- Quarterly Report (10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2012

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-30541

 

 

PIONEER BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Virginia		54-1278721
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

263 East Main Street

P. O. Box 10

Stanley, Virginia 22851

(Address of principal executive offices) (Zip code)

[phone]

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨   (Do not check if a smaller reporting company)		Smaller reporting company		x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES   ¨     NO   x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common shares outstanding as of May 11, 2012 were 1,042,173.

 

 

 

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Table of Contents

PIONEER BANKSHARES, INC.

INDEX

 

				Page
PART I		FINANCIAL INFORMATION			3
Item 1.		Financial Statements.			3
		Consolidated Balance Sheets – March 31, 2012 and December 31, 2011			3
		Consolidated Statements of Income – Three Months Ended March 31, 2012 and 2011			4
		Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2012 and 2011			5
		Consolidated Statements of Changes in Stockholders’ Equity – Three Months Ended March 31, 2012 and 2011			6
		Consolidated Statements of Cash Flows – Three Months Ended March 31, 2012 and 2011			7
		Notes to Consolidated Financial Statements			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.			34
Item 3.		Quantitative and Qualitative Disclosures About Market Risk.			45
Item 4.		Controls and Procedures.			45
PART II		OTHER INFORMATION			45
Item 1.		Legal Proceedings.			45
Item 1A.		Risk Factors.			45
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.			45
Item 3.		Defaults Upon Senior Securities.			45
Item 4.		Mine Safety Disclosures.			45
Item 5.		Other Information.			45
Item 6.		Exhibits.			46
		SIGNATURES			47

 

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Part I - Financial Information.

Item 1. Financial Statements

PIONEER BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands of Dollars)

 

		March 31, 2012				December 31, 2011
		(Unaudited)				(Audited)
ASSETS
Cash and due from banks		$	3,906			$	3,360
Interest bearing deposits in banks			10,270				6,788
Federal funds sold			3,499				1,200
Securities available for sale, at fair value			11,790				11,989
Restricted securities			891				891
Loans receivable, net of allowance for loan losses of $2,427 and $2,429 respectively			132,967				133,286
Premises and equipment, net			4,140				4,127
Accrued interest receivable			748				727
Other real estate owned			627				1,095
Other assets			3,666				3,784
Total Assets		$	172,504			$	167,247
LIABILITIES
Deposits
Noninterest bearing demand		$	30,657			$	29,210
Interest bearing
Demand			28,224				27,718
Savings			13,090				12,037
Time deposits over $100,000			26,995				22,601
Other time deposits			40,758				42,314
Total Deposits			139,724				133,880
Accrued expenses and other liabilities			2,778				2,304
Long term debt			9,000				10,500
Total Liabilities			151,502				146,684
STOCKHOLDERS’ EQUITY
Common stock; $.50 par value, authorized 5,000,000, outstanding 1,041,373 shares			521				521
Retained earnings			20,219				19,783
Accumulated other comprehensive income, net			262				259
Total Stockholders’ Equity			21,002				20,563
Total Liabilities and Stockholders’ Equity		$	172,504			$	167,247

See Notes to Consolidated Financial Statements

 

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PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands of Dollars, except share and per share data)

(UNAUDITED)

 

		Three Months Ended March 31,
		2012				2011
Interest and Dividend Income:
Loans including fees		$	2,285			$	2,190
Interest on securities - taxable			25				24
Interest on securities - nontaxable			27				30
Interest on deposits and federal funds sold			21				30
Dividends			22				15
Total Interest and Dividend Income			2,380				2,289
Interest Expense:
Deposits			300				350
Borrowings			22				25
Total Interest Expense			322				375
Net Interest Income			2,058				1,914
Provision for loan losses			66				356
Net interest income after provision for loan losses			1,992				1,558
Noninterest Income:
Service charges and fees			235				208
Other income			78				55
Gain (loss) on security transactions			5				(1	)
Total Noninterest Income			318				262
Noninterest Expense:
Salaries and benefits			689				656
Occupancy expenses			119				93
Equipment expenses			74				89
Other expenses			553				563
Total Noninterest Expenses			1,435				1,401
Income before Income Taxes			875				419
Income Tax Expense			283				128
Net Income		$	592			$	291
Per Share Data
Net income, basic and diluted		$	0.57			$	0.28
Dividends		$	0.15			$	0.15
Weighted Average Shares Outstanding, Basic and Diluted			1,041,373				1,035,274

See Notes to Consolidated Financial Statements

 

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PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands of Dollars, except share and per share data)

(UNAUDITED)

 

Net income, March 31, 2011						$	291
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising during period (net of tax of $ 30)		$	50
Reclassification adjustment for losses included in net income (net of tax of $— )			1
Other comprehensive income							51
Comprehensive income, March 31, 2011						$	342
Net income, March 31, 2012						$	592
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising during period (net of tax of $4)		$	6
Reclassification adjustment for gains included in net income (net of tax of $2)			(3	)
Other comprehensive income							3
Comprehensive income, March 31, 2012						$	595

 

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PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In Thousands of Dollars)

(UNAUDITED)

		Common Stock				Retained Earnings				Accumulated Other Comprehensive Income				Total
BALANCE DECEMBER 31, 2010		$	518			$	18,649			$	228			$	19,395
Net Income							291								291
Other Comprehensive Income, net of tax											51				51
Cash Dividends			—				(155	)			—				(155	)
BALANCE MARCH 31, 2011		$	518			$	18,785			$	279			$	19,582
BALANCE DECEMBER 31, 2011		$	521			$	19,783			$	259			$	20,563
Net Income							592								592
Other Comprehensive Income, net of tax											3				3
Cash Dividends			—				(156	)			—				(156	)
BALANCE MARCH 31, 2012		$	521			$	20,219			$	262			$	21,002

See Notes to Consolidated Financial Statements

 

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PIONEER BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands of Dollars)

(UNAUDITED)

 

		Three Months Ended March 31,
		2012				2011
Cash Flows from Operating Activities:
Net income		$	592			$	291
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			66				356
Depreciation and amortization			75				84
(Gain) Loss on sale of securities			(5	)			1
Net amortization on securities			24				5
(Gain) loss on sale of other real estate			(2	)			10
Net change in:
Accrued interest receivable			(21	)			3
Other assets			116				53
Accrued expense and other liabilities			474				357
Net Cash Provided by Operating Activities			1,319				1,160
Cash Flows from Investing Activities:
Net change in federal funds sold			(2,299	)			(3,700	)
Net change in interest bearing deposits			(3,482	)			(8,510	)
Proceeds from maturities and sales of securities available for sale			3,685				4,250
Purchase of securities available for sale			(3,500	)			(6,022	)
Net decrease in loans			235				1,630
Proceeds from sale of other real estate			488				70
Purchase of bank premises and equipment			(88	)			(17	)
Net Cash (Used in) Investing Activities			(4,961	)			(12,299	)
Cash Flows from Financing Activities:
Net change in:
Demand and savings deposits			3,006				13,020
Time deposits			2,838				881
Proceeds from borrowings			500				—
Curtailments of borrowings			(2,000	)			(3,000	)
Dividends paid			(156	)			(155	)
Net Cash Provided by Financing Activities			4,188				10,746
Cash and Cash Equivalents:
Net increase (decrease) in cash and cash equivalents			546				(393	)
Cash and Cash Equivalents, beginning of year			3,360				4,373
Cash and Cash Equivalents, End of Period		$	3,906			$	3,980
Supplemental Disclosure of Cash Paid During the Period for Interest		$	261			$	309
Supplemental Disclosure of non-cash activity:
Unrealized gain on securities available for sale		$	5			$	81
Loans transferred to other real estate owned			18				86

See Notes to Consolidated Financial Statements

 

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PIONEER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The accounting and reporting policies of Pioneer Bankshares, Inc. (“Company”), and its subsidiary Pioneer Bank (“Bank”), conform to accounting principles generally accepted in the United States of America and to accepted practices within the banking industry. Operating results for the three month period ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. These statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

A summary of significant accounting policies is as follows:

Consolidation Policy - The consolidated financial statements of the Company include the Bank and Pioneer Financial Services, LLC, and Pioneer Special Assets, LLC, which are wholly-owned subsidiaries of the Bank. All significant inter-company balances and transactions have been eliminated.

Use of Estimates - In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate and deferred tax assets, other-than-temporary impairment of securities, and fair value of financial instruments.

Subsequent Events - In preparing these financial statements, management has evaluated subsequent events and transactions for potential recognition or disclosure through the date these financial statements were issued. Management has included within this report any such events determined to be material subsequent events as required.

