Document And Entity Information
v4.1.212.0
Document And Entity Information
6 Months Ended
Jun. 30, 2011
Aug. 05, 2011
Document And Entity Information    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Jun. 30, 2011
Document Fiscal Year Focus 2011  
Document Fiscal Period Focus Q2  
Entity Registrant Name SURREY BANCORP  
Entity Central Index Key 0001229146  
Current Fiscal Year End Date --12-31  
Entity Filer Category Smaller Reporting Company  
Entity Common Stock, Shares Outstanding   3,215,764

Consolidated Balance Sheets
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Consolidated Balance Sheets (USD $)
6 Months Ended 12 Months Ended
Jun. 30, 2011
Dec. 31, 2010
Assets    
Cash and due from banks $ 2,641,584 $ 2,398,433
Interest-bearing deposits with banks 37,255,803 22,792,088
Federal funds sold 705,453 702,121
Investment securities available for sale 2,516,590 2,012,132
Restricted equity securities 892,304 941,379
Loans, net of allowance for loan losses of $4,468,475 at June 30, 2011 and $6,683,922 at December 31, 2010 172,005,516 171,794,247
Property and equipment, net 4,694,516 4,726,483
Foreclosed assets 186,730 450,532
Accrued income 925,856 955,516
Goodwill 120,000 120,000
Bank owned life insurance 3,337,525 3,284,990
Other assets 3,062,606 3,474,563
Total assets 228,344,483 213,652,484
Liabilities and Stockholders' Equity    
Noninterest-bearing 33,666,556 27,954,669
Interest-bearing 153,884,442 146,005,404
Total deposits 187,550,998 173,960,073
Long-term debt 9,100,000 9,450,000
Dividends payable 45,729 35,515
Accrued interest payable 247,017 227,887
Other liabilities 1,556,053 1,334,854
Total liabilities 198,499,797 185,008,329
Commitments and contingencies    
Stockholders' equity    
Common stock, 10,000,000 shares authorized at no par value; 3,213,230 and 3,206,495 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively 9,487,704 9,464,178
Retained earnings 16,552,494 15,380,083
Accumulated other comprehensive loss (64,319) (68,913)
Total stockholders' equity 29,844,686 28,644,155
Total liabilities and stockholders' equity 228,344,483 213,652,484
Convertible Preferred Stock Series A [Member]
   
Stockholders' equity    
Preferred stock 2,620,325 2,620,325
Preferred Stock Series D [Member]
   
Stockholders' equity    
Preferred stock $ 1,248,482 $ 1,248,482

Consolidated Balance Sheets (Parenthetical)
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Consolidated Balance Sheets (Parenthetical) (USD $)
6 Months Ended 12 Months Ended
Jun. 30, 2011
Dec. 31, 2010
Allowance for loan losses $ 4,468,475 $ 6,683,922
Common stock, no par value    
Common stock, shares authorized 10,000,000 10,000,000
Common stock, shares issued 3,213,230 3,206,495
Common stock, shares outstanding 3,213,230 3,206,495
Convertible Preferred Stock Series A [Member]
   
Preferred stock, no par value    
Preferred stock, shares authorized 1,000,000 1,000,000
Preferred stock, shares issued 189,356 189,356
Preferred stock, shares outstanding 189,356 189,356
Preferred stock, liquidation value $ 14 $ 14
Preferred stock, fixed percentage rate 4.50% 4.50%
Preferred Stock Series D [Member]
   
Preferred stock, no par value    
Preferred stock, shares issued 181,154 181,154
Preferred stock, shares outstanding 181,154 181,154
Preferred stock, liquidation value $ 7.08 $ 7.08
Preferred stock, fixed percentage rate 5.00% 5.00%

