(Address of Principal Executive Offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code: (765) 529-2230
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨   No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “ 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
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨ No x
 
At May 13, 2011, the registrant had 2,988,952 shares of its common stock outstanding. 

 
 

 
 
AMERIANA BANCORP

Table of Contents

     
Page No.
       
Part I.  Financial Information
 
       
 
Item 1.
Financial Statements (Unaudited)
  3
       
   
Consolidated Condensed Balance Sheets at March 31, 2011 and December 31, 2010
  3
       
   
Consolidated Condensed Statements of Income for the Three Months Ended March 31, 2011 and 2010
  4
       
   
Consolidated Condensed Statement of Shareholders’ Equity for the Three Months Ended March 31, 2011
  6
       
   
Consolidated Condensed Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010
  7
       
   
Notes to Consolidated Condensed Financial Statements
  8
       
  Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  23
       
 
Item 3.
Quantitative and Qualitative Disclosure about Market Risk
  34
       
 
Item 4.
Controls and Procedures
  34
       
Part II.  Other Information
 
       
 
Item 1.
Legal Proceedings
  34
       
 
Item 1A.
Risk Factors
  34
       
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
  35
       
 
Item 3.
Defaults upon Senior Securities
  35
       
 
Item 4.
(Removed and Reserved)
  35
       
 
Item 5.
Other Information
  35
       
 
Item 6.
Exhibits
  35
       
Signatures
  36
 
 
(2)

 

PART I - FINANCIAL INFORMATION

ITEM I - FINANCIAL STATEMENTS

Ameriana Bancorp
Consolidated Condensed Balance Sheets
(In thousands, except share data)

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
Assets
           
Cash on hand and in other institutions
  $ 4,309     $ 3,673  
Interest-bearing demand deposits
    26,953       8,074  
Cash and cash equivalents
    31,262       11,747  
Investment securities available for sale
    32,769       38,608  
Loans held for sale
    532       91  
Loans, net of allowance for loan losses of $4,416 and $4,212
    309,035       312,715  
Premises and equipment
    14,513       14,736  
Stock in Federal Home Loan Bank
    5,101       5,101  
Goodwill
    649       649  
Cash value of life insurance
    25,623       25,413  
Other real estate owned
    9,027       9,067  
Other assets
    12,673       11,530  
Total assets
  $ 441,184     $ 429,657  
                 
Liabilities and Shareholders’ Equity
               
Liabilities
               
Deposits
               
Noninterest-bearing
  $ 38,093     $ 34,769  
Interest-bearing
    316,872       303,209  
Total deposits
    354,965       337,978  
Borrowings
    45,810       51,810  
Drafts payable
    1,018       1,594  
Other liabilities
    6,201       5,024  
Total liabilities
    407,994       396,406  
Commitments and contingencies
               
Shareholders’ equity
               
Preferred stock - 5,000,000 shares authorized and unissued
           
Common stock, $1.00 par value
Authorized 15,000,000 shares
Issued  –  3,213,952 shares
    3,214       3,214  
Outstanding – 2,988,952 shares
               
Additional paid-in capital
    1,050       1,048  
Retained earnings
    31,940       31,849  
Accumulated other comprehensive (loss) income
    (16 )     138  
Treasury stock at cost – 225,000 shares
    (2,998 )     (2,998 )
Total shareholders’ equity
    33,190       33,251  
Total liabilities and shareholders’ equity
  $ 441,184     $ 429,657  
See notes to consolidated condensed financial statements

 
(3)

 

Ameriana Bancorp
Consolidated Condensed Statements of Income
(In thousands, except per share data)
(Unaudited)

   
Three Months Ended
March 31,
 
   
2011
   
2010
 
Interest Income
           
Interest and fees on loans
  $ 4,394     $ 4,676  
Interest on mortgage-backed securities
    288       318  
Interest on investment securities
    38       52  
Other interest and dividend income
    46       37  
Total interest income
    4,766       5,083  
Interest Expense
               
Interest on deposits
    862       1,169  
Interest on borrowings
    475       631  
Total interest expense
    1,337       1,800  
Net Interest Income
    3,429       3,283  
Provision for loan losses
    360       360  
Net Interest Income After Provision for Loan Losses
    3,069       2,923  
Other Income
               