Securities - Investment securities which the Company intends to hold until maturity or until called are classified as held to maturity. These investment securities are carried at cost. Restricted securities include the Bank’s investments in Federal Reserve Bank stock and FHLB stock and are carried at cost.

Securities which the Company intends to hold for indefinite periods of time, including securities used as part of the Company’s asset/liability management strategy, are classified as available for sale. These securities are carried at fair value. Net unrealized gains and losses, net of deferred income taxes, are excluded from earnings and reported as a separate component of stockholders’ equity until realized. As of March 31, 2012 and December 31, 2011 the Company classified all securities as available for sale.

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the Company intends to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-than-likely that the Company will be required to sell the security before recovery, management must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income.

For equity securities, impairment is considered to be other-than-temporary based on our ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in income. The Company regularly reviews each security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, our best estimate of the present value of cash flows expected to be collected from debt securities, our intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.

 

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Loans Receivable - Loans receivable are intended to be held until maturity and are reported at their outstanding principal balance less any adjustments for charge offs, net of unearned interest, the allowance for loan losses, and deferred loan fees and costs. Interest is computed by methods which generally result in level rates of return on principal. Interest income is generally not recognized on non-accrual loans and payments received on such loans are applied as a reduction of the loan principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

The Company classifies all loans past due when the payment of principal and interest based upon contractual terms is greater than 30 days delinquent.

The accrual of interest on loans is generally discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection for all loan classes. Commercial non-real estate classes are placed on nonaccrual status when it is probable that principal or interest is not fully collectible, or generally when principal or interest becomes 90 days past due, whichever occurs first. Real estate loans, which includes the residential, commercial, and construction land categories, are generally placed on nonaccrual status when principal and interest becomes 90 days past due. Consumer non-real estate loans, including personal auto mobile loans and all other individual loans are placed on nonaccrual status at varying intervals, based on the type of product, generally when principal and interest becomes between 90 days and 120 days past due. Revolving consumer credit card loans are not placed on nonaccrual but are generally charged-off if they reach 120 days past due, with unpaid fees and finance charges reversed against interest income. Consumer non-real estate loans are typically charged off between 90 and 120 days past due unless the loan is well secured and in the process of collection and are subject to mandatory charge-off at a specified delinquency date consistent with regulatory guidelines. In most cases, loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All other loan classes are generally charged off within the range of 90 to 180 days, unless there are specific or extenuating circumstances that warrant further collection or legal actions.

Interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Payments received on nonaccrual loans are applied as a reduction to the remaining principal balance as long as concern exists as to the ultimate collection of the principal. Loans are generally removed from nonaccrual status when the concern no longer exists as to the collectability of principal and interest and the borrower has been able to demonstrate a specific period of payment performance.

Allowance for Loan Losses - The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance that management considers adequate to absorb potential losses in the portfolio. This evaluation process is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance evaluation process also gives consideration to risk characteristics associated with each segment of the loan portfolio, which are further defined in Note 3 of this report.

Loans are charged against the allowance when management believes the collectability of the principal is unlikely. Recoveries of amounts previously charged-off are credited to the allowance. Management’s determination of the adequacy of the allowance is based on the evaluation of the composition of the loan portfolio, the value and adequacy of collateral, current economic conditions, historical loan loss experience, concentrations of credit within the portfolio, loan growth trends, levels of adversely classified loans, past due trends, as well as other factors related to the knowledge and experience of lending personnel and legal, regulatory, or compliance issues related to lending practices. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, particularly those affecting real estate values. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

 

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The allowance consists of specific and various general components. The specific component relates to loans that are classified as either substandard or doubtful. For such loans that are also 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-classified loans and is based on historical loss experience adjusted for qualitative factors.

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 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 commercial real estate loans and construction land loans are reviewed and evaluated on an annual basis or as they become delinquent so as to determine any possible impairment. Residential real estate loans are specifically evaluated for possible impairment on a case by case basis as they become delinquent or are identified as a potential problem credit. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not generally separately identify individual consumer loans for impairment disclosures.

Troubled Debt Restructurings - In situations where, for economic or legal reasons related to a borrower’s financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a troubled debt restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loan.

Restructured loans totaled $6.1 million as of March 31, 2012 compared to $5.5 million as of December 31, 2011. As of March 31, 2012, approximately $3.2 million of these restructured loan balances were considered to be performing and in compliance with their modified terms, leaving approximately $2.9 million classified as nonperforming based on their past due or nonaccrual status. Restructured loans classified as performing as of December 31, 2011 were $2.2 million, with approximately $3.3 million being classified as nonperforming based on their past due or nonaccrual status.

Transfers of Financial Assets - Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank – put presumptively beyond reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Foreclosed Assets - Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets.

 

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Bank Premises and Equipment - Land values are carried at cost. Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is charged to income over estimated useful lives ranging from 3 to 40 years, on a straight-line method.

Income Taxes - Amounts provided for income tax expense are based on income reported for financial statement purposes rather than amounts currently payable under income tax laws. Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statements of income.

Financial Instruments - In the ordinary course of business, the Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit-card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded.

The Bank’s exposure to credit loss is represented by the contractual amount of these commitments. The Bank uses the same credit policies in making commitments as it does for other loans. Commitments to extend credit are generally made for a period of one year or less and interest rates are determined when funds are disbursed. Collateral and other security for the loans are determined on a case-by-case basis. Since some of the commitments are expected to expire without being drawn upon, the contract or notional amounts do not necessarily represent future cash requirements.

Cash and Cash Equivalents - For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks.

Advertising Costs - The Company follows the policy of charging the production costs of advertising to expense as incurred.

Earnings Per Share - Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.

Stock Compensation Plans - Accounting guidance requires that costs resulting from all share-based plans be expensed and recognized in the financial statements over the vesting period of each specific stock option granted. The Company’s 1998 Stock Incentive Plan (the “Plan”) was adopted by the Board of Directors on June 11, 1998 and approved by the shareholders on June 11, 1999. This ten year Plan expired in June of 2008 with respect to the issuance of new option grants. However, grants previously issued under this Plan may still be exercised within the original terms.

Generally, the Plan provided for the grants of incentive stock options and non-qualified stock options. The exercise price of an Option could not be less than 100% of the fair market value of the common stock (or if greater, the book value) on the date of the grant. The option terms applicable to each grant were determined at the grant date, but no Option could be exercisable in any event, after ten years from its grant date.

 

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The accounting standard relating to Stock Compensation requires that costs resulting from all share-based plans be expensed and recognized in the financial statements over the vesting period of each specific stock option granted. All outstanding shares are fully vested and all compensation expense relating to outstanding stock options under this plan have been previously recorded. There is no additional compensation expense expected to be booked relating to this plan.

The fair value of each previously issued stock option grant was estimated at the grant date using the Black-Scholes option-pricing model. The expected volatility was based on historical volatility. The risk-free interest rates for periods within the contractual life of the awards were based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend paid assumptions were based on the Company’s history and expectation of dividend payments.

The following summarizes the stock options outstanding as of March 31, 2012:

 

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (In Years)				Intrinsic Value of  Unexercised In-the-Money Options (In Thousands)
Options outstanding, 12/31/11			4,800			$	17.86				3.00			$	—
Options Granted			—
Options Exercised			—
Options Forfeited			—
Options outstanding, 3/31/12			4,800			$	17.86				2.75
Options exercisable, 3/31/12			4,800			$	17.86				2.75			$	—

 

NOTE 2

INVESTMENT SECURITIES:

The amortized cost and approximate fair market value of investment securities as of March 31, 2012 are as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In Thousands)
March 31, 2012
Available for Sale
U.S. government and agency securities		$	4,500			$	—			$	—			$	4,500
Mortgage-backed securities			1,641				57				—				1,698
State and municipals			3,440				235				—				3,675
Corporate Securities			469				26				—				495
Equity securities			1,336				100				(14	)			1,422
		$	11,386			$	418			$	(14	)		$	11,790

 

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The amortized cost and approximate fair market value of investment securities as of December 31, 2011 are as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In Thousands)
December 31, 2011
Available for Sale
U.S. government and agency securities		$	4,518			$	—			$	—			$	4,518
Mortgage-backed securities			1,725				55				(1	)			1,779
State and municipals			3,444				229				—				3,673
Corporate Securities			470				29				—				499
Equity securities			1,433				91				(4	)			1,520
		$	11,590			$	404			$	(5	)		$	11,989

Management recognizes that current economic conditions and market trends may result in other than temporary impairment classifications for certain securities or equity investments. Management’s evaluation of the individual stocks and securities within the investment portfolios is performed on a quarterly basis and assesses the unrealized loss positions that exist to determine whether there is potential other than temporary impairment. The key factors considered during this evaluation process are the amount of unrealized loss, percentage decline in value, length of time in loss position, near-term prospects of the issuer, current market trading activity, financial strength ratings from industry reports, credit quality, credit ratings, continued dividend payments of the issuer, diversification or multiple holdings within particular funds, as well as management’s intent and ability to hold stocks until such time that they can recover in value and further assessment and determination that the institution will not be required to sell such investments to meet operational cash flow needs in the near future. In analyzing an issuer’s financial condition, management also considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. As of March 31, 2012, management has determined that the unrealized losses in the investment portfolio are temporary. Securities in an unrealized loss position at March 31, 2012 and December 31, 2011, by duration of the unrealized loss are shown in the following tables.