Consolidated Statements Of Income
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Consolidated Statements Of Income (USD $)
3 Months Ended 6 Months Ended
Jun. 30, 2011
Jun. 30, 2010
Jun. 30, 2011
Jun. 30, 2010
Interest income        
Loans and fees on loans $ 2,652,444 $ 2,774,256 $ 5,376,596 $ 5,539,444
Federal funds sold 458 248 795 404
Investment securities, taxable 13,944 12,035 26,358 25,663
Deposits with banks 2,673 7,558 8,004 11,711
Total interest income 2,669,519 2,794,097 5,411,753 5,577,222
Interest expense        
Deposits 459,353 516,011 933,423 1,042,286
Short-term debt   13,959   17,720
Long-term debt 91,364 104,387 182,900 203,463
Total interest expense 550,717 634,357 1,116,323 1,263,469
Net interest income 2,118,802 2,159,740 4,295,430 4,313,753
Provision for loan losses (279,825) 254,485 (120,928) 1,203,842
Net interest income after provision for loan losses 2,398,627 1,905,255 4,416,358 3,109,911
Noninterest income        
Service charges on deposit accounts 260,994 270,302 508,885 532,477
Gain on sale of government guaranteed loans   32,865   244,924
Fees and yield spread premiums on loans delivered to correspondents 26,442 23,054 53,618 49,737
Other service charges and fees 128,068 123,914 247,027 223,049
Other operating income 160,527 164,754 359,979 369,462
Total noninterest income 576,031 614,889 1,169,509 1,419,649
Noninterest expense        
Salaries and employee benefits 883,412 852,390 1,761,997 1,723,400
Occupancy expense 101,720 87,921 197,180 197,230
Equipment expense 61,634 72,347 120,497 136,383
Data processing 98,757 100,215 185,588 196,774
Foreclosed assets, net 120,908 11,490 140,332 15,682
Postage, printing and supplies 60,251 68,497 102,754 118,508
Professional fees 67,253 68,683 190,460 152,578
FDIC insurance premiums 56,287 66,399 139,577 118,281
Other expense 352,231 309,173 694,440 635,019
Total noninterest expense 1,802,453 1,637,115 3,532,825 3,293,855
Net income before income taxes 1,172,205 883,029 2,053,042 1,235,705
Income tax expense 461,028 332,256 789,674 455,156
Net income 711,177 550,773 1,263,368 780,549
Preferred stock dividends and accretion of discount (45,729) (65,753) (90,957) (128,813)
Net income available to common stockholders $ 665,448 $ 485,020 $ 1,172,411 $ 651,736
Basic earnings per common share $ 0.21 $ 0.15 $ 0.37 $ 0.20
Diluted earnings per common share $ 0.19 $ 0.14 $ 0.33 $ 0.20
Basic weighted average common shares outstanding 3,212,247 3,206,495 3,210,498 3,206,263
Diluted weighted average common shares outstanding 3,788,549 3,605,146 3,786,800 3,604,913

Consolidated Statements Of Cash Flows
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Consolidated Statements Of Cash Flows (USD $)
6 Months Ended
Jun. 30, 2011
Jun. 30, 2010
Cash flows from operating activities    
Net income $ 1,263,368 $ 780,549
Adjustments to reconcile net income to net cash provided by operations:    
Depreciation and amortization 120,055 127,763
Gain on sale of property and equipment (670) (300)
Loss on the sale of foreclosed assets 50,254 9,411
Stock-based compensation, net of tax benefit 11,213 14,516
Provision for loan losses (120,928) 1,203,842
Deferred income taxes (1,156) 12,724
Accretion of discount on securities, net of amortization of premiums 870 1,944
Increase in cash surrender value of life insurance (52,535) (55,308)
Changes in assets and liabilities:    
Accrued income 29,660 (12,829)
Other assets 410,231 (868,538)
Accrued interest payable 19,130 (3,996)
Other liabilities 221,198 494,029
Net cash provided by operating activities 1,950,690 1,703,807
Cash flows from investing activities    
Net increase in interest-bearing deposits with banks (14,463,715) (6,105,763)
Net increase in federal funds sold (3,332) (88,085)
Purchases of investment securities (1,502,500) (1,500,000)
Sales and maturities of investment securities 1,004,648 1,505,051
Redemption of restricted equity securities 49,100 10
Purchase of restricted equity securities (25)  
Net (increase) decrease in loans (315,466) 4,219,857
Proceeds from the sale of foreclosed assets 438,673 54,890
Purchases of property and equipment (88,088) (32,727)
Proceeds from the sale of property and equipment 670 300
Net cash (used in) investing activities (14,880,035) (1,946,467)
Cash flows from financing activities    
Net increase in deposits 13,590,925 3,598,122
Net decrease in short-term debt   (3,750,000)
Net (decrease) increase in long-term debt (350,000) 750,000
Dividends paid (80,742) (113,984)
Common stock options exercised 12,313 34,450
Net cash provided by financing activities 13,172,496 518,588
Net increase (decrease) in cash and cash equivalents 243,151 275,928
Cash and due from banks, beginning 2,398,433 1,923,621
Cash and due from banks, ending 2,641,584 2,199,549
Supplemental disclosures of cash flow information    
Interest paid 1,097,193 1,267,465
Taxes paid 424,019 819,457
Loans transferred to foreclosed properties $ 225,125 $ 305,490

