INVESTMENT
SECURITIES
The goal of the investment policy of the Bank is to provide for management of
the investment securities portfolio in a manner designed to maximize portfolio
yield over the long term consistent with liquidity needs, pledging
requirements, asset/liability strategies, and safety/soundness concerns. Specific
investment objectives include the desire to: provide adequate liquidity for
loan demand, deposit fluctuations, and other changes in balance sheet mix; manage
interest rate risk; maximize the institution's overall return; provide
availability of collateral for pledging; and manage asset-quality
diversification of the bank's assets. At December 31, 2011 and 2010, investment
securities represented 36.3% and 32.5% of total assets, respectively.
Loans declined in 2009 due to weakened loan demand as a result of the
recessionary economy during the first three quarters of the year and continued
pressure on local real estate markets. The declining trend in loan volume
continued throughout 2010 and 2011. At December 31, 2011, 2010, and 2009,
the Loans/Total Assets ratios were 53.0%, 58.6%, and 63.0%, respectively. Investment
securities have correspondingly risen as a percentage of total assets.
Investment securities with a par value of $175,457,000, $204,917,000, and $207,233,000
at December 31, 2011, 2010, 2009, respectively, were pledged to secure public
deposits and for other purposes as required by law.
The following summaries reflect the book value, unrealized gains and losses,
approximate market value, weighted-average tax-equivalent yields, and
maturities on investment securities at December 31, 2011, 2010, 2009.
|
December
31, 2011
(Dollars in Thousands)
|
|
Book
|
|
Unrealized Holding
|
|
Fair
|
|
|
|
|
Value
|
|
Gains
|
|
Losses
|
|
Value
|
|
Yield(1)
|
|
AVAILABLE
FOR SALE
|
|
|
|
|
|
|
|
|
|
|
Government
sponsored enterprises
|
|
|
|
|
|
|
|
|
|
|
Within
one year
|
$ 52,367
|
|
$ 153
|
|
$ -
|
|
$ 52,520
|
|
.62%
|
|
One
to five years
|
185,112
|
|
842
|
|
93
|
|
185,861
|
|
.97%
|
|
Six
to ten years
|
29,877
|
|
160
|
|
30
|
|
30,007
|
|
1.40%
|
|
|
267,356
|
|
1,155
|
|
123
|
|
268,388
|
|
.95%
|
|
Mortgage
backed securities
|
|
|
|
|
|
|
|
|
|
|
One
to five years
|
84
|
|
8
|
|
-
|
|
92
|
|
5.86%
|
|
Six
to ten years
|
3,149
|
|
128
|
|
-
|
|
3,277
|
|
3.51%
|
|
Over
ten years
|
18,787
|
|
232
|
|
30
|
|
18,989
|
|
2.46%
|
|
|
22,020
|
|
368
|
|
30
|
|
22,358
|
|
2.63%
|
|
State,
county and municipal
|
|
|
|
|
|
|
|
|
|
|
Within
one year
|
265
|
|
-
|
|
-
|
|
265
|
|
5.47%
|
|
One
to five years
|
1,784
|
|
64
|
|
-
|
|
1,848
|
|
4.13%
|
|
Six
to ten years
|
19,472
|
|
1,410
|
|
3
|
|
20,879
|
|
5.01%
|
|
Over
ten years
|
5,538
|
|
283
|
|
-
|
|
5,821
|
|
4.78%
|
|
|
27,059
|
|
1,757
|
|
3
|
|
28,813
|
|
4.91%
|
|
Other
investments
|
|
|
|
|
|
|
|
|
|
|
CRA
Qualified Investment Fund
|
1,079
|
|
43
|
|
-
|
|
1,122
|
|
-%
|
|
Other
|
36
|
|
-
|
|
-
|
|
36
|
|
-%
|
|
|
1,115
|
|
43
|
|
-
|
|
1,158
|
|
-%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available for sale
|
$ 317,550
|
|
$ 3,323
|
|
$ 156
|
|
$ 320,717
|
|
1.40%
|
|
|
|
|
|
|
|
|
|
|
|
|
HELD TO
MATURITY
|
|
|
|
|
|
|
|
|
|
|
State,
county and municipal
|
|
|
|
|
|
|
|
|
|
|
Within
one year
|
$ 804
|
|
$ 11
|
|
$ -
|
|
$ 815
|
|
4.41%
|
|
One
to five years
|
812
|
|
38
|
|
-
|
|
850
|
|
5.62%
|
|
Six
to ten years
|
6,519
|
|
473
|
|
-
|
|
6,992
|
|
5.36%
|
|
Over
ten years
|
2,874
|
|
213
|
|
-
|
|
3,087
|
|
4.86%
|
|
|
11,009
|
|
735
|
|
-
|
|
11,744
|
|
5.18%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held to maturity
|
$ 11,009
|
|
$ 735
|
|
$ -
|
|
$ 11,744
|
|
5.18%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Tax
equivalent adjustment on tax exempt obligations based on a 34% tax rate.
As of the year ended December 31, 2011, the Bank did not hold any securities of
an issuer that
exceeded 10% of stockholders' equity.
13
INVESTMENT SECURITIES, continued
|
December
31, 2010
(Dollars in Thousands)
|
|
Book
|
|
Unrealized Holding
|
Fair
|
|
|
|
Value
|
|
Gains
|
|
Losses
|
|
Value
|
|
Yield(1)
|
AVAILABLE
FOR SALE
|
|
|
|
|
|
|
|
|
|
Government
sponsored enterprises
|
|
|
|
|
|
|
|
|
|
One
to five years
|
$ 186,938
|
|
$ 349
|
|
$ 652
|
|
$ 186,635
|
|
1.13%
|
Six
to ten years
|
58,047
|
|
137
|
|
322
|
|
57,862
|
|
1.87%
|
|
244,985
|
|
486
|
|
974
|
|
244,497
|
|
1.30%
|
Mortgage
backed securities
|
|
|
|
|
|
|
|
|
|
Six
to ten years
|
2,112
|
|
90
|
|
-
|
|
2,202
|
|
4.01%
|
Over
ten years
|
8,090
|
|
102
|
|
86
|
|
8,106
|
|
3.31%
|
|
10,202
|
|
192
|
|
86
|
|
10,308
|
|
3.46%
|
State,
county and municipal
|
|
|
|
|
|
|
|
|
|
Within
one year
|
950
|
|
4
|
|
-
|
|
954
|
|
6.26%
|
One
to five years
|
1,395
|
|
40
|
|
-
|
|
1,435
|
|
6.28%
|
Six
to ten years
|
12,531
|
|
332
|
|
82
|
|
12,781
|
|
5.41%
|
Over
ten years
|
4,442
|
|
5
|
|
142
|
|
4,305
|
|
4.93%
|
|
19,318
|
|
381
|
|
224
|
|
19,475
|
|
5.41%
|
Other
investments
|
|
|
|
|
|
|
|
|
|
CRA
Qualified Investment Fund
|
1,065
|
|
-
|
|
-
|
|
1,065
|
|
-%
|
Other
|
36
|
|
-
|
|
-
|
|
36
|
|
-%
|
|
1,101
|
|
-
|
|
-
|
|
1,101
|
|
-%
|
|
|
|
|
|
|
|
|
|
|
Total
available for sale
|
$ 275,606
|
|
$ 1,059
|
|
$ 1,284
|
|
$ 275,381
|
|
1.67%
|
|
|
|
|
|
|
|
|
|
|
HELD TO
MATURITY
|
|
|
|
|
|
|
|
|
|
Government
sponsored enterprises
|
|
|
|
|
|
|
|
|
|
One
to five years
|
10,000
|
|
25
|
|
4
|
|
10,021
|
|
1.33%
|
|
10,000
|
|
25
|
|
4
|
|
10,021
|
|
1.33%
|
State,
county and municipal
|
|
|
|
|
|
|
|
|
|
One
to five years
|
$ 1,103
|
|
$ 46
|
|
$ -
|
|
$ 1,149
|
|
4.74%
|
Six
to ten years
|
5,847
|
|
149
|
|
14
|
|
5,982
|
|
5.60%
|
Over
ten years
|
3,728
|
|
-
|
|
96
|
|
3,632
|
|
4.85%
|
|
10,678
|
|
195
|
|
110
|
|
10,763
|
|
5.25%
|
|
|
|
|
|
|
|
|
|
|
Total
held to maturity
|
$ 20,678
|
|
$ 220
|
|
$ 114
|
|
$ 20,784
|
|
3.34%
|
|
|
|
|
|
|
|
|
|
|
(1) Tax equivalent adjustment on tax exempt obligations based on a 34% tax
rate.
As of the year ended December 31, 2010, the Bank did not hold any securities of
an issuer that
exceeded 10% of stockholders' equity.
14
INVESTMENT
SECURITIES, continued
|
December
31, 2009
(Dollars in Thousands)
|
|
Book
|
|
Unrealized Holding
|
Fair
|
|
|
|
|
Value
|
|
Gains
|
|
Losses
|
|
Value
|
|
Yield(1)
|
|
AVAILABLE
FOR SALE
|
|
|
|
|
|
|
|
|
|
|
Government
sponsored enterprises
|
|
|
|
|
|
|
|
|
|
|
One
to five years
|
$135,494
|
|
$ 945
|
|
$ 11
|
|
$136,428
|
|
2.18%
|
|
Six
to ten years
|
42,907
|
|
116
|
|
144
|
|
42,879
|
|
2.61%
|
|
|
178,401
|
|
1,061
|
|
155
|
|
179,307
|
|
2.28%
|
|
Mortgage
backed securities
|
|
|
|
|
|
|
|
|
|
|
Six
to ten years
|
2,240
|
|
63
|
|
1
|
|
2,302
|
|
3.87%
|
|
Over
ten years
|
6,975
|
|
165
|
|
-
|
|
7,140
|
|
3.94%
|
|
|
9,215
|
|
228
|
|
1
|
|
9,442
|
|
3.92%
|
|
State,
county and municipal
|
|
|
|
|
|
|
|
|
|
|
Within
one year
|
1,381
|
|
13
|
|
-
|
|
1,394
|
|
7.04%
|
|
One
to five years
|
2,543
|
|
93
|
|
-
|
|
2,636
|
|
6.64%
|
|
Six
to ten years
|
16,563
|
|
442
|
|
68
|
|
16,937
|
|
5.61%
|
|
Over
ten years
|
4,010
|
|
62
|
|
-
|
|
4,072
|
|
5.39%
|
|
|
24,497
|
|
610
|
|
68
|
|
25,039
|
|
5.77%
|
|
Other
investments
|
|
|
|
|
|
|
|
|
|
|
CRA
Qualified Investment Fund
|
780
|
|
-
|
|
-
|
|
780
|
|
-%
|
|
MasterCard
International Stock
|
11
|
|
-
|
|
-
|
|
11
|
|
-%
|
|
Other
|
36
|
|
-
|
|
-
|
|
36
|
|
-%
|
|
|
827
|
|
-
|
|
-
|
|
827
|
|
-%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
available for sale
|
$212,940
|
|
$ 1,899
|
|
$ 224
|
|
$214,615
|
|
2.76%
|
|
|
|
|
|
|
|
|
|
|
|
|
HELD TO
MATURITY
|
|
|
|
|
|
|
|
|
|
|
Government
sponsored enterprises
|
|
|
|
|
|
|
|
|
|
|
One
to five years
|
6,003
|
|
-
|
|
17
|
|
5,986
|
|
1.29%
|
|
|
6,003
|
|
-
|
|
17
|
|
5,986
|
|
1.29%
|
|
State,
county and municipal
|
|
|
|
|
|
|
|
|
|
|
Within
one year
|
$ 645
|
|
$ 5
|
|
$ -
|
|
$ 650
|
|
6.98%
|
|
One
to five years
|
826
|
|
26
|
|
-
|
|
852
|
|
4.41%
|
|
Six
to ten years
|
6,232
|
|
161
|
|
28
|
|
6,365
|
|
5.80%
|
|
Over
ten years
|
1,243
|
|
69
|
|
-
|
|
1,312
|
|
6.44%
|
|
|
8,946
|
|
261
|
|
28
|
|
9,179
|
|
5.85%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
held to maturity
|
$ 14,949
|
|
$ 261
|
|
$ 45
|
|
$ 15,165
|
|
4.01%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Tax
equivalent adjustment on tax exempt obligations based on a 34% tax rate.
As of the year ended December 31, 2009, the Bank did not hold any securities of
an issuer that
exceeded 10% of stockholders' equity.
15
LOAN PORTFOLIO
LENDING ACTIVITIES
The Company engages, through the Bank, in a full complement of lending
activities, including commercial, consumer, installment and real estate loans.
Real Estate Loans
Loans secured by first or second mortgages on residential and commercial real
estate are one of the primary components of the Bank's loan portfolio. These
loans will generally consist of commercial real estate loans, construction and
development loans and residential real estate loans (including home equity and
second mortgage loans). Interest rates are generally fixed but
adjustable rates are also utilized for some commercial purpose loans. The
Bank seeks to manage credit risk in the commercial real estate portfolio by
emphasizing loans on owner-occupied office and retail buildings. In
addition, the Bank typically requires personal guarantees of the principal
owners of the borrower. The Bank may also originate mortgage loans
funded and owned by investors in the secondary market, earning a fee, but
avoiding the interest rate risk of holding long-term, fixed-rate loans. The
principal economic risk associated with all loans, including real estate loans,
is the creditworthiness of the Bank's borrowers. The ability of a
borrower to repay a real estate loan will depend upon a number of economic
factors, including employment levels and fluctuations in the value of real
estate. In the case of a real estate construction loan, there is
generally no income from the underlying property during the construction
period, borrowings may exceed the current value of the improvements to the
property, and the developer's personal obligations under the loan may be
limited. Each of these factors increases the risk of nonpayment by
the borrower. In the case of a real estate purchase loan and other
first mortgage real estate loans structured with a balloon payment, the
borrower may be unable to repay the loan at the end of the loan term and may
thus be forced to refinance the loan at a higher interest rate, or, in certain
cases, the borrower may default as a result of an inability to refinance the
loan. In either case, the risk of nonpayment by the borrower is
increased. The Bank will also face additional credit risks to the
extent that it engages in making adjustable rate mortgage loans ("ARMs"). In
the case of an ARM, as interest rates increase, the borrower's required
payments increase periodically, thus increasing the potential for default (See "Adjustable
Rate Mortgage Loans" below). The marketability of all real estate loans,
including ARMs, is also generally affected by the prevailing level of interest
rates. Bank management monitors loans with loan-to-value ratios in
excess of regulatory guidelines and secured by real estate in accordance with
guidance as set forth by regulatory authorities. Aggregate levels of
both commercial and residential real estate loans with loan-to-value ratios
above regulatory guidelines at the time the loans were made are reported to the
Banks Board of Directors on a quarterly basis in total dollars and as a
percent of capital. Additionally, loans in excess of $500,000 with a
loan-to-value ratio exception are simultaneously reported on an individual
basis. The total of loans with loan-to-value ratio exceptions are
maintained within regulatory limitations. The total amount of loans
with loan-to-value ratios in excess of regulatory guidelines at the time the
loans were made totaled $36,244,000 and $46,075,000 or 7.5% and 8.6% of total
loans at fiscal year-ends December 31, 2011 and 2010, respectively.
Commercial Loans
The Bank makes loans for commercial purposes in various lines of business. The
commercial loans will include both secured and unsecured loans for working
capital (including inventory and receivables), loans for business expansion
(including acquisition of real estate and improvements), and loans for
purchases of equipment. When taken, security usually consists of
liens on inventories, receivables, equipment, and furniture and fixtures. Unsecured
business loans are generally short-term with emphasis on repayment strengths
and low debt-to-worth ratios. Commercial lending involves
significant risk because repayment usually depends on the cash flows generated
by a borrowers business, and debt service capacity can deteriorate because of
downturns in national and local economic conditions. Management
generally seeks to control risks by conducting more in-depth and ongoing
financial analysis of a borrowers cash flows and other financial information.
Consumer Loans
The Bank makes a variety of loans to individuals for personal and household
purposes, including secured and unsecured installment and term loans, home
equity loans, lines of credit, and unsecured revolving lines of credit such as
credit cards. The secured installment and term loans to consumers
will generally consist of loans to purchase automobiles, boats, recreational
vehicles, mobile homes, and household furnishings, with the collateral for each
loan being the purchased property. The underwriting criteria for
home equity loans will generally be the same as applied by the Bank when making
a first mortgage loan, as described above, but more restrictive for home equity
lines of credit. Consumer loans generally involve more credit risks than other
loans because of the type and nature of the underlying collateral or because of
the absence of any collateral. Consumer loan repayments are
dependent on the borrower's continuing financial stability and are likely to be
adversely affected by job loss, divorce and illness. Furthermore,
the application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans in the case of default. In most cases, any repossessed
collateral will not provide an adequate source of repayment of the outstanding
loan balance. Although the underwriting process for consumer loans
includes a comparison of the value of the security, if any, to the proposed
loan amount, the Bank cannot predict the extent to which the borrower's ability
to pay and the value of the security will be affected by prevailing economic
and other conditions.
16
LOAN PORTFOLIO
LENDING ACTIVITIES (Continued)
Adjustable Rate
Mortgage Loans
The
Bank offers adjustable rate mortgages (ARMs)(as defined by regulatory
authorities) for consumer purpose real estate loans only in the form of
revolving equity lines of credit. ARMs are more typically offered as
an alternative structuring on commercial purpose real estate loans and other
commercial purpose loans. Variable rate loans, the majority of which
are real estate secured, totaled $74,121,000 and $78,879,000 or 15.3% and 14.8%
of total loans at fiscal year-ends December 31, 2011 and 2010, respectively. (The
Bank does not offer any loan products which provide for planned graduated
payments or loans which allow negative amortization.)
Loan Approval and Review
The Bank's loan approval policies provide for various levels of officer lending
authority. When the amount of aggregate loans to a single borrower exceeds an
individual officer's lending authority, the loan request will be considered and
approved by an officer with a higher lending limit or by the Credit Committee
as established by the Board of Directors. The Loan Committee of the Board of
Directors recommends to the Board of Directors the lending limits for the
Bank's loan officers. The Bank has an in-house lending limit to a
single borrower, group of borrowers, or related entities, of the lesser of
$10,000,000 or 15% of capital. An unsecured limit (aggregate) for
the Bank is set at 50% of total capital.
CATEGORIES OF LOANS
The following is a summary of loans, in thousands of dollars, at December 31,
2011, 2010, 2009, 2008, 2007 by major category:
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
Real Estate Loans
mortgage
|
$334,234
|
|
$362,998
|
|
$375,741
|
|
$366,948
|
|
$350,138
|
- construction
|
52,271
|
|
63,080
|
|
81,311
|
|
92,010
|
|
83,398
|
Commercial and
industrial loans
|
50,855
|
|
61,127
|
|
74,565
|
|
89,348
|
|
88,106
|
Loans to
individuals for household
family and other consumer
expenditures
|
42,351
|
|
43,350
|
|
44,865
|
|
46,278
|
|
47,731
|
Agriculture
|
3,615
|
|
3,282
|
|
2,930
|
|
3,119
|
|
3,264
|
All other loans,
including
|
|
|
|
|
|
|
|
|
|
Overdrafts
and deferred loan costs
|
696
|
|
349
|
|
384
|
|
578
|
|
1,114
|
Gross
Loans
|
484,022
|
|
534,186
|
|
579,796
|
|
598,281
|
|
573,751
|
Less
allowance for loan losses
|
(12,373)
|
|
(11,627)
|
|
(9,142)
|
|
(7,091)
|
|
(6,507)
|
Net
loans
|
$471,649
|
|
$522,559
|
|
$570,654
|
|
$591,190
|
|
$567,244
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2011, the Company's loan portfolio contained
approximately $409,901 in fixed rate loans and approximately $74,121 in
variable rate loans. The following schedule summarizes the Companys
commercial, financial and agricultural, real estate construction, and all
other loans by maturity and sensitivity to changes in interest rates for December
31, 2011.
MATURITIES AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES
(Thousands of Dollars)
For the Year Ended
December 31, 2011
|
|
|
|
|
|
|
|
|
|
Loans
Maturing in
One Year or
Less
|
|
Loans Maturing
after One
through
Five Years
|
|
Loans
Maturing
after Five
Years
|
|
Total
|
Total loans by category
|
|
|
|
|
|
|
|
Commercial, financial and agriculture
|
$ 25,259
|
|
$ 27,580
|
|
$ 1,630
|
|
$ 54,469
|
Real-estate construction
|
25,018
|
|
26,919
|
|
335
|
|
52,272
|
All other loans
|
100,908
|
|
218,263
|
|
58,110
|
|
377,281
|
Total
|
151,185
|
|
272,762
|
|
60,075
|
|
484,022
|
|
|
|
|
|
|
|
|
Fixed rate loans by category
|
|
|
|
|
|
|
|
Commercial, financial and agriculture
|
$ 17,276
|
|
$ 22,447
|
|
$ 339
|
|
$ 40,062
|
Real-estate construction
|
15,938
|
|
20,811
|
|
335
|
|
37,084
|
All other loans
|
86,754
|
|
197,378
|
|
48,623
|
|
332,755
|
Total
|
119,968
|
|
240,636
|
|
49,297
|
|
409,901
|
|
|
|
|
|
|
|
|
Variable rate loans by category
|
|
|
|
|
|
|
|
Commercial, financial and agriculture
|
$ 7,983
|
|
$ 5,133
|
|
$ 1,291
|
|
$ 14,407
|
Real-estate construction
|
9,080
|
|
6,108
|
|
-
|
|
15,188
|
All other loans
|
14,154
|
|
20,885
|
|
9,487
|
|
44,526
|
Total
|
31,217
|
|
32,126
|
|
10,778
|
|
74,121
|
17
NONACCRUAL,
PAST DUE AND RESTRUCTURED LOANS
(Thousands
of Dollars)
The following schedule summarizes the amount of nonaccrual, past due, and
restructured loans for the periods ended December 31, 2011, 2010, 2009, 2008, and
2007:
|
2011
|
2010
|
2009
|
2008
|
2007
|
|
|
|
|
|
|
Nonaccrual
loans
|
$ 22,913
|
$ 25,704
|
$ 12,678
|
$ 2,990
|
$ 861
|
Accruing loans which are contractually
past due 90 days or more as to principal
or interest payments
|
$ 2,141
|
$ 1,042
|
$ 961
|
$ 607
|
$ 147
|
Troubled debt restructurings
|
$ 3,638
|
$ 20
|
$ 22
|
$ 24
|
$ 25
|
Accruing loans which
are contractually past due 90 days or more are graded substandard within the
Bank's internal loan grading system and come under heightened scrutiny.