 

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NOTE 2

INVESTMENT SECURITIES (continued):

 

As of March 31, 2012 there were 7 securities in the portfolio with unrealized losses, which were considered to be temporary. The schedule of losses on theses securities is as follows:

 

Unrealized Losses				Equity Securities				Total
Less than 12 Months		Fair Value		$	337			$	337
		Unrealized Losses			(14	)			(14	)
More than 12 Months		Fair Value			—				—
		Unrealized Losses			—				—
Total		Fair Value			337				337
		Unrealized Losses			(14	)			(14	)

As of December 31, 2011, there were 4 securities in the portfolio that have unrealized losses, which are considered to be temporary. The schedule of unrealized losses on these securities is as follows (in thousands):

 

Unrealized Losses				Mortgage Backed Securities				Equity Securities				Total
Less than 12 Months		Fair Value		$	1,020			$	127			$	1,147
		Unrealized Losses			(1	)			(4	)			(5	)
More than 12 Months		Fair Value			—				—				—
		Unrealized Losses			—				—				—
Total		Fair Value			1,020				127				1,147
		Unrealized Losses			(1	)			(4	)			(5	)

The Bank also holds additional investments in Federal Home Loan Bank of Atlanta (“FHLB”) in the form of FHLB stock, which is a membership requirement. Loan advances from FHLB are subject to additional stock purchase requirements, which are generally redeemed as outstanding loan balances are repaid, subject to FHLB’s quarterly excess capital evaluation process.

FHLB evaluates the excess capital stock of its members on a quarterly basis to determine stock repurchase activities. Additionally, FHLB generally pays quarterly dividends on the outstanding stock investment of each of its members.

FHLB stock is generally viewed as a long term investment and is considered to be a restricted security, which is carried at cost, because there is no market for the stock other than FHLB or other member institutions. As of March 31, 2012, the Bank’s investment in FHLB stock totaled approximately $816,000.

Management’s evaluation of FHLB stock for possible impairment is based on the ultimate recoverability of par value rather than recognizing temporary declines in value. Management’s evaluation of FHLB stock as of March 31, 2012 did not consider this investment to be other than temporarily impaired, and therefore, no impairment has been recognized.

 

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NOTE 3

LOANS:

Loans outstanding are summarized as follows:

 

		March 31, 2012				December 31, 2011
		(In Thousands)
Real Estate Loans
Construction & land loans		$	4,261			$	4,934
Residential equity lines of credit			1,794				1,766
Residential 1-4 family first liens			51,962				52,241
Residential second mortgages 1 - 4 family			3,525				3,616
Residential multifamily			5,308				5,346
Commercial agricultural loans			3,503				3,412
Commercial municipal loans			177				183
Commercial owner & non-owner occupied			38,095				37,826
Total real estate loans			108,625				109,324
Commercial Non Real Estate loans			6,685				6,694
Consumer Non Real Estate loans
Consumer installment loans			19,710				19,245
Credit Cards			639				706
Overdrafts/Other			42				69
Total consumer installment loans			20,391				20,020
Gross Loans			135,701				136,038
Less unearned discount on loans			(307	)			(323	)
Loans, less unearned discount			135,394				135,715
Less allowance for loan losses			(2,427	)			(2,429	)
Net Loans Receivable		$	132,967			$	133,286

The Bank grants commercial, real estate and consumer installment loans to its customers. Collateral requirements for loans are determined on a case by case basis depending upon the purpose of the loan and the financial condition of the borrower. The ultimate collectability of the Bank’s loan portfolio and the ability to realize the value of any underlying collateral, if needed, are influenced by the economic conditions of its market service area.

The Bank’s loan portfolio is concentrated in real estate loans, including those secured by residential consumer properties and small business commercial properties. The residential real estate loans, including equity lines of credit, residential 1 – 4 family first and second mortgages, and multifamily loans totaled $62.6 million as of March 31, 2012, as compared to $62.9 million at December 31, 2011. The small business commercial real estate loans, including construction and land loans, agricultural/farm loans, and other business properties totaled $45.4 million as of March 31, 2012 as compared to $45.0 million at December 31, 2011. Management has established specific lending criteria relating to real estate loans as a means of assessing the risk inherent in the portfolio.

Deposit account overdrafts are also classified as loans and totaled $48,000 as of March 31, 2012 compared to $69,000 as of December 31, 2011.

 

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The following table reflects the detailed breakdown of impaired loans with a recorded allowance by loan class for period ending March 31, 2012 (in thousands):

 

Impaired Loans with a Recorded Allowance as of March 31, 2012		Recorded Investment				Unpaid Principal				Related Allowance				Average Recorded Investment				Interest Income Recognized
Construction & Land Loans
Commercial properties		$	568			$	568			$	175			$	570			$	—
Residential Real Estate
1-4 Family Residences			658				658				177				757				1
Multifamily Dwellings			760				760				130				762				3
Commercial Real Estate
Owner Occupied			617				617				62				617				—
Agricultural			351				351				100				356				—
Commercial – Non Real Estate
Industrial loans			285				285				207				435				—
Totals		$	3,239			$	3,239			$	851			$	3,497			$	4

The following table reflects the detailed breakdown of impaired loans without a recorded allowance by loan class for period ending March 31, 2012 (in thousands):

 

Impaired Loans without a Recorded Allowance as of March 31, 2012		Recorded Investment				Unpaid Principal				Average Recorded Investment				Interest Income Recognized
Residential Real Estate
1-4 Family Residences		$	493			$	493			$	497			$	3
Commercial Real Estate
Owner Occupied			1,360				1,360				1,311				24
Non-owner Occupied			1,770				1,770				1,771				25
Commercial – Non Real Estate
Industrial loans			404				404				290				6
Totals		$	4,027			$	4,027			$	3,869			$	58

 

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The following table reflects the detailed breakdown of impaired loans with a recorded allowance by loan class for the year ended December 31, 2011 (in thousands):

 

Impaired Loans with a Recorded Allowance as of December 31, 2011		Recorded Investment				Unpaid Principal				Related Allowance				Average Recorded Investment				Interest Income Recognized
Construction & Land Loans
Commercial properties		$	572			$	572			$	175			$	829			$	—
Residential Real Estate
1-4 Family Residences			856				856				252				955				27
Multifamily Dwellings			763				763				75				763				51
Commercial Real Estate
Non-owner occupied			361				361				100				363				14
Commercial – Non Real Estate
Industrial loans			585				585				273				424				29
Totals		$	3,137			$	3,137			$	875			$	3,334			$	121

The following table reflects the detailed breakdown of impaired loans without a recorded allowance by loan class for the year ended December 31, 2011 (in thousands):

 

Impaired Loans without a Recorded Allowance as of December 31, 2011		Recorded Investment				Unpaid Principal				Average Recorded Investment				Interest Income Recognized
Residential Real Estate
1-4 Family Residences		$	501			$	501			$	382			$	15
Commercial Real Estate
Owner Occupied		$	1,261			$	1,261			$	1,261			$	56
Non-owner Occupied		$	1,771			$	1,771			$	1,773			$	71
Commercial – Non Real Estate
Industrial loans		$	176			$	176			$	177			$	9
Totals		$	3,709			$	3,709			$	3,593			$	151

 

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The following table reflects the amounts of outstanding delinquencies by loan class as of March 31, 2012 (in thousands):

 