Consolidated Statements Of Changes In Stockholders' Equity And Comprehensive Income
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Consolidated Statements Of Changes In Stockholders' Equity And Comprehensive Income (USD $)
Preferred Stock [Member]
Convertible Preferred Stock Series A [Member]
Preferred Stock Series D [Member]
Common Stock [Member]
Retained Earnings [Member]
Unrealized Appreciation (Depreciation) On Securities [Member]
Total
Balance, value at Dec. 31, 2009 $ 4,626,830     $ 9,406,429 $ 14,468,089 $ (75,996) $ 28,425,352
Balance, shares at Dec. 31, 2009       3,198,105      
Comprehensive income              
Net income         780,549   780,549
Net change in unrealized gain (loss) on investment securities available for sale,net of income tax           15,564 15,564
Total comprehensive income             796,113
Common stock options exercised, value       34,450     34,450
Common stock options exercised, shares       8,390      
Stock-based compensation, net of tax benefit       14,516     14,516
Dividends declared on convertible preferred stock   (59,157)          
Dividends declared and accrued on Series B and Series C preferred stock, net of discount accretion and (premium) amortization 15,762       (69,656)   (53,894)
Balance, value at Jun. 30, 2010 4,642,592     9,455,395 15,119,825 (60,432) 29,157,380
Balance, shares at Jun. 30, 2010       3,206,495      
Balance, value at Dec. 31, 2010 3,868,807     9,464,178 15,380,083 (68,913) 28,644,155
Balance, shares at Dec. 31, 2010       3,206,495      
Comprehensive income              
Net income         1,263,368   1,263,368
Net change in unrealized gain (loss) on investment securities available for sale,net of income tax           4,594 4,594
Total comprehensive income             1,267,962
Common stock options exercised, value       12,313     12,313
Common stock options exercised, shares       6,735      
Stock-based compensation, net of tax benefit       11,213     11,213
Dividends declared on convertible preferred stock   (59,157) (31,800)        
Balance, value at Jun. 30, 2011 $ 3,868,807     $ 9,487,704 $ 16,552,494 $ (64,319) $ 29,844,686
Balance, shares at Jun. 30, 2011       3,213,230      

Consolidated Statements Of Changes In Stockholders' Equity And Comprehensive Income (Parenthetical)
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Consolidated Statements Of Changes In Stockholders' Equity And Comprehensive Income (Parenthetical) (USD $)
6 Months Ended
Jun. 30, 2011
Jun. 30, 2010
Net change in unrealized gain (loss) on investment securities available for sale, income tax $ 2,882 $ 9,764
Convertible Preferred Stock Series A [Member]
   
Dividends declared $ 0.31 $ 0.31
Preferred Stock Series D [Member]
   
Dividends declared $ 0.18  

Basis Of Presentation
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Basis Of Presentation
6 Months Ended
Jun. 30, 2011
Basis Of Presentation  
Basis Of Presentation
NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and therefore, do not include all disclosures required by generally accepted accounting principles for a complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments necessary to present fairly the financial condition of Surrey Bancorp, (the "Company), as of June 30, 2011, the results of operations for the six and three months ended June 30, 2011 and 2010, and its changes in stockholders' equity and comprehensive income and cash flows for the six months ended June 30, 2011 and 2010. The results of operations for the three and six months ended June 30, 2011, are not necessarily indicative of the results expected for the full year. These consolidated financial statements should be read in conjunction with the Company's audited financial statements and related disclosures for the year ended December 31, 2010, included in the Company's Form 10-K. The balance sheet at December 31, 2010, has been taken from the audited financial statements at that date.

Organization

Surrey Bancorp began operation on May 1, 2003 and was created for the purpose of acquiring all the outstanding shares of common stock of Surrey Bank & Trust. Stockholders of the bank received six shares of Surrey Bancorp common stock for every five shares of Surrey Bank & Trust common stock owned. The Company is subject to regulation by the Federal Reserve.

Surrey Bank & Trust (the "Bank") was organized and incorporated under the laws of the State of North Carolina on July 15, 1996 and commenced operations on July 22, 1996. The Bank currently serves Surry County, North Carolina and Patrick County, Virginia and surrounding areas through five banking offices. As a state chartered bank, which is not a member of the Federal Reserve, the Bank is subject to regulation by the State of North Carolina Banking Commission and the Federal Deposit Insurance Corporation.

Surrey Investment Services, Inc., ("Subsidiary") was organized and incorporated under the laws of the State of North Carolina on February 10, 1998. The subsidiary provides insurance services through SB&T Insurance and investment advice and brokerage services through LPL Financial.

On July 31, 2000, Surrey Bank & Trust formed Freedom Finance, LLC, a subsidiary operation specializing in the purchase of sales finance contracts from local automobile dealers.

The accounting and reporting policies of the Company, the Bank, and its subsidiaries follow generally accepted accounting principles and general practices within the financial services industry. Following is a summary of the more significant policies.

Critical Accounting Policies

The notes to the audited consolidated financial statements for the year ended December 31, 2010 contain a summary of the significant accounting policies. The Company believes our policies with respect to the methodology for the determination of the allowance for loan losses, and asset impairment judgments, including the recoverability of intangible assets involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. These critical policies and their application are periodically reviewed with the Audit Committee and our Board of Directors. See our Annual Report for full details on critical accounting policies.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, the Bank and the subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

 

Presentation of Cash Flows

For purposes of reporting cash flows, cash and cash equivalents includes cash and amounts due from depository institutions (including cash items in process of collection). Overnight interest bearing deposits and federal funds sold are shown separately. Federal funds purchased are shown with securities sold under agreements to repurchase.

Investment Securities

Investments classified as available for sale are intended to be held for indefinite periods of time and include those securities that management may employ as part of asset/liability strategy or that may be sold in response to changes in interest rates, prepayments, regulatory capital requirements or similar factors. These securities are carried at fair value and are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or significant other observable inputs.