Typically, a loan will not remain in the 90 days past due category, but will
either show improvement or be moved to nonaccrual loans. Consumer
purpose loans are moved to nonaccrual or charged off, as appropriate, at 120
days or more past due. Loans are placed in a nonaccrual status when, in the
opinion of management, the collection of additional interest is
questionable. Thereafter, no interest is taken into income unless
received in cash or until such time as the borrower demonstrates the ability to
pay principal and interest. Loans which demonstrate sustained
performance for a period of time, usually six months, can be returned to
accrual status provided the loan is contractually current and the borrower can
demonstrate the financial capacity to perform on the loan in future periods. At December 31, 2011,
the Company had $22,913 of nonaccrual loans consisting of 119 loans averaging $193.
Nonaccrual loans are written down to the fair value of the underlying
collateral at the time of transfer to nonaccrual, or as soon as reasonably
possible, based on a current appraisal. At December 31, 2011, the Company had
$2,141 of accruing loans which were contractually past due 90 days or more
consisting of 67 consumer purpose loans averaging $32. At December 31, 2011,
the Company had $3,638 of restructured troubled debt consisting of 7 loans.
Information relating to interest income on nonaccrual and renegotiated loans
outstanding, in thousands of dollars, for the years ended December 31, 2011, 2010,
2009, 2008, and 2007 is as follows:
|
2011
|
2010
|
2009
|
2008
|
2007
|
|
|
|
|
|
|
Interest included in income during
the year
|
$ 386
|
$ 408
|
$ 318
|
$ 103
|
$ 33
|
Interest which would have been included at the original
contract rates (includes amount included
in income)
|
$ 1,919
|
$ 1,847
|
$ 953
|
$ 288
|
$ 94
|
POTENTIAL PROBLEM LOANS
(Thousands of Dollars)
In addition to those loans disclosed under "Nonaccrual, Past Due, and
Restructured Loans," there are certain loans in the portfolio which are not
yet 90 days past due but about which management has concerns regarding the
ability of the borrower to comply with present loan repayment terms. Such
loans and nonaccrual loans are classified as impaired. Problem loan
identification includes a review of individual loans, the borrowers and guarantors
financial capacity and position, loss potential, and present economic
conditions. A specific allocation is provided for impaired loans not yet placed
in nonaccrual status and not yet written down to fair value in managements
determination of the allowance for loan losses.
As of December 31, 2011, all loans which management had identified as potential
problem loans totaled $3,123.
FOREIGN OUTSTANDINGS
As of the year ended December 31, 2011, the Company had no foreign loans
outstanding.
LOAN CONCENTRATIONS
As of the year ended December 31, 2011, the Company did not have any
concentration of loans to multiple borrowers engaged in similar activities that
would cause them to be similarly affected by economic or other conditions
exceeding 10% of total loans which are not otherwise disclosed as a category of
loans in the tables above. However, because the Company is engaged
in the business of community banking, most of its loans are geographically
concentrated to borrowers in Horry and Georgetown counties of South Carolina.
18
SUMMARY OF LOAN LOSS EXPERIENCE
ALLOWANCE FOR LOAN LOSSES
The following table summarizes loan balances as of the end of each period
indicated, averages for each period, changes in the allowance for loan losses
arising from charge-offs and recoveries by loan category, and additions to the
allowance which have been charged to expense.
The allowance for loan losses is increased by the provision for loan losses,
which is a direct charge to expense. Losses on specific loans are
charged against the allowance in the period in which management determines that
such loans become uncollectible. Recoveries of previously
charged-off loans are credited to the allowance.
|
Years
Ended December 31,
(Thousands of Dollars)
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
Loans:
|
|
|
|
|
|
|
|
|
|
Average
loans outstanding for the period
|
$510,742
|
|
$559,823
|
|
$593,370
|
|
$587,931
|
|
$563,864
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
the beginning of period
|
$ 11,627
|
|
$ 9,142
|
|
$ 7,091
|
|
$ 6,507
|
|
$ 6,476
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
Commercial,
financial, and agricultural
|
$ 1,872
|
|
$ 3,273
|
|
$ 2,251
|
|
$ 896
|
|
$ 732
|
Real
Estate - construction and mortgage
|
7,798
|
|
7,444
|
|
4,383
|
|
750
|
|
127
|
Loans
to individuals
|
917
|
|
899
|
|
1,141
|
|
836
|
|
587
|
|
|
|
|
|
|
|
|
|
|
Total
charge-offs
|
$ 10,587
|
|
$ 11,616
|
|
$ 7,775
|
|
$ 2,482
|
|
$ 1,446
|
|
|
|
|
|
|
|
|
|
|
Recoveries
:
|
|
|
|
|
|
|
|
|
|
Commercial,
financial, and agricultural
|
$ 298
|
|
$ 259
|
|
$ 593
|
|
$ 278
|
|
$ 96
|
Real
Estate - construction and mortgage
|
929
|
|
73
|
|
16
|
|
44
|
|
25
|
Loans
to individuals
|
218
|
|
372
|
|
469
|
|
211
|
|
211
|
|
|
|
|
|
|
|
|
|
|
Total
recoveries
|
$ 1,445
|
|
$ 704
|
|
$ 1,078
|
|
$ 533
|
|
$ 332
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs
|
$ 9,142
|
|
$ 10,912
|
|
$ 6,697
|
|
$ 1,949
|
|
$ 1,114
|
Additions
charged to operations
|
$ 9,888
|
|
$ 13,397
|
|
$ 8,748
|
|
$ 2,533
|
|
$ 1,145
|
Balance at
end of period
|
$ 12,373
|
|
$ 11,627
|
|
$ 9,142
|
|
$ 7,091
|
|
$ 6,507
|
|
|
|
|
|
|
|
|
|
|
Net
Charge-offs as a Percentage of Average Loans Outstanding
|
1.79%
|
|
1.95%
|
|
1.13%
|
|
.33%
|
|
.20%
|
The
allowance for loan losses is maintained at an amount based on considerations of
classified and internally-identified problem loans, the current trend in
delinquencies, the volume of past-due loans, historical loss experience,
current economic conditions, over-margined real estate loans, if any, the effects
of changes in risk selection or underwriting practices, the experience, ability
and depth of lending management and staff, industry conditions, the effect of
changes in concentrations of credit, and loan administration risks. In
addition, the Asset/Liability Management Committee and the Credit Committee
review the adequacy of the allowance quarterly and make recommendations regarding
the appropriate degree of consideration to be given the various factors
utilized in determining the allowance and to make recommendations as to the
appropriate amount of the allowance.
The Banks real estate loan portfolio and consequently the allowance for loan
losses has been significantly impacted by deterioration of local real estate
markets in terms of both real estate market activity and real estate values during
the most recent recession, 2007 through 2009, and although local real estate
markets have begun to recover, management expects that full recovery of this
economic sector will not be evident before 2013 or later. Management has
sought to maintain the allowance for loan losses at a level commensurate with
the level of risk identified in the loan portfolio and has continuously
monitored the methodologies employed in determining the allowance for loan
losses. Management believes it has reduced all real estate exposures to levels
below acceptable thresholds established by regulatory authorities. As a result
of these actions and growth in past due, nonaccrual, and impaired loans
(outlined in the Nonaccrual, Past Due, and Restructured Loans and Potential
Problem Loans above), provisions for loan losses and the allowance for loan
losses have exceeded historical norms since the onset of the recession in 2007.
The Board of Directors maintains an independent Loan Review function which has
established controls and procedures to monitor loan portfolio risk on an
on-going basis. Credit reviews on all major relationships are
conducted on a continuing basis as is the monitoring of past-due trends and
classified assets. The function utilizes various methodologies in
its assessment of the adequacy of the Allowance for
19
Loan
Losses. Three primary measurements are reported to the Board of
Directors on a quarterly basis, the Graded Loan Method based on a bank-wide risk
grading model, the Migration Analysis Method which tracks risk patterns on
charged-off loans for the previous 10 years, and the Percentage of Net Loans
Method. The graded loans and migration methodologies are calculated
based on gross charge offs. Additionally, the function annually reviews the
economic assessment conducted by Loan Administration, addresses portfolio risk
by industry concentration, reviews loan policy changes and marketing strategies
for any effect on portfolio risk, and conducts tests addressing portfolio
performance by type of portfolio, collateral type, and loan officer
performance.
Management utilizes the best information available to establish the allowance
for loan losses. However, future adjustments to the allowance or to
the reserve adequacy methodology may be necessary if economic conditions differ
substantially, the required methodology is altered by regulatory authorities
governing the Company or the Bank, or alternative accounting methodologies are
promulgated by the Public Company Accounting Oversight Board. During
2011, one primary change to the methodology of determining the allowance for
loan losses was implemented. This change effectively modified the
factor utilized to adjust incorporated existing migration loss calculations for
pooled loans calculated for gross charge-offs to net charge-offs.
Specifically, the factor was modified to the average recovery rate for the
previous five years excepting the rates for the highest and lowest years.
Prior to this change, the lowest recovery rate experienced during the last five
years was utilized. This change better reflects recovery rates experienced in
2011 and those expected to be experienced.
The following table presents an estimated allocation of the allowance for loan
losses at December 31, 2011, 2010, 2009, 2008, and 2007. This table is presented
based on the regulatory reporting classifications of the loans. This allocation
of the allowance for loan losses is calculated on an approximate basis and is
not necessarily indicative of future losses or allocations. The entire amount
of the allowance is available to absorb losses occurring in any category of
loans.
ALLOCATION OF
ALLOWANCE FOR LOAN LOSSES
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
2011
|
2010
|
2009
|
2008
|
2007
|
|
Amount
|
|
%
Loans
in each
category
|
|
Amount
|
|
%
Loans
in each
category
|
|
Amount
|
|
%
Loans
in each
category
|
|
Amount
|
|
%
Loans
in each
category
|
|
Amount
|
|
%
Loans
in each
category
|
Balance
applicable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Industrial,
Agriculture
|
$ 2,205
|
|
11.2%
|
|
$ 2,776
|
|
12.0%
|
|
$3,309
|
|
13.4%
|
|
$2,411
|
|
15.5%
|
|
$2,212
|
|
17.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate -
Construction
and
Mortgage
|
8,676
|
|
79.9%
|
|
7,380
|
|
79.8%
|
|
4,590
|
|
78.8%
|
|
3,616
|
|
76.7%
|
|
3,319
|
|
74.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans to
Individuals
|
1,492
|
|
8.9%
|
|
1,361
|
|
8.2%
|
|
1,228
|
|
7.8%
|
|
1,064
|
|
7.8%
|
|
936
|
|
8.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated
|
-
|
|
-
|
|
110
|
|
-
|
|
15
|
|
-
|
|
-
|
|
-
|
|
40
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$12,373
|
|
100%
|
|
$11,627
|
|
100%
|
|
$9,142
|
|
100%
|
|
$7,091
|
|
100%
|
|
$6,507
|
|
100%
|
20
DEPOSITS
AVERAGE DEPOSITS BY CLASSIFICATION
The following table sets forth the classification of average deposits for the
indicated period, in thousands of dollars:
|
Years
Ended December 31,
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Noninterest
bearing demand deposits
|
|
$119,637
|
|
$106,854
|
|
$105,182
|
Interest bearing
demand deposits
|
|
98,876
|
|
93,260
|
|
89,172
|
Money market
deposits
|
|
85,650
|
|
84,919
|
|
75,979
|
Savings deposits
|
|
63,539
|
|
56,605
|
|
51,743
|
Health savings
deposits
|
|
1,210
|
|
1,028
|
|
896
|
Time deposits
|
|
318,618
|
|
335,296
|
|
314,367
|
Individual
retirement accounts
|
|
52,085
|
|
52,059
|
|
47,770
|
Total deposits
|
|
$739,615
|
|
$730,021
|
|
$685,109
|
AVERAGE RATES PAID ON DEPOSITS
The
following table sets forth average rates paid on categories of interest-bearing
deposits for the periods indicated:
|
Years
Ended December 31,
|
|
2011
|
2010
|
2009
|
|
|
|
|
Interest bearing
demand deposits
|
.08%
|
.12%
|
.14%
|
Money Market
Deposits
|
.25%
|
.75%
|
1.03%
|
Savings deposits
|
.27%
|
.66%
|
.81%
|
Health savings deposits
|
.55%
|
1.32%
|
1.85%
|
Time deposits
|
1.25%
|
1.88%
|
2.48%
|
Individual retirement account deposits
|
1.51%
|
2.33%
|
3.23%
|
MATURITIES OF TIME DEPOSITS
The following table sets forth the maturity of time deposits in thousands of
dollars, at December 31, 2011:
|
Time
Deposits of
$100,000 or
more
|
|
Time Deposits
of Less Than
$100,000
|
|
Total
Time
Deposits
|
Maturity within 3 months or less
|
$ 79,759
|
|
|
$ 41,490
|
|
|
$121,249
|
|
Over 3 through 6 months
|
33,200
|
|
|
35,425
|
|
|
68,625
|
|
Over 6 through 12 months
|
50,872
|
|
|
51,962
|
|
|
102,834
|
|
Over 12 months
|
37,531
|
|
|
24,683
|
|
|
62,214
|
|
Total
|
$201,362
|
|
|
$153,560
|
|
|
$354,922
|
|
RETURN ON EQUITY AND ASSETS
The following table presents certain ratios relating to the Company's equity
and assets:
|
Years
Ended December 31,
|
|
2011
|
2010
|
2009
|
|
|
|
|
Return
on average total assets(1)
|
.13%
|
|
.11%
|
|
.56%
|
|
Return
on average stockholders' equity(2)
|
1.38%
|
|
1.18%
|
|
5.91%
|
|
Cash
dividend payout ratio(3)
|
-%
|
|
-%
|
|
41.25%
|
|
Average equity to average assets
ratio (4)
|
9.50%
|
|
9.32%
|
|
9.48%
|
|
|
|
|
|
|
|
|
(1) Net income divided by average
total assets.
|
|
|
|
|
|
|
(2) Net income divided by average
equity.
|
|
|
|
|
|
|
(3) Dividends per share divided by
net income per share
|
|
|
|
|
|
|
(4) Average equity divided by average
total assets.
|
|
|
|
|
|
|
21
SHORT-TERM BORROWINGS
Securities sold under repurchase agreements are short-term borrowings which
generally mature within 180 days from the dates of issuance. No
other category of short-term borrowings had an average balance outstanding
during the reported period which represented 30 percent or more of
stockholders' equity at the end of the period.
The following is a summary of securities sold under repurchase agreements
outstanding at December 31 of each reported period, in thousands of dollars:
|
At December 31,
|
|
2011
|
2010
|
2009
|
Securities sold under agreement to repurchase
|
$87,784
|
$99,153
|
$104,654
|
The following information relates to outstanding securities sold under
repurchase agreements during 2011, 2010, and 2009, in thousands of dollars:
|
Maximum Amount
Outstanding at Any
Month End
|
Weighted Average
Interest Rate
at
December 31,
|
|
2011
|
2010
|
2009
|
2011
|
2010
|
2009
|
|
|
|
|
|
|
|
Securities sold under
agreement to repurchase
|
$111,274
|
$113,463
|
$114,267
|
.22%
|
.46%
|
.94%
|
|
Years
ended December 31,
|
|
2011
|
2010
|
2009
|
Securities sold under agreement to repurchase -
average daily amount outstanding during the year
|
$98,009
|
$108,392
|
$101,286
|
|
|
|
|
Weighted average interest rate paid
|
.28%
|
.73%
|
1.11%
|
22
ITEM 1A.
RISK FACTORS
An investment in our common stock involves a significant degree of risk. Any
of the following risks could adversely affect our business, our results of
operations and our financial condition, as well as the price of our common
stock. The risks discussed below also include forward-looking
statements, and our actual results may differ substantially from those
discussed in these forward-looking statements.
Risks Related to Our
Business
Our growth strategy may not
be successful.
We have plans to maintain our recent asset and deposit growth through the
opening of additional branch locations and the hiring of additional bankers. We
may not be successful in identifying or obtaining suitable new branch locations
or receiving regulatory approval for them, or employing and retaining suitable
bankers, on terms that we can afford and that are attractive to us. Even if we
successfully open additional branch locations and hire additional bankers, we
may not achieve the asset and deposit growth that we seek because of
competition or poor economic conditions, or for other reasons.
Our growth strategy may reduce our earnings in the near term.
We expect each new
office we open to take several years to become profitable and we cannot
guarantee that any new office will ever become profitable. We expect
that by having a number of new offices at any given time, our ability to
operate at higher levels of profitability will be reduced until our new offices
can operate at levels of profitability that equal or exceed our older offices.
Our growth strategy may require future increases in capital that we may not be
able to accomplish.
We are required by
banking regulators to maintain various ratios of capital to assets. As our
assets continue to grow we expect our capital ratios to decline unless we can
also continue to increase our earnings or raise sufficient new capital to keep
pace with asset growth. Our ability to raise additional capital, if
needed, will depend, among other things, on conditions in the capital markets
at that time, which are outside our control, and on our financial condition and
performance. If we are unable to limit a capital ratio decline by
increasing our capital, we will have to restrict our asset growth to the amount
our earnings will support.
We may be unable to manage our sustained growth successfully.
We have grown substantially in the last several years. Although we
may not continue to grow as fast as we have in the past, we intend to expand
our asset base. Our future profitability will depend in part on our
ability to manage growth successfully. Our ability to manage growth
successfully will depend on our ability to maintain cost controls and asset
quality while attracting additional loans and deposits, as well as on factors
beyond our control, such as economic conditions and interest rate trends. If
we grow quickly and are not able to control costs and maintain asset quality,
growth could materially adversely affect our financial performance.
We depend on the services of a number of key personnel, and a loss of any of
those personnel could disrupt our operations and result in reduced revenues.
We are a relationship-driven organization. Our growth and
development in recent years have depended in large part on the efforts of
several members of our senior management team. These senior officers
have primary contact with our customers and are extremely important in
maintaining personalized relationships with our customer base, which are key
aspects of our business strategy, and in increasing our market presence. The
unexpected loss of services of one or more of these key employees could have a
material adverse effect on our operations and possibly result in reduced
revenues if we were unable to find suitable replacements promptly.
If our loan customers do not pay us as they have contracted to, we may
experience losses.
Our principal revenue
producing business is making loans. If our customers do not repay
the loans, we will suffer losses. Even though we maintain an allowance for loan
losses, the amount of the allowance may not be adequate to cover the losses we
experience. We attempt to mitigate this risk by a thorough review of
the creditworthiness of loan customers. Nevertheless, there is risk that our
credit evaluations will prove to be inaccurate due to changed circumstances,
unanticipated economic conditions, or otherwise.
Our assets include
substantial amounts of real estate acquired through foreclosure or in
settlement of loans, which we may not be able to sell without incurring
additional losses.
We have acquired, and expect to continue
to acquire, substantial amounts of real estate through foreclosure or
settlement of loans in default. When we acquire such real estate, it is written
down to its estimated fair market value less the estimated costs of selling.
If we cannot sell the property for that amount we will incur additional loss
which, for one or more properties, could materially reduce our earnings.
23
ITEM 1A. RISK FACTORS - Continued
Risks Related to Our Business - Continued
Our business is concentrated in Horry County and the "Waccamaw Neck"
region of Georgetown County, and a downturn in the economy of the Horry County
and the Waccamaw Neck area, a continuing decline in real estate values in the
Horry County and the Waccamaw Neck areas, or other events in our market area
may adversely affect our business.
Substantially all of our business is located in the Horry County and the "Waccamaw
Neck" region of Georgetown County areas in coastal South Carolina. As
a result, our financial condition and results of operations are affected by
changes in the Horry County and the Waccamaw Neck economies. Over
the past three years, we have experienced the adverse effects of the economic
recession in the form of increased nonpayment and delinquent payment of loans,
and decreases in the value of collateral securing loans and of real estate
acquired through foreclosures. If the economic recession and general decline
in real estate values in our market areas, or other adverse economic conditions
continue, we would expect continuing decreases in demand for our services,
increases in nonpayment of loans and decreases in the value of collateral
securing loans. The existence of adverse economic conditions, declines in real
estate values or the occurrence of other adverse economic conditions in Horry
County, the Waccamaw Neck and South Carolina could have a material adverse
effect on our business, future prospects, financial condition or results of
operations.
We operate in an area susceptible to hurricane and other weather related damage
which could disrupt our business and reduce our profitability.
Nearly all of our business and our customers are located in coastal South
Carolina, an area that often experiences damage from hurricanes and other
weather phenomena. We attempt to mitigate such risk with insurance
and by requiring insurance on property taken as collateral. However,
catastrophic weather damage to a large portion of our market area could cause
substantial disruptions to our business and our customers businesses which
would reduce our profitability for some period.
We face strong competition from larger, more established competitors which may
adversely affect our ability to operate profitably.
We encounter strong competition from financial institutions operating in the
greater Horry/Georgetown County and Grand Strand areas of South Carolina. In
the conduct of our business, we also compete with credit unions, insurance
companies, money market mutual funds and other financial institutions, some of
which are not subject to the same degree of regulation as we are. Many
of these competitors have substantially greater resources and lending abilities
than we have and offer services, such as investment banking, insurance, trust
and international banking services that we do not provide. We
believe that we have been able to, and will continue to be able to, compete
effectively with these institutions because of our experienced bankers and
personalized service, as well as through loan participations and other
strategies and techniques. However, we cannot promise that we are
correct in our belief. If we are wrong, our ability to operate
profitably may be negatively affected.
Technological changes affect
our business, and we may have fewer resources than many of our competitors to
invest in technological improvements.
The financial services industry continues to undergo rapid technological
changes with frequent introductions of new technology-driven products and
services. In addition to enabling financial institutions to serve
customers better, the effective use of technology may increase efficiency and
may enable financial institutions to reduce costs. Our future
success may depend, in part, upon our ability to use technology to provide
products and services that provide convenience to customers and to create
additional efficiencies in our operations. We may need to make
significant additional capital investments in technology in the future, and we
may not be able to effectively implement new technology-driven products and
services. Many of our competitors have substantially greater
resources to invest in technological improvements.
Our profitability and liquidity may be affected by changes in interest rates
and economic conditions.