Past Due Loans by Class		30-59 Days				60-89 Days				90 Days or More				Total Past Due				Total Current				Total Loans
Construction & Land Loans
Residential		$	—			$	—			$	—			$	—			$	628			$	628
Commercial			—				—				568				568				1,725				2,293
Other – Land only			—				27				34				61				1,279				1,340
Residential Real Estate
Equity Lines of Credit			32				—				10				42				1,752				1,794
1-4 Family Residences			3,543				150				234				3,927				51,560				55,487
Multifamily Dwellings			—				760				—				760				4,548				5,308
Commercial Real Estate
Owner occupied			181				28				182				391				21,275				21,666
Non-owner occupied			78				—				—				78				16,351				16,429
Agricultural / Farm loans			—				—				—				—				3,503				3,503
Municipals			—				—				—				—				177				177
Commercial – Non Real Estate
Agricultural			—				—				—				—				163				163
Industrial			69				51				229				349				6,122				6,471
Municipals			—				—				—				—				51				51
Consumer – Non Real Estate
Credit Cards			23				10				18				51				588				639
Automobile loans			233				70				30				333				14,075				14,408
Other personal loans			81				13				7				101				5,243				5,344
Totals Gross Loans		$	4,240			$	1,109			$	1,312			$	6,661			$	129,040			$	135,701

 

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The following table reflects the amounts of outstanding delinquencies by loan class as of December 31, 2011 (in thousands):

 

Past Due Loans by Class		30-59 Days				60-89 Days				90 Days or More				Total Past Due				Total Current				Total Loans
Construction & Land Loans
Residential		$	—			$	—			$	—			$	—			$	1,332			$	1,332
Commercial			—				572				—				572				1,691				2,263
Other – Land only			51				34				—				85				1,254				1,339
Residential Real Estate
Equity Lines of Credit			18				—				9				27				1,739				1,766
1-4 Family Residences			3,404				383				739				4,526				54,848				55,857
Multifamily Dwellings			763				—				—				763				4,583				5,346
Commercial Real Estate
Owner occupied			—				574				—				574				21,640				22,214
Non-owner occupied			—				78				—				78				15,534				15,612
Agricultural / Farm loans			—				—				—				—				3,412				3,412
Municipals			—				—				—				—				183				183
Commercial – Non Real Estate
Agricultural			—				—				—				—				165				165
Industrial			51				13				323				387				6,127				6,514
Municipals			—				—				—				—				15				15
Consumer – Non Real Estate
Credit Cards			24				—				—				24				682				706
Automobile loans			340				92				41				473				13,432				13,905
Other personal loans			145				20				51				216				5,193				5,409
Totals Gross Loans		$	4,796			$	1,766			$	1,163			$	7,725			$	128,313			$	136,038

 

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The following table represents loans 90 days delinquent and still accruing interest and loans in a nonaccrual status as of March 31, 2012 by loan class (in thousands):

 

		90 days past due &  still accruing interest				Nonaccrual Loans
Construction & Land Loans
Commercial		$	—			$	568
Other – Land Only			34				—
Residential Real Estate
Equity Lines of Credit			10				—
1-4 Family Residences			159				1,002
Multifamily dwellings			—				760
Commercial Real Estate
Owner occupied			182				617
Agricultural/Farm loans			—				351
Commercial Non-Real Estate
Industrial			—				437
Consumer – Non Real Estate
Automobile loans			22				9
Other personal loans			7				36
Totals Gross Loans		$	414			$	3,780

The following table represents loans 90 days delinquent and still accruing interest and loans in a nonaccrual status as of December 31, 2011 by loan class (in thousands):

 

		90 days past due &  still accruing interest				Nonaccrual Loans
Construction & Land Loans
Commercial		$	—			$	572
Residential Real Estate
Equity Lines of Credit			9				—
1-4 Family Residences			274				1,416
Multifamily dwellings			—				763
Commercial Real Estate
Owner occupied			—				621
Non-owner occupied			—				175
Agricultural / Farm loans			—				361
Commercial Non-Real Estate
Industrial			47				460
Consumer – Non Real Estate
Automobile loans			6				12
Other personal loans			9				42
Totals Gross Loans		$	345			$	4,422

 

 

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Loans past due greater than 90 days and still accruing interest at March 31, 2012 and December 31, 2011 totaled $414,000 and $345,000, respectively. Management continually monitors past due accounts and places these accounts in nonaccrual status if the payment plans are not adhered to. Nonaccrual loans excluded from impaired loan disclosure amounted to $176,000 and $619,000, at March 31, 2012 and December 31, 2011, respectively. The nonaccrual loans excluded from impaired loan disclosure at March 31, 2012 consisted primarily of three consumer real estate loans and two small installment loans.

The loan portfolio is comprised of various categories or segments, each of which have certain risk characteristics that are evaluated at the time of loan origination and periodically thereafter. Construction loans carry risks associated with whether or not the project will be completed according to schedule and within its original budget, as well as valuation risk associated with the overall value of the collateral upon completion. Residential real estate loans carry risks associated with continued credit-worthiness and financial stability of the borrower, as well as potential valuation changes relating to collateral. Commercial real estate loans carry risks associated with the continued operations of the business, as well as sufficient cash flow and profitability to service the debt. Additionally, commercial real estate loans are subject to risks associated with potential collateral valuation changes. Commercial non-real estate loans, including those in the industrial and agricultural categories, carry similar risks to the commercial real estate loans, as they are dependent upon the continued successful business operations and cash flow. Commercial non-real estate loans also carry a risk associated with collateral being more difficult to assess. Consumer loans carry risks associated with the continued credit-worthiness and financial stability of the borrower, as well as potential for rapid depreciation or reduced value of the collateral, especially in automobile lending

Management has developed an internal loan risk rating system as part of its credit analysis process. Loans are assigned an appropriate risk grade at the time of origination based on specific assessment factors relating to the borrower’s ability to meet contractual obligations under the loan agreement. This process includes reviewing borrowers’ financial information, historical payment experience, credit documentation, public information, and other information specific to each borrower. Commercial loan grade assessments also include consideration of business cash flow and debt obligations. Risk grades are generally reviewed on an annual basis for credit relationships with total credit exposure of $500,000 or more, or at any point management becomes aware of information affecting the borrower’s ability to fulfill their obligations. Management utilizes both internal and external loan review processes as a means of monitoring the appropriateness of risk ratings across the loan portfolio.

The specific loan risk rating categories included in the Bank’s internal rating system include pass credits, pass-watch, special mention, substandard, doubtful, and loss. Pass credits generally consist of loans secured by cash or cash equivalents and loans to borrowers with a strong cash flow ratio, stable financial net worth and above average sources of liquidity to meet financial obligations. Pass-watch credits generally consist of loans to borrowers that may have minor, yet manageable, weaknesses related to the stability of cash flow and repayment sources and may require periodic monitoring. Special mention credits are loans that have identified weaknesses or adverse trends in the borrower’s financial position that could potentially impact the bank’s credit position at some future date if not monitored closely. Substandard credits are those loans that have been identified as having a well-defined, specific, or major weakness in the primary cash flow sources or upon which significant reliance is being placed on secondary sources of repayment due to the borrower’s financial difficulties. Potential for losses related to substandard credits is evaluated on a regular basis with specific allocations being made as needed, as well as other corrective actions necessary to protect the institution. Loans categorized as doubtful also have well defined weaknesses with the added characteristic of the likelihood that collection of payment in full is highly questionable or perhaps improbable. Loans classified as loss are considered to be totally uncollectible or of such little value that their continuance on the bank’s books as an asset is not warranted.

 

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The following table represents a summary of the Bank’s loan portfolio by class and internal risk rating as of March 31, 2012 (in thousands):

 

Loans By Class and Internal Risk Rating as of March 31, 2012		Pass				Pass- Watch				Special Mention				Substandard				Doubtful				Loss				Total Loans
Construction & Land Loans
Residential		$	623			$	5			$	—			$	—			$	—			$	—			$	628
Commercial			—				1,725				—				568				—				—				2,293
Other – Land only			1,097				188				55				—				—				—				1,340
Residential Real Estate
Equity Lines of Credit			1,751				33				10				—				—				—				1,794
1-4 Family Residences			44,882				7,097				2,440				1,068				—				—				55,487
Multifamily Dwellings			2,670				1,879				—				759				—				—				5,308
Commercial Real Estate
Owner occupied			7,061				10,017				2,669				1,919				—				—				21,666
Non-owner occupied			3,098				9,442				2,119				1,770				—				—				16,429
Agricultural / Farm loans			708				2,088				356				351				—				—				3,503
Municipals			177				—				—				—				—				—				177
Commercial – Non Real Estate
Agricultural			51				112				—				—				—				—				163
Industrial			2,245				3,521				16				572				117				—				6,471
Municipals			51				—				—				—				—				—				51
Consumer – Non Real Estate
Credit Cards			588				34				17				—				—				—				639
Automobile loans			14,382				—				26				—				—				—				14,408
Other personal loans			5,251				50				42				1				—				—				5,344
Totals Gross Loans		$	84,635			$	36,191			$	7,750			$	7,008			$	117			$	—			$	135,701