Investment securities classified as held to maturity are those debt securities that the Bank has the ability and intent to hold to maturity. Accordingly, these securities are carried at cost adjusted for amortization of premiums and accretion of discount, computed by the interest-method over their contractual lives. At June 30, 2011 and December 31, 2010, the Bank had no investments classified as held to maturity.

Loans Held for Sale

The Bank originates and holds Small Business Administration (SBA) and United States Department of Agriculture (USDA) guaranteed loans in its portfolio in the normal course of business. Occasionally, the Bank sells the guaranteed portions of these loans into the secondary market. The loans are generally variable rate loans, which eliminates the market risk to the Bank and are therefore carried at cost. The Bank recognizes gains on the sale of the guaranteed portion upon the consummation of the transaction. The Bank plans to continue to originate guaranteed loans for sales, however no such loans were funded at June 30, 2011 and December 31, 2010.

Loans Receivable

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal amount adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or cost on originated loans and unamortized premiums or discounts on purchased loans.

Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan using the interest method. Discounts and premiums on any purchased residential real estate loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Discounts and premiums on any purchased consumer loans are recognized over the expected lives of the loans using methods that approximate the interest method.

Interest is accrued and credited to income based on the principal amount outstanding. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When the interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Payments received on nonaccrual loans are first applied to principal and any residual amounts are then applied to interest. When facts and circumstances indicate the borrower has regained the ability to meet the required payments, the loan is returned to accrual status. Past due loans are determined on the basis of contractual terms.

 

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.

Recent Accounting Pronouncements

The following is a summary of recent authoritative pronouncements:

In July 2010, the Receivables topic of the Accounting Standards Codification ("ASC") was amended by Accounting Standards Update ("ASU") 2010-20 to require expanded disclosures related to a company's allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis. The Company is required to include these disclosures in their interim and annual financial statements. See Note 6.

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 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.

 

Recent Accounting Pronouncements, continued

Disclosures related to TDRs under ASU 2010-20 will be effective for reporting periods beginning after June 15, 2011.

In December 2010, the Intangibles topic of the ASC was amended to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings upon adoption. Impairments occurring subsequent to adoption should be included in earnings. The amendment was effective for the Company beginning January 1, 2011 and had no effect on the financial statements.

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. The amendment requires consecutive presentation of the statement of net income and other comprehensive income and requires an entity to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements. The amendments will be applicable to the Company on January 1, 2012 and will be applied retrospectively.

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

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. Non-recognized 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 issued and no subsequent events have occurred requiring accrual or disclosure.


Securities
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Securities
6 Months Ended
Jun. 30, 2011
Securities  
Securities

NOTE 2. SECURITIES

Debt and equity securities have been classified in the balance sheets according to management's intent. The amortized costs of securities available for sale and their approximate fair values at June 30, 2011 and December 31, 2010 follow:

 

     Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 

June 30, 2011

           

Government-sponsored enterprises

   $ 2,001,656       $ 10,184       $ —         $ 2,011,840   

Mortgage-backed securities

     69,603         2,022         —           71,625   

Corporate bonds

     550,000         —           116,875         433,125   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,621,259       $ 12,206       $ 116,875       $ 2,516,590   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

           

Government-sponsored enterprises

   $ 1,500,000       $ 1,770       $ —         $ 1,501,770   

Mortgage-backed securities

     74,278         1,584         —           75,862   

Corporate bonds

     550,000         —           115,500         434,500   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,124,278       $ 3,354       $ 115,500       $ 2,012,132   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2011 and December 31, 2010, substantially all government-sponsored enterprises securities were pledged as collateral on public deposits and for other purposes as required or permitted by law. The mortgage-backed securities were pledged to the Federal Home Loan Bank.

Maturities of mortgage-backed bonds are stated based on contractual maturities. Actual maturities of these bonds may vary as the underlying mortgages are prepaid. The scheduled maturities of securities (all available for sale) at June 30, 2011, were as follows:

 

     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ —         $ —     

Due after one year through five years

     2,001,656         2,011,840   

Due after five years through ten years

     605,061         489,693   

Due after ten years

     14,542         15,057   
  

 

 

    

 

 

 
   $ 2,621,259       $ 2,516,590   
  

 

 

    

 

 

 

The following table shows investments' gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at June 30, 2011 and December 31, 2010. These unrealized losses on investment securities are a result of volatility in interest rates and primarily relate to corporate bonds issued by other banks at June 30, 2011 and December 31, 2010.