Other fees and service charges
    461       469  
Brokerage and insurance commissions
    386       364  
Net realized and recognized gains on available-for-sale investment securities
    52       104  
Gains on sales of loans and servicing rights
    32       66  
Net loss from sales and write-downs of other real estate owned
    (11 )     (35 )
Other real estate owned rental income
    212       100  
Increase in cash value of life insurance
    210       218  
Other
    47       66  
Total other income
    1,389       1,352  
Other Expense
               
Salaries and employee benefits
    2,403       2,274  
Net occupancy expense
    447       408  
Furniture and equipment expense
    219       215  
Legal and professional fees
    163       221  
FDIC insurance premiums and assessments
    208       196  
Data processing expense
    202       176  
Printing and office supplies
    68       54  
Marketing expense
    88       101  
Other real estate owned expense
    183       208  
Other
    420       433  
Total other expense
    4,401       4,286  
Income (Loss) Before Income Taxes
    57       (11 )
Income tax benefit
    64       91  
Net Income
  $ 121     $ 80  
See notes to consolidated condensed financial statements

 
(4)

 

Ameriana Bancorp
Consolidated Condensed Statements of Income
(In thousands, except per share data)
(Unaudited)

   
Three Months Ended 
March 31,
 
   
2011
   
2010
 
             
Basic Earnings Per Share
  $ 0.04     $ 0.03  
Diluted Earnings Per Share
  $ 0.04     $ 0.03  
Dividends Declared Per Share
  $ 0.01     $ 0.01  

See notes to consolidated condensed financial statements

 
(5)

 
 
Ameriana Bancorp
Consolidated Condensed Statement of Shareholders’ Equity
For the Three Months Ended March 31, 2011
(In thousands, except per share data)
(Unaudited)

   
Common
Stock
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Treasury
Stock
   
Total
 
Balance at December 31, 2010
  $ 3,214     $ 1,048     $ 31,849     $ 138     $ (2,998 )   $ 33,251  
Net Income
                121                   121  
Change of $234 from unrealized gain to unrealized loss on available-for-sale securities, net of income tax benefit of $80
                      (154 )           (154 )
Comprehensive loss
                                            (33 )
Share-based compensation
          2                         2  
Dividends declared ($0.01 per share)
                (30 )                 (30 )
Balance at March 31, 2011
  $ 3,214     $ 1,050     $ 31,940     $ (16 )   $ (2,998 )   $ 33,190  
 
See notes to consolidated condensed financial statement.

 
(6)

 

Ameriana Bancorp
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)

   
Three Months Ended March 31,
 
   
2011
   
2010
 
Operating Activities
           
Net income
  $ 121     $ 80  
Items not requiring (providing) cash                
Provision for losses on loans
    360       360  
Depreciation and amortization
    352       285  
Increase in cash value of life insurance
    (210 )     (218 )
Gain from sale of available-for-sale securities
    (52 )     (104 )
Loss on sale or write-down of other real estate owned
    11       35  
Mortgage loans originated for sale
    (1,793 )     (3,489 )
Proceeds from sales of mortgage loans originated for sale
    1,365       3,131  
Gains on sales of mortgage loans and servicing rights
    (32 )     (66 )
Increase in accrued interest payable
    554       621  
Other adjustments
    1,023       (354 )
Net cash provided by operating activities
    1,699       281  
Investing Activities
               
Purchase of securities
    (13 )     (10 )
Proceeds/principal from the sale of securities
    2,369       553  
Principal collected on mortgage-backed securities
    1,457       1,094  
Net change in loans
    3,152       194  
Proceeds from sales of other real estate owned
    197       389  
Net purchases and construction of premises and equipment
    (31 )     (30 )
Construction cost for other real estate owned
          (32 )
Other investing activities
    2       8  
Net cash provided by investing activities
    7,133       2,166  
Financing Activities
               
Net change in demand and savings deposits
    11,691       1,490  
Net change in brokered certificates of deposit
    6,178        
Net change in other certificates of deposit
    (882 )     (3,175 )
(Decrease) increase in drafts payable
    (576 )     28  
Proceeds from long-term borrowings
          3,000  
Repayment of long-term borrowings
    (6,000 )     (3,375 )
Net change in advances by borrowers for taxes and insurance
    302       175  
Cash dividends paid
    (30 )     (30 )
Net cash provided by (used) in financing activities
    10,683       (1,887 )
Change in Cash and Cash Equivalents
    19,515       560  
Cash and Cash Equivalents at Beginning of Year
    11,747       19,588  
Cash and Cash Equivalents at End of Quarter
  $ 31,262     $ 20,148  
                 
Supplemental information:
               
                 
Interest paid on deposits
  $ 288     $ 544  
                 
Interest paid on borrowings
  $ 495     $ 635  
                 
Non-cash supplemental information:
               
                 
Transfers from loans to other real estate owned
  $ 168     $ 1,470  

See notes to consolidated condensed financial statements.