Our profitability depends upon our net interest income, which is the difference
between interest earned on our interest earning assets, such as loans and
investment securities, and interest expense on interest bearing liabilities,
such as deposits and borrowings. Our net interest income will be
adversely affected if market interest rates change such that the interest we
pay on deposits and borrowings increases faster than the interest earned on
loans and investments, or, conversely, if the interest earned on loans and
investments decreases faster than the interest we pay on deposits and
borrowings. Interest rates, and consequently our results of
operations, are affected by general economic conditions (domestic and foreign)
and fiscal and monetary policies. Monetary and fiscal policies may
materially affect the level and direction of interest rates. Increases
in interest rates generally decrease the market values of interest earning
investments and loans held and therefore may adversely affect our liquidity and
earnings. Increased interest rates also generally affect the volume
of mortgage loan originations, and the ability of borrowers to perform under
existing loans of all types. Decreases in interest rates generally
have the opposite effect on market values of interest-bearing assets, the
volume of mortgage loan originations, and the ability of borrowers to perform
under existing loans of all types.
24
ITEM 1A. RISK
FACTORS Continued
Risks Related to Our Common Stock
Our common stock has a limited trading market, which may make the prompt
execution of sale transactions difficult.
Although our common stock
may be traded from time to time on an individual basis, no active trading
market has developed and none is expected to develop in the foreseeable future. Our
common stock is not traded on any exchange. Accordingly, shareholders who wish to sell shares may experience a delay
or have to sell them at lower prices than they seek in order to sell them
promptly, if at all.
There is no guarantee we will pay cash dividends in the future.
Declaration and payment of dividends are within the discretion of our board of
directors. Our bank is currently our only source of funds with which
to pay cash dividends. Our banks declaration and payment of future
dividends to us are within the discretion of the banks board of directors, and
are dependent upon its earnings, financial condition, its need to retain
earnings for use in the business and any other pertinent factors. The
banks payment of dividends is also subject to various regulatory requirements
and the ability of the banks regulators to forbid or limit its payment of
dividends. Although we have historically paid cash dividends, we have not done
so for the past two years in order to conserve capital in the face of reduced
earnings. We cannot estimate when, or if , we will resume paying cash
dividends.
Provisions in our articles of incorporation and South Carolina law may
discourage or prevent takeover attempts, and these provisions may have the
effect of reducing the market price for our stock.
Our articles of incorporation include several provisions that may have the
effect of discouraging or preventing hostile takeover attempts. The provisions
include staggered terms for our board of directors and requirements of
supermajority votes to approve certain business transactions. In addition, South Carolina law contains
several provisions that may make it more difficult for a third party to acquire
control of us without the approval of our board of directors, and may make it
more difficult or expensive for a third party to acquire a majority of our
outstanding common stock. To the
extent that these provisions are effective in discouraging or preventing
takeover attempts, they may tend to reduce the market price for our stock.
Our common stock is not insured, so shareholders could lose their total
investments.
Our
common stock is not a deposit or savings account, and is not insured by the
Federal Deposit Insurance Corporation or any other government agency. Should
our business fail, shareholders could lose their total investments.
Risks Related to Our Industry
There can be no
assurance that recent government actions will help stabilize the U.S. financial
system.
In response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, various branches and agencies of the U.S. government have put in
place laws, regulations, and programs to address capital and liquidity issues
in the banking system. There can be no assurance, however, as to the actual long-term
impact that such laws, regulations, and programs will have on the financial
markets, including the extreme levels of volatility, liquidity and confidence
issues, and limited credit availability experienced over the past several years.
The failure of such laws, regulations, and programs to continue to stabilize
the financial markets and a continuation or worsening of current financial
market conditions could materially and adversely affect our business, financial
condition, results of operations, access to credit, or the trading price of our
common stock.
Recent levels of market volatility are unprecedented.
The volatility and disruption of financial and credit markets in the past few
years has reached unprecedented levels for recent times. In some cases, the
markets produced downward pressure on stock prices and credit availability for
certain issuers without regard to those issuers underlying financial strength.
If recent levels of market disruption and volatility continue or worsen, there
can be no assurance that we will not experience an adverse effect, which may be
material, on our ability to access capital and on our business, financial
condition, and results of operations.
The soundness of other financial institutions could adversely affect us.
Financial services institutions are interrelated
as a result of trading, clearing, counterparty, or other
relationships. We have exposure to many different industries and
counterparties, and we routinely execute transactions with counterparties in
the financial services industry, including brokers, dealers, commercial banks,
investment banks, and government sponsored enterprises. Many of
these transactions expose us to credit risk in the event of default of our
counterparty. In addition, our credit risk may be exacerbated when the collateral
held by us cannot be realized or is liquidated at prices not sufficient to
recover the full amount of the loan or other
25
ITEM
1A. RISK FACTORS Continued
Risks Related to Our Industry - Continued
The soundness of other financial institutions could adversely affect us
Continued.
obligation due us. There is no assurance that any such losses would
not materially and adversely affect our results of operations or
earnings. Our primary
source of funding for our operations is deposits from customers in our local
market. Should other banks in or near our market areas fail, it
could cause our deposit customers to lose confidence in banks and cause them to
withdraw or substantially restrict their deposits with us. If such
activity reached a high enough level, it could substantially disrupt our
business. There is no assurance that such disruptions, were they to occur,
would not materially and adversely affect our results of operations or
earnings.
Recent market developments may adversely affect our industry, business, and
results of operations.
Dramatic declines in the housing market during the prior three years, with
falling home prices and increasing foreclosures and unemployment, have resulted
in significant write-downs of asset values by financial institutions, including
government-sponsored entities and major commercial and investment
banks. These write-downs, initially of mortgage-backed securities
but spreading to credit default swaps and other derivative securities, as well
as other financial assets, including loans, have caused many financial
institutions to seek additional capital, to merge with larger and stronger
institutions and, in some cases, to fail. Reflecting concern about
the stability of the financial markets generally and the strength of
counterparties, many lenders and institutional investors have reduced, and in
some cases, ceased to provide funding to borrowers, including other financial
institutions. The resulting lack of available credit, lack of
confidence in the financial sector, increased volatility in the financial
markets, and reduced business activity could materially and adversely, directly
or indirectly, affect our business, financial condition and results of
operations.
We are subject to governmental regulation which could change and increase
our cost of doing business or have an adverse affect on our business.
We
operate in a highly regulated industry and are subject to examination,
supervision and comprehensive regulation by various federal and state
agencies. Most of this regulation is designed to protect our
depositors and other customers, not our shareholders. Our compliance
with the requirements of these agencies is costly and may limit our growth and
restrict certain of our activities, including, payment of dividends, mergers
and acquisitions, investments, loans and interest rates charged, and locations
of offices. We are also subject to capitalization guidelines
established by federal authorities and our failure to meet those guidelines
could result, in an extreme case, in our banks being placed in receivership.
Various laws, including the
Federal Deposit Insurance Act, the Emergency Economic Stabilization Act of 2008
(EESA), and the Dodd-Frank Act, and related regulations are structured to
spread the governmental costs of problems in the financial industry broadly
over the financial industry in order to prevent the taxpayers from having to
pay such costs. As a result, assessments by the FDIC to pay for deposit
insurance have increased, and will likely continue to increase, substantially,
and the total our bank will be required to pay could increase enough to
materially affect our income and our ability to operate profitably.
Additionally, EESA contains a provision for the financial industry to be
required to absorb, in an as yet undetermined fashion, any losses suffered by
the government on account of its acquiring troubled assets under the Troubled
Assets Relief Program of EESA. The Dodd-Frank Act also makes numerous changes
in the way financial institutions are regulated, and creates a new agency to
regulate consumer protection as well as expanding and modifying consumer
protection laws.
We are also
subject to the extensive and expensive requirements imposed on public companies
by the Sarbanes-Oxley Act of 2002 and on financial services businesses by the
Dodd-Frank Act, and related regulations.
The laws and regulations applicable to the banking industry could change at any
time, and numerous regulations required by the Dodd-Frank Act are yet to be
adopted. Therefore, we cannot predict the impact of these changes on our
business or profitability. Because government regulation greatly
affects the business and financial results of all commercial banks and bank
holding companies, such regulation may not put us at a competitive disadvantage
with respect to other similarly situated banks and holding companies, but our
cost of compliance could adversely affect our ability to operate profitably.
We are susceptible to changes in monetary policy and other economic factors
which may adversely affect our ability to operate profitably.
Changes
in governmental, economic and monetary policies may affect the ability of our
bank to attract deposits and make loans. The rates of interest
payable on deposits and chargeable on loans are affected by governmental
regulation and fiscal policy as well as by national, state and local economic
conditions. All of these matters are outside of our control and
affect our ability to operate profitably.
26
ITEM 1B.
UNRESOLVED STAFF COMMENTS
The
Company has no unresolved comments from the SEC staff regarding its 1934 Act
filings in the 180 days prior to fiscal year-end December 31, 2011.
ITEM 2.
PROPERTIES
The Company's subsidiary, The Conway National Bank, has twelve permanent
banking offices in Horry County and two permanent banking offices in Georgetown
County, for a total of fourteen banking offices. In addition, the
Bank has an Operations and Administration Building, located at 1400 Third
Avenue in Conway, which houses the Bank's administrative offices and data
processing facilities. This three-story structure contains
approximately 33,616 square feet. Adjacent to the Operations and
Administration Building is a 24,000 square foot branch banking office, known as
the Conway Banking Office, which provides retail banking functions at the
Banks principal site. In addition, the Bank has a 1,450 square foot
building for express banking services adjacent to the Conway Banking Office. The
Bank has a two-story office on Main Street in Conway containing 8,424 square
feet, banking offices located at Red Hill in Conway (3,760 square feet), West
Conway in Conway (3,286 square feet), North Conway in Conway (3,600 square
feet), Surfside in Surfside Beach (6,339 square feet), Northside, north of
Myrtle Beach (2,432 square feet), Socastee in the southern portion of Myrtle
Beach (3,498 square feet), Aynor in the Town of Aynor (2,809 square feet),
Myrtle Beach in the City of Myrtle Beach (12,000 square feet), Murrells Inlet
in Murrells Inlet, Georgetown County (3,600 square feet), North Myrtle Beach in
the City of North Myrtle Beach (3,600 square feet), Pawleys Island in Pawleys
Island, Georgetown County (3,900 square feet), and Little River northwest of
North Myrtle Beach (3,900 square feet). In addition to the existing
facilities, the Company has purchased one future office site. The
site consists of 1.63 acres at Loop Road and River Oaks Drive, Carolina Forest,
Myrtle Beach. The Company anticipates building a banking office on
the site within the next two to six years, depending on market conditions. The
physical addresses of each location are as follows: The Operations
and Administration Building at 1400 Third Avenue, Conway; Conway Banking Office
at 1411 Fourth Avenue, Conway; Main Street at 309 Main Street, Conway; West
Conway at Highway 501 & Cultra Road, Conway; North Conway at 2601 Main
Street, Conway; Surfside at Highway 17 & 5
th
Avenue North,
Surfside Beach; Northside at 9726 Highway 17 North, Myrtle Beach; Red Hill at
Highways 544 & 501, Conway; Socastee at 3591 North Gate Road, Myrtle Beach;
Aynor at 2605 Highway 501, Aynor; Myrtle Beach at 1353 21
st
Avenue
North, Myrtle Beach; Murrells Inlet at 4345 Highway 17 Bypass, Murrells Inlet; North
Myrtle Beach at 110 Highway 17 North, North Myrtle Beach; Pawleys Island at
10608 Ocean Highway, Pawleys Island; and Little River at 2380 Highway 9 East,
Longs, S.C. The Bank owns all of its facilities.
ITEM 3.
LEGAL PROCEEDINGS
There were no material legal proceedings against the Company or its subsidiary,
The Conway National Bank, as of December 31, 2011.
ITEM 4. (MINE SAFETY DISCLOSURES)
Not applicable.
27
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of March 1, 2012, there were approximately 1,020 holders of record of
Company common stock. There is no established market for shares of Company common
stock and only limited trading in such shares has occurred since the formation
of the Company on June 10, 1985. During 2011 and 2010, management
was aware of a few transactions, including a few transactions in which the Company
was the purchaser, a few transactions in which the Company was the seller, and for
which the Companys common stock traded in the ranges set forth below. However,
management has not ascertained that these transactions resulted from arms
length transactions between the parties involved, and because of the limited
number of shares involved, these prices may not be indicative of the value of
the common stock.
|
2011
|
2010
|
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
|
High
$63.00
$61.00
$57.50
$57.50
|
Low
$61.00
$61.00
$57.50
$57.50
|
High
$80.50
$80.50
$80.00
$81.00
|
Low
$80.50
$75.00
$79.50
$61.00
|
|
|
|
|
|
Holders of shares of Company stock are entitled to such dividends as may be
declared from time to time by the Board of Directors of the Company. The
Company did not pay any annual cash dividends for 2011 or 2010, and there can
be no assurance as to the payment of dividends by the Company in the future. Payment
of dividends is within the discretion of the Board of Directors, subject to
regulatory approval, and is dependent upon the earnings and financial condition
of the Company and the Bank, and other related factors. The
Companys primary source of funds with which to pay dividends are dividends
paid to the Company by the Bank, which are also subject to regulatory approval. There
are also other legal restrictions on the Banks ability to pay dividends. See
"Supervision and RegulationPayment of Dividends" under Item 1, Part
I of this Form 10-K for a description of these legal restrictions.
The Company does not have any equity compensation plans. Accordingly,
no information is required to be disclosed pursuant to Item 201(d) of
Regulation S-K.
The Company made one sale of securities during 2011. On August 10,
2011 the Company sold 468 shares of common stock to The Conway National Bank Profit
Sharing and Savings Plan for a price of $26,910, or $57.50 per share. This
sale was exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933 because no public offering was involved.
Purchases of stock during the fourth quarter of 2011 are outlined in the below
table. Information about all other purchases during 2011 has been
previously reported on Forms 10-Q, filed May 10, 2011, August 9, 2011, and
November 9, 2011, and is incorporated herein by reference.
Period
|
(a) Total Number
of Shares
Purchased
|
(b) Average Price
Paid per Share
|
(c) Total Number
of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
|
(d) Maximum
Number (or
approximate
dollar value) of
Shares that May
Yet Be Purchased
Under the Plans
or Programs
|
October 1 - October 31, 2011
|
1
|
$ 57.50
|
-
|
-
|
November 1 - November 30, 2011
|
-
|
$ -
|
-
|
-
|
December 1 - December 31, 2011
|
-
|
$ -
|
-
|
-
|
Total
|
1
|
$ 57.50
|
-
|
-
|
(1) During the fourth quarter of 2011, the Company purchased 1 share of stock
from The Conway National Bank Profit Sharing and Savings Plan, at the request
of the participants, which is held by the Company as an authorized and unissued
share. This share was purchased on a case-by-case basis and not
pursuant to any formal program.
28
ITEM
6.
SELECTED FINANCIAL DATA
CNB Corporation
FINANCIAL SUMMARY
(All Dollar Amounts, Except Per Share Data, in Thousands)
The following table sets forth certain selected financial data relating to the
Company and subsidiary and is qualified in its entirety by reference to the
more detailed financial statements of the Company and subsidiary and notes
thereto included elsewhere in this report.
|
Years
Ended December 31,
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
Selected
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
Total
Interest Income
|
$ 35,722
|
|
$ 39,957
|
|
$ 43,947
|
|
$ 50,119
|
|
$ 53,755
|
Total
Interest Expense
|
5,526
|
|
9,620
|
|
12,129
|
|
18,221
|
|
22,858
|
Net
Interest Income
|
30,196
|
|
30,337
|
|
31,818
|
|
31,898
|
|
30,897
|
Provision
for Loan Losses
|
9,888
|
|
13,397
|
|
8,748
|
|
2,533
|
|
1,145
|
Net Interest
Income
|
|
|
|
|
|
|
|
|
|
after
Provision for Loan Losses
|
20,308
|
|
16,940
|
|
23,070
|
|
29,365
|
|
29,752
|
Total Noninterest
Income
|
6,258
|
|
7,549
|
|
8,179
|
|
7,182
|
|
7,002
|
Total Noninterest
Expenses
|
25,223
|
|
23,405
|
|
24,069
|
|
23,102
|
|
22,019
|
Income Before
Income Taxes
|
1,343
|
|
1,084
|
|
7,180
|
|
13,445
|
|
14,735
|
Income Taxes
|
124
|
|
44
|
|
2,113
|
|
4,488
|
|
5,015
|
Net Income
|
$ 1,219
|
|
$ 1,040
|
|
$ 5,067
|
|
$ 8,957
|
|
$ 9,720
|
|
|
|
|
|
|
|
|
|
|
Per Share*:
|
|
|
|
|
|
|
|
|
|
Net Income Per
Weighted Average
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
$ .73
|
|
$ .62
|
|
$ 3.03
|
|
$ 5.36
|
|
$ 5.65
|
Cash Dividend Paid
Per Share
|
$ -
|
|
$ -
|
|
$ 1.25
|
|
$ 2.63
|
|
$ 2.63
|
Weighted Average
Shares Outstanding
|
1,663,867
|
|
1,671,568
|
|
1,672,527
|
|
1,672,566
|
|
1,722,130
|
|
|
|
|
|
|
|
|
|
|
*Per
share data for years 2008-2007 adjusted for the effect of a two-for-one stock
split issued during 2009.
Selected Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
Assets
|
$ 913,820
|
|
$ 911,271
|
|
$ 920,641
|
|
$ 874,625
|
|
$ 865,638
|
Net Loans
|
471,649
|
|
522,559
|
|
570,654
|
|
591,190
|
|
567,244
|
Investment Securities
|
333,591
|
|
298,788
|
|
232,605
|
|
206,996
|
|
216,177
|
Federal Funds Sold
|
10,000
|
|
14,000
|
|
14,000
|
|
21,000
|
|
26,000
|
Deposits:
|
|
|
|
|
|
|
|
|
|
Noninterest-Bearing
|
$ 119,649
|
|
$ 108,031
|
|
$ 96,834
|
|
$ 100,560
|
|
$ 112,450
|
Interest-Bearing
|
612,976
|
|
610,109
|
|
608,436
|
|
578,659
|
|
579,839
|
Total Deposits
|
$ 732,625
|
|
$ 718,140
|
|
$ 705,270
|
|
$ 679,219
|
|
$ 692,289
|
Stockholders' Equity
|
$ 89,406
|
|
$ 86,333
|
|
$ 87,429
|
|
$ 83,527
|
|
$ 82,112
|
29
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
"Management's Discussion and Analysis" is provided to afford a
clearer understanding of the major elements of the Company's financial
condition, results of operations, liquidity, and capital resources. The
following discussion should be read in conjunction with the Company's financial
statements and notes thereto and other detailed information appearing elsewhere
in this report. References to dollar amounts in this section are
in thousands, except per share data.
Economic Conditions
The national recession which began in 2007 and (according to the classical
definition of recession with reference to gross domestic product figures) ended
in September of 2009 has significantly impacted the Companys market area, two
coastal counties of South Carolina, Horry County and the Waccamaw Neck region
of Georgetown County. Although many industries within our market have been
affected during this difficult period, the primary impact of this recession was
to depress real estate sales, and consequently real estate values. The decline
in real estate values, ensuing defaults, and foreclosures has had a moderately
negative impact on the Company, resulting in historically low profitability.
With the national and local economies expected to
remain subdued through 2012 and beyond, we anticipate that profitability will
remain below historical levels, but will improve moderately over time and, at
the same time, expect that the Bank will continue to grow, further strengthen,
and generally prosper. Although the Banks credit concerns have
remained moderate in comparison to the magnitude of non-performing assets in
the industry and local markets, we will continue to address credit concerns
during 2012. Loan losses declined for 2011 and are expected to
further decline in 2012, but will still remain above historical levels during
2011.
The national and local economies continue to recover slowly. The Bureau of Economic Analysis, a division of the
U.S. Department of Commerce, indicated that real gross domestic product (GDP)
increased at an annual rate of 1.7% for 2011. The 2011 increase
reflects positive contributions from personal consumption expenditures,
exports, and nonresidential fixed investment that were partly offset by
negative contributions from private sector inventory investment, state and
local government spending, federal government spending, and increased imports.
Locally, the real estate sector fell in the fourth quarter of 2011 with the
total number of real estate transactions decreasing approximately 5% as
compared to the fourth quarter of 2010. For all of 2011, the real estate
market declined .1% compared to 2010. The banking industry has
continued to experience significant difficulties, with 92 bank failures
occurring nationally in 2011, compared to 157 for 2010, 140 for 2009, and 25
for 2008. Further failures are anticipated for 2012.
Regulatory
Actions
On June 7, 2011, the Bank entered into a formal agreement with the OCC
requiring the Bank to take specified actions with respect to the operation of
the Bank. The substantive actions called for by the agreement should strengthen
the Bank and make it more efficient in the long-term. The agreement was filed
as an exhibit to a Current Report on Form 8-K filed June 10, 2011. The Company believes the Bank has appropriately responded to
all of the terms of the formal agreement, including implementing plans, and
programs within the timeframes required by the agreement.
On June 16, 2011, the Company entered into a memorandum of understanding with
the Federal Reserve Bank of Richmond (FRB). The memorandum of understanding
requires the Company to seek permission from the FRB before it takes certain
actions that would reduce its ability to serve as a source of strength for the
Bank by dissipating its assets, such as payment of dividends to shareholders,
or that would make changes in senior management. The Company believes it is in
compliance with the memorandum of understanding with the FRB as of December 31,
2011.
Critical Accounting Policies
The Company has adopted various accounting policies which govern the
application of accounting principles generally accepted in the United States in
the preparation of the Company's financial statements. The significant
accounting policies of the Company are described in the footnotes to the
consolidated financial statements.
Certain accounting policies involve significant judgments and assumptions by
management which have a material impact on the carrying value of certain assets
and liabilities; management considers such accounting policies to be critical
accounting policies. The judgments and assumptions used by management are based
on historical experience and other factors, which are believed to be reasonable
under the circumstances. Because of the nature of the judgments and assumptions
made by management, actual results could differ from these judgments and
estimates which could have a material impact on the carrying values of assets
and liabilities and the results of operations of the Company.
The Company believes the allowance for loan losses is a critical accounting
policy that requires the most significant judgments and estimates used in
preparation of its consolidated financial statements. Refer to "Provision
for Loan Losses" below for a detailed description of the Company's
estimation process and methodology related to the allowance for loan losses.
30
Distribution of Assets and Liabilities
The Company maintains a conservative approach in determining the distribution
of assets and liabilities. Loans decreased 9.4% from $534,186 at
December 31, 2010 to $484,022 at December 31, 2011; and decreased 7.9% from
December 31, 2009 to $534,186 at December 31, 2010. Loan demand from
creditworthy borrowers in our market area decreased during 2011, 2010, and 2009.