 

     Less Than 12 Months      12 Months or More      Total  
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

June 30, 2011

                 

Corporate bonds

   $ —         $ —         $ 433,125       $ 116,875       $ 433,125       $ 116,875   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —         $ 433,125       $ 116,875       $ 433,125       $ 116,875   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

                 

Corporate bonds

   $ —         $ —         $ 434,500       $ 115,500       $ 434,500       $ 115,500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —         $ 434,500       $ 115,500       $ 434,500       $ 115,500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Management considers the nature of the investment, the underlying causes of the decline in the market value and the severity and duration of the decline in market value in determining if impairment is other than temporary. 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. Based upon this evaluation, there are two securities in the portfolio with unrealized losses for a period greater than 12 months. We have analyzed each individual security for Other Than Temporary Impairment ("OTTI") purposes by reviewing delinquencies, loan-to-value ratios, and credit quality and concluded that all unrealized losses presented in the tables above are not related to an issuer's financial condition but are due to changes in the level of interest rates and no declines are deemed to be other than temporary in nature.

The Company had no gross realized gains or losses from the sales of investment securities for the six and three month periods ended June 30, 2011 and 2010.


Earnings Per Share
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Earnings Per Share
6 Months Ended
Jun. 30, 2011
Earnings Per Share  
Earnings Per Share
NOTE 3. EARNINGS PER SHARE

Basic earnings per share for the six and three months ended June 30, 2011 and 2010 were calculated by dividing net income available to common stockholders by the weighted average number of shares outstanding during the period.

The computation of diluted earnings per share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares. The potential dilutive shares are represented by common stock options and by the Series A and D convertible preferred stock. Each share of the Series A preferred is convertible into 2.0868 shares of common stock. Each share of Series D preferred is convertible into one share of common stock.


Commitments And Letters Of Credit
v4.1.212.0
Commitments And Letters Of Credit
6 Months Ended
Jun. 30, 2011
Commitments And Letters Of Credit  
Commitments And Letters Of Credit
NOTE 4. COMMITMENTS AND LETTERS OF CREDIT

At June 30, 2011, the Company had commitments to extend credit, including unused lines of credit of approximately $37,364,000. Letters of credit totaling $1,341,974 were outstanding.


Loans
v4.1.212.0
Loans
6 Months Ended
Jun. 30, 2011
Loans  
Loans
NOTE 5. LOANS

The major components of loans in the balance sheets at June 30, 2011 and December 31, 2010 are below.

 

     2011     2010  

Commercial

   $ 67,791,434      $ 66,377,076   

Real estate:

    

Construction and land development

     5,544,068        5,986,045   

Residential, 1-4 families

     42,991,762        46,356,711   

Residential, 5 or more families

     2,257,358        1,853,346   

Farmland

     2,735,521        2,854,481   

Nonfarm, nonresidential

     48,365,786        48,170,698   

Agricultural

     50,088        73,852   

Consumer, net of discounts of $16,063 in 2011 and $14,770 in 2010

     6,697,606        6,759,770   
  

 

 

   

 

 

 
     176,433,623        178,431,979   

Deferred loan origination costs, net of fees

     40,368        46,190   
  

 

 

   

 

 

 
     176,473,991        178,478,169   

Allowance for loan losses

     (4,468,475     (6,683,922
  

 

 

   

 

 

 
   $ 172,005,516      $ 171,794,247   
  

 

 

   

 

 

 

 

Residential, 1-4 family loans pledged as collateral against FHLB advances approximated $24,288,000 and $25,141,000 at June 30, 2011 and December 31, 2010.


Allowance For Loan Losses
v4.1.212.0
Allowance For Loan Losses
6 Months Ended
Jun. 30, 2011
Allowance For Loan Losses  
Allowance For Loan Losses

NOTE 6.  ALLOWANCE FOR LOAN LOSSES

The allocation of the allowance for loan losses by loan components at June 30, 2011 and 2010 was as follows:

 

     Construction                 Commercial                    
     &     1-4 Family     Nonfarm,     &                    
     Development     Residential     Nonresidential     Industrial     Consumer     Other     Total  

2011

              

Allowance for credit losses:

              

Beginning balance

   $ 118,797      $ 1,696,068      $ 1,199,292      $ 3,411,403      $ 205,662      $ 52,700      $ 6,683,922   

Charge-offs

     (27,468     (1,105,516     (203,418     (959,152     (27,387     —          (2,322,941

Recoveries

     996        54,285        83,772        71,500        17,869        —          228,422   

Provision

     6,720        77,596        (204,924     (537     (3,383     3,600        (120,928
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 99,045      $ 722,433      $ 874,722      $ 2,523,214      $ 192,761      $ 56,300      $ 4,468,475   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 645      $ 42,233      $ 301,922      $ 1,468,614      $ —        $ —        $ 1,813,414   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 98,400      $ 680,200      $ 572,800      $ 1,054,600      $ 192,761      $ 56,300      $ 2,655,061   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

   $ —        $ —        $ —        $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans Receivable:

              

Ending balance

   $ 5,544,068      $ 42,991,762      $ 48,365,786      $ 67,791,434      $ 6,697,606      $ 5,042,967      $ 176,433,623   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 95,121      $ 1,052,398      $ 4,094,870      $ 6,998,129      $ 16,896      $ —        $ 12,257,414   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 5,448,947      $ 41,939,364      $ 44,270,916      $ 60,793,305      $ 6,680,710      $ 5,042,967      $ 164,176,209   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