 

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The following table represents a summary of the Bank’s loan portfolio by class and internal risk rating as of December 31, 2011 (in thousands):

 

Loans By Class and Internal Risk Rating as of December 31, 2011		Pass				Pass- Watch				Special Mention				Substandard				Doubtful				Loss				Total Loans
Construction & Land Loans
Residential		$	1,326			$	6			$	—			$	—			$	—			$	—			$	1,332
Commercial			—				1,690				—				573				—				—				2,263
Other – Land only			1,125				191				23				—				—				—				1,339
Residential Real Estate
Equity Lines of Credit			1,730				36				—				—				—				—				1,766
1-4 Family Residences			44,640				7,267				2,459				1,491				—				—				55,857
Multifamily Dwellings			2,688				1,895				—				763				—				—				5,346
Commercial Real Estate
Owner occupied			7,169				10,463				2,679				1,903				—				—				22,214
Non-owner occupied			3,269				8,434				2,138				1,771				—				—				15,612
Agricultural / Farm loans			895				1,798				358				361				—				—				3,412
Municipals			181				2				—				—				—				—				183
Commercial – Non Real Estate
Agricultural			21				144				—				—				—				—				165
Industrial			2,526				3,232				7				565				184				—				6,514
Municipals			15				—				—				—				—				—				15
Consumer – Non Real Estate
Credit Cards			682				24				—				—				—				—				706
Automobile loans			13,883				—				22				—				—				—				13,905
Other personal loans			5,296				71				40				2				—				—				5,409
Totals Gross Loans		$	85,446			$	35,253			$	7,726			$	7,429			$	184				—			$	136,038

 

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Loans modified and classified as troubled debt restructures during the reporting period ending March 31, 2012 are reported in the table below. These loans are also included in the impaired loan disclosures previously presented within this report.

 

(Dollars in 000’s)		For the Period Ending March 31, 2012
		Number of TDR modifications				Pre-modification outstanding recorded investment				Post- modification outstanding recorded investment
Commercial Real Estate Loans			1				699				725
Total			1			$	699			$	725

Loans classified as troubled debt restructures are monitored for payment default on an on-going basis. During the reporting period ending March 31 2012, there were two accounts that have subsequently defaulted within 12 months of the original modification date, with default being defined as payments being 90 days or more past due.

The table below reflects the outstanding recorded investment for defaulted troubled debt restructures as of March 31, 2012:

 

(Dollars in 000’s)		For the Period Ending March 31, 2012
		Number of Contracts				Recorded investment
Commercial non-real estate			2			$	162
Total			2			$	162

 

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NOTE 4

ALLOWANCE FOR LOAN LOSSES (ALLL):

The summary table below includes the allowance allocations and total loans evaluated both individually and collectively for impairment, as well as a roll-forward representation of the activity that has occurred in the allowance account during the quarter ending March 31, 2012 (in thousands):

 

		Construction & Land Loans				Residential Real Estate				Commercial Real Estate				Commercial Non-Real Estate				Consumer Non-Real Estate				Total
ALLL ending balance 12/31/2011		$	211			$	818			$	434			$	352			$	614			$	2,429
YTD Charge-offs			—				(2	)			—				(38	)			(121	)			(161	)
YTD Recoveries			—				6				—				3				84				93
YTD Provision			(2	)			15				106				(47	)			(6	)			66
ALLL ending Balance 3/31/2012		$	209			$	837			$	540			$	270			$	571			$	2,427
Evaluated individually for impairment			175				307				162				207				—				851
Evaluated collectively for impairment			34				530				378				63				571				1,576
Total Gross Loans 3/31/2012		$	4,261			$	62,589			$	41,775			$	6,685			$	20,391			$	135,701
Evaluated individually for impairment			568				1,911				4,098				689				—				7,266
Evaluated collectively for impairment			3,693				60,678				37,677				5,996				20,391				128,435

 

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The summary table below includes the allowance allocations and total loans evaluated both individually and collectively for impairment by loan segment as of December 31, 2011 (in thousands):

 

		Construction & Land Loans				Residential Real Estate				Commercial Real Estate				Commercial Non-Real Estate				Consumer Non-Real Estate				Total
ALLL ending balance 12/31/2010		$	575			$	587			$	540			$	222			$	418			$	2,342
Charge-offs			(391	)			(387	)			—				(31	)			(356	)			(1,165	)
Recoveries			—				4				—				4				181				189
Provision			27				614				(106	)			157				371				1,063
ALLL ending Balance 12/31/2011		$	211			$	818			$	434			$	352			$	614			$	2,429
Evaluated individually for impairment			175				327				100				273				—				875
Evaluated collectively for impairment			36				491				334				79				614				1,554
Total Gross Loans 12/31/2011		$	4,934			$	62,969			$	41,421			$	6,694			$	20,020			$	136,038
Evaluated individually for impairment			572				2,121				3,393				760				—				6,846
Evaluated collectively for impairment			4,362				60,848				38,028				5,934				20,020				129,192

 

NOTE 5

EARNINGS PER SHARE:

The following shows the weighted average number of shares as of March 31, 2012 and 2011, used in computing earnings per share and the effect on weighted average number of shares diluted potential common stock. Potential dilutive common stock had no effect on income available to common shareholders.

 

		March 31, 2012								March 31, 2011
		Shares				Per Share Amount				Shares				Per Share Amount
Basic earnings per share			1,041,373			$	0.57				1,035,274			$	0.28
Effect of dilutive securities:
Stock Options			—								—
Diluted earnings per share			1,041,373			$	0.57				1,035,274			$	0.28

Stock options representing 4,800 and 5,600 shares were not included in computing diluted EPS because their effects were anti-dilutive for the reporting period ending March 31, 2012 and March 31, 2011, respectively.

 

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NOTE 6

BORROWINGS:

The Bank has a line of credit with the Federal Home Loan Bank of Atlanta upon which credit advances can be made up to 40% of total Bank assets, subject to certain eligibility requirements. FHLB advances bear interest at a fixed or floating rate depending on the terms and maturity of each advance and numerous renewal options are available. These advances are secured by the Bank’s real estate loan portfolio, with a current pledge against the institution’s first lien 1-4 family residential mortgages totaling $51.9 million as of March 31, 2012. On certain fixed rate advances, the FHLB may convert the advance to an indexed floating rate at some set point in time for the remainder of the term. If the advance converts to a floating rate, the Bank may repay all or part of the advance without a prepayment penalty.

At March 31, 2012, total outstanding borrowings with FHLB were $9.0 million as compared to $10.5 million at December 31, 2011. The outstanding borrowings at March 31, 2012 consisted of two fixed rate advances with scheduled principal payments due quarterly and a final maturity date of March 1, 2013 and July 15, 2014. The interest rates on these outstanding advances range from 0.71% to 1.14%.

 

NOTE 7

OTHER EXPENSES:

Other expenses in the consolidated statements of income include the following components:

 

		Three Months Ended March 31,
		2012				2011
		(In Thousands)
ATM Service Fees		$	33			$	28
Data Processing Fees			69				58
Director Fees			31				31
FDIC Assessment Fees			42				68
Professional Fees			87				105
Supplies and Printing			22				33
Telephone Expense			29				31
Sales & Franchise Taxes			29				33
Other			211				176
Total		$	553			$	563

 

NOTE 8

FAIR VALUE MEASUREMENTS:

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups financial assets and financial liabilities generally measured 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 the fair value.

 

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Level 1 –		Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 –		Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 –		Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available for sale : Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2).

The following table presents the balances of financial assets measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011:

 

						Fair Value Measurements Using:
Description		Balances Outstanding (In Thousands)				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
As of March 31, 2012
U.S. Government & Agency Securities		$	4,500			$	—			$	4,500			$	—
Mortgage-backed Securities			1,698				—				1,698				—
State & Municipals			3,675				—				3,675				—
Corporate Securities			495				—				495				—
Equity Securities			1,422				1,337				85				—
Total Available –for-sale securities		$	11,790			$	1,337			$	10,453			$	—
As of December 31, 2011
U.S. Government & Agency Securities		$	4,518			$	—			$	4,518			$	—
Mortgage-backed Securities			1,779				—				1,779				—
State & Municipals			3,673				—				3,673				—
Corporate Securities			499				—				499				—
Equity Securities			1,520				1,442				78				—
Total Available-for-sale securities		$	11,989			$	1,442			$	10,547			$	—

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

 

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The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans : The Fair Value Measurement accounting standard also applies to loans measured for impairment including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate.