Loans decreased as a percentage of total assets from 58.6% at
year-end 2010 to 53.0% at year-end 2011, and decreased from 63.0% at year-end
2009 to 58.6% at year-end 2010. Investment securities, federal funds
sold, and other earning assets increased as a percentage of total assets from 35.6%
at year-end 2010 to 40.9% at year-end 2011, and increased from 30.8% at
year-end 2009 to 35.6% at year-end 2010. Investments and federal
funds sold provide for an adequate supply of secondary liquidity. Year-end
other assets as a percentage of total assets increased from 5.8% at year-end 2010
to 6.1% at year-end 2011, and decreased from 6.2% at year-end 2009 to 5.8% at
year-end 2010. Management has sought to build the deposit base with
stable, relatively noninterest-rate sensitive deposits by offering the small to
medium account holders a wide array of deposit instruments at competitive
rates. Noninterest-bearing demand deposits, as a percent of total assets increased
from 11.8% at year-end 2010 to 13.1% at year-end 2011, and increased from 10.5%
at year-end 2009 to 11.8% at year-end 2010. Interest-bearing
liabilities as a percentage of total assets decreased from 78.1% at December
31, 2010 to 76.7% at December 31, 2011, and decreased from 79.2% at December
31, 2009 to 78.1% at December 31, 2010. Stockholders equity as a
percentage of total assets increased to 9.8% at year-end 2011, and was 9.5% for
both 2010 and 2009. The Bank remains well-capitalized (see Note 16
to the Consolidated Financial Statements, contained elsewhere in this report).
The table below sets forth the percentage relationship to total assets of
significant components of the Company's balance sheet as of December 31, 2011,
2010, and 2009:
|
At December
31,
|
Assets:
|
2011
|
|
2010
|
|
2009
|
Earning assets:
|
|
|
|
|
|
Loans
|
53.0%
|
|
|
58.6%
|
|
|
63.0%
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Taxable
|
32.1
|
|
|
29.5
|
|
|
21.6
|
|
Tax-exempt
|
4.4
|
|
|
3.3
|
|
|
3.7
|
|
Federal funds sold and
securities purchased
|
|
|
|
|
|
|
|
|
under agreement
to resell
|
1.1
|
|
|
1.5
|
|
|
1.5
|
|
Other earning assets
|
3.3
|
|
|
1.3
|
|
|
4.0
|
|
Total
earning assets
|
93.9
|
|
|
94.2
|
|
|
93.8
|
|
Other assets
|
6.1
|
|
|
5.8
|
|
|
6.2
|
|
Total
assets
|
100.0%
|
|
|
100.0%
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity:
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits
|
67.1%
|
|
|
66.9%
|
|
|
66.1%
|
|
Securities sold under
agreement to resell
|
9.6
|
|
|
10.9
|
|
|
11.4
|
|
FHLB Advances
and other borrowings
|
-
|
|
|
.3
|
|
|
1.7
|
|
Total
interest-bearing liabilities
|
76.7
|
|
|
78.1
|
|
|
79.2
|
|
Noninterest-bearing deposits
|
13.1
|
|
|
11.8
|
|
|
10.5
|
|
Other liabilities
|
.4
|
|
|
.6
|
|
|
.8
|
|
Stockholders' equity
|
9.8
|
|
|
9.5
|
|
|
9.5
|
|
Total
Liabilities and stockholders' equity
|
100.0%
|
|
|
100.0%
|
|
|
100.0%
|
|
31
Results of Operations
The
Company and the Bank recognized earnings in 2011, 2010, and 2009 of $1,219, $1,040,
and $5,067, respectively, resulting in a return on average assets of .13%, .11%,
and .56%, and a return on average stockholders' equity of 1.38%, 1.18%, and 5.91%.
The earnings were primarily attributable to favorable net interest margins in
each period (see "Net Income-Net Interest Income"). Other factors
include management's ongoing effort to maintain other income at adequate levels
(see "Net Income ‑ Noninterest Income") and to control other
expenses (see "Net Income - Noninterest Expenses"). Earnings,
coupled with a conservative dividend policy, have supplied the necessary
capital funds to support bank operations. Total assets were $913,820 at
December 31, 2011 as compared to $911,271 at December 31, 2010 and $920,641 at
December 31, 2009. The following table sets forth the financial
highlights for fiscal years 2011, 2010, and 2009.
CNB Corporation and Subsidiary
FINANCIAL HIGHLIGHTS
(All Dollar Amounts, Except Per Share Data, in Thousands)
|
December 31,
2011
|
2010
to
2011
Percent
Increase
(Decrease)
|
December 31,
2010
|
2009
to
2010
Percent
Increase
(Decrease)
|
December 31,
2009
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
after provision for loan
losses
|
$ 20,308
|
|
19.9 %
|
|
$ 16,940
|
|
(26.6)%
|
|
$ 23,070
|
|
Income before income taxes
|
1,343
|
|
23.9
|
|
1,084
|
|
(84.9)
|
|
7,180
|
|
Net Income
|
1,219
|
|
17.2
|
|
1,040
|
|
(79.5)
|
|
5,067
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
|
(weighted average shares outstanding)
|
$ .73
|
|
17.7
|
|
$ .62
|
|
(79.5)
|
|
$ 3.03
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
-
|
|
-
|
|
-
|
|
(100.0)
|
|
2,096
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
$ -
|
|
-
|
|
$ -
|
|
(100.0)
|
|
$ 1.25
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$913,820
|
|
.3 %
|
|
$911,271
|
|
(1.0)%
|
|
$ 920,641
|
|
Total deposits
|
732,625
|
|
2.0
|
|
718,140
|
|
1.8
|
|
705,270
|
|
Total loans
|
484,022
|
|
(9.4)
|
|
534,186
|
|
(7.9)
|
|
579,796
|
|
Investment securities
|
333,591
|
|
11.6
|
|
298,788
|
|
28.5
|
|
232,605
|
|
Stockholders' equity
|
89,406
|
|
3.6
|
|
86,333
|
|
(1.3)
|
|
87,429
|
|
Book value per share
|
$ 53.80
|
|
3.7
|
|
$ 51.86
|
|
(.5)
|
|
$ 52.13
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios (1):
|
|
|
|
|
|
|
|
|
|
|
Return on average total assets
|
.13%
|
|
18.2
|
|
.11%
|
|
(80.4)
|
|
.56%
|
|
Return on average stockholders' equity
|
1.38%
|
|
16.9
|
|
1.18%
|
|
(80.0)
|
|
5.91%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
For
the fiscal years ended December 31, 2011, 2010, and 2009 average total assets
amounted to $932,020, $941,581, and $904,866,
respectively, with average stockholders equity totaling $88,524, $87,782,
and $85,771, for the same periods.
|
32
NET
INCOME
Net Interest Income
Earnings are
dependent to a large degree on net interest income, defined as the difference
between gross interest and fees earned on earning assets, primarily loans and
investment securities, and interest paid on deposits and borrowed funds. Net
interest income is affected by the interest rates earned or paid and by volume
changes in loans, investment securities, deposits, and borrowed funds.
The Bank maintained net interest margins in 2011, 2010, and 2009 of 3.52%, 3.42%,
and 3.78%, respectively, as compared to management's long-term target of 4.20%.
Net interest margins have been compressed for the Bank and industry-wide, as a
result of competitive lending practices, softening loan demand, and the historically
low and prolonged market interest rate environment. Loan demand
remained strong throughout 2005 and 2006, declined in 2007, was moderate in
2008, and declined in 2009, 2010, and 2011. Fully-tax-equivalent net interest
income decreased slightly from $30,940 in 2010 to $30,793 in 2011, and
decreased from $32,446 in 2009 to $30,940 in 2010. During the
three-year period, total fully-tax-equivalent interest income decreased by 10.5%
from 2010 to 2011, from $40,560 to $36,319, respectively, and decreased 9.0%
from 2009 to 2010 from $44,575 to $40,560, respectively. Over the same
period, total interest expense decreased 42.6% from 2010 to 2011, from $9,620 to
$5,526, respectively, and decreased 20.7% from 2009 to 2010 from $12,129 to $9,620,
respectively. Fully-tax-equivalent net interest income as a percentage of
average total earning assets was 3.52% in 2011, 3.42% in 2010, and 3.78% in 2009.
Interest rates paid on deposits and borrowed funds and earned on loans and
investments have generally followed the fluctuations in market interest rates
in 2011, 2010, and 2009. However, fluctuations in market interest
rates may not necessarily have a significant impact on net interest income,
depending on the Bank's rate sensitivity position. A rate sensitive
asset (RSA) is any loan or investment that can be repriced up or down in
interest rate within a certain time interval. A rate sensitive
liability (RSL) is an interest paying deposit or other liability that can be repriced
either up or down in interest rate within a certain time interval. When a
proper balance between RSA and RSL exists, market interest rate fluctuations
should not have a significant impact on earnings. The larger the
imbalance, the greater the interest rate risk assumed by the Bank and the
greater the positive or negative impact of interest rate fluctuations on
earnings. When RSAs exceed RSLs for a specific repricing period, a
positive interest sensitivity gap results. The gap is negative when
interest-sensitive liabilities exceed interest-sensitive assets. For
a bank with a positive gap, rising interest rates would be expected to have a
positive effect on net interest income and falling rates would be expected to
have the opposite effect. However, gap analysis, such as set forth
in the table below, does not take into account actions a bank or its customers may
take during periods of changing rates, which could significantly change the
effects of rate changes that would otherwise be expected. The Bank
seeks to manage its assets and liabilities in a manner that will limit interest
rate risk and thus stabilize long-term earning power. The following table sets
forth the Bank's estimated gap rate sensitivity position, including anticipated
calls of investment securities, at each of the time intervals indicated. The
table illustrates the Bank's rate sensitivity position on specific dates and
may not be indicative of the position at other points in time. Management
believes that a 200, 300, or 400 basis point rise or fall in interest rates
will have less than a 10 percent effect on before-tax net interest income over
a one-year period, which is within bank guidelines.
Interest Rate Sensitivity Analysis
December 31, 2011
(Dollars in Thousands)
|
1 Day
|
|
90 Days
|
|
180 Days
|
|
365 Days
|
|
Over
1
to
5 Years
|
|
Over
5 Years
|
Rate Sensitive Assets
(RSA)
|
|
|
|
|
|
|
|
|
|
|
|
Federal Funds
Sold
|
$ 10,000
|
|
$ -
|
|
$ -
|
|
$ -
|
|
$ -
|
|
$ -
|
Interest
Bearing Due From
|
30,678
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Federal
Reserve
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities (net of FRB and
FHLB stock in the amount of $1,865
and other investments of $1,122)
|
-
|
|
39,265
|
|
43,115
|
|
62,140
|
|
133,260
|
|
45,254
|
Loans (net of nonaccruals of $22,913)
|
74,121
|
|
31,498
|
|
23,570
|
|
44,463
|
|
240,013
|
|
47,444
|
Total, RSA
|
$ 114,799
|
|
$ 70,763
|
|
$ 66,685
|
|
$ 106,603
|
|
$ 373,273
|
|
$ 92,698
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Sensitive
Liabilities (RSL)
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of Deposit
of $100,000
or more
|
$ -
|
|
$ 80,537
|
|
29,255
|
|
54,407
|
|
37,163
|
|
-
|
All Other Time Deposits
|
-
|
|
44,885
|
|
39,370
|
|
45,263
|
|
24,042
|
|
-
|
Securities Sold under
Repurchase
Agreements
|
66,696
|
|
20,088
|
|
-
|
|
1,000
|
|
-
|
|
-
|
Federal Home Loan Bank
Advances
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Total RSL
|
$ 66,696
|
|
$145,510
|
|
$ 68,625
|
|
$ 100,670
|
|
$ 61,205
|
|
$ -
|
RSA-RSL
|
$ 48,103
|
|
$ (74,747)
|
|
$ (1,940)
|
|
$ 5,933
|
|
$ 312,068
|
|
$ 92,698
|
Cumulative RSA-RSL
|
$ 48,103
|
|
$ (26,644)
|
|
$ (28,584)
|
|
$ (22,651)
|
|
$ 289,417
|
|
$ 382,115
|
Cumulative RSA/RSL
|
1.72
|
|
.87
|
|
.90
|
|
.94
|
|
1.65
|
|
1.86
|
33
NET INCOME
(continued)
Provision for Loan Losses
It is the policy of
the Bank to maintain the allowance for loan losses in an amount commensurate
with managements ongoing evaluation of the loan portfolio and deemed
appropriate by management to cover estimated losses inherent in the portfolio. The
Company complies with the provisions of ASC 310-10, "Accounting by
Creditors for Impairment of a Loan," in connection with the allowance for
loan losses (see Note 1 to the Consolidated Financial Statements - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES). The provision for
loan losses was $9,888 in 2011, $13,397 in 2010, and $8,748 in 2009. Net
loan charge-offs totaled $9,142 in 2011, $10,912 in 2010, and $6,697 in 2009,
with net charge-offs being concentrated in real estate development loans, other
real estate loans, commercial and industrial loans, and consumer purpose loans in
2011, 2010 and 2009. The allowance for loan losses as a percentage
of gross loans was 2.56% at December 31, 2011, 2.18% at December 31, 2010,
and 1.58% at December 31, 2009.
Securities Transactions
Net unrealized gains/(losses)
in the investment securities portfolio were $3,902 at December 31, 2011, $(120)
at December 31, 2010, and $1,891 at December 31, 2009. The market
value of investment securities increased during 2008 due to the declines in
market interest rates, increased demand for bonds, and the consequent increase
in prices. This trend leveled in 2009 as market interest rates leveled. However,
the yield curve steepened for most of 2010, flattening slightly in the fourth
quarter. The net unrealized gains on investment securities decreased during
2009 primarily due to the realization of gains from sales of investment
securities. In 2010, the net unrealized gain on investment securities moved to
a loss position due, in part, to the steepening of the yield curve during most
of the year, but was primarily due to the realization of gains from sales of
investment securities. In 2011, net unrealized gains on investment securities
grew to $3,902 due to a flattening of the yield curve resulting from extended
forecasts of the current historically low interest rate environment. There
were no sales of securities during 2011. In 2010, securities gains of $993
and $73 were realized on sales proceeds of $21,733 and $2,322 in short and
mid-term available for sale and held to maturity investment securities,
respectively (See Note 3 to the Consolidated Financial Statements INVESTMENT
SECURITIES). Security gains of $1,576 were realized on sales of $55,192 in
short and mid-term available for sale securities during 2009.
Noninterest Income
Noninterest income,
net of any securities gains, decreased by 3.5% from $6,483 in 2010 to $6,258 in
2011, and decreased by 1.8% from $6,603 in 2009 to $6,483 in 2010. During
2009, service charge income on deposit accounts decreased due to decreased non-sufficient
funds and overdraft charges. During 2009 noninterest income also decreased due
to declines in credit card merchant discount income, mortgage negotiation fees,
and other miscellaneous noninterest income. In 2010 and 2011, noninterest
income, net of any securities gains, declined only slightly and as a result of
declines in various miscellaneous noninterest income items.
Noninterest Expenses
Noninterest expenses
increased by 7.8% from $23,405 in 2010 to $25,223 in 2011, and decreased by 2.8%
from $24,069 in 2009 to $23,405 in 2010. The components of other
expenses are salaries and employee benefits of $13,379, $13,315, and $14,005;
occupancy and furniture and equipment expenses of $3,349, $3,340, and $3,313; and
other operating expenses of $8,495, $6,750, and $6,751 for 2009, 2010, and 2011,
respectively.
The increase in other operating expenses during 2011 is attributable to an increase
in FDIC insurance premiums, which increased 21.3% from $1,176 for 2010 to
$1,426 for 2011; increases in examination and professional fees, which
increased 6.4% from $994 for 2010 to $1,058 for 2011; and increases in the net
cost of operation of other real estate, which increased 362.1% from $454 for
2010 to $2,098 for 2011.
The decrease in salary and employee benefits during 2010 reflects declines in
the number of employees and the consequent reduction in salaries and benefits
expense.
Income Taxes
Provisions for
income taxes increased 182% from $44 in 2010 to $124 in 2011 and decreased 97.9%
from $2,113 in 2009 to $44 in 2010, based on earnings in each respective
year. Income tax liability increased 23.9% in 2011and decreased 84.9%
in 2010.
Liquidity
The Bank's liquidity position is
primarily dependent on short-term demands for funds caused by customer credit
needs and deposit withdrawals and upon the liquidity of bank assets to meet
these needs. The Bank's liquidity sources include cash and due from
banks, federal funds sold, and short-term investments. In addition,
the Bank has established federal funds lines of credit from correspondent banks
and has a line of credit from the Federal Home Loan Bank of Atlanta (see Note 9
to the Consolidated Financial Statements-LINES OF CREDIT). The
Company had cash balances on hand of $206, $96, and $3,259 at December 31, 2011,
2010, and 2009, respectively. At December 31, 2011 and 2010, the Company, on a
parent only basis, had no liabilities. At December 31, 2009, the Company, on a
parent only basis, had liabilities consisting of cash dividends payable
totaling $2,096. Management believes that liquidity sources are more than
adequate to meet funding needs.
34
Off Balance Sheet Arrangements and Contractual
Obligations
The Company, through the operations of the Bank, makes
contractual commitments to extend credit in the ordinary course of business. These
commitments are legally binding agreements to lend money to customers of the
Bank at predetermined interest rates for a specified period of time. In
addition to commitments to extend credit, the Bank also issues standby letters
of credit which are assurances to a third party that they will not suffer a
loss if the Bank's customer fails to meet its contractual obligation to a third
party. The Bank may also have outstanding commitments to buy/sell
securities. At December 31, 2011, the Bank had issued commitments to
extend credit of $33.9 million, standby letters of credit of $1.3 million, and
no commitments to buy or sell securities (see Note 11 to the Consolidated
Financial Statements-FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK). The
majority of the commitments and standby letters of credit typically mature
within one year and past experience indicates that many of the commitments and
standby letters of credit will expire unused. However, through its
various sources of liquidity, the Bank believes that it will have the necessary
resources to meet these obligations should the need arise.
Neither the Company nor the Bank is involved in other off-balance sheet
contractual relationships, unconsolidated related entities that have
off-balance sheet arrangements or transactions that could result in liquidity
needs or other commitments or significantly impact earnings.
The following table presents, as of December 31, 2011, the Companys and the
Banks fixed and determinable contractual obligations by payment date. The
payment amounts represent those amounts contractually due to the recipient.
Contractual Obligations
and Other Commitments
|
December 31, 2011
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
1 to 3
|
|
3 to 5
|
|
|
Total
|
|
One Year
|
|
Years
|
|
Years
|
Contractual Cash Obligations
|
|
|
|
|
|
|
|
|
Operating leases
|
$
|
6
|
$
|
2
|
$
|
4
|
$
|
-
|
Time
deposits
|
|
354,922
|
|
292,706
|
|
46,052
|
|
16,164
|
Securities
sold under agreement to repurchase
|
|
87,784
|
|
87,784
|
|
-
|
|
-
|
Total
contractual cash obligations
|
$
|
442,712
|
$
|
380,492
|
$
|
46,052
|
$
|
16,164
|
Obligations under non-cancelable operating lease agreements totaled $6 at
December 31, 2011. These obligations are payable over three years as
shown in Note 12 to the Consolidated Financial Statements - COMMITMENTS AND
CONTINGENCIES. Further information regarding the nature of time
deposits is outlined in Note 7 to the Consolidated Financial Statements
DEPOSITS. At December 31, 2011, securities sold under agreement to repurchase
totaled $87,784 and are due and payable within one year. Further information
on securities sold under agreements to repurchase is outlined in Note 8 to the
Consolidated Financial Statements SECURITIES SOLD UNDER REPURCHASE
AGREEMENTS.
Capital Resources
Total stockholders' equity was $89,406, $86,333
and $87,429 at December 31, 2011, 2010, and 2009, representing 9.78%, 9.47%, and
9.50% of total assets, respectively. At December 31, 2011, the
Company and the Bank exceeded quantitative measures established by regulation
to ensure capital adequacy (see Note 16 to the Consolidated Financial
Statements - REGULATORY MATTERS). Capital is considered sufficient
by management to meet current and prospective capital requirements and,
together with anticipated retained earnings, to support anticipated growth in
bank operations.
Effects of Inflation
Inflation normally has the effect of
accelerating the growth of both a bank's assets and liabilities. One
result of this inflationary effect is an increased need for equity capital. Income
is also affected by inflation. While interest rates have
traditionally moved with inflation, the effect on net income is diminished
because both interest earned on assets and interest paid on liabilities vary
directly with each other. In some cases, however, rate increases are
delayed on fixed-rate instruments. Loan demand normally declines
during periods of high inflation. Inflation has a direct impact on the Bank's
noninterest expense. The Bank responds to inflation changes through
re-adjusting noninterest income by repricing services.
Accounting Issues
Accounting standards that have been
issued or proposed by the Financial Accounting Standards Board that do not
require adoption until a future date are not expected to have a material impact
on the consolidated financial statements upon adoption. (See Note 1
to the Consolidated Financial Statements - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES AND ACTIVITIES).
35
Risks and Uncertainties
In the normal course of its business, the Company encounters two significant
types of risks: economic and regulatory. There are three main
components of economic risk: interest rate risk, credit risk and market risk. The
Company is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different speeds, or on
different bases, than its interest-earning assets. Credit risk is
the risk of default on the Company's loan portfolio that results from borrowers
inability or unwillingness to make contractually required payments. Market
risk, in regard to lending, reflects changes in the value of collateral
underlying loans receivable and the valuation of real estate held by the
Company.
The Company is subject to the regulations of various governmental agencies. These
regulations can and do change significantly from period to period. The
Company also undergoes periodic examinations by the regulatory agencies, which
may subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions as a result of the
regulators' judgments based on information available to them at the time of
their examination.
ITEM 7.A
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk, in regard to interest rate risk, is the risk of loss from adverse
changes in market prices and rates. The Company's market risk arises
principally from the interest rate risk inherent in its lending, deposit and
borrowing activities. Management actively monitors and manages its
interest rate risk exposure. In addition to other risks which the
Company manages in the normal course of business, such as credit quality and
liquidity risk, management considers interest rate risk to be a significant
market risk that could potentially have a material effect on the Company's
financial condition and results of operations (See Item 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Net
Income - Net Interest Income). Other types of market risks, such as
foreign currency risk and commodity price risk, do not arise in the normal
course of the Company's business activities.