   $ —        $ —        $ —        $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2010

              

Allowance for credit losses:

              

Beginning balance

   $ 106,397      $ 628,963      $ 696,044      $ 2,903,267      $ 281,134      $ 54,100      $ 4,669,905   

Charge-offs

     —          (26,728     (109,948     (82,830     (48,427     —          (267,933

Recoveries

     —          —          20,501        —          16,672        —          37,173   

Provision

     (23,497     17,173        54,634        1,153,274        5,358        (3,100     1,203,842   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 82,900      $ 619,408      $ 661,231      $ 3,973,711      $ 254,737      $ 51,000      $ 5,642,987   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ —        $ 54,908      $ 87,331      $ 3,068,511      $ —        $ —        $ 3,210,750   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 82,900      $ 564,500      $ 573,900      $ 905,200      $ 254,737      $ 51,000      $ 2,432,237   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

   $ —        $ —        $ —        $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans Receivable:

              

Ending balance

   $ 6,897,511      $ 46,751,717      $ 46,438,718      $ 68,522,853      $ 7,038,277      $ 4,636,669      $ 180,285,745   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: individually evaluated for impairment

   $ 18,144      $ 652,749      $ 499,457      $ 6,543,616      $ 17,224      $ 5,813      $ 7,737,003   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: collectively evaluated for impairment

   $ 6,879,367      $ 46,098,968      $ 45,939,261      $ 61,979,237      $ 7,021,053      $ 4,630,856      $ 172,548,742   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance: loans acquired with deteriorated credit quality

   $ —        $ —        $ —        $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following table presents impaired loans individually evaluated by class of loan as of June 30, 2011 and December 31, 2010:

 

            Unpaid             Average      Interest  
     Recorded      Principal      Related      Recorded      Income  
     Investment      Balance      Allowance      Investment      Recognized  

June 30, 2011

              

With no related allowance recorded:

              

Construction and development

   $ 78,500       $ 78,500       $ —         $ 79,635       $ —     

1-4 family residential

     865,148         922,961         —           933,245         15,566   

Nonfarm, nonresidential

     2,437,161         2,599,892         —           2,619,716         49,880   

Commercial and industrial

     2,645,793         2,645,794         —           2,722,209         70,210   

Consumer

     16,896         16,896         —           18,437         301   

Other loans

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     6,043,498         6,264,043         —           6,373,242         135,957   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Construction and development

   $ 16,622       $ 16,622       $ 645       $ 17,194       $ —     

1-4 family residential

     187,249         215,624         42,233         198,000         372   

Nonfarm, nonresidential

     1,657,709         1,657,709         301,992         1,691,991         8,004   

Commercial and industrial

     4,352,336         4,478,247         1,468,614         4,723,398         76,791   

Consumer

     —           —           —           —           —     

Other loans

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     6,213,916         6,368,202         1,813,414         6,630,583         85,167   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Combined:

              

Construction and development

   $ 95,122       $ 95,122       $ 645       $ 96,829       $ —     

1-4 family residential

     1,052,397         1,138,585         42,233         1,131,245         15,938   

Nonfarm, nonresidential

     4,094,870         4,257,601         301,922         4,311,707         57,884   

Commercial and industrial

     6,998,129         7,124,041         1,468,614         7,445,607         147,001   

Consumer

     16,896         16,896         —           18,437         301   

Other loans

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 12,257,414       $ 12,632,245       $ 1,813,414       $ 13,003,825       $ 221,124   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

              

With no related allowance recorded:

              

Construction and development

   $ 97,436       $ 97,436       $ —         $ 173,163       $ 5,758   

1-4 family residential

     931,920         931,920         —           938,365         55,516   

Nonfarm, nonresidential

     2,098,860         2,098,860         —           2,136,591         110,297   

Commercial and industrial

     2,246,985         2,246,985         —           2,289,276         123,804   

Consumer

     10,439         10,439         —           10,439         —     

Other loans

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     5,385,640         5,385,640         —           5,547,834         295,375   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

              

Construction and development

   $ 39,267       $ 39,267       $ 12,097       $ 38,893       $ 1,357   

1-4 family residential

     1,240,144         1,240,144         1,118,468         1,243,083         39,709   

Nonfarm, nonresidential

     2,169,536         2,169,536         604,692         2,216,160         126,030   

Commercial and industrial

     5,803,125         5,803,125         2,334,003         6,076,005         276,677   

Consumer

     —           —           —           —           —     

Other loans

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     9,252,072         9,252,072         4,069,260         9,574,141         443,773   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Combined:

              

Construction and development

   $ 136,703       $ 136,703       $ 12,097       $ 212,056       $ 7,115   

1-4 family residential

     2,172,064         2,172,064         1,118,468         2,181,448         95,225   

Nonfarm, nonresidential

     4,268,396         4,268,396         604,692         4,352,751         236,327   

Commercial and industrial

     8,050,110         8,050,110         2,334,003         8,365,281         400,481   

Consumer

     10,439         10,439         —           10,439         —     

Other loans

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 14,637,712       $ 14,637,712       $ 4,069,260       $ 15,121,975       $ 739,148   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Nonperforming loans and impaired loans are defined differently. As such, some loans may be included in both categories, whereas other loans may only be included in one category. The following presents by class, an aging analysis of the recorded investment in loans.