 
(7)

 

AMERIANA BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)

NOTE A — BASIS OF PRESENTATION

The consolidated condensed financial statements include the accounts of Ameriana Bancorp (the “Company”) and its wholly-owned subsidiary Ameriana Bank (the “Bank”).  The Bank has two wholly-owned subsidiaries, Ameriana Insurance Agency and Ameriana Financial Services, Inc.

The unaudited interim consolidated condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and disclosures required by generally accepted accounting principles (“GAAP”) for complete financial statements.  In the opinion of management, the financial statements reflect all adjustments (comprised only of normal recurring adjustments and accruals) necessary to present fairly the Company’s financial position and results of operations and cash flows.  The consolidated condensed balance sheet of the Company as of December 31, 2010 has been derived from the audited consolidated balance sheet of the Company as of that date.  The results of operations for the three  months ended March 31, 2011 are not necessarily indicative of the results to be expected in the full year or for any other period.  These statements should be read in conjunction with the consolidated financial statements and related notes which are included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.

NOTE B — SHAREHOLDERS’ EQUITY

On March 28, 2011, the Board of Directors declared a quarterly cash dividend of $0.01 per share.  This dividend, totaling approximately $30,000, was accrued for payment to shareholders of record on April 8, 2011, and was paid on April 29, 2011.

No stock options were exercised during the first quarter of 2011.

NOTE C — EARNINGS PER SHARE

Earnings per share were computed as follows:

   
(In thousands, except share data)
 
   
Three Months Ended March 31,
 
   
2011
   
2010
 
   
Net
Income
   
Weighted
Average
Shares
   
Per Share
Amount
   
Net
Income
   
Weighted
Average
Shares
   
Per Share
Amount
 
Basic Earnings Per Share:  Income available to common shareholders
  $ 121       2,988,952     $ 0.04     $ 80       2,988,952     $ 0.03  
Effect of dilutive stock options
    -       -               -       -          
Diluted Earnings Per Share: Income available to common shareholders
  $ 121       2,988,952     $ 0.04     $ 80       2,988,952     $ 0.03  

Options to purchase 169,482 and 169,982 shares of common stock at exercise prices of $9.25 to $15.56 per share were outstanding at March 31, 2011 and 2010, respectively, but were not included in the computation of diluted earnings per share because the options were anti-dilutive.

 
(8)

 

NOTE D — INVESTMENT SECURITIES

The following tables provide the composition of investment securities at March 31, 2011 and December 31, 2010 (dollars in thousands):

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Available for sale at March 31, 2011
                       
Ginnie Mae and GSE mortgage-backed pass-through securities
  $ 23,852     $ 176     $ 145     $ 23,883  
Ginnie Mae collateralized mortgage obligations
    5,075             75       5,000  
Municipal securities
    2,228       17       33       2,212  
Mutual fund
    1,639       35             1,674  
    $ 32,794     $ 228     $ 253     $ 32,769  

   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
Available for sale at December 31, 2010
                       
Ginnie Mae and GSE mortgage-backed pass-through securities
  $ 29,210     $ 336     $ 110     $ 29,436  
Ginnie Mae collateralized mortgage obligations
    5,335       8       2       5,341  
Municipal securities
    2,228       12       76       2,164  
Mutual fund
    1,626       41             1,667  
    $ 38,399     $ 397     $ 188     $ 38,608  

The amortized cost and fair value of securities available for sale at March 31, 2011, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call
or prepay obligations with or without call or prepayment penalties.