36
CNB CORPORATION AND
SUBSIDIARY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
Principles of consolidation and nature of operations
The
consolidated financial statements include the accounts of
CNB Corporation
(the Company) and its wholly-owned subsidiary, The Conway National Bank (the
Bank). The Company operates as one business segment. All significant
intercompany balances and transactions have been eliminated. The Bank operates
under a national bank charter and provides full banking services to customers.
The Bank is subject to regulation by the Office of the Comptroller of the
Currency (OCC) and the Federal Deposit Insurance Corporation. The Company is
subject to regulation by the Federal Reserve Board.
Estimates
The preparation of
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 the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the dates
of the consolidated balance sheets and the consolidated statements of income
for the periods covered. Actual results could differ from those estimates.
Concentrations of
credit risk
Financial instruments, which
potentially subject the Company to concentrations of credit risk, consist
principally of loans receivable, investment securities, federal funds sold and
amounts due from banks.
The Company makes loans to individuals and small businesses for various
personal and commercial purposes primarily in Horry County, South Carolina and
the Waccamaw Neck area of Georgetown County, South Carolina. The Companys
loan portfolio is not concentrated in loans to any single borrower or a
relatively small number of borrowers. The Company monitors concentrations of
loans to classes of borrowers or industries that would be similarly affected by
economic conditions. As of December 31, 2011, the Company had concentrations
of loans to the following classes of borrowers or industries: lessors of
residential buildings and lessors of non-residential buildings. The amount of
commercial purpose loans outstanding to these groups of borrowers as of
December 31, 2011 was $25,967,000 and $29,208,000, respectively. These amounts
represented 27.55% and 30.99% of Total Capital, as defined for regulatory
purposes, for the same period, respectively.
In addition to monitoring potential concentrations of loans to particular
borrowers or groups of borrowers, industries and geographic regions, management
monitors exposure to credit risk from concentrations of lending products and
practices such as loans with high loan-to-value ratios, interest-only payment
loans, and balloon payment loans. Management monitors loans with loan-to-values
in excess of regulatory guidelines and secured by real estate in accordance
with guidance as set forth by regulatory authorities and maintains total loans
with loan-to-value exceptions within regulatory limitations. Management
monitors and manages other loans with high loan-to-value ratios, interest-only
payment loans, and balloon payment loans within levels of risk acceptable to management.
The Bank does not offer any loan products which provide for planned graduated
payments or loans which allow negative amortization.
The Companys investment portfolio consists principally of obligations of the
United States, its agencies or its corporations, and general obligation
municipal securities. In the opinion of management, there is no concentration
of credit risk in its investment portfolio. The Company places its deposits
and correspondent accounts with and sells its federal funds to high quality institutions.
Management believes credit risk associated with correspondent accounts is not
significant.
47
Continued
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
ACTIVITIES, Continued
Cash and cash equivalents
Cash and cash
equivalents include cash and due from banks, due from Federal Reserve, and
federal funds sold. Generally, both cash and cash equivalents are considered to
have maturities of three months or less, and accordingly, the carrying amount
of such instruments is deemed to be a reasonable estimate of fair value.
Investment
securities
The Company accounts
for investment securities in accordance with Financial
Accounting Standards
Board Accounting Standards Codification 320-10 (ASC 320-10)
, "Investments in Debt
Securities."
This statement requires that the Company classify debt
securities upon purchase as available for sale, held to maturity or trading.
Such assets classified as available for sale are carried at fair value.
Unrealized holding gains or losses are reported as a component of stockholders'
equity (accumulated other comprehensive income) net of deferred income taxes.
Securities classified as held to maturity are carried at cost, adjusted for the
amortization of premiums and the accretion of discounts into interest income
using a method which approximates a level yield. To qualify as held to maturity
the Company must have the intent and ability to hold the securities to
maturity. Trading securities are carried at market value. The Company has no
trading securities. Gains or losses on disposition of securities are based on
the difference between the net proceeds and the adjusted carrying amount of the
securities sold, using the specific identification method.
Loans and interest income
Loans are recorded
at their unpaid principal balance. Interest on loans is accrued and recognized
based upon the interest method.
The Company accounts for nonrefundable
fees and certain direct costs associated with the origination of loans in
accordance with ASC 310-20,
Nonrefundable Fees and Other Costs
. Under
ASC 310-20 nonrefundable fees and certain direct costs associated with the
origination of loans are deferred and recognized as a yield adjustment over the
contractual life of the related loans until such time that the loan is sold.
The Company accounts for impaired loans in accordance with ASC 310-10,
Receivables.
This standard requires that all creditors value loans at the lesser of the
recorded balance or the loans fair value if it is probable that the creditor
will be unable to collect all amounts due according to the terms of the loan
agreement. Fair value may be determined based upon the present value of
expected cash flows, market price of the loan, if available, or value of the
underlying collateral. Expected cash flows are required to be discounted at
the loans effective interest rate. The standard also requires creditors to provide
additional disclosures for the recognition of interest income on an impaired
loan.
Under ASC 310-10, when the ultimate collectibility of an impaired loans
principal is in doubt, wholly or partially, all cash receipts are applied to
principal. When this doubt does not exist, cash receipts are applied under the
contractual terms of the loan agreement. Once the reported principal balance
has been reduced to zero, future cash receipts are applied to interest income,
to the extent that any interest has been foregone. Further cash receipts are
recorded as recoveries of any amounts previously charged off.
A loan is also considered impaired if its terms are modified in a troubled debt
restructuring. For these accruing impaired loans, cash receipts are typically
applied to principal and interest receivable in accordance with the terms of
the restructured loan agreement. Interest income is recognized on these loans
using the accrual method of accounting.
48
Continued
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
ACTIVITIES, Continued
Allowance for loan losses
The allowance for
loan losses is based on management's ongoing evaluation of the loan portfolio
and reflects an amount that, in management's opinion, is adequate to absorb
losses in the existing portfolio. In evaluating the portfolio, management
takes into consideration numerous factors, including current economic
conditions, prior loan loss experience, the composition of the loan portfolio,
and management's estimate of anticipated credit losses. Loans are charged
against the allowance at such time as they are determined to be losses.
Subsequent recoveries are credited to the allowance. Management considers the
year-end allowance adequate to cover losses in the loan portfolio; however,
management's judgment is based upon a number of assumptions about future
events, which are believed to be reasonable, but which may or may not prove
valid. Thus, there can be no assurance that charge-offs in future periods will
not exceed the allowance for loan losses or that additional increases in the
allowance for loan losses will not be required.
Non-performing assets
Non-performing
assets include real estate acquired through foreclosure or deed taken in lieu
of foreclosure, loans on nonaccrual status, and restructured loans. Loans are
placed on nonaccrual status when, in the opinion of management, the collection
of additional principal and interest is questionable. Thereafter no interest
is taken into income unless received in cash or until such time as the borrower
demonstrates the ability to pay principal and interest. Loans which
demonstrate sustained performance for a period of time, usually six months, can
be returned to accrual status provided the loan is contractually current and
the borrower can demonstrate the financial capacity to perform on the loan in
future periods.
Other Real Estate Owned
Other real estate
owned includes real estate acquired through foreclosure. Other real estate
owned is initially recorded at estimated fair value and subsequently at the
lower of cost or estimated fair value. Any write-downs at the dates of
foreclosure are charged to the allowance for loan losses. Expenses to maintain
such assets and subsequent write-downs and gains and losses on disposal are
included in noninterest expenses net cost of operation of other real estate
owned.
Premises and equipment
Premises and equipment
are stated at cost less accumulated depreciation and amortization. Depreciation
and amortization are computed over the estimated useful lives of the assets
using primarily the straight-line method. Additions to premises and equipment
and major replacements or improvements are capitalized at cost. Maintenance,
repairs and minor replacements are expensed when incurred. Gains and losses on
routine dispositions are reflected in current operations.
Stock Split
During 2009, the
Corporation effected a two-for-one common stock split, which resulted in the
reduction of the par value of its common stock from $10 per share to $5 per
share and the issuance of 838,741 additional shares.
Advertising expense
Advertising, promotional and other
business development costs are generally expensed as incurred. External costs
incurred in producing media advertising are expensed the first time the
advertising takes place. External costs relating to direct mailing costs are
expensed in the period in which the direct mailings are sent. Advertising,
promotional and other business development costs of $387,000, $396,000 and $448,000,
were included in the Company's results of operations for 2011, 2010, and 2009,
respectively.
49
Continued
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
ACTIVITIES, Continued
Securities sold under agreements to repurchase
The Bank enters into sales of securities
under agreements to repurchase. Fixed-coupon repurchase agreements are treated
as financing, with the obligation to repurchase securities sold being reflected
as a liability and the securities underlying the agreements remaining as
assets.
Income taxes
Income taxes are
accounted for in accordance with ASC 740-10,
"Income Taxes.
Under
ASC 740-10, deferred tax liabilities are recognized on all taxable temporary
differences (reversing differences where tax deductions initially exceed
financial statement expense, or income is reported for financial statement
purposes prior to being reported for tax purposes). In addition, deferred tax
assets are recognized on all deductible temporary differences (reversing
differences where financial statements expense initially exceeds tax deductions,
or income is reported for tax purposes prior to being reported for financial
statement purposes). Valuation allowances are established to reduce deferred
tax assets if it is determined to be
"
more likely than not
"
that all or some portion of the potential deferred tax assets will not be
realized. ASC 740-10 also clarifies
accounting for uncertainty in income taxes recognized in an enterprises
financial statements and prescribes a recognition threshold and measurement of
a tax position taken or expected to be taken in an enterprises tax return.
Reclassifications
Certain amounts in
the financial statements for the years ended December 31, 2010 and 2009 have
been reclassified, with no effect on net income or stockholders equity, to be
consistent with the classifications adopted for the year ended December 31, 2011.
Net income per share
The Company computes
net income per share in accordance with ASC 260-10,
"Earnings Per
Share."
Net income per share is computed on the basis of the weighted
average number of common shares outstanding: 1,663,867 in 2011, 1,671,568 in
2010 and 1,672,527 in 2009. The Company does not have any dilutive instruments
and therefore only basic net income per share is presented.
Fair values of financial instruments
ASC 820,
"Fair
Value Measurements and Disclosures,"
requires disclosure of fair value
information for financial instruments, whether or not recognized in the balance
sheet, when it is practicable to estimate the fair value. ASC 820 defines a
financial instrument as cash, evidence of an ownership interest in an entity or
contractual obligations which require the exchange of cash or other financial
instruments. Certain items are specifically excluded from the disclosure
requirements, including the Company's common stock. In addition, other
nonfinancial instruments such as premises and equipment and other assets and
liabilities are not subject to the disclosure requirements.
50
Continued
NOTE 1
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
Fair values of financial instruments - continued
The following methods and assumptions were used by the Company in estimating
fair values of financial instruments as disclosed herein:
Cash and due from
banks
- The carrying amounts of cash and due from banks (cash on hand, due
from banks, and interest bearing deposits with other banks) approximate their
fair value.
Due from Federal Reserve
The carrying amounts of balances due from the Federal
Reserve Bank approximate their fair value.
Federal funds sold
- The carrying amounts of federal funds sold approximate
their fair value.
Investment securities available for sale and held to maturity
- Fair values for
investment securities are based on quoted market prices.
Other investments -
No ready market exists for Federal Reserve and Federal
Home Loan Bank Stock and they have no quoted market value. However, redemption
of this stock has historically been at par value.
Loans
- For variable rate loans that reprice frequently and for loans that
mature within one year, fair values are based on carrying values. Fair values
for all other loans are estimated using discounted cash flow analyses, with
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral values,
where applicable.
Deposits
- The fair values disclosed for demand deposits are, by definition,
equal to their carrying amounts. The carrying amounts of variable rate,
fixed-term money market accounts and short-term certificates of deposit
approximate their fair values at the reporting date. Fair values for long-term
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities.
Short-term borrowings
- The carrying amounts of borrowings under repurchase
agreements, federal funds purchased, and U. S. Treasury demand notes
approximate their fair values.
Advances from the Federal Home Loan Bank
The fair values of
fixed rate borrowings are estimated using a discounted cash flow calculation
that applies the Companys current borrowing rate from the FHLB.
Off balance sheet instruments
Contract and fair values of off balance sheet lending
commitments are based on estimated fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing.
51
Continued
NOTE 1
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
Recently issued accounting standards
The following is a summary of recent authoritative pronouncements that may
affect accounting, reporting, and disclosure of financial information by the
Company:
Disclosures
about Troubled Debt Restructurings (TDRs) required by ASU 2010-20 were
deferred by the Financial Accounting Standards Board (FASB) in ASU 2011-01
issued in January 2011. In April 2011 the FASB issued ASU 2011-02 to assist
creditors with their determination of when a restructuring is a TDR. The
determination is based on whether the restructuring constitutes a concession
and whether the debtor is experiencing financial difficulties as both events
must be present. Disclosures related to TDRs under ASU 2010-20 have been
presented in Note 4 to the financial statements Loans and Allowance for Loan
Losses.
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 are effective for the Company
beginning January 1, 2012 but are not expected to have a material effect on the
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 will be effective for the Company beginning
January 1, 2012 but are not expected to have a material effect on the financial
statements.
The Comprehensive Income topic of the ASC was amended in June 2011. 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 will be applicable to the Company on January 1, 2012 and will be
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.
The Company will continue to report reclassifications out of accumulated other
comprehensive income consistent with the presentation requirements in effect
prior to the amendments while FASB deliberates 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 or cash flows.
52
Continued
NOTE 1
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES, Continued
Risks and uncertainties
In the
normal course of its business the Company encounters two significant types of
risks: economic and regulatory. There are three main components of economic
risk: interest rate risk, credit risk and market risk. The Company is subject
to interest rate risk to the degree that its interest-bearing liabilities
mature or reprice at different speeds, or on different basis, than its interest-earning
assets. Credit risk is the risk of default on the Companys loan portfolio
that results from borrowers inability or unwillingness to make contractually
required payments. Market risk, as it relates to lending and real estate held
for operating locations, reflects changes in the value of collateral underlying
loans receivable and the valuation of real estate held by the Company.
The Company is subject to the regulations of various governmental agencies
(regulatory risk).
These regulations can and do change significantly from period to period. The
Company also undergoes periodic examinations by the regulatory agencies, which
may subject it to further changes with respect to asset valuations, amounts of
required loss allowances and operating restrictions from the regulators
judgments based on information available to them at the time of their
examination.
NOTE 2 - RESTRICTIONS ON CASH AND CASH EQUIVALENTS
The Bank is required to maintain average reserve
balances either at the Bank or on deposit with the Federal Reserve Bank. The
average amounts of these reserve balances for the years ended December 31, 2011
and 2010 were approximately $1,193,000 and $1,191,000, respectively.
53
C
ontinued
NOTE 3 - INVESTMENT
SECURITIES
The amortized cost and fair value of investment
securities are based on contractual maturity dates. Actual maturities may
differ from the contractual maturities because borrowers may have the right to
prepay obligations with or without penalty. The amortized cost, approximate
fair value, and expected maturities of investment securities are summarized as
follows (amounts in thousands):
|
|
|
December 31, 2011
|
|
|
|
|
Amortized
|
|
Unrealized Holding
|
|
Fair
|
|
AVAILABLE FOR SALE
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
$
|
52,367
|
|
$
|
153
|
|
$
|
-
|
|
$
|
52,520
|
|
One to five years
|
|
185,112
|
|
|
842
|
|
|
93
|
|
|
185,861
|
|
Six to ten years
|
|
29,877
|
|
|
160
|
|
|
30
|
|
|
30,007
|
|
|
|
267,356
|
|
|
1,155
|
|
|
123
|
|
|
268,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
One to five years
|
|
84
|
|
|
8
|
|
|
-
|
|
|
92
|
|
Six to ten years
|
|
3,149
|
|
|
128
|
|
|
-
|
|
|
3,277
|
|
Over ten years
|
|
18,787
|
|
|
232
|
|
|
30
|
|
|
18,989
|
|
|
|
22,020
|
|
|
368
|
|
|
30
|
|
|
22,358
|
|
State, county and municipal
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
265
|
|
|
-
|
|
|
-
|
|
|
265
|
|
One to five years
|
|
1,784
|
|
|
64
|
|
|
-
|
|
|
1,848
|
|
Six to ten years
|
|
19,472
|
|
|
1,410
|
|
|
3
|
|
|
20,879
|
|
Over ten years
|
|
5,538
|
|
|
283
|
|
|
-
|
|
|
5,821
|
|
|
|
27,059
|
|
|
1,757
|
|
|
3
|
|
|
28,813
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
|
|
|
CRA Qualified Investment Fund
|
|
1,079
|
|
|
43
|
|
|
-
|
|
|
1,122
|
|
Other
|
|
36
|
|
|
-
|
|
|
-
|
|
|
36
|
|
|
|
1,115
|
|
|
43
|
|
|
-
|
|
|
1,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
$
|
317,550
|
|
$
|
3,323
|
|
$
|
156
|
|
$
|
320,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELD TO MATURITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State, county and municipal
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
804
|
|
|
11
|
|
|
-
|
|
|
815
|
|
One to five years
|
|
812
|
|
|
38
|
|
|
-
|
|
|
850
|
|
Six to ten years
|
|
6,519
|
|
|
473
|
|
|
-
|
|
|
6,992
|
|
Over ten years
|
|
2,874
|
|
|
213
|
|
|
-
|
|
|
3,087
|
|
|
|
11,009
|
|
|
735
|
|
|
-
|
|
|
11,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
$
|
11,009
|
|
$
|
735
|
|
$
|
-
|
|
$
|
11,744
|
|
54
Continued
NOTE 3 - INVESTMENT
SECURITIES, Continued
|
|
|
December 31, 2010
|
|
|
|
|
Amortized
|
|
Unrealized Holding
|
|
Fair
|
|
AVAILABLE FOR SALE
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
|
|
|
|
|
|
|
|
|
|
|
One to five years
|
$
|
186,938
|
|
$
|
349
|
|
$
|
652
|
|
$
|
186,635
|
|
Six to ten years
|
|
58,047
|
|
|
137
|
|
|
322
|
|
|
57,862
|
|
|
|
244,985
|
|
|
486
|
|
|
974
|
|
|
244,497
|
|
Mortgage backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Six to ten years
|
|
2,112
|
|
|
90
|
|
|
-
|
|
|
2,202
|
|
Over ten years
|
|
8,090
|
|
|
102
|
|
|
86
|
|
|
8,106
|
|
|
|
10,202
|
|
|
192
|
|
|
86
|
|
|
10,308
|
|
State, county and municipal
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
950
|
|
|
4
|
|
|
-
|
|
|
954
|
|
One to five years
|
|
1,395
|
|
|
40
|
|
|
-
|
|
|
1,435
|
|
Six to ten years
|
|
12,531
|
|
|
332
|
|
|
82
|
|
|
12,781
|
|
Over ten years
|
|
4,442
|
|
|
5
|
|
|
142
|
|
|
4,305
|
|
|
|
19,318
|
|
|
381
|
|
|
224
|
|
|
19,475
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
|
|
|
CRA Qualified Investment Fund
|
|
1,065
|
|
|
-
|
|
|
-
|
|
|
1,065
|
|
Other
|
|
36
|
|
|
-
|
|
|
-
|
|
|
36
|
|
|
|
1,101
|
|
|
-
|
|
|
-
|
|
|
1,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
$
|
275,606
|
|
$
|
1,059
|
|
$
|
1,284
|
|
$
|
275,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELD TO MATURITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
|
|
|
|
|
|
|
|
|
|
|
One to five years
|
$
|
10,000
|
|
$
|
25
|
|
$
|
4
|
|
$
|
10,021
|
|
|
|
10,000
|
|
|
25
|
|
|
4
|
|
|
10,021
|
|
State, county and municipal
|
|
|
|
|
|
|
|
|
|
|
|
|
One to five years
|
|
1,103
|
|
|
46
|
|
|
-
|
|
|
1,149
|
|
Six to ten years
|
|
5,847
|
|
|
149
|
|
|
14
|
|
|
5,982
|
|
Over ten years
|
|
3,728
|
|
|
-
|
|
|
96
|
|
|
3,632
|
|
|
|
10,678
|
|
|
195
|
|
|
110
|
|
|
10,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
$
|
20,678
|
|
$
|
220
|
|
$
|
114
|
|
$
|
20,784
|
|
55
Continued
NOTE 3 - INVESTMENT SECURITIES, Continued
The
following tables show 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 December 31, 2011 and 2010 (tabular
amounts in thousands):
|
Less than
|
|
Twelve months
|
|
|
|
|
|
2011
|
twelve months
|
|
or more
|
|
Total
|
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
AVAILABLE FOR SALE
|
Fair value
|
|
losses
|
|
Fair value
|
|
losses
|
|
Fair value
|
|
losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
$
|
42,732
|
|
$
|
123
|
|
$
|
-
|
|
$
|
-
|
|
$
|
42,732
|
|
$
|
123
|
|
State, county, and municipal
|
|
260
|
|
|
3
|
|
|
-
|
|
|
-
|
|
|
260
|
|
|
3
|
|
Mortgage backed securities
|
|
6,507
|
|
|
30
|
|
|
-
|
|
|
-
|
|
|
6,507
|
|
|
30
|
|
Total
|
$
|
49,499
|
|
$
|
156
|
|
$
|
-
|
|
$
|
-
|
|
$
|
49,499
|
|
$
|
156
|
|
|
Less than
|
|
Twelve months
|
|
|
|
|
|
2010
|
twelve months
|
|
or more
|
|
Total
|
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
|
|
Unrealized
|
|
AVAILABLE FOR SALE
|
Fair value
|
|
losses
|
|
Fair value
|
|
losses
|
|
Fair value
|
|
losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
$
|
132,747
|
|
$
|
973
|
|
$
|
-
|
|
$
|
-
|
|
$
|
132,747
|
|
$
|
974
|
|
State, county, and municipal
|
|
5,882
|
|
|
207
|
|
|
323
|
|
|
17
|
|
|
6,205
|
|
|
224
|
|
Mortgage backed securities
|
|
5,005
|
|
|
87
|
|
|
-
|
|
|
-
|
|
|
5,005
|
|
|
86
|
|
Total
|
$
|
143,634
|
|
$
|
1,267
|
|
$
|
323
|
|
$
|
17
|
|
$
|
143,957
|
|
$
|
1,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HELD TO MATURITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
$
|
1,996
|
|
$
|
4
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,996
|
|
$
|
4
|
|
State, county, and municipal
|
|
4,534
|
|
|
110
|
|
|
-
|
|
|
-
|
|
|
4,534
|
|
|
110
|
|
Total
|
$
|
6,530
|
|
$
|
114
|
|
$
|
-
|
|
$
|
-
|
|
$
|
6,530
|
|
$
|
114
|
|
Securities classified as available for sale are recorded at fair
market value. There were no securities classified as available for sale in
an unrealized loss position for twelve months or more at December 31, 2011.