 

                                        Recorded  
                                        Investment  
                                        > 90 Days  
     30-89 Days      90 Days Plus      Total                    and  
     Past Due      Past Due      Past Due      Current      Total      Accruing  

June 30, 2011

                 

Construction and development

   $ 180,544       $ —         $ 180,544       $ 5,363,524       $ 5,544,068       $ —     

1-4 family residential

     943,179         264,167         1,207,346         41,784,416         42,991,762         23,549   

Nonfarm, nonresidential

     552,023         —           552,023         47,813,763         48,365,786         —     

Commercial and industrial

     893,742         1,727,612         2,621,354         65,170,080         67,791,434         43,268   

Consumer

     53,130         8,463         61,593         6,636,013         6,697,606         2,742   

Other loans

     —           —           —           5,042,967         5,042,967         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,622,618       $ 2,000,242       $ 4,622,860       $ 171,810,763       $ 176,433,623       $ 69,559   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-accruals included above

   $ 494,212       $ 1,930,683       $ 2,424,895       $ 2,453,363       $ 4,878,258      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

December 31, 2010

                 

Construction and development

   $ 67,993       $ 39,267       $ 107,260       $ 5,878,785       $ 5,986,045       $ —     

1-4 family residential

     766,017         272,405         1,038,422         45,318,289         46,356,711         —     

Nonfarm, nonresidential

     229,393         220,321         449,714         47,720,984         48,170,698         —     

Commercial and industrial

     567,740         1,351,710         1,919,450         64,457,626         66,377,076         —     

Consumer

     143,832         —           143,832         6,615,938         6,759,770         —     

Other loans

     3,472         —           3,472         4,778,207         4,781,679         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,778,447       $ 1,883,703       $ 3,662,150       $ 174,769,829       $ 178,431,979       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-accruals included above

   $ 369,103       $ 1,883,703       $ 2,252,806       $ 4,109,322       $ 6,362,128      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as substandard or special mention are reviewed quarterly by the Company for further impairment or improvement to determine if appropriately classified. All other loans greater than $500,000, commercial lines greater than $250,000 and personal lines of credit greater than $100,000, and unsecured loans greater than $100,000 are specifically reviewed at least annually to determine the appropriate loan grading. In addition, during the renewal process of any loan, as well as when a loan becomes past due, the Company will evaluate the loan grade.

Loans excluded from the scope of the annual review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of deterioration in the credit worthiness of the borrower; or (c) the customer contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or even charged off. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Loans by credit quality indicator are provided in the following table.

 

                 Special              
     Total     Pass Credits     Mention     Substandard     Doubtful  

June 30, 2011

          

Construction and development

   $ 5,544,068      $ 5,448,947      $ 95,121      $ —        $ —     

1-4 family residential

     42,991,762        41,870,311        1,121,451        —          —     

Nonfarm, nonresidential

     48,365,786        47,987,952        377,834        —          —     

Commercial and industrial

     67,791,434        62,937,773        4,853,661        —          —     

Consumer

     6,697,606        6,683,255        11,638        2,713        —     

Other loans

     5,042,967        5,042,967        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 176,433,623      $ 169,971,205      $ 6,459,705      $ 2,713      $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     100.0     96.3     3.7     0.0     0.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Guaranteed portion of loans

   $ 35,638,702      $ 32,665,430      $ 2,973,272      $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                 Special              
     Total     Pass Credits     Mention     Substandard     Doubtful  

December 31, 2010

          

Construction and development

   $ 5,986,045      $ 5,779,959      $ 206,086      $ —        $ —     

1-4 family residential

     46,356,711        43,990,930        1,333,354        65,143        967,284   

Nonfarm, nonresidential

     48,170,698        45,750,435        2,420,263        —          —     

Commercial and industrial

     66,377,076        59,501,127        6,094,833        —          781,116   

Consumer

     6,759,770        6,743,029        13,864        2,877        —     

Other loans

     4,781,679        4,781,679        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 178,431,979      $ 166,547,159      $ 10,068,400      $ 68,020      $ 1,748,400   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     100.0     93.3     5.7     0.0     1.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Guaranteed portion of loans

   $ 32,259,668      $ 29,142,378      $ 3,117,290      $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value
v4.1.212.0
Fair Value
6 Months Ended
Jun. 30, 2011
Fair Value  
Fair Value

NOTE 7. FAIR VALUE

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale, trading securities and derivatives, if present, are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Fair Value Hierarchy

Under the Fair Value Measurements and Disclosures Topic of FASB ASC, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

Level 1    Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2    Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3    Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with the Receivables Topic of FASB ASC. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2011 substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with the Fair Value and Measurement Topic of the FASB ASC, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

 

Servicing Assets

A valuation of loan servicing rights is performed on an individual basis due to the small number of loans serviced. Loans are evaluated on a discounted earnings basis to determine the present value of future earnings. The present value of the future earnings is the estimated market value for the loan, calculated using consensus assumptions that a third party purchaser would utilize in evaluating a potential acquisition of the servicing. As such, the Company classifies loan servicing rights as Level 3.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are 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 Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis.