   
Available for Sale
 
   
Amortized
Cost
   
Fair
Value
 
Within one year
  $     $  
One to five years
    1,465       1,482  
Five to ten years
           
After ten years
    763       730  
      2,228       2,212  
Ginnie Mae and GSE mortgage-backed pass-through securities
    23,852       23,883  
Ginnie Mae collateralized mortgage obligations
    5,075       5,000  
Mutual fund
    1,639       1,674  
    $ 32,794     $ 32,769  

Mortgage-backed pass-through securities: The contractual cash flows of those investments are guaranteed by either Ginnie Mae, a U.S. Government agency, or by U.S. Government-sponsored entities, Fannie Mae and Freddie Mac, institutions which the U.S. Government has affirmed its commitment to support.  Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment.

Collateralized mortgage obligations:  The contractual cash flows of these investments are guaranteed by Ginnie Mae, a U.S. Government Agency.  Accordingly, it is expected that the securities would not be settled at a price less than the amortized cost of the Company’s investment.

 
(9)

 

Municipal securities:  There were five municipal securities in the Company’s investment portfolio at March 31, 2011, and two received an investment grade from both Moody’s and Standard & Poor’s.  Two securities received an investment grade from one of the two rating agencies, but were not rated by the other.  One security was not rated by either Moody’s or Standard & Poor’s.   The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost of the investment.

Mutual fund:  The mutual fund balance at March 31, 2011 consisted of an investment in the CRA Qualified Investment mutual fund, whose portfolio composition is primarily in debt securities with an average credit quality rating of AAA.

Certain investment securities are reported in the financial statements at an amount less than their historical cost.  Total fair value of these investments at March 31, 2011 and December 31, 2010 were $13,998,000 and $9,159,000, respectively, which was approximately 42.7% and 23.7%, respectively, of the Company’s investment portfolio at these dates.
 
Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2011 and December 31, 2010 (dollars in thousands):

At March 31, 2011
 
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
 
Ginnie Mae and GSE mortgage-backed pass-through securities
  $ 8,267     $ 145     $     $     $ 8,267     $ 145  
Ginnie Mae collateralized mortgage obligations
    5,000       75                   5,000       75  
Municipal securities
    731       33                   731       33  
    $ 13,998     $ 253     $     $     $ 13,998     $ 253  

At December 31, 2010
 
Less Than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
 
Ginnie Mae and GSE mortgage-backed pass-through securities
  $ 5,055     $ 109     $ 51     $ 1     $ 5,106     $ 110  
Ginnie Mae collateralized mortgage obligations
    2,225       2                   2,225       2  
Municipal securities
    1,828       76                   1,828       76  
    $ 9,108     $ 187     $ 51     $ 1     $ 9,159     $ 188  

Together with mortgage loans, investment securities with a total market value of $5,000,000 and $5,341,000 were pledged at March 31, 2011 and December 31, 2010, respectively, to secure FHLB advances and three letters of credit.

Investment securities with a total market value of $9,329,000 and $9,047,000 were pledged at March 31, 2011 and December 31, 2010, respectively, to secure a repurchase agreement.

A gross gain of $52,000 resulting from sales of available-for-sale securities was realized during the three-month period ended March 31, 2011, with a tax expense of $17,000, compared to an $104,000 gross gain for the three-month period ended March 31, 2010, with a tax expense of $35,000

 
(10)

 

NOTE E — LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

   
At March 31,
   
At December 31,
 
   
2011
   
2010
 
Real estate loans:
           
Commercial
  $ 96,816     $ 94,595  
Residential
    161,943       167,162  
Construction
    26,706       26,817  
Commercial loans and leases
    24,536       22,360  
Municipal loans
    3,075       2,718  
Consumer loans
    3,613       3,943  
Total loans
    316,689       317,595  
                 
Less:
               
Undisbursed loan proceeds
    2,985       443  
Deferred loan fees (expenses), net
    253       225  
Allowance for loan losses
    4,416       4,212  
      7,654       4,880  
                 
Total loans - net
  $ 309,035     $ 312,715  

Methodology:  Bank policy is designed to ensure that an adequate allowance for loan and lease losses (“ALLL”) will be maintained.   Primary responsibility for ensuring that the Bank has in place processes to consistently assess the adequacy of the ALLL rests with the Board. The Board has charged the Chief Credit Officer (“CCO”) with responsibility for establishing the methodology to be used and to assess the adequacy of the ALLL quarterly. The methodology will be reviewed and affirmed by the Loan Review Committee. Quarterly the Board will review recommendations from the CCO to adjust the allowance as appropriate.