The Company owned one municipal bond with a fair value of $323,000, which had
been in an unrealized loss position for twelve months or more at December 31,
2010. At December 31, 2011, the Company retained ownership of this bond.
At December 31, 2011, the bond had a fair value of $376,000 with an unrealized
gain of $41,000. The Company does not intend to sell these securities and
it is more likely than not that the Company will not be required to sell these
securities before recovery of their amortized cost. The Company believes,
based on industry analyst reports and credit ratings, that the deterioration in
value is attributable to changes in market interest rates and not in the credit
quality of the issuer and therefore, these losses are not considered
other-than-temporary.
Securities
classified as held to maturity are recorded at cost. There were no securities
classified as held-to-maturity in an unrealized loss position at December 31,
2011. There were no securities classified as held-to-maturity in an unrealized
loss position for twelve months or more at December 31, 2010.
Investment securities with an aggregate par value
of $175,457,000 ($179,252,000 fair value) at December 31, 2011 and $204,917,000
($207,349,000 fair value) at December 31, 2010 were pledged to secure public
deposits and for other purposes.
56
Continued
NOTE 3 - INVESTMENT SECURITIES, Continued
There were
no sales of securities available for sale in 2011. During 2010, $20,758,000
par value of available for sale securities were sold for a gain of $993,000.
During 2009, $53,560,000 par value of available for sale securities were sold
for a gain of $1,576,000.
During 2010, the Company sold $2,255,000 par value
($2,370,000 fair value) of held to maturity securities, consisting of four
securities, for a net gain of $73,000. Two of these held to maturity
securities, $770,000 par value ($785,000 fair value), were sold under exception
a. of ASC 320-10-25-6 as a result of both securities losing their rating due
to a downgrade of the insurer. Two of these held to maturity securities,
$1,485,000 par value ($1,585,000 fair value), were sold under exception d. of
ASC 320-10-25-6 because the primary regulator of the Companys subsidiary bank
has increased scrutiny of capital and its components and, consequently, due to
continued uncertainty in the municipal bond markets, the amount of investment
in individual municipal securities issuers. In response to these regulatory
concerns related to capital and its components, the Company sold all of its
municipal securities of individual issuers in excess of $600,000 including all
municipal securities in this size category classified held to maturity as well
as those classified available for sale. We believe that the sale of these held
to maturity securities should not be considered inconsistent with the original
classification and the remaining portfolio is not tainted.
Management reviews securities for other-than-temporary
impairment on at least a quarterly basis, and more frequently when economic or
market concerns warrant such evaluation. Consideration is given to (1) the
length of time and the extent to which the fair value has been less than cost,
(2) the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair value.
Other Investments, at
Cost
The Bank, as a member
institution, is required to own certain stock investments in the Federal Home
Loan Bank of Atlanta ("FHLB") and the Federal Reserve Bank. The
stock is generally pledged against any borrowings from these institutions (see
Note 9 to the Consolidated Financial Statements LINES OF CREDIT). No
ready market exists for the stock and it has no quoted market value. However,
redemption of these stocks has historically been at par value.
The Companys investments in stock are summarized below (amounts in thousands):
|
December 31,
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
Federal Reserve Bank
|
$
|
116
|
|
$
|
116
|
|
FHLB
|
|
1,749
|
|
|
2,613
|
|
|
$
|
1,865
|
|
$
|
2,729
|
|
57
NOTE 4
- LOANS AND ALLOWANCE FOR LOAN LOSSES
Following is a summary of
loans by major category (amounts in thousands):
|
December 31,
|
|
|
2011
|
|
2010
|
|
Real estate - mortgage
|
$
|
334,234
|
|
$
|
362,998
|
|
Real estate - construction
|
|
52,271
|
|
|
63,080
|
|
Commercial and industrial
|
|
50,855
|
|
|
61,127
|
|
Loans to individuals for household, family and
|
|
|
|
|
|
|
other consumer expenditures
|
|
42,351
|
|
|
43,350
|
|
Agriculture
|
|
3,615
|
|
|
3,282
|
|
All other loans, including overdrafts
|
|
611
|
|
|
304
|
|
Unamortized deferred loan costs
|
|
85
|
|
|
45
|
|
|
$
|
484,022
|
|
$
|
534,186
|
|
The Bank's loan portfolio consisted of $409,901,000
and $455,307,000 in fixed rate loans as of December 31, 2011 and 2010,
respectively. Fixed rate loans with maturities in excess of one year amounted
to $287,999,000 and $316,663,000 at December 31, 2011 and 2010, respectively.
Changes in the allowance
for loan losses are summarized as follows (amounts in thousands):
|
For the years ended December 31,
|
|
|
2011
|
|
2010
|
|
2009
|
|
Balance, beginning of year
|
$
|
11,627
|
|
$
|
9,142
|
|
$
|
7,091
|
|
Recoveries of loans previously charged
|
|
|
|
|
|
|
|
|
|
against the allowance
|
|
1,445
|
|
|
704
|
|
|
1,078
|
|
Provided from current year's income
|
|
9,888
|
|
|
13,397
|
|
|
8,748
|
|
Loans charged against the allowance
|
|
(10,587)
|
|
|
(11,616)
|
|
|
(7,775)
|
|
Balance, end of year
|
$
|
12,373
|
|
$
|
11,627
|
|
$
|
9,142
|
|
As of December 31,
2011, 2010, and 2009 loans individually evaluated and considered impaired under
ASC 310-10 Receivables were as follows (amounts in thousands):
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Total loans considered impaired
|
$
|
26,036
|
|
$
|
29,074
|
|
$
|
13,578
|
|
Loans considered impaired for which there is a related
|
|
|
|
|
|
|
|
|
|
allowance for loan loss:
|
|
|
|
|
|
|
|
|
|
Outstanding loan balance
|
|
15,955
|
|
|
8,620
|
|
|
491
|
|
Related allowance established
|
|
1,484
|
|
|
709
|
|
|
176
|
|
Loans considered impaired and previously written
|
|
|
|
|
|
|
|
|
|
down to fair value
|
|
10,081
|
|
|
20,454
|
|
|
13,065
|
|
Loans considered impaired and which are classified as
|
|
|
|
|
|
|
|
|
|
troubled debt restructurings.
|
|
3,638
|
|
|
20
|
|
|
22
|
|
Average annual investment in impaired loans
|
|
26,873
|
|
|
25,241
|
|
|
6,412
|
|
Interest income recognized on impaired loans during the
|
|
|
|
|
|
|
|
|
|
period of impairment.
|
|
580
|
|
|
636
|
|
|
7
|
|
58
Continued
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Continued
The following tables summarize (in thousands of dollars)
commercial and consumer credit exposure by internally assigned grade,
collateral, and purpose as indicators of credit quality existing in the
Companys loan portfolios as of December 31, 2011 and 2010. The Company utilizes four
Pass grade categories and the regulatorily defined Other Assets Especially
Mentioned, Substandard, and Doubtful grade categories to monitor credit
risk existing in its loan portfolios on an on-going basis. The four pass
grades are defined as: Pass-1, loans that have minimal credit risk and are of
excellent quality; Pass-2, loans with satisfactory credit risk; Pass-3, loans
with reasonable credit risk, however a degree of watchfulness is warranted; and
Pass-4, loans which demonstrate some weakness and a higher degree of
watchfulness is warranted. Other Assets Especially Mentioned (OAEM) loans
have weaknesses and warrant managements close attention. Substandard loans
have a high degree of credit risk and credit factors that indicate potential
further deterioration, which could result in a protracted workout or possible
loss. Doubtful loans have a high degree of potential loss, in whole or in
part.
Commercial Credit Exposure
Credit Risk Profile by Internally Assigned Grade
December 31, 2011 and 2010
|
Commercial
Other
|
|
Commercial
Real Estate Construction
|
Commercial
Real Estate- Other
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
PASS 1
|
$
|
4,720
|
$
|
7,524
|
$
|
37
|
$
|
39
|
$
|
77
|
$
|
-
|
PASS 2
|
|
15,803
|
|
12,980
|
|
10,168
|
|
8,590
|
|
46,882
|
|
55,930
|
PASS 3
|
|
12,207
|
|
15,859
|
|
11,094
|
|
11,168
|
|
38,237
|
|
31,521
|
PASS 4
|
|
12,514
|
|
16,611
|
|
15,555
|
|
18,377
|
|
34,394
|
|
30,054
|
OAEM
|
|
4,422
|
|
6,007
|
|
4,962
|
|
9,283
|
|
7,299
|
|
14,105
|
Substandard
|
|
4,804
|
|
5,428
|
|
10,455
|
|
15,623
|
|
15,624
|
|
20,611
|
Total
|
$
|
54,470
|
$
|
64,409
|
$
|
52,271
|
$
|
63,080
|
$
|
142,513
|
$
|
152,221
|
Consumer Credit Exposure
Credit Risk Profile by Internally Assigned Grade
December 31, 2011 and 2010
Consumer
Real
Estate-Residential
|
|
|
|
|
|
|
|
2011
|
|
2010
|
PASS
1
|
$
|
164
|
$
|
761
|
PASS
2
|
|
67,010
|
|
74,462
|
PASS
3
|
|
42,424
|
|
48,216
|
PASS
4
|
|
52,577
|
|
46,158
|
OAEM
|
|
8,366
|
|
12,687
|
Substandard
|
|
21,265
|
|
28,538
|
Total
|
$
|
191,806
|
$
|
210,822
|
The Company had no loans
classified as doubtful at December 31, 2011 and 2010. The Company does not
make loans defined as sub-prime loans.
59
Continued
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
Continued
The
following table summarizes the Companys consumer credit card and all other
consumer loans based on performance at December 31, 2011 and 2010 (amounts in thousands).
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
December 31, 2011 and 2010
|
Consumer
Credit Card
|
|
Consumer
Other
|
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
$
|
3,282
|
$
|
3,225
|
$
|
39,680
|
$
|
40,429
|
|
Non-Performing
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
3,282
|
$
|
3,225
|
$
|
39,680
|
$
|
40,429
|
|
The Company classifies consumer credit cards or other consumer loans as
"Non-Performing" at 120 days or more past due. The Company had no consumer credit card
or other consumer loans classified as Non-Performing at December 31, 2011 and
2010.
The following
tables outlines the changes in the allowance for loan losses by collateral type
and purpose, the allowances for loans individually and collectively evaluated for
impairment, and the amount of loans individually and collectively evaluated for
impairment at and for the year ended December 31, 2011 and 2010 (amounts in thousands).
Allowance for Loan Losses and Recorded
Investment in Loans Receivable
At and for the Year Ended December 31, 2011
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Real Estate
|
|
Consumer
|
|
Residential
|
|
Unallocated
|
|
Total
|
|
Allowance
for loan losses
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
2,776
|
$
|
4,266
|
$
|
1,361
|
$
|
3,114
|
$
|
110
|
$
|
11,627
|
Charge-offs
|
|
(1,872)
|
|
(3,561)
|
|
(917)
|
|
(4,237)
|
|
-
|
|
(10,587)
|
Recoveries
|
|
298
|
|
836
|
|
218
|
|
93
|
|
-
|
|
1,445
|
Provisions
|
|
991
|
|
3,222
|
|
822
|
|
4,897
|
|
(44)
|
|
9,888
|
Ending
balance
|
$
|
2,193
|
$
|
4,763
|
$
|
1,484
|
$
|
3,867
|
$
|
66
|
$
|
12,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated
|
|
|
|
|
|
|
|
|
|
|
|
|
for
impairment
|
$
|
40
|
$
|
734
|
$
|
-
|
$
|
710
|
$
|
-
|
$
|
1,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively
evaluated
|
|
|
|
|
|
|
|
|
|
|
|
|
for
impairment
|
$
|
2,153
|
$
|
4,029
|
$
|
1,484
|
$
|
3,157
|
$
|
66
|
$
|
10,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance - total
|
$
|
54,470
|
$
|
194,784
|
$
|
42,962
|
$
|
191,806
|
$
|
-
|
$
|
484,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated
|
|
|
|
|
|
|
|
|
|
|
|
|
for
impairment
|
$
|
1,408
|
$
|
13,844
|
$
|
-
|
$
|
10,784
|
$
|
-
|
$
|
26,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively
evaluated
|
|
|
|
|
|
|
|
|
|
|
|
|
for
impairment
|
$
|
53,062
|
$
|
180,940
|
$
|
42,962
|
$
|
181,022
|
$
|
-
|
$
|
457,986
|
60
Continued
NOTE
4 - LOANS AND ALLOWANCE FOR LOAN LOSSES Continued
Allowance for Loan Losses
and Recorded Investment in Loans Receivable
At and for the Year Ended December 31, 2010
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Real Estate
|
|
Consumer
|
|
Residential
|
|
Unallocated
|
|
Total
|
|
Allowance
for loan losses
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
$
|
3,309
|
$
|
2,246
|
$
|
1,228
|
$
|
2,344
|
$
|
15
|
$
|
9,142
|
Charge-offs
|
|
(3,273)
|
|
(4,639)
|
|
(899)
|
|
(2,805)
|
|
-
|
|
(11,616)
|
Recoveries
|
|
259
|
|
14
|
|
372
|
|
59
|
|
-
|
|
704
|
Provisions
|
|
2,481
|
|
6,645
|
|
660
|
|
3,516
|
|
95
|
|
13,397
|
Ending
balance
|
$
|
2,776
|
$
|
4,266
|
$
|
1,361
|
$
|
3,114
|
$
|
110
|
$
|
11,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated
|
|
|
|
|
|
|
|
|
|
|
|
|
for
impairment
|
$
|
-
|
$
|
506
|
$
|
-
|
$
|
203
|
$
|
-
|
$
|
709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively
evaluated
|
|
|
|
|
|
|
|
|
|
|
|
|
for
impairment
|
$
|
2,776
|
$
|
3,760
|
$
|
1,361
|
$
|
2,911
|
$
|
110
|
$
|
10,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance - total
|
$
|
64,409
|
$
|
215,301
|
$
|
43,654
|
$
|
210,822
|
$
|
-
|
$
|
534,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated
|
|
|
|
|
|
|
|
|
|
|
|
|
for
impairment
|
$
|
315
|
$
|
19,977
|
$
|
-
|
$
|
8,782
|
$
|
-
|
$
|
29,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collectively
evaluated
|
|
|
|
|
|
|
|
|
|
|
|
|
for
impairment
|
$
|
64,094
|
$
|
195,324
|
$
|
43,654
|
$
|
202,040
|
$
|
-
|
$
|
505,112
|
The following table outlines the performance status of the Companys loan
portfolios by collateral type and purpose at December 31, 2011 and 2010
(amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
|
Than
|
|
|
|
|
|
|
Than
|
|
|
|
|
|
|
|
90 Days
|
|
|
30-59 Days
|
|
60-89 Days
|
|
90 Days
|
|
Total
|
|
|
|
Total Loans
|
|
Past Due
|
2011
|
|
Past
Due
|
|
Past
Due
|
|
Past Due
|
|
Past Due
|
|
Current
|
|
Receivable
|
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
1,206
|
$
|
1,559
|
$
|
807
|
$
|
3,572
|
$
|
50,898
|
$
|
54,470
|
$
|
-
|
Commercial real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate- construction
|
|
1,190
|
|
625
|
|
4,226
|
|
6,041
|
|
46,230
|
|
52,271
|
|
18
|
Commercial
real estate-
other
|
|
2,650
|
|
465
|
|
4,317
|
|
7,432
|
|
135,081
|
|
142,513
|
|
-
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer-residential
|
|
2,201
|
|
1,532
|
|
9,175
|
|
12,908
|
|
178,898
|
|
191,806
|
|
1,898
|
Consumer-credit
cards
|
|
26
|
|
54
|
|
39
|
|
119
|
|
3,163
|
|
3,282
|
|
39
|
Consumer-other
|
|
1,116
|
|
330
|
|
345
|
|
1,791
|
|
37,889
|
|
39,680
|
|
186
|
Total
|
$
|
8,389
|
$
|
4,565
|
$
|
18,909
|
$
|
31,863
|
$
|
452,159
|
$
|
484,022
|
$
|
2,141
|
61
Continued
NOTE
4 - LOANS AND ALLOWANCE FOR LOAN LOSSES Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
Greater
|
|
|
|
|
|
|
|
Than
|
|
|
|
|
|
|
Than
|
|
|
|
|
|
|
|
90 Days
|
|
|
30-59 Days
|
|
60-89 Days
|
|
90 Days
|
|
Total
|
|
|
|
Total Loans
|
|
Past Due
|
2010
|
|
Past
Due
|
|
Past Due
|
|
Past Due
|
|
Past Due
|
|
Current
|
|
Receivable
|
|
Accruing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
877
|
$
|
564
|
$
|
-
|
$
|
1,441
|
$
|
62,968
|
$
|
64,409
|
$
|
-
|
Commercial real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate- construction
|
|
1,838
|
|
853
|
|
7,630
|
|
10,321
|
|
52,759
|
|
63,080
|
|
12
|
Commercial
real estate-
other
|
|
1,146
|
|
591
|
|
5,856
|
|
7,593
|
|
144,628
|
|
152,221
|
|
161
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer-residential
|
|
3,297
|
|
4,237
|
|
5,487
|
|
13,021
|
|
197,801
|
|
210,822
|
|
695
|
Consumer-credit
cards
|
|
36
|
|
44
|
|
26
|
|
106
|
|
3,119
|
|
3,225
|
|
27
|
Consumer-other
|
|
829
|
|
373
|
|
147
|
|
1,349
|
|
39,080
|
|
40,429
|
|
147
|
Total
|
$
|
8,023
|
$
|
6,662
|
$
|
19,146
|
$
|
33,831
|
$
|
500,355
|
$
|
534,186
|
$
|
1,042
|
In addition to
those loans placed in a nonaccrual status, there are certain loans in the
portfolio which are not yet 90 days past due but about which management has
concerns regarding the ability of the borrower to comply with present loan repayment
terms. Such loans and nonaccrual loans are classified as
impaired. Problem loan identification includes a review of
individual loans, the borrowers and guarantors financial capacity and
position, loss potential, and present economic conditions. A
specific allocation is provided for impaired loans not yet placed in nonaccrual
status and not yet written down to fair value in managements determination of
the allowance for loan losses. The following tables outline the Companys loans
classified as impaired by collateral type and purpose at December 31, 2011 and
2010 (amounts in thousands):
Impaired Loans
At and for the Year Ended December 31, 2011
|
|
|
|
Unpaid
|
|
|
|
Average
|
|
Interest
|
|
|
Recorded
|
|
Principal
|
|
Related
|
|
Recorded
|
|
Income
|
|
Investment
|
|
Balance
|
|
Allowance
|
|
Investment
|
|
Recognized
|
With no related
allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate-construction
|
$
|
2,391
|
$
|
2,797
|
$
|
-
|
$
|
4,891
|
$
|
-
|
Commercial
real estate-other
|
|
4,853
|
|
4,876
|
|
-
|
|
6,511
|
|
61
|
Commercial
and industrial
|
|
939
|
|
987
|
|
-
|
|
838
|
|
17
|
Consumer-residential
|
|
1,897
|
|
1,939
|
|
-
|
|
3,454
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance
recorded:
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate-construction
|
$
|
3,341
|
$
|
5,748
|
$
|
469
|
$
|
3,042
|
$
|
43
|
Commercial
real estate-other
|
|
3,259
|
|
3,720
|
|
265
|
|
2,015
|
|
95
|
Commercial
and industrial
|
|
469
|
|
648
|
|
40
|
|
70
|
|
20
|
Consumer-residential
|
|
8,887
|
|
10,942
|
|
710
|
|
6,052
|
|
308
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate-construction
|
$
|
5,732
|
$
|
8,545
|
$
|
469
|
$
|
7,933
|
$
|
43
|
Commercial
real estate-other
|
|
8,112
|
|
8,596
|
|
265
|
|
8,526
|
|
156
|
Commercial
and industrial
|
|
1,408
|
|
1,635
|
|
40
|
|
908
|
|
37
|
Consumer-residential
|
|
10,784
|
|
12,881
|
|
710
|
|
9,506
|
|
344
|
|
$
|
26,036
|
$
|
31,657
|
$
|
1,484
|
$
|
26,873
|
$
|
580
|
62
Continued
NOTE
4 - LOANS AND ALLOWANCE FOR LOAN LOSSES Continued
Impaired Loans
At and for the Year Ended December 31, 2010
|
|
|
|
Unpaid
|
|
|
|
Average
|
|
Interest
|
|
|
Recorded
|
|
Principal
|
|
Related
|
|
Recorded
|
|
Income
|
|
Investment
|
|
Balance
|
|
Allowance
|
|
Investment
|
|
Recognized
|
With no related
allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate-construction
|
$
|
6,563
|
$
|
7,977
|
$
|
-
|
$
|
8,210
|
$
|
27
|
Commercial
real estate-other
|
|
7,952
|
|
7,975
|
|
-
|
|
4,495
|
|
294
|
Commercial
and industrial
|
|
315
|
|
315
|
|
-
|
|
314
|
|
13
|
Consumer-residential
|
|
4,455
|
|
4,743
|
|
-
|
|
4,648
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance
recorded:
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate-construction
|
$
|
4,138
|
$
|
6,175
|
$
|
419
|
$
|
3,799
|
$
|
32
|
Commercial
real estate-other
|
|
1,324
|
|
1,705
|
|
87
|
|
729
|
|
23
|
Commercial
and industrial
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
Consumer-residential
|
|
4,327
|
|
4,947
|
|
203
|
|
3,046
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate-construction
|
$
|
10,701
|
$
|
14,152
|
$
|
419
|
$
|
12,009
|
$
|
59
|
Commercial
real estate-other
|
|
9,276
|
|
9,680
|
|
87
|
|
5,224
|
|
317
|
Commercial
and industrial
|
|
315
|
|
315
|
|
-
|
|
314
|
|
13
|
Consumer-residential
|
|
8,782
|
|
9,690
|
|
203
|
|
7,694
|
|
247
|
|
$
|
29,074
|
$
|
33,837
|
$
|
709
|
$
|
25,241
|
$
|
636
|
The following table outlines the
Companys loans on nonaccrual status by collateral type and purpose for the
years ended December 31, 2011 and 2010 (amounts in thousands).