 

(in thousands)                            
June 30, 2011    Total      Level 1      Level 2      Level 3  

Government-sponsored enterprises

   $ 2,012       $ —         $ 2,012       $ —     

Mortgage-backed securities

     72         —           72         —     

Corporate bonds

     433         —           433         —     

Servicing assets

     93         —           —           93   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 2,610       $ —         $ 2,517       $ 93   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
(in thousands)                            
December 31, 2010    Total      Level 1      Level 2      Level 3  

Government-sponsored enterprises

   $ 1,502       $ —         $ 1,502       $ —     

Mortgage-backed securities

     76         —           76         —     

Corporate bonds

     434         —           434         —     

Servicing assets

     95         —           —           95   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 2,107       $ —         $ 2,012       $ 95   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

For the six months ended June 30, 2011 and 2010, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:

 

     Level 3  
     2011     2010  
     Fair Value     Fair Value  

Balance, January 1

   $ 94,878      $ —     

Capitalized

     —          64,115   

Amortization included in other income

     (1,427     (101
  

 

 

   

 

 

 

Balance, June 30

   $ 93,451      $ 64,014   
  

 

 

   

 

 

 

Changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three month period ended June 30, 2011 was $732, which was amortized to other income. Gains on the sale of government guaranteed loans are presented as a separate component of noninterest income on the consolidated statements of income for the six and three months ended June 30, 2011 and 2010.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets or liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets and liabilities that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets and liabilities measured at fair value on a nonrecurring basis are included in the table below.

 

(in thousands)                            
June 30, 2011    Total      Level 1      Level 2      Level 3  

Loans-commercial and industrial

   $ 2,884       $ —         $ 2,884       $ —     

Loans-nonfarm, non-residential

     1,734         —           1,734         —     

Loans-other

     207         —           207         —     

Foreclosed assets

     187         —           187         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 5,012       $ —         $ 5,012       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
(in thousands)                            
December 31, 2010    Total      Level 1      Level 2      Level 3  

Loans-commercial and industrial

   $ 3,469       $ —         $ 3,469       $ —     

Loans-nonfarm, non-residential

     1,565         —           1,565         —     

Loans- 1- 4 family residential

     90         —           90         —     

Loans-other

     56         —           56         —     

Foreclosed assets

     451         —           451         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets at fair value

   $ 5,631       $ —         $ 5,631       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities at fair value

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company had no Level 3 assets or liabilities measured at fair value on a non-recurring basis at June 30, 2011 or December 31, 2010.

Financial Instruments

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Cash and due from banks: The carrying amounts reported in the balance sheet for cash and due from banks approximate their fair values.

Interest-bearing deposits with banks: Fair values for time deposits are estimated using a discounted cash flow analysis that applies interest rates currently being offered on certificates to a schedule of aggregated contractual maturities on such time deposits.

 

Federal funds sold: Due to the short-term nature of these assets, the carrying value approximates fair value.

Securities: Fair values for securities, excluding restricted equity securities, are based on quoted market prices, where available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. The carrying values of restricted equity securities approximate fair values.

Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows.

Bank owned life insurance: The carrying amount reported in the balance sheet approximates the fair value as it represents the cash surrender value of the life insurance.

Deposit liabilities: The fair values disclosed for demand and savings deposits are, by definition, equal to the amount payable on demand at the reporting date. The fair values for 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 contractual maturities on such time deposits.

Federal funds purchased, securities sold under agreements to repurchase and short-term debt: The carrying amounts of federal funds purchased, securities sold under agreements to repurchase and short-term debt approximate their fair values.

Long-term debt: The fair value of long-term debt is estimated using a discounted cash flow calculation that applies interest rates currently available on similar instruments.

Other liabilities: For fixed-rate loan commitments, fair value considers the difference between current levels of interest rates and the committed rates. The carrying amounts of other liabilities approximate fair value.

The estimated fair values of the Company's financial instruments are as follows (dollars in thousands):

 

     June 30, 2011      December 31, 2010  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Financial Assets

           

Cash and due from banks

   $ 2,642       $ 2,642       $ 2,398       $ 2,398   

Federal funds sold and interest-bearing deposits with banks

     37,961         37,961         23,494         23,494   

Securities, available for sale

     2,517         2,517         2,012         2,012   

Restricted equity securities

     892