The methodology employed by the CCO will at a minimum contain the following:

 
1)
Loans will be segmented by type of loan.
 
2)
Loans will be further segmented by risk grades.
 
3)
The required ALLL for types of performing homogeneous loans which do not have a specific reserve will be determined by applying a factor based on historical losses averaged over the past 12 quarters.  In those instances, where  the Banks historical experience is not available, the CCO will develop factors based on industry experience and best practices.
 
4)
All criticized and classified loans will be tested for impairment by applying one of three methodologies:
a. Present value of future cash flows;
b. Fair value of collateral less cost to sell; or
c. The loans observable market price
 
5)
Loans tested for impairment will be removed from other pools to prevent layering (double-counting).
 
6)
The required ALLL for each group of loans will be added together to determine the total required ALLL for the Bank.  The required ALLL will be compared to the current ALLL to determine the required provision to increase the ALLL or credit to decrease the ALLL.

 
(11)

 

The following table presents the balance in allowance for loan losses and the recorded investment in loans and impairment methods as of March 31, 2011:

Allowance for Loan Losses and Recorded Investment In Loans
For Three Months Ended March 31, 2011

    
Commercial
Real Estate
Loans
   
Residential
Real Estate
Loans
   
Construction
Real Estate
Loans
   
Commercial
Loans and
Leases
   
Municipal
Loans
   
Consumer
Loans
   
Total
 
Balance at beginning of quarter
  $ 639     $ 1,584     $ 1,254     $ 657     $     $ 78     $ 4,212  
Provision for losses
    194       295       (211 )     66             16       360  
Charge-offs  (1)
          (153 )     (2 )                 (20 )     (175 )
Recoveries
          15                         4       19  
Balance at end of quarter
  $ 833     $ 1,741     $ 1,041     $ 723           $ 78     $ 4,416  
                                                         
Ending allowance balance:
                                                       
Individually evaluated for impairment
  $ 556     $ 845     $ 595     $ 97     $     $ 8     $ 2,101  
Collectively evaluated for impairment
    277       896       446       626             70       2,315  
Total
  $ 833     $ 1,741     $ 1,041     $ 723           $ 78     $ 4,416  
                                                         
Ending loan balance:
                                                       
Individually evaluated for impairment
  $ 6,081     $ 5,817     $ 4,474     $ 1,014     $     $ 60     $ 17,446  
Collectively evaluated for impairment
    90,735       156,126       22,232       23,522       3,075       3,553       299,243  
Total
  $ 96,816     $ 161,943     $ 26,706     $ 24,536     $ 3,075     $ 3,613     $ 316,689  
 
 
(12)

 

The following table presents the balance in allowance for loan losses and the recorded investment in loans and impairment methods as of December 31, 2010:

Allowance for Loan Losses and Recorded Investment In Loans
For Year Ended December 31, 2010

    
Commercial
Real Estate
Loans
   
Residential
Real Estate
Loans
   
Construction
Real Estate
Loans
   
Commercial
Loans and
Leases
   
Municipal
Loans
   
Consumer
Loans
   
Total
 
Balance at beginning of year
  $ 661     $ 1,262     $ 1,269     $ 686     $     $ 127     $ 4,005  
Provision for losses
    200       1,059       304       365             5       1,933  
Charge-offs  (1)
    (238 )     (737 )     (525 )     (398 )           (72 )     (1,970 )
Recoveries
    16             206       4             18       244  
Balance at end of year
  $ 639     $ 1,584     $ 1,254     $ 657           $ 78     $ 4,212  
                                                         
Ending allowance balance:
                                                       
Individually evaluated for impairment
  $ 406     $ 876     $ 797     $ 97     $     $ 8     $ 2,184  
Collectively evaluated for impairment
    233       708       457       560             70       2,028  
Total
  $ 639     $ 1,584     $ 1,254     $ 657     $     $ 78     $ 4,212  
                                                         
Ending loan balance:
                                                       
Individually evaluated for impairment
  $ 6,288     $ 7,604     $ 5,694     $ 1,055     $     $ 42     $ 20,683  
Collectively evaluated for impairment
    88,307       159,558       21,123       21,305       2,718       3,901       296,912  
Total
  $ 94,595     $ 167,162     $ 26,817     $ 22,360     $ 2,718     $ 3,943     $ 317,595  