Loans on Nonaccrual
Status
As of December 31, 2011 and 2010
|
|
2011
|
|
2010
|
Commercial
|
$
|
1,250
|
$
|
315
|
Commercial real estate:
|
|
|
|
|
Commercial real estate construction
|
|
5,414
|
|
9,71
|
Commercial real estate other
|
|
7,541
|
|
9,250
|
|
|
|
|
|
Consumer:
|
|
|
|
|
Consumer-credit card
|
|
-
|
|
-
|
Consumer-other
|
|
159
|
|
-
|
|
|
|
|
|
Residential:
|
|
|
|
|
Residential
|
|
8,549
|
|
6,428
|
Total
|
$
|
22,913
|
$
|
25,704
|
At December 31, 2011 and 2010, nonaccrual loans
totaled $22,913,000 and $25,704,000, respectively. The total amount of
interest earned on nonaccrual loans was $386,000 in 2011, $408,000 in 2010 and
$318,000 in 2009. The gross interest income which would have been recorded
under the original terms of the nonaccrual loans amounted to $1,919,000 in
2011, $1,847,000 in 2010, and $953,000 in 2009. Foregone interest on
nonaccrual loans totaled $1,533,000 in 2011, $1,439,000 in 2010, and $635,000
in 2009. The Company writes
down any confirmed losses associated with nonaccrual loans at the time such
loans are placed in a nonaccrual status. Accrued and unpaid current period
interest income on nonaccrual loans is reversed to current period income at the
time a loan is placed in nonaccrual status. Accrued and unpaid prior period
interest income on nonaccrual loans is charged to the Allowance for Loan Losses
at the time the loan is placed in nonaccrual status. Any payments received on
loans placed in nonaccrual status are applied first to principal. The Company
recognized $126,000 of interest on a cash basis on one loan relationship
consisting of five nonaccrual loans totaling $1,949,000 during 2011. The
Company did not recognize interest income on nonaccrual loans on a cash basis
during any of 2010 and 2009.
63
Continued
NOTE
4 - LOANS AND ALLOWANCE FOR LOAN LOSSES Continued
At December 31, 2011 and 2010 the amount of loans
ninety days or more past due and still accruing interest totaled $2,141,000 and
$1,042,000, respectively. Loans ninety days or more past due and still
accruing interest primarily consist of consumer loans which are placed in
nonaccrual status at one hundred twenty days or more past due.
At
December 31, 2011 and 2010 classified assets, the majority consisting of
classified loans, were $62,811,000 and $76,642,000, respectively. At December
31, 2011 and 2010 classified assets represented 63.03% and 78.24% of total
capital (the sum of Tier 1 Capital and the Allowance for Loan Losses),
respectively.
Troubled Debt Restructurings
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 troubled
debt restructurings (TDRs) under the amended guidance. The Company identified
six loans with a recorded investment of $3,836,000 which met the definition of a TDR under the amended guidance. All of these loans were classified as impaired
prior to restructuring. The allowance for loan losses associated with these
loans was previously, and will continue to be, determined under the impairment
measurement guidance in ASC 310-10-35.
Troubled debt restructurings that were made during the year ended December
31, 2011 are illustrated in the table below (dollar amounts in thousands):
|
For the year ended
December
31, 2011
|
|
|
Pre-Modification
|
Post-Modification
|
|
|
Outstanding
|
Outstanding
|
|
Number of
|
Recorded
|
Recorded
|
|
Contracts
|
Investment
|
Investment
|
|
|
|
|
Troubled
Debt Restructurings
|
|
|
|
Commercial
|
1
|
$ 247
|
$ 247
|
Commercial
real estate-construction
|
1
|
487
|
487
|
Commercial
real estate - other
|
1
|
1,609
|
1,609
|
Consumer -
residential
|
3
|
1,493
|
1,493
|
During the year ended December 31, 2011, six loans were modified
and considered to be troubled debt restructurings. All six loans were granted
an extended term and no interest rate concessions were made.
Troubled debt
restructurings are considered in default when they become ninety or more days
past due. Troubled debt restructurings which have defaulted during year ended December
31, 2011 are presented in the tables below (dollar amounts in thousands):
|
Year ended
December
31,
2011
|
|
Number of
Contracts
|
Recorded Investment
|
|
Troubled
Debt Restructurings
|
|
|
That
Subsequently Defaulted
|
|
|
During the
Period:
|
|
|
Commercial
|
-
|
$ -
|
Commercial
real estate-construction
|
1
|
13
|
Commercial
real estate - other
|
1
|
1,435
|
Consumer -
residential
|
1
|
910
|
During
the year ended December 31, 2011, three loans that had previously been
restructured, were in default.
64
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 is
summarized as follows (amounts in thousands):
|
2011
|
|
2010
|
|
Land and buildings
|
$
|
26,402
|
|
$
|
26,386
|
|
Furniture, fixtures and equipment
|
|
8,821
|
|
|
8,897
|
|
|
|
35,223
|
|
|
35,283
|
|
Less accumulated depreciation and amortization
|
|
(14,089)
|
|
|
(13,195)
|
|
|
|
21,134
|
|
|
22,088
|
|
Construction in progress
|
|
115
|
|
|
-
|
|
|
$
|
21,249
|
|
$
|
22,088
|
|
Depreciation and amortization of premises and equipment charged to operating
expense totaled $1,333,000 in 2011, $1,493,000 in 2010, and $1,538,000 in 2009.
The construction in progress is primarily related to the renovation of the
Companys Main Street branch and Socastee
branch offices and the installation of a new automated teller machine (ATM) at
the Companys Conway Banking Office. Remaining construction and equipment costs
are approximately $69.
Depreciation
with regard to premises and equipment owned by the Company is recorded using
the straight-line method over the estimated useful life of the related asset
for financial reporting purposes. Estimated lives range from fifteen to
thirty-nine years for buildings and improvements and from five to seven years
for furniture and equipment. Estimated lives for computer software are
typically five years. Estimated lives of Bank automobiles are typically five
years. Estimating the useful lives of premises and equipment includes a
component of management judgment.
NOTE 6 OTHER REAL ESTATE OWNED
The following summarizes the activity in the other real estate owned for
the years ended December 31, 2011 and 2010 (amounts in thousands):
|
2011
|
|
2010
|
|
Balance, beginning of year
|
$
|
5,476
|
|
$
|
1,622
|
|
Additions - foreclosures
|
|
8,711
|
|
|
7,363
|
|
Proceeds from sales
|
|
(3,929)
|
|
|
(3,231)
|
|
Write downs
|
|
(1,195)
|
|
|
(278)
|
|
Balance, end of year
|
$
|
9,063
|
|
$
|
5,476
|
|
65
NOTE 7 - DEPOSITS
A
summary of deposits, by type, as of December 31 follows (tabular amounts in
thousands):
|
|
|
2011
|
|
2010
|
|
Transaction accounts
|
|
|
$
|
225,060
|
|
$
|
200,615
|
|
Savings deposits
|
|
|
|
68,295
|
|
|
59,426
|
|
Insured money market accounts
|
|
|
84,348
|
|
|
82,663
|
|
Time deposits over $100,000
|
|
|
|
201,362
|
|
|
215,935
|
|
Other time deposits
|
|
|
|
153,560
|
|
|
159,501
|
|
Total deposits
|
|
|
$
|
732,625
|
|
$
|
718,140
|
|
Interest
paid on certificates of deposit of $100,000 or more totaled $2,783,000, in
2011, $4,362,000 in 2010, and $5,359,000 in 2009.
The
Company had no brokered deposits in 2011 or 2010.
At December 31, 2011, the scheduled maturities of
time deposits are as follows (dollar amounts in thousands):
2012
|
$
|
292,706
|
2013
|
|
38,833
|
2014
|
|
7,219
|
2015
|
|
6,745
|
2016 and after
|
|
9,419
|
|
$
|
354,922
|
The amount of
overdrafts classified as loans at December 31, 2011 and 2010 were $611,000 and
$304,000, respectively.
NOTE 8 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under
repurchase agreements are summarized as follows (dollar amounts in
thousands):
|
At and for the year ended
|
|
|
December 31,
|
|
|
2011
|
|
2010
|
|
Amount outstanding at year end
|
$
|
87,784
|
|
$
|
99,153
|
|
Average amount outstanding during year
|
|
98,009
|
|
108,392
|
|
Maximum outstanding at any month-end
|
111,274
|
|
113,463
|
|
Weighted average rate paid at year-end
|
|
.22%
|
|
|
.46%
|
|
Weighted average rate paid during year
|
|
.28%
|
|
|
.73%
|
|
The Bank enters into sales of securities under
agreements to repurchase. These obligations to repurchase securities sold are
reflected as liabilities in the consolidated balance sheets. The dollar amount
of securities underlying the agreements are book entry securities maintained with
an independent third party safekeeping agent. Government sponsored enterprise
and municipal securities with a book value of $101,383,000 ($101,742,000 fair
value) and $117,386,000 ($117,549,000 fair value) at December 31, 2011 and 2010,
respectively, were pledged as collateral for the agreements.
66
NOTE 9 - LINES OF
CREDIT
At December 31, 2011, the Bank had unused
short-term lines of credit totaling $22,000,000 to purchase Federal Funds from
unrelated banks. These lines of credit are available on a one to seven day
basis for general corporate purposes of the Bank. All of the lenders have
reserved the right to withdraw these lines at their option.
During 2011 the U.S. Treasury announced that
beginning January 1, 2012 the Treasury would discontinue the practice of
leaving a portion of the funds paid through depository financial institutions
with those depositories, effectively ending its Treasury, Tax and Loan
program. The Bank closed its demand note through the U.S. Treasury, Tax and
Loan system with the Federal Reserve Bank of Richmond (FRB) on November 30,
2011. However, during the portion of 2011 the Bank maintained this
arrangement, the Bank could borrow up to $7,000,000 at varying rates set weekly
by the FRB. The FRB did not charge interest under the arrangement for 2011 or
2010. On November 30, 2011, the date the arrangement was closed, the note was
secured by Federal agency securities with a market value of $2,998,000, and the
amount outstanding under the note totaled $473,000. At December 31, 2010, the
note was secured by Federal agency securities with a market value of $4,067,000,
and the amount outstanding under the note totaled $2,324,000.
The Bank also has a line of credit from the
Federal Home Loan Bank (FHLB) for $55,726,000 secured by a lien on the Banks
qualifying 1-4 family mortgages and the Banks investment in FHLB stock.
Allowable terms range from overnight to 20 years at varying rates set daily by
the FHLB. The amount outstanding under the agreement totaled $0 at December
31, 2011 and 2010, respectively.
NOTE 10 - INCOME
TAXES
The
provision for income taxes is reconciled to the amount of income tax computed
at the federal statutory rate on income before income taxes as follows (dollar
amounts in thousands):
|
|
|
For the years ended December 31,
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax expense at statutory rate
|
$
|
457
|
|
34.00%
|
|
$
|
369
|
|
34.00%
|
|
$
|
2,441
|
|
34.00%
|
|
Increase/(decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt interest
|
|
(394)
|
|
(29.33)
|
|
|
(398)
|
|
(36.71)
|
|
|
(386)
|
|
(5.38)
|
|
State bank tax (net of federal benefit)
|
|
36
|
|
2.69
|
|
|
17
|
|
1.57
|
|
|
122
|
|
1.70
|
|
Other - net
|
|
25
|
|
1.87
|
|
|
56
|
|
5.20
|
|
|
(64)
|
|
(.89)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax provision
|
$
|
124
|
|
9.23%
|
|
$
|
44
|
|
4.06%
|
|
$
|
2,113
|
|
29.43%
|
|
The sources and tax effects of temporary
differences that give rise to significant portions of the deferred tax assets
and deferred tax liabilities are as follows (amounts in thousands):
|
For the years ended December 31,
|
|
|
2011
|
|
2010
|
|
2009
|
|
Income taxes currently payable
|
|
|
|
|
|
|
|
|
|
Federal
|
$
|
582
|
|
$
|
766
|
|
$
|
3,063
|
|
State
|
|
55
|
|
|
26
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
637
|
|
|
792
|
|
|
3,248
|
|
Net deferred income tax
benefit
|
|
(513)
|
|
|
(748)
|
|
|
(1,135)
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
$
|
124
|
|
$
|
44
|
|
$
|
2,113
|
|
The net deferred tax asset is included in other assets at
December 31, 2011 and 2010.
67
Continued
NOTE 10 - INCOME TAXES Continued
A portion of the change in net deferred taxes
relates to the change in unrealized net gains and losses on securities
available for sale. The related 2011 tax expense of $1,340,000 and
the 2010 tax benefit of $760,000 have been recorded directly to stockholders
equity. The balance of the change in net deferred taxes results from
the current period deferred tax benefit or expense.
Tax returns for 2008 and subsequent years are subject
to examination by taxing authorities.
Deferred tax assets represent the future tax benefit of
deductible differences and, if it is more likely than not that a tax asset will
not be realized, a valuation allowance is required to reduce the recorded
deferred tax assets to net realizable value. After review of all positive
and negative factors, as of December 31, 2011 management has determined that it
is more likely than not that the total deferred tax asset will be realized
except for the deferred tax asset associated with state net operating loss carryforwards and, accordingly has established a valuation allowance only for
this item. The valuation allowance increased by $4,000 in 2011.
The following summary of the provision for income taxes
includes tax deferrals which arise from temporary differences in the
recognition of certain items of revenue and expense for tax and financial
reporting purposes (amounts in thousands):
|
December 31,
|
|
2011
|
|
2010
|
Deferred tax assets:
|
|
|
|
Allowance for loan losses deferred for tax purposes
|
$
|
4,207
|
|
$
|
3,953
|
Deferred compensation
|
|
403
|
|
|
450
|
Executive retirement plan
|
|
185
|
|
|
173
|
Unrealized net losses on securities available for sale
|
|
-
|
|
|
90
|
Interest on nonaccrual loans
|
|
521
|
|
|
489
|
Other
|
|
582
|
|
|
302
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
5,898
|
|
|
5,457
|
Less valuation allowance
|
|
35
|
|
|
31
|
|
|
|
|
|
|
Net deferred tax assets
|
|
5,863
|
|
|
5,426
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Depreciation for income tax reporting in excess of amount
|
|
|
|
|
|
for financial reporting
|
|
(681)
|
|
|
(705)
|
Unrealized net gains on securities available for sale
|
|
(1,250)
|
|
|
-
|
Other
|
|
(197)
|
|
|
(159)
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
(2,128)
|
|
|
(864)
|
|
|
|
|
|
|
Net deferred tax asset
|
$
|
3,735
|
|
$
|
4,562
|
68
NOTE 11 - FINANCIAL
INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Bank is a party to financial instruments with
off balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the accompanying consolidated balance sheets. The
contractual amounts of those instruments reflect the extent of involvement the
Bank has in particular classes of financial instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on balance sheet instruments.
The contractual value of the Bank's off balance
sheet financial instruments is as follows as of December 31, 2011 (amounts in
thousands):
|
Contract
|
|
|
amount
|
|
|
|
|
Commitments to extend credit
|
$
|
33,903
|
|
|
|
|
|
Standby letters of credit
|
$
|
1,337
|
|
Commitments to extend
credit are agreements to lend as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained if deemed necessary by the Bank upon extension of
credit is based on management's credit evaluation.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
At December 31, 2011 the Bank had no significant obligations under capital or operating
leases.
The Company is party to litigation and claims
arising in the normal course of business. Management, after consultation with
legal counsel, believes that the liabilities, if any, arising from such
litigation and claims will not be material to the Company's financial position
or results of operations.
69
NOTE 13 - RESTRICTION ON DIVIDENDS
The ability of the Company to pay dividends is
currently subject to prior approval of the Federal Reserve pursuant to a
Memorandum of Understanding between the Company and the Federal Reserve. The
ability of the Company to pay cash dividends is dependent upon receiving cash
in the form of dividends from the Bank. The ability of the Bank to pay
dividends is currently limited and subject to prior approval of the OCC pursuant
to a Formal Agreement between the Bank and the OCC. Additionally, federal
banking regulations restrict the amount of dividends that can be paid and such
dividends are payable only from the retained earnings of the Bank. At December
31, 2011, the Banks retained earnings were $83,388,000.
NOTE 14 - TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND ASSOCIATES
Directors and executive officers of the Company
and the Bank and associates of such persons are customers of and have loan and
deposit transactions with the Bank in the ordinary course of business.
Additional transactions may be expected to take place in the future. Loans and
commitments are made on comparable terms, including interest rates and
collateral, as those prevailing at the time for other customers of the Bank,
and do not involve more than normal risk of collectibility or present other
unfavorable features.
Total
loans to all executive officers and directors, including immediate family and
business interests, at December 31, were as follows (amounts in
thousands):
|
December 31,
|
|
|
2011
|
|
2010
|
|
|
|
|
|
|
Balance, beginning of year
|
$
|
1,936
|
|
$
|
2,031
|
|
New loans
|
|
95
|
|
|
192
|
|
Less loan payments
|
|
595
|
|
|
287
|
|
Balance, end of year
|
$
|
1,436
|
|
$
|
1,936
|
|
Deposits by directors and executive
officers of the Company and the Bank, and associates of such persons, totaled
$10,359,000 and $14,641,000 at December 31, 2011 and 2010, respectively.
NOTE 15 - EMPLOYEE
BENEFIT PLAN
The Bank has a defined contribution pension plan
covering all employees who have attained age twenty-one and have a minimum of
one year of service. Upon ongoing approval of the Board of Directors, the Bank
matches one hundred percent of employee contributions up to three percent of
employee salary deferred and fifty percent of employee contributions in excess
of three percent and up to five percent of salary deferred. The Board of
Directors may also make discretionary contributions to the Plan. For the years
ended December 31, 2011, 2010 and 2009, $382,000, $388,000 and $380,000,
respectively, were charged to operations under the plan.
Supplemental
benefits are provided to certain key officers under The Conway National Bank
Executive Supplemental Income Plan (ESI) and the Long-Term Deferred
Compensation Plan (LTDC). These plans are not qualified under the Internal
Revenue Code. The plans are unfunded. However, certain benefits under the ESI
Plan are informally and indirectly funded by insurance policies on the lives of
the covered employees.
The ESI plan provides a life insurance benefit on the life of the covered officer
payable to the officer's beneficiary. The plan also provides a retirement
stipend to certain officers. For the years ended December 31, 2011, 2010, and
2009, the Bank had $180,399, $144,704 and $290,518 in income and $61,812, $57,480
and $53,678 of expense associated with this plan, respectively. The LTDC plan
provides cash awards to certain officers payable upon death, retirement, or
separation from service. The awards are made in dollar increments equivalent
to the value of the Company's stock at the time of the award. The Bank
maintains the value of awards in amounts equal to current market value of the
Company's stock plus any cash dividends paid. Such plans are commonly referred
to as phantom stock plans. For the years ended December 31, 2011 and 2010, due
to a decline in the market value of the Companys stock, the Company experienced
benefits related to the plan of $12,155 and $170,022, respectively. For the
year ended December 31, 2009, $81,947 was charged to operations under the plan.
70
NOTE 16 - REGULATORY MATTERS
The Company and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company and Bank. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company and the
Banks capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation
to ensure capital adequacy require the Company and 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. Management
believes, as of December 31, 2011, the Company and the Bank meet all capital
adequacy requirements to which they are subject.
The Companys and the Banks actual capital
amounts and ratios and minimum regulatory amounts and ratios are presented as
follows (dollar amounts in thousands):
CNB Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For capital
|
|
|
|
|
|
|
adequacy purposes
|
|
|
Actual
|
|
Minimum
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
As of December 31, 2011
|
|
|
|
|
|
|
|
|
Total Capital (to risk
|
|
|
|
|
|
|
|
|
|
|
weighted assets)
|
$
|
94,264
|
|
17.69%
|
|
$
|
42,633
|
|
8.00%
|
|
Tier 1 Capital (to risk
|
|
|
|
|
|
|
|
|
|
|
weighted assets)
|
|
87,532
|
|
16.43
|
|
|
21,317
|
|
4.00
|
|
Tier 1 Capital (to average assets)
|
|
87,532
|
|
9.42
|
|
|
37,164
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk
|
|
|
|
|
|
|
|
|
|
|
weighted assets)
|
$
|
93,564
|
|
16.62%
|
|
$
|
45,043
|
|
8.00%
|
|
Tier 1 Capital (to risk
|
|
|
|
|
|
|
|
|
|
|
weighted assets)
|
|
86,469
|
|
15.36
|
|
|
22,522
|
|
4.00
|
|
Tier 1 Capital (to average assets)
|
|
86,469
|
|
9.21
|
|
|
37,574
|
|
4.00
|
|
The Conway National Bank
|
|
|
|
|
|
|
|
|
To be well capitalized
|
|
|
|
|
|
|
|
|
For capital
|
|
under prompt corrective
|
|
|
|
|
|
|
|
|
adequacy purposes
|
|
|
action provisions
|
|
|
|
|
|
Actual
|
|
|
Minimum
|
|
|
Minimum
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
As of December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted assets)
|
$
|
93,991
|
|
17.64%
|
|
$
|
42,631
|
|
8.00%
|
|
$
|
53,288
|
|
10.00%
|
|
Tier 1 Capital (to risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted assets)
|
|
87,259
|
|
16.37
|
|
|
21,315
|
|
4.00
|
|
|
31,973
|
|
6.00
|
|
Tier 1 Capital (to average assets)
|
|
87,259
|
|
9.39
|
|
|
37,163
|
|
4.00
|
|
|
46,454
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted assets)
|
$
|
93,432
|
|
16.59%
|
|
$
|
45,043
|
|
8.00%
|
|
$
|
56,304
|
|
10.00%
|
|
Tier 1 Capital (to risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
weighted assets)
|
|
86,337
|
|
15.33
|
|
|
22,522
|
|
4.00
|
|
|
33,782
|
|
6.00
|
|
Tier 1 Capital (to average assets)
|
|
86,337
|
|
9.19
|
|
|
37,572
|
|
4.00
|
|
|
46,966
|
|
5.00
|
|
In addition to the general regulatory capital requirements
shown above, the Bank is currently required to maintain individual minimum
capital ratios by the OCC. Those required ratios are: Tier 1 capital to
average assets 8.5%; Tier 1 capital to risk weighted assets 12.0%; and
total capital to risk weighted assets 14.0%.