The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business financial statement if not considered significant using observable market data. Internal collateral evaluations relating to commercial loans secured by business assets such as inventory and equipment are generally performed on an annual basis. However, since this is not a formalized or certified valuation, these evaluations are considered to be level 3 for fair value disclosure and reporting purposes. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

For residential and commercial real estate loans considered to be collateral dependent, appraisals or updated collateral evaluations are generally obtained in conjunction with specific allowance allocations and/or anticipated foreclosure proceedings, on a case by case basis, depending upon the strength of additional mitigating arrangements with individual borrowers.

The outstanding principal balance of impaired loans considered to be collateral dependent in the level 3 category as of March 31, 2012 totaled approximately $343,000 compared to $643,000 as of December 31, 2011. These loans primarily consisted of business asset loans and certain real estate properties with appraisal valuations that were in the process of being updated. As a general rule, management utilizes a significant discount factor for outdated appraisals when calculating its allowance allocation estimates and making specific reserves. Local professional realtors are also contacted regarding potential fair market values in an effort to ensure that the discounted values are within reasonable ranges on individual properties. Additionally, updated tax assessed values are also considered in this evaluation process on a case by case basis.

Other Real Estate Owned : Certain assets such as other real estate owned (OREO) are measured at the lower of loan balance or fair value less cost to sell. Fair value of OREO properties held are generally based on current appraisal values with data less than two years old being considered Level 2 and any older valuation data being considered Level 3, as previously defined above.

 

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The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis during the period.

 

Description		Balances Outstanding (In Thousands)				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets as of March 31, 2012
Impaired Loans,
Net of allowance		$	2,388			$	—			$	2,264				124
Other Real Estate Owned		$	627			$	—			$	627				—
Assets as of December 31, 2011
Impaired Loans,
Net of allowance		$	2,262			$	—			$	1,904			$	358
Other Real Estate Owned		$	1,095			$	—			$	1,095			$	—

The changes in Level 3 assets measured at estimated fair value on a nonrecurring basis during the 3 month period ending March 31, 2012 were as follows:

Fair Value Measurements at March 31, 2012

 

		Net Impaired Loans
Level 3 Balances, January 1, 2012		$	358
Adjustments for settlements or pay-downs			(32	)
Balances removed by charge off			(3	)
Transfer out of Level 3 to Level 2			(199	)
Level 3 Balances, March 31, 2012		$	124

 

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The following table displays quantitative information about Level 3 Fair Value Measurements for March 31, 2012 (dollars in thousands):

 

Quantitative information about Level 3 Fair Value Measurements  for March 31, 2012

Fair Value

Valuation Technique(s)

Unobservable Input

Range (Weighted Average)

Assets

Impaired loans

$

124

Discounted appraised value or recent tax assessment values

Selling cost

0% - 10% (5%)

Discount for lack of marketability, Age of appraisal, or Condition of property

10% - 30% (20%)

Accounting guidance defines the fair value of a financial instrument as the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced liquidation sale. As the majority of the Company’s financial instruments lack an available trading market; significant estimates, assumptions and present value calculations are required to determine estimated fair value. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Due From Banks and Federal Funds Sold - For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

Interest Bearing Deposits in Other Banks - Fair values are based on quoted reinvestment market rates available for similar deposits accounts as of the date of this report.

Securities - Fair values, excluding restricted stock, are based on quoted market prices or dealer quotes.

Loans Receivable - For certain homogeneous categories of loans, such as some residential mortgages, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Deposits and Borrowings - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value of all other deposits and borrowings is determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products.

Accrued Interest - The carrying amounts of accrued interest approximates fair value.

Off-Balance-Sheet Financial Instruments - The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter party. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counter parties at the reporting date.

 

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At March 31, 2012 and December 31, 2011, the fair value of loan commitments and stand-by letters of credit was immaterial. Therefore, they have not been included in the following tables. The carrying values and estimated fair values of the Company’s financial instruments as of March 31, 2012 are as follows:

 

						Fair Value Measurements at March 31, 2012 using
		Carrying Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total Fair Value Balance
		(In thousands)
Assets
Cash and cash equivalents		$	3,906			$	3,906			$	—			$	—			$	3,906
Interest bearing deposits in other banks			10,270				4,020				6,249				—				10,269
Federal funds sold			3,499				3,499				—				—				3,499
Securities available for sale			11,790				1,337				10,453				—				11,790
Loans, net			132,967				—				136,256				124				136,380
Accrued Interest			748				—				748				—				748
Liabilities
Non-interest bearing deposits			30,657				—				30,657				—				30,657
Interest bearing deposits			28,224				—				28,224				—				28,224
Savings deposits			13,090				—				13,090				—				13,090
Time deposits			67,753				—				68,460				—				68,460
Borrowings			9,000				—				9,040				—				9,040
Accrued interest payable			257				—				257				—				257

 

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Estimated fair value and the carrying value of financial instruments as of December 31, 2011 are as follows:

 

		December 31, 2011
		Carrying Value				Estimated Fair  Value
		(In Thousands)
Financial Assets
Cash and due from banks		$	3,360			$	3,360
Interest bearing deposits in other banks			6,788				6,812
Federal funds sold			1,200				1,200
Securities available for sale			11,989				11,989
Loans, net			133,286				136,142
Accrued interest receivable			727				727
Financial Liabilities
Demand Deposits:
Non-interest bearing			29,210				29,210
Interest bearing			27,718				27,718
Savings deposits			12,037				12,037
Time deposits			64,915				65,798
Borrowings			10,500				10,551
Accrued interest payable			196				196

The Company, through its bank subsidiary, assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair value of their financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to repay in a rising rate environment and more likely to repay in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

 

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Item 2.

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

The discussion covers the consolidated financial condition and operations of Pioneer Bankshares, Inc. (“Company”) and its subsidiary Pioneer Bank (“Bank”).

Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements with respect to the Company’s and the Bank’s financial condition, results of operations and business. These forward-looking statements involve certain risks and uncertainties. When used in this quarterly report or future regulatory filings, in press releases or other public shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “believe,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We caution the readers and users of this information not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and advise readers that various factors including regional and national economic conditions, changes in the levels of market rates of interest, credit risk and lending activities, and competitive and regulatory factors could affect the financial performance of the Company and the Bank and could cause actual results for future periods to differ materially from those anticipated or projected.

The Company and the Bank do not undertake and specifically disclaim any obligation to publicly release the result of any revisions, which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Overview

The Company reported net earnings of $592,000 for the first quarter of 2012, as compared to $291,000 for the first quarter of 2011. Total earnings per share for the quarter ended March 31, 2012 were $0.57 compared to $0.28 for the first quarter of 2011.

The Company had asset growth of approximately $5.3 million during the first quarter of 2012. Interest bearing deposits in other banks increased by $3.5 million or 51.3% during the three month period ending March 31, 2012, as compared to the prior year.

The Company’s loan portfolio remained relatively stable at approximately $133.0 million during the first quarter of 2012. The deposit portfolio increased by $5.8 million or 4.37% during the same period, with the majority of this growth being in the categories of time deposits and noninterest-bearing accounts. The Company’s capital position as of March 31, 2012 was approximately $21.0 million, or 12.17% as a percentage of total assets.

Management recognizes that prevailing economic conditions may have the potential to adversely impact the Company’s operational results, including future earnings, liquidity, and capital resources. Management continually monitors economic factors in an effort to promptly identify specific trends that could have a direct material effect on the Company.

Critical Accounting Policies

General

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset, or relieving a liability.

The Company uses historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

 

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Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic accounting standards: 1) Accounting for Contingencies, which requires that losses be accrued when they are considered to be probable and can be reasonably estimated, and 2) Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the market and the loan balance.

Management also evaluates the loan portfolio in light of national and local economic trends, changes in the nature and value of the portfolio and industry standards. Allocation factors relating to identified loan concentrations and loan growth trends are included in the calculation of the adequacy of the loan loss reserve. The periodic review of the allowance for loan loss and funding provision considers concentrations of loans in terms of geography, business type or level of risk. Management evaluates the risk elements involved in loans relative to collateral values and maintains the allowance for loan losses at a level which is adequate to absorb credit losses considered to be inherent in the loan portfolio. Management engages the services of an outside loan review firm periodically to evaluate the loan portfolio, provide an independent analysis of significant borrowers, and to assist in identifying potential problem credits. The independent loan review report is used by management as an additional tool for monitoring and minimizing risks that may be inherent in the loan portfolio. Management has also implemented an internal loan review process for the purpose of identifying and monitoring possible loan losses in the portfolio. Other factors considered in management’s evaluation process are changes in lending policies, procedures and underwriting criteria; changes in the nature and volume of the loan portfolio; the experience, ability, and depth of lending management or other lending personnel; the volume and severity of past dues, non-accruals, and classified loans; and other external or regulatory requirements. Regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgment about information available to them at the time of their examination.