(1)
Loan Charge-Offs: A loan should be charged off at any point in time when it no longer can be considered a bankable asset, meaning collectable within the parameters of policy. The Bank shall not renew any loan, or put a loan on a demand basis, only to defer a problem, nor is it appropriate to attempt long-term recoveries while reporting loans as assets.  An unsecured loan generally should be charged off no later than when it is 120 days past due as to principal or interest. For loans in the legal process of foreclosure against collateral of real and/or liquid value, the 120-day rule does not apply. Such charge-offs can be deferred until the foreclosure process progresses to the point where the Bank can adequately determine whether or not any ultimate loss will result. In similar instances where other legal actions will cause extraordinary delays, such as the settlement of an estate, yet collateral of value is realizable, the 120-day period could be extended. When a loan is unsecured or not fully collateralized, the loan should be charged off or written down to the documented collateral value rather than merely being placed on non-accrual status.

All charge-offs and forgiveness of debt greater than $50,000 must be approved by the Loan Committee upon recommendation by  the CCO. Charge-offs between $10,000 and $50,000 must be approved by the CCO. Decisions to defer the charge off of a loan must be approved by the CCO.

The following table presents an analysis of the allowance for loan losses for the periods indicated:

   
Three Months Ended March 31,
 
   
2011
   
2010
 
Balance at beginning of quarter
  $ 4,212     $ 4,005  
Provision for losses
    360       360  
Charge-offs
    (175 )     (540 )
Recoveries
    19       138  
Net charge-offs
    (156 )     (402 )
Balance at end of Quarter
  $ 4,416     $ 3,963  
 
 
(13)

 

Narrative Description of Borrower Rating:

Grade 1 — Highest Quality (Pass)
This loan represents a credit extension of the highest quality. The borrowers historic (at least five years) cash flows manifest extremely large and stable margins of coverage. Balance sheets are conservative, well capitalized, and liquid. After considering debt service for proposed and existing debt, projected cash flows continue to be strong and provide ample coverage. The borrower typically reflects broad geographic and product diversification and has broad access to alternative financial markets. Also included in this category may be loans secured by U.S. government securities, U.S. government agencies, highly rated municipal bonds, insured savings accounts, and insured certificates of deposit drawn on high quality banks.

Grade 2 — Excellent Quality (Pass)
This loan has a sound primary and secondary source of repayment. The borrower has proven access to alternative sources of financing. This loan carries a low level of risk, with minimal loss exposure. The borrower has the ability to perform according to the terms of the credit facility.  The margins of cash flow coverage are strong. Loans secured by high quality traded stocks and lower grade municipal bonds (must still be investment grade).

Grade 3 — Good Quality (Pass)
This loan has a sound primary source of repayment. The borrower may have access to alternative sources of financing, but sources are not as widely available as they are to a higher graded borrower. This loan carries a normal level of risk, with minimal loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow coverage are satisfactory but vulnerable to more rapid deterioration than the higher quality loans.  Real estate loans in this category display advance rates below the suggested maximum, debt coverage well in excess of the suggested level, or are leased beyond the loan term by a credit tenant.

Grade 4 — Acceptable Quality (Pass)
The borrower is a reasonable credit risk and demonstrates the ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. Historic financial information may indicate erratic performance, but current trends are positive. Quality of financial information is adequate, but is not as detailed and sophisticated as information found on higher graded loans. If adverse circumstances arise, the impact on the borrower may be significant. All small business loans extended based upon credit scoring should be classified in this category unless deterioration occurs, in which case they should bear one of the below mentioned grades.

Grade 5 - Marginal Quality (Pass)
The borrower is an acceptable credit risk and while it can demonstrate it has the ability to repay the debt from normal business operations, the coverage is not as strong as an Acceptable Quality loan. Weakness in one or more areas are defined. Risk factors would typically include a higher leverage position than desirable, low liquidity, weak or sporadic cash flow, the lack of reasonably current and complete financial information, and/or overall financial trends are erratic.

Grade 6 – Elevated Risk, Management Attention (Watch)
The borrower while at origination is not considered a high risk potential, there are characteristics related to the financial condition, and/or a level of concern regarding either or both the primary and secondary source of repayment, that may preclude this from being a pass credit. These credit facilities are considered pass credits but exhibit the potential of developing a more serious weakness in their operation going forward. Usually, a credit in this category will be upgraded or downgraded on further analysis within a short period of time.