71
NOTE 17 - ESTIMATED FAIR VALUE OF
FINANCIAL INSTRUMENTS
The
estimated fair values of the Company's financial instruments were as follows at
December 31 (amounts in thousands):
|
2011
|
|
2010
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
FINANCIAL ASSETS
|
|
|
|
|
|
|
|
|
Cash and due from banks and Federal Reserve
|
$
|
55,000
|
|
$
|
55,000
|
|
$
|
32,517
|
|
$
|
32,517
|
|
balance in excess of requirement
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold
|
|
10,000
|
|
|
10,000
|
|
|
14,000
|
|
|
14,000
|
|
Investment securities available for sale
|
|
320,717
|
|
|
320,717
|
|
|
275,381
|
|
|
275,381
|
|
Investment securities held to maturity
|
|
11,009
|
|
|
11,744
|
|
|
20,678
|
|
|
20,784
|
|
Other investments
|
|
1,865
|
|
|
1,865
|
|
|
2,729
|
|
|
2,729
|
|
Loans (net)
|
|
471,649
|
|
|
477,168
|
|
|
522,559
|
|
|
527,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
732,625
|
|
|
731,660
|
|
|
718,140
|
|
|
716,733
|
|
Securities sold under repurchase agreements
|
|
87,784
|
|
|
87,784
|
|
|
99,153
|
|
|
99,153
|
|
U.S. Treasury demand notes
|
|
-
|
|
|
-
|
|
|
2,324
|
|
|
2,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
|
|
Notional
|
|
|
|
|
|
Amount
|
|
|
|
|
Amount
|
|
|
|
|
OFF BALANCE SHEET INSTRUMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
$
|
33,903
|
|
|
|
|
$
|
38,343
|
|
|
|
|
Standby letters of credit
|
|
1,337
|
|
|
|
|
|
1,577
|
|
|
|
|
Accounting
standards require disclosures about the fair value of assets and liabilities
recognized in the balance sheet in periods subsequent to initial recognition,
whether the measurements are made on a recurring basis (for example,
available-for-sale investment securities) or on a nonrecurring basis (for
example, impaired loans).
The accounting standard defines fair value as the
exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the
measurement date. It also establishes a fair value hierarchy which requires an
entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:
Level 1
|
Quoted market prices in active markets for identical assets or liabilities.
Level 1 assets and liabilities include debt and equity securities and
derivative contracts that are traded in an active exchange market, as well as
U.S. Treasuries, and money market funds.
|
Level 2
|
Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data
for substantially the full term of the assets or liabilities. Level 2 assets
and liabilities include debt securities with quoted prices that are traded
less frequently than exchange-traded instruments, mortgage-backed securities,
municipal bonds, corporate debt securities, and derivative contracts whose
value is determined using a pricing model with inputs that are observable in
the market or can be derived principally from or corroborated by observable
market data. This category generally includes certain derivative contracts
and impaired loans.
|
72
Continued
NOTE 17 - ESTIMATED FAIR VALUE OF
FINANCIAL INSTRUMENTS, Continued
Level 3
|
Unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. Level 3 assets
and liabilities include financial instruments whose value is determined using
pricing models, discounted cash flow methodologies, or similar techniques, as
well as instruments for which the determination of fair value requires
significant management judgment or estimation. For example, this category
generally includes certain private equity investments, retained residual
interests in securitizations, residential mortgage servicing rights, and
highly-structured or long-term derivative contracts.
|
Following
is a description of valuation methodologies used for assets and liabilities
recorded at fair value on a recurring or non-recurring basis:
Investment
Securities Available for Sale
Measurement is on a recurring basis based upon quoted market prices, if
available. If quoted market 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 prepayment assumptions,
projected credit losses, and liquidity. Level 1 securities include those
traded on an active exchange or by dealers or brokers in active over-the-counter
markets. Level 2 securities include securities issued by government sponsored
enterprises, municipal securities, and mortgage-backed securities issued by
government sponsored enterprises. Generally these fair values are priced from
established pricing models.
Loans
Loans that are
considered impaired are recorded at fair value on a non-recurring basis. Once
a loan is considered impaired, the fair value is measured using one of several
methods, including collateral liquidation value, market value of similar debt
and discounted cash flows. Those impaired loans not requiring a specific
charge against the allowance represent loans for which the fair value of the
expected repayments or collateral meet or exceed the recorded investment in the
loan. At December 31, 2011, substantially all of the total impaired loans were
evaluated based on the fair value of the underlying collateral. When the
Company records the fair value based upon a current appraisal, the fair value
measurement is considered a Level 2 measurement. When a current appraisal is
not available or there is estimated further impairment below the current
appraised value the measurement is considered a Level 3 measurement.
Other Real Estate Owned (OREO)
Other real estate owned is adjusted to fair value upon transfer of the loans to
foreclosed assets. Subsequently, other real estate owned is carried at the
lower of carrying value or fair value. Fair value is based upon independent
market prices, appraised values of the collateral or management's 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 Bank records the
other real estate owned 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 other real estate owned as non-recurring Level
3.
73
Continued
NOTE 17 - ESTIMATED FAIR VALUE OF
FINANCIAL INSTRUMENTS, Continued
Assets and liabilities measured at fair value on
a recurring basis for December 31, 2011 and 2010 are presented in the following
table (dollars in thousands):
2011
|
|
Quoted
market price
in active markets
(Level 1)
|
|
Significant other
observable inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
Available-for-sale
securities
|
|
|
|
|
|
|
Government
sponsored enterprises
|
$
|
-
|
$
|
268,388
|
$
|
-
|
State,
county, and municipal
|
|
-
|
|
28,813
|
|
-
|
Mortgage
backed securities
|
|
-
|
|
22,358
|
|
-
|
Other
investments
|
|
-
|
|
1,158
|
|
-
|
Total
|
$
|
-
|
$
|
320,717
|
$
|
-
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
|
|
|
|
|
Government
sponsored enterprises
|
$
|
-
|
$
|
244,497
|
$
|
-
|
State,
county, and municipal
|
|
-
|
|
19,475
|
|
-
|
Mortgage
backed securities
|
|
-
|
|
10,308
|
|
-
|
Other
investments
|
|
-
|
|
1,101
|
|
-
|
Total
|
$
|
-
|
$
|
275,381
|
$
|
-
|
Certain assets and liabilities are measured at fair
value on a nonrecurring basis; that is, the instruments are not measured at fair
value on an ongoing basis but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of impairment). The
following table presents the assets and liabilities carried on the balance sheet
by caption and by level within the valuation hierarchy (as described above) as
of December 31, 2011 and 2010 for which a nonrecurring change in fair value was
recorded during the years ended December 31, 2011 and 2010 (dollars in
thousands):
2011
|
|
Quoted
market price
in active markets
(Level 1)
|
|
Significant other
observable inputs
(Level 2)
|
|
Significant
unobservable
inputs
(Level 3)
|
Other real estate owned
|
$
|
-
|
$
|
9,063
|
$
|
-
|
Impaired loans
|
$
|
-
|
$
|
24,552
|
$
|
-
|
|
$
|
-
|
$
|
33,615
|
$
|
-
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real
estate owned
|
$
|
-
|
$
|
5,476
|
$
|
-
|
Impaired loans
|
$
|
-
|
$
|
28,365
|
$
|
-
|
|
$
|
-
|
$
|
33,841
|
$
|
-
|
74
NOTE 18 - PARENT COMPANY
INFORMATION
Following is condensed financial
information of CNB Corporation (parent company only) (amounts in
thousands):
CONDENSED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
ASSETS
|
|
|
2011
|
|
|
2010
|
|
Cash
|
|
$ 206
|
|
$
96
|
|
Investment in subsidiary
|
|
|
89,163
|
|
|
86,201
|
|
Other assets
|
|
|
37
|
|
|
36
|
|
|
|
$
|
89,406
|
|
$
|
86,333
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
Dividends payable
|
|
$
|
-
|
|
$
|
-
|
|
Stockholders equity
|
|
|
89,406
|
|
|
86,333
|
|
|
|
$
|
89,406
|
|
$
|
86,333
|
|
CONDENSED STATEMENTS
OF INCOME
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
INCOME
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Dividend from bank subsidiary
|
$
|
387
|
|
$
|
-
|
|
$
|
2,322
|
|
Other income
|
|
43
|
|
|
-
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
-
|
|
|
-
|
|
|
7
|
|
Legal
|
|
51
|
|
|
24
|
|
|
43
|
|
Sundry
|
|
24
|
|
|
24
|
|
|
31
|
|
Other
|
|
59
|
|
|
69
|
|
|
62
|
|
Income/(loss) before equity in undistributed
|
|
|
|
|
|
|
|
|
|
net income of bank subsidiary
|
|
296
|
|
|
(117)
|
|
|
2,225
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN UNDISTRIBUTED NET INCOME OF
|
|
|
|
|
|
|
|
|
|
SUBSIDIARY
|
|
923
|
|
|
1,157
|
|
|
2,842
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
1,219
|
|
$
|
1,040
|
|
$
|
5,067
|
|
75
Continued
NOTE 18 - PARENT COMPANY
INFORMATION, Continued
CONDENSED STATEMENTS
OF CASH FLOWS
|
|
For the years ended December 31,
|
|
OPERATING ACTIVITIES
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Net income
|
$
|
1,219
|
|
$
|
1,040
|
|
$
|
5,067
|
|
Adjustments to reconcile net income to net cash provided
|
|
|
|
|
|
|
|
|
|
by operating activities
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net income of bank subsidiary
|
|
(923)
|
|
|
(1,157)
|
|
|
(2,842)
|
|
Net change in other liabilities
|
|
-
|
|
|
-
|
|
|
(12)
|
|
Net change in other assets
|
|
(30)
|
|
|
47
|
|
|
(45)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided/(used) by operating activities
|
|
266
|
|
|
(70)
|
|
|
2,168
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
-
|
|
|
(2,097)
|
|
|
(4,355)
|
|
Common shares repurchased
|
|
(183)
|
|
|
(1,016)
|
|
|
(1,588)
|
|
Common shares sold
|
|
27
|
|
|
20
|
|
|
3,012
|
|
Change in short term borrowings
|
|
-
|
|
|
-
|
|
|
(1,120)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for financing activities
|
|
(156)
|
|
|
(3,093)
|
|
|
(4,051)
|
|
|
|
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash
|
|
110
|
|
|
(3,163)
|
|
|
(1,883)
|
|
|
|
|
|
|
|
|
|
|
|
CASH, BEGINNING OF THE YEAR
|
|
96
|
|
|
3,259
|
|
|
5,142
|
|
|
|
|
|
|
|
|
|
|
|
CASH, END OF THE YEAR
|
$
|
206
|
|
$
|
96
|
|
$
|
3,259
|
|
76
Continued
NOTE
19 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited condensed
financial data by quarter for 2011 and 2010 is as follows (tabular amounts,
except per share data, in thousands):
|
|
|
Quarter ended
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
$
|
9,123
|
|
$
|
9,104
|
|
$
|
8,871
|
|
$
|
8,624
|
|
Interest expense
|
|
1,648
|
|
|
1,423
|
|
|
1,291
|
|
|
1,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
7,475
|
|
|
7,681
|
|
|
7,580
|
|
|
7,460
|
|
Provision for loan losses
|
|
2,112
|
|
|
3,065
|
|
|
2,296
|
|
|
2,415
|
|
Net interest income after
|
|
|
|
|
|
|
|
|
|
|
|
|
provision for loan losses
|
|
5,363
|
|
|
4,616
|
|
|
5,284
|
|
|
5,045
|
|
Noninterest income
|
|
1,391
|
|
|
1,511
|
|
|
1,760
|
|
|
1,596
|
|
Noninterest expenses
|
|
6,268
|
|
|
6,191
|
|
|
6,667
|
|
|
6,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
486
|
|
|
(64)
|
|
|
377
|
|
|
544
|
|
Income tax provision/(benefit)
|
|
104
|
|
|
(94)
|
|
|
(3)
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
382
|
|
$
|
30
|
|
$
|
380
|
|
$
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
$
|
.23
|
|
$
|
.02
|
|
$
|
.23
|
|
$
|
.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
1,664,620
|
|
|
1,664,614
|
|
|
1,664,344
|
|
|
1,661,890
|
|
|
|
|
Quarter ended
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
$
|
10,390
|
|
$
|
10,115
|
|
$
|
9,948
|
|
$
|
9,504
|
|
Interest expense
|
|
2,723
|
|
|
2,532
|
|
|
2,345
|
|
|
2,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
7,667
|
|
|
7,583
|
|
|
7,603
|
|
|
7,484
|
|
Provision for loan losses
|
|
3,763
|
|
|
3,806
|
|
|
4,379
|
|
|
1,449
|
|
Net interest income after
|
|
|
|
|
|
|
|
|
|
|
|
|
provision for loan losses
|
|
3,904
|
|
|
3,777
|
|
|
3,224
|
|
|
6,035
|
|
Noninterest income
|
|
1,412
|
|
|
1,822
|
|
|
2,334
|
|
|
1,981
|
|
Noninterest expenses
|
|
5,586
|
|
|
5,989
|
|
|
5,943
|
|
|
5,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
(270)
|
|
|
(390)
|
|
|
(385)
|
|
|
2,129
|
|
Income tax provision/(benefit)
|
|
(227)
|
|
|
(170)
|
|
|
(217)
|
|
|
658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
$
|
(43)
|
|
$
|
(220)
|
|
$
|
(168)
|
|
$
|
1,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share
|
$
|
(.03)
|
|
$
|
(.13)
|
|
$
|
(.10)
|
|
$
|
.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
1,676,890
|
|
|
1,675,492
|
|
|
1,668,854
|
|
|
1,665,036
|
|
|
|
|
|
|
|
|
|
|
|
77
NOTE
20 SUBSEQUENT EVENTS
Subsequent events are events or
transactions that occur after the balance sheet date but before financial
statements are issued. Recognized subsequent events are events or transactions
that provide additional evidence about conditions that existed at the date of
the balance sheet, including the estimates inherent in the process of preparing
financial statements. Nonrecognized subsequent events are events
that provide evidence about conditions that did not exist at the date of the
balance sheet but arose after that date. Management has reviewed events
occurring through the date the financial statements were available to be issued
and no subsequent events occurred requiring accrual or disclosure.
78
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
(a)
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b)
or 240.15d-15(b) of the Corporations disclosure controls and procedures (as
defined in 17 C.F.R. Sections 240.13a-15(e) or 240.15d-15(e)), the
Corporations chief executive officer and chief financial officer concluded
that such controls and procedures, as of the end of the period covered by this
annual report, were effective.
Internal Control over Financial Reporting
(a) MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of CNB Corporation is responsible
for establishing and maintaining adequate internal control over financial
reporting for the company. Internal control over financial reporting
is a process designed to provide reasonable assurance that assets are
safeguarded against loss from unauthorized use or disposition, transactions are
executed in accordance with appropriate management authorization and accounting
records are reliable for the preparation of financial statements in accordance
with generally accepted accounting principles. Because of its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of CNB
Corporation's internal control over financial reporting as of December 31, 2011. In
making our assessment, management has utilized the framework published by the
Committee of Sponsoring Organizations ("COSO") of the Treadway
Commission "Internal Control-Integrated Framework." Based
on our assessment, management has concluded that, as of December 31, 2011,
internal control over financial reporting was effective.
Elliott Davis, LLC, the independent registered
public accounting firm that audited the Company's consolidated financial
statements included in this report, has issued an attestation report on the
Company's internal control over financial reporting, and a copy of Elliott
Davis, LLC's report is included with this report.
Date: March 15, 2012
/s/W.
Jennings Duncan
|
/s/L.
Ford Sanders, II
|
W. Jennings
Duncan
|
L. Ford
Sanders, II
|
President and
Chief Executive Officer
|
Executive Vice
President, Treasurer and Chief Financial Officer
|
|
|
(b) REPORT OF INDEPENDENT
REGISTERED
PUBLIC ACCOUNTING FIRM
The Report of
Independent Registered Public accounting firm on Internal Control over
Financial Reporting, is included in Item 8- Financial Statements and
Supplementary Data, of this Form 10-K.
(c)
There has been no change in the Company's internal control over
financial reporting identified in connection with management's assessment
thereof that occurred during the Company's last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B. - OTHER INFORMATION
None.
79
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS OF THE REGISTRANT AND
CORPORATE GOVERNANCE
The information set forth under the captions "Information
about Nominees, Directors Whose Terms will Continue after the Annual Meeting of
Shareholders and Executive Officers," "Section 16(a) Beneficial
Ownership Reporting Compliance" and "Governance Matters - -Committees
of the Board of Directors - Audit Committee" set forth in the Companys
Proxy Statement filed in connection with the Companys 2012 Annual Meeting of
the Shareholders (the "2012 Proxy Statement") is incorporated herein
by reference.
Audit Committee Financial Expert
The Company's board of directors has determined that the Company does not have an
"audit committee financial expert," as that term is defined by Item
407(d)(5) of Regulation S-K promulgated by the Securities and Exchange
Commission, serving on its audit committee. The Company's audit
committee is comprised of directors who are independent of the Company and its
management. After reviewing the experience and training of all of
the Company's independent directors, the board of directors has concluded that
no independent director currently meets the SEC's very demanding definition of "audit
committee financial expert." Therefore, it would be necessary
to find a qualified individual willing to serve as both a director and member
of the audit committee and have that person elected by the shareholders in order
to have an "audit committee financial expert" serving on the
Company's audit committee. The Company's audit committee is,
however, authorized to use consultants to provide financial accounting
expertise in any instance where members of the committee believe such
assistance would be useful. Accordingly, the Company does not
believe that it needs to have an "audit committee financial expert"
on its audit committee.
Code of Ethics
The Company has adopted a Code of
Ethics applicable to its principal executive officer, principal financial
officer, and principal accounting officer. The Company will provide
a copy of the Code of Ethics to any person, without charge, upon request to:
Corporate Secretary, CNB Corporation, 1400 Third Avenue, Conway, South Carolina
29526.
ITEM 11. EXECUTIVE COMPENSATION
The information set
forth in the 2012 Proxy Statement under the caption "Compensation of
Directors and Executive Officers" is incorporated herein by reference;
provided, however, the information set forth under the caption "Compensation
Committee Report" shall be deemed to be "furnished" and not "filed"
and will not be deemed incorporated by reference into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934 as a result of
being so furnished.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGMEENT AND RELATED STOCKHOLDER MATTERS
The information set
forth in the 2012 Proxy Statement under the captions "Security Ownership
of Certain Beneficial Owners" and "Security Ownership of Management"
is incorporated herein by reference.
The Company does
not have any equity compensation plans pursuant to which securities may be
issued. Accordingly, no disclosure is required pursuant to
Regulation S-K, Item 201(d).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The information set
forth in the 2012 Proxy Statement under the caption "Transactions with
Related Persons" and "Governance Matters -- Director Independence"
is incorporated herein by reference. The members of the Companys Audit and
Governance (nominating and compensation) Committees are independent as defined
in the Nasdaq Global Market Rules.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set
forth in the 2012 Proxy Statement under the caption "Ratification of
Appointment of Independent Registered Public Accounting Firm Fees Billed by
Independent Auditors" and "Audit Committee Pre-Approval of Audit and
Permissible Non-Audit Services of Independent Auditors" is incorporated
herein by reference.
80
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following exhibits, financial statements and financial statement schedules
are filed as part of this report:
(a) FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2011 and 2010
Consolidated Statements of Income - Years ended December 31, 2011, 2010, and 2009
Consolidated Statements of Stockholders' Equity - Years ended December 31, 2011,
2010, and 2009
Consolidated Statements of Comprehensive Income - Years ended December 31, 2011,
2010, and 2009
Consolidated Statements of Cash Flows - Years Ended December 31, 2011, 2010,
and 2009
Notes to Consolidated Financial Statements
(b) EXHIBITS
See Exhibit Index.
(c) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted from this Annual Report
because the required information is presented in the financial statements or in
the notes thereto or the required subject matter is not applicable.
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CNB Corporation
|
|
/s/W.
Jennings Duncan
|
W. Jennings Duncan, President and Chief Executive Officer
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 15, 2012.
Signature
|
Capacity
|
|
|
/s/James W. Barnette, Jr.
|
Chairman of the Board
|
James W. Barnette, Jr.
|
|
W. Jennings Duncan
|
President, Chief Executive Officer, and Director
|
W. Jennings Duncan
|
|
L. Ford Sanders, II
|
Executive
Vice President, Chief Financial Officer, and Treasurer
|
L. Ford Sanders, II
|
|
/s/Virginia B. Hucks
|
Vice
President and Secretary
|
Virginia B. Hucks
|
|
/s/Dana P. Arneman, Jr.
|
Director
|
Dana P. Arneman, Jr.
|
|
/s/William R. Benson
|
Director
|
William R. Benson
|
|
/s/Harold G. Cushman, III
|
Director
|
Harold G. Cushman, III
|
|
/s/William O. Marsh
|
Director
|
William O. Marsh
|
|
/s/George F. Sasser
|
Director
|
George F. Sasser
|
|
/s/Lynn G. Stevens
|
Director
|
Lynn G. Stevens
|
|
82
EXHIBIT INDEX
Exhibit
Number
3.1
|
Articles of
Incorporation The Articles of Incorporation of the Company are incorporated
herein by reference to Exhibit 3(a) which was
filed with a Form 8-A dated June 24, 1998.
|
3.2
|
By-laws of the
Company as amended June 14, 2005 The Bylaws of the Company are incorporated
by reference to Exhibit 3 which was
filed with the Form 10-Q for the quarter ended June 30, 2005.
|
10.1
|
Executive Supplemental Income
Plan The Executive Supplemental Income Plan is incorporated herein by
reference to Exhibit 10(a)
which was filed with a Form 10-K/A Annual Report dated June 10, 2002.
|
10.2
|
Deferred Compensation Plan
entitled "Phantom Stock Plan" The Phantom Stock Deferred
Compensation Plan is incorporated herein
by reference to Exhibit 10(b) which was filed with a Form 10-K/A Report dated
June 10, 2002.
|
14.1
|
Code of Ethics Policy The
Conway National Bank Code of Ethics Policy is incorporated herein by reference
to Exhibit 99 which
was filed with a Form 8-K filed August 13, 2004.
|
21
|
Subsidiaries of
the Registrant Incorporated herein by reference to Exhibit 21 which was filed
with a Form 10-K Annual Report
dated March 28, 1986.
|
31.1
|
Certification of Principal
Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.2
|
Certification of Principal
Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the
Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1
|
Certification of Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley
Act of 2002.
|
32.2
|
Certification of Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley
Act of 2002.
|