The methodology used to calculate the allowance for loan losses and the provision for loan losses is a significant accounting principle, which is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.

Goodwill

Goodwill is evaluated on an annual basis for impairments in value and adjusted accordingly. The accounting standards for Business Combinations, Goodwill and Other Intangible Assets require that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Additionally, it further clarifies the criteria for the initial recognition and measurement of intangible assets separate from goodwill. The provisions of these accounting standards discontinued the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets are subject to an annual impairment review, which must be performed at least annually or more frequently if certain impairment indicators are in evidence. The accounting standards relating to Goodwill also require that reporting units be identified for the purpose of assessing potential future impairments.

Goodwill is included in other assets and totaled $360,000 at March 31, 2012 and December 31, 2011. Goodwill is no longer amortized, but instead is tested for impairment at least annually.

Results of Operations

Net Interest Income

Total interest income increased by $91,000 or 3.98% during the first quarter of 2012 as compared to the same period for 2011. Total interest expense decreased $53,000 or 14.13% during the three month period ending March 31, 2012, as compared to the same period of 2011. Therefore, net interest income increased by $144,000 or 7.52% for the period ending March 31, 2012 as compared to the period ending March 31, 2011. This net increase is primarily attributed to increased earnings on a higher volume of loans as compared to the same period in the prior year, as well as reduced interest expense on deposits resulting from the current low interest rate environment.

 

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The average outstanding loan balances as of March 31, 2012 totaled $135.7 million, as compared to $130.6 million as of March 31, 2011. The average yield on loan balances outstanding has increased from 6.71% as of March 31, 2011 to 6.74% as of March 31, 2012. The overall average yield on earning assets increased from 5.83% as of March 31, 2011 to 6.14% as of March 31, 2012, and is attributed to the previously mentioned factors.

The Company’s cost of liabilities decreased from 1.24% as of March 31, 2011 to 1.10% as of March 31, 2012. This is attributed to management’s proactive re-pricing efforts to reduce interest expense on deposit products in conjunction with lower market rates.

The Company’s overall net interest margin increased from 4.88% as of March 31, 2011 to 5.32% as of March 1, 2012.

Noninterest Income

During the first quarter of 2012, non-interest income increased by $56,000 or 21.37%, when compared to the same period last year. This increase in non-interest income is primarily related to service charges and fee income, as well as gains on other real estate and securities transactions compared to losses in the prior year.

Noninterest Expense

During the first quarter of 2012, non-interest expense increased by $34,000 or 2.43% in comparison to the same period last year. The primary factors contributing to this increase were salary and benefit expenses, as well as increased occupancy expenses resulting from the new leased facility in Charlottesville and repairs and maintenance necessary at other existing branch locations. Additionally, data processing expenses increased approximately $11,000 as a result of certain new mobile application enhancements and internal processing upgrades.

Financial Condition

Securities

The Company’s securities portfolio is held to assist the Company in liquidity and asset liability management as well as capital appreciation. The securities portfolio generally consists of securities held to maturity and securities available for sale. Securities are classified as held to maturity when management has the intent and ability to hold the securities to maturity. These securities are carried at amortized cost. Securities available for sale include securities that may be sold in response to general market fluctuations, general liquidity needs and other similar factors. Securities available for sale are recorded at market value. Unrealized holding gains and losses of available for sale securities are excluded from earnings and reported (net of deferred income taxes) as a separate component of shareholders’ equity.

As of March 31, 2012, the fair market value of securities available for sale was approximately $404,000 more than the net amortized cost value as shown in Note 2 of the financial statements included in this report. Management generally has the intent and demonstrated ability to hold securities to scheduled maturity, call dates or until they recover in value and does not expect to be required to sell these securities for operational cash flow purposes. Management continually monitors any securities in a loss position for possible impairment. At this time, management does not expect the fluctuation in the value of these securities to have a material impact on earnings.

Investments in securities, including those which were restricted, decreased by $199,000 during the first quarter of 2012. The Company generally invests in securities with a relatively short-term maturity due to uncertainty in the direction of interest rates. Of the investments in securities available for sale, 12.06% (based on market value) are invested in equities, most of which are dividend producing and subject to the corporate dividend exclusion for taxation purposes. The equity securities generally include common stocks, which are purchased with the objective of generating additional income. The value of these investments is sensitive to general trends in the stock market and other economic conditions.

 

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Loan Portfolio

The Company operates in a service area in the western portion of Virginia in the counties of Page, Greene, Rockingham and Albemarle, as well as the City of Harrisonburg and the City of Charlottesville, Virginia. The Company does not make a significant number of loans to borrowers outside its primary service area. The Company is active in local residential construction mortgages and consumer lending. Commercial lending includes loans to small and medium sized businesses within its service area.

An inherent risk in the lending of money is that the borrower will not be able to repay the loan under the terms of the original agreement. The allowance for loan losses (see subsequent section) provides for this risk and is reviewed periodically for adequacy. The risk associated with real estate and installment loans to individuals is based upon employment, the local and national economies, and consumer confidence. All of these affect the ability of borrowers to repay indebtedness. The risk associated with commercial lending is substantially based on the strength of the local and national economies in addition to the financial strength of the borrower.

While lending is geographically diversified within the service area, the Company does have loan concentrations in commercial and residential real estate loans, as well as, consumer auto loans. A portion of these loans are made to borrowers who are employed by businesses outside the service area.

During the first quarter of 2012, net loans remained relatively stable at approximately $133.0 million. A schedule of loans by type is shown in Note 3 of the consolidated financial statements included in this report.

The risk elements in lending activities include non-accrual loans, loans 90 days or more past due, restructured and impaired loans. Non-accrual loans are loans on which interest accruals have been suspended or discontinued permanently as previously defined in the Company’s significant accounting policies. Restructured loans are loans on which the original interest rate or repayment terms have changed due to the borrower’s financial hardship and were previously discussed in Note 1.

Impaired loans are those loans which have been identified by management as problem credits due to various circumstances concerning the borrower’s financial condition and frequent delinquency status. These loans may not be delinquent to the extent that would warrant a non-accrual classification, however, management has classified these accounts as impaired and is monitoring the circumstances and payment status closely. In most cases, a specific allocation to the Bank’s allowance for loan loss is made for an impaired loan. The total amount of impaired loans as of March 31, 2012 was $7.3 million compared to $6.8 million as of December 31, 2011.

Management has placed $3.6 million of the Bank’s impaired loans in a nonaccrual status as of March 31, 2012. Specific allocations have been made to the allowance for loan loss account of approximately $851,000 as of March 31, 2012, to cover potential losses that may occur relating to these loans. Impaired loans not in nonaccrual status as of March 31, 2012 were approximately $3.7 million.

Management continually monitors past due, non-accrual, and impaired loans and takes necessary collection actions on a consistent basis to minimize losses in the portfolio. Management monitors all non-performing assets in order to promptly identify any loss allocations that should be made. Although the potential exists for additional losses, management believes the Bank is generally well secured and continues to actively work with these customers to effect payment.

Problem loans (serious doubt loans) are loans whereby information known by management indicates that the borrower may not be able to comply with present payment terms. Management was not aware of any problem loans at March 31, 2012 that are not included in the past due or non-accrual loans referred to above.

Allowance for Loan Losses

Management’s analysis process for evaluating the adequacy of the allowance for loan loss is a continual process, which is monitored at least quarterly, or more frequently, as needed. The evaluation process consists of regular periodic reviews of the loans outstanding by loan type. Specific reviews and allocations are made for loans that have been identified as potential loss, in which the borrower’s financial condition has substantially weakened or habitual past due payment activity has occurred. Specific reviews and allocations are also made for various sectors of the loan portfolio that have been identified as higher risk categories. Historical loss ratios are applied to the remaining loan portfolio by loan type, based on the most recent loss trends. Management takes into consideration expected recoveries from prior charge offs as part of its allowance and funding calculation.