Grade 7 — Special Mention
These credit facilities have developing weaknesses that deserve extra attention from the loan officer and other management personnel. If the developing weakness is not corrected or mitigated, there may be deterioration in the ability of the borrower to repay the Banks debt in the future. This grade should not be assigned to loans which bear certain peculiar risks normally associated with the type of financing involved, unless circumstances have caused the risk to increase to a level higher than would have been acceptable when the credit was originally approved. Loans where actual, not potential, weaknesses or problems are clearly evident and significant should generally be graded in one of the grade categories below.

 
(14)

 

Grade 8 — Substandard
Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral.  These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions which have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that some future loss will be sustained by the Bank if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual assets classified as substandard.

Grade 9 — Doubtful
Loans and other credit extensions graded 9 have all the weaknesses inherent in those graded 8, with the added characteristic that the severity of the weaknesses make collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. The probability of some loss is extremely high, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral. Loans in this classification should be placed in nonaccrual status, with collections applied to principal on the Banks books.

Grade 10 — Loss
Loans in this classification are considered uncollectible and cannot be justified as a viable asset of the Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future.

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of March 31, 2011 and December 31, 2010:

Loan Portfolio Quality Indicators
At March 31, 2011

    
Commercial
Real Estate
Loans
   
Residential
Real Estate
Loans
   
Construction
Real Estate
Loans
   
Commercial
Loans and
Leases
   
Municipal
Loans
   
Consumer
Loans
   
Total
 
Rating:
                                         
Pass (Grades 1-5)
  $ 78,402     $ 155,009     $ 18,332     $ 22,161     $ 3,075     $ 3,613     $ 280,592  
Watch (Grade 6)
    6,752       970       3,880       1,300                   12,902  
Special Mention (Grade 7)
    5,378       499       55       36                   5,968  
Substandard (Grade 8)
    4,740       1,235       240       487                   6,702  
Doubtful (Grade 9)
    1,544       4,230       4,199       552                   10,525  
Loss (Grade 10)
                                         
Total
  $ 96,816     $ 161,943     $ 26,706     $ 24,536     $ 3,075     $ 3,613     $ 316,689  
 
Loan Portfolio Quality Indicators
At December 31, 2010

    
Commercial
Real Estate
Loans
   
Residential
Real Estate
Loans
   
Construction
Real Estate
Loans
   
Commercial
Loans and
Leases
   
Municipal
Loans
   
Consumer
Loans
   
Total
 
Rating:
                                         
Pass (Grades 1-5)
  $ 76,303     $ 157,801     $ 18,383     $ 21,277     $ 2,718     $ 3,929     $ 280,411  
Watch (Grade 6)
    6,501       1,257       2,685       513                   10,956  
Special Mention (Grade 7)
    5,420       216       55       43                   5,734  
Substandard (Grade 8)
    6,168       1,630       1,510                         9,308  
Doubtful (Grade 9)
    203       6,258       4,184       527             14       11,186  
Loss (Grade 10)
                                         
Total
  $ 94,595     $ 167,162     $ 26,817     $ 22,360     $ 2,718     $ 3,943     $ 317,595  
 
 
(15)

 

The following tables present the Company’s loan portfolio aging analysis as of March 31, 2011 and December 31, 2010:

Loan Portfolio Aging Analysis
At March 31, 2011

    
30-59 Days
Past Due (A)
   
60-89 Days
Past Due
   
Greater than
90 Days
   
Total Past
Due
   
Current
   
Total Loans
Receivable
   
Total Loans
> 90 days & 
Accruing
 
Real estate loans:
                                         
Commercial
  $     $     $ 1,341     $ 1,341     $ 95,475     $ 96,816     $  
Residential
    685       422       4,784       5,891       156,052       161,943       465  
Construction
    1,647             2,552       4,199       22,507       26,706        
Commercial loans and leases
    124       25       527       676       23,860       24,536        
Municipal loans
                            3,075       3,075        
Consumer loans
    52                   52       3,561       3,613        
Total
  $ 2,508     $ 447     $ 9,204     $ 12,159     $ 304,530     $ 316,689     $ 465  

(A)  Includes $1,647,000 in loans classified as nonaccrual that are less than 30 days past due, which are construction loans.

Loan Portfolio Aging Analysis
At December 31, 2010

    
30-59 Days
Past Due (A)
   
60-89 Days
Past Due
   
Greater than
90 Days
   
Total Past
Due
   
Current
   
Total Loans
Receivable
   
Total Loans
> 90 days &
Accruing
 
Real estate loans:
                                         
Commercial
  $     $     $     $     $ 94,595     $ 94,595     $  
Residential
    2,069       538       5,221       7,828       159,334       167,162       60  
Construction
    4,909                   4,909       21,908       26,817        
Commercial loans and leases
          203       527       730       21,630       22,360        
Municipal loans
                            2,718       2,718        
Consumer loans
    191       11       14       216       3,727       3,943        
Total
  $ 7,169     $ 752     $ 5,762     $ 13,683     $ 303,912     $ 317,595     $ 60  

(A)  Includes $2,978,000 in loans classified as nonaccrual that are less than 30 days past due, of which $1,097,000 are residential real estate loans and $1,881,000 are construction loans.

 
(16)

 

Impaired Loans:  A loan is designated as impaired when, based on current information or events, it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement.  Payments with insignificant delays not exceeding 90 days outstanding are not considered impaired.  Certain non-accrual and substantially delinquent loans may be considered to be impaired.  Generally, loans are placed on non-accrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well-secured and in the process of collection.  The accrual of interest on impaired and non-accrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due.

When interest accrual is discontinued, all unpaid accrued interest is reversed when considered uncollectible.  When a loan is in a non-accrual status, all cash payments of interest are applied to loan principal.  Should the loan be reinstated to accrual status, all cash payments of interest received while in non-accrual status will be taken into income over the remaining life of the loan using the level yield accounting method.

The following table presents impaired loans for the quarter ended March 31, 2011:

Impaired Loans
At March 31, 2011
 
   
Recorded
Balance
   
Unpaid Principal
Balance
   
Specific
Allowance
   
Average Investment
in Impaired Loans
(1)
   
Interest Income
Recognized
(2)
 
Loans without a specific valuation allowance:
                             
Real estate loans:
                             
Commercial
  $     $     $ N/A     $     $  
Residential
                N/A              
Construction
                N/A              
Commercial loans and leases
                N/A              
Municipal loans
                N/A              
Consumer loans
                N/A              
Total
                N/A              
                                         
Loans with a specific valuation allowance:
                                       
Real estate loans:
                                       
Commercial
  $ 6,081     $ 6,081     $ 556     $ 6,184     $ 2  
Residential
    5,817       5,820       845       6,596       42  
Construction
    4,474       4,534       595       5,109       14  
Commercial loans and leases
    1,014       1,014       97       1,035        
Municipal loans
                             
Consumer loans
    60       60       8       51        
Total
  $ 17,446     $ 17,509     $ 2,101     $ 18,975     $ 58  
                                         
All Impaired Loans
  $ 17,446     $ 17,509     $ 2,101     $ 18,975     $ 58  

(1) 
Includes all loans that were classified as impaired at any time during the quarter, not just impaired loans at March 31, 2011, and their average balance for only the time in the quarter during which they were classified as impaired.

(2) 
Interest recorded in income only during the time in the quarter the loans were classified as impaired, for all loans that were classified as impaired at any time during the quarter ended March 31, 2011.

 
(17)

 

Cash basis interest on impaired loans included above was $91,000 for the quarter ended March 31, 2011.
The following table presents impaired loans for the year ended December 31, 2010:

Impaired Loans
At December 31, 2010

   
Recorded
Balance
   
Unpaid Principal
Balance
   
Specific
Allowance
   
Average Investment
in Impaired Loans
(1)
   
Interest Income
Recognized
(2)
 
Loans without a specific valuation allowance:
                             
Real estate loans:
                             
Commercial
          $ N/A         $  
Residential
    60       60       N/A       78        
Construction
                N/A              
Commercial loans and leases
                N/A              
Municipal loans
                N/A              
Consumer loans
                N/A              
Total
  $ 60     $ 60       N/A     $ 78        
                                         
Loans with a specific valuation allowance:
                                       
Real estate loans:
                                       
Commercial
  $ 6,288     $ 6,288     $ 406     $ 4,835     $ 333  
Residential
    7,544