 

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Management also evaluates the loan portfolio in light of national and local economic trends, changes in the nature and value of the portfolio and industry standards. Allocation factors relating to identified loan concentrations and loan growth trends are included in the calculation of the adequacy of the loan loss reserve. The periodic review of the allowance for loan loss and funding provision considers concentrations of loans in terms of geography, business type or level of risk. Management evaluates the risk elements involved in loans relative to collateral values and maintains the allowance for loan losses at a level which is adequate to absorb credit losses considered to be inherent in the loan portfolio. Management engages the services of an outside loan review firm periodically to evaluate the loan portfolio, provide an independent analysis of significant borrowers, and to assist in identifying potential problem credits. The independent loan review report is used by management as an additional tool for monitoring and minimizing risks that may be inherent in the loan portfolio. Management has also implemented an internal loan review process for the purpose of identifying and monitoring possible loan losses in the portfolio. Other factors considered in management’s evaluation process are changes in lending policies, procedures and underwriting criteria; changes in the nature and volume of the loan portfolio; the experience, ability, and depth of lending management or other lending personnel; the volume and severity of past dues, non-accruals, and classified loans; and other external or regulatory requirements. Regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require the Bank to recognize additional losses based on their judgment about information available to them at the time of their examination.

The methodology used to calculate the allowance for loan losses and the provision for loan losses is a significant accounting principle which is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.

The provision for loan losses and changes in the allowance for loan losses are shown in note 4 of the financial statements included in this report.

The allowance for loan loss balance of $2.4 million, at March 31, 2012, decreased by approximately $2,000 from its level at December 31, 2011. This consistent level in the allowance for loan loss balance is considered to be appropriate, as there have been minimal changes in risk levels identified within the bank’s portfolio during the first quarter of 2012. Additionally, while certain new impairment allocations have been made, there were others that have been reduced or removed as a result of the borrower’s improved financial condition, continued payment performance or improved collateral position.

Management’s evaluation of the allowance for loan loss account also includes allocations for current economic conditions and trends, concentrations of credit and changes that occur in the level of non-performing assets, as a means of providing sufficient funding for possible losses.

The cumulative balance in the allowance for loan loss account was equal to 1.79% of total loans at March 31, 2012 and December 31, 2011, and is considered to be directionally consistent with the trends that have been identified within the loan portfolio as of March 31, 2012.

The allowance is deemed to be within an acceptable range based on management’s evaluation of the losses inherent in the loan portfolio at the end of this reporting period. The evaluation of the allowance for loan loss account as of March 31, 2012 included specific allocations for certain borrowers, in which the payment performance and collateral value assessment indicates possible future losses. Management exercises the utmost caution and due diligence in allocating for possible loan losses, and follows a conservative methodology in order to protect its investors and to minimize the potential for large fluctuations in future provision expenses. Management’s practice of funding the allowance for loan loss account is to make necessary adjustments on a quarterly basis for the foreseeable period in an attempt to effectively match expenses to loan losses as they are occurring. Large fluctuations or variances outside of the acceptable range as calculated for the necessary allowance for loan loss reserves are recorded directly to income or expense in the reporting period.

The provision expense related to the allowance for loan loss as of March 31, 2012 was $66,000 as compared to $356,000 for the same period last year.

Management’s evaluation of the allowance for loan losses as of March 31, 2012 and December 31, 2011 concluded that the reserved amount was adequate to cover potential estimated losses. The allowance for loan loss account is monitored closely by management on an on-going basis, and is periodically adjusted to ensure that an adequate level of loss coverage is maintained.

 

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Premises, Equipment and Software

During the first quarter of 2012, the Company had purchases relating to premises, equipment or other fixed assets of approximately $88,000. These purchases were primarily related to in-house software and equipment upgrades.

The Bank continually monitors technological upgrades in the banking industry, and periodically, in order to achieve higher levels of internal operational efficiency, purchases new or additional equipment relating to such technologies. Management sets specific budget allowances on an annual basis, which are deemed to be adequate to cover expenditures that may arise throughout the year relating to technological upgrades or enhancements.

Additionally, there were certain expenses related to the relocation of the Bank’s Charlottesville office with regard to new signage and furniture. The Bank is also in the planning phase for a new branch facility in Ruckersville, Virginia, which is expected to be operational in early 2013.

Deposits

The Company’s main source of funds is customer deposits received from individuals, governmental entities and businesses located within the Company’s service area. Deposit accounts include demand deposits, savings, money market and certificates of deposit. The Company’s total deposit portfolio has historically remained relatively stable; however, these balances fluctuate with normal daily activity.

During the first quarter of 2012, the deposit portfolio increased by $5.8 million or 4.37%, with the majority of this growth being in the categories of time deposits and noninterest-bearing accounts. Non interest-bearing demand deposits increased by $1.4 million or 4.95%, while interest-bearing demand deposits increased by $506,000 or 1.83%. Savings deposit accounts increased by approximately $1.1 million or 8.75%, while time deposits increased by approximately $2.8 million or 4.37%.

The Company monitors its deposits carefully on an on-going basis in order to provide adequate funding for investment and loan opportunities.

Borrowings

The Bank has a line of credit with the Federal Home Loan Bank of Atlanta upon which credit advances can be made up to 40% of total Bank assets, subject to certain eligibility requirements. FHLB advances bear interest at a fixed or floating rate depending on the terms and maturity of each advance and numerous renewal options are available. These advances are secured by the Bank’s real estate loan portfolio, with a current pledge against the institution’s first lien 1-4 family residential mortgages totaling $51.9 million as of March 31, 2012. On certain fixed rate advances, the FHLB may convert the advance to an indexed floating rate at some set point in time for the remainder of the term. If the advance converts to a floating rate, the Bank may repay all or part of the advance without a prepayment penalty.

At March 31, 2012, total outstanding borrowings with FHLB were $9.0 million as compared to $10.5 million at December 31, 2011. The outstanding borrowings at March 31, 2012 consisted of two fixed rate advances with scheduled principal payments due quarterly and a final maturity date of March 1, 2013 and July 15, 2014. The interest rates on these outstanding advances range from 0.71% to 1.14%.

The scheduled repayments and maturities of outstanding FHLB borrowings as of March 31, 2012 are shown in TABLE II of this report.

 

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Capital

The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to its size, composition, quality of assets and liability levels, and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level to support asset growth, shareholder dividends, and ongoing operational needs.

As of March 31, 2012 and December 31, 2011, the Company’s total capital-to-asset ratios were 12.17% and 12.29%, respectively. The Company’s Tier 1 risk-based capital ratio was 16.27% and the total risk-based capital ratio was 17.52% as of March 31, 2012. The Bank’s Tier 1 risk-based capital ratio was 14.22% and total risk-based capital ratio was 15.48% as of March 31, 2012. The capital ratios for both the Company and the Bank exceed the well-capitalized regulatory guidelines as of March 31, 2012 and earnings have historically been sufficient to allow for consistent dividends to be declared on a quarterly basis.

Liquidity

Liquidity is the ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest bearing deposits with banks, federal funds sold, investments and loans maturing within one year. The Company’s ability to obtain deposits and purchase funds at favorable rates determines its liquidity exposure. As a result of the Company’s management of liquid assets and the ability to generate liquidity through borrowings, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors’ requirements and meet its customers’ credit needs.

Additional sources of liquidity available to the Company include, but are not limited to, loan repayments, deposits obtained through the adjustment of interest rates, purchases of federal funds and borrowings. To further meet its liquidity needs, the Company also maintains lines of credit with the FHLB and certain correspondent banks.

There are no off-balance sheet items that should impair future liquidity.

Liquidity as of March 31, 2012 is considered to be adequate.

Interest Rate Sensitivity

The Company historically has had a stable core deposit base and, therefore, does not have to rely on volatile funding sources. Because of the stable core deposit base, changes in interest rates should not have a significant effect on liquidity. The Company also uses loan repayments and maturing investments to meet its liquidity needs. The Bank’s membership in the Federal Home Loan Bank System provides additionally liquidity. The matching of long-term receivables and liabilities helps the Company reduce its sensitivity to interest rate changes. The Company reviews its interest rate gap periodically and makes adjustments as needed.

As of March 31, 2012, the Company had a negative cumulative Gap Rate Sensitivity Ratio of 34.43% for the one year re-pricing period, compared with a negative cumulative Gap Rate Sensitivity of 38.71% at December 31, 2011. This negative gap position generally indicates that earnings would improve in a declining interest rate environment as liabilities re-price more quickly than assets. Conversely, earnings would probably decrease in periods during which interest rates are increasing. However, in actual practice, this may not be the case as deposits may not re-price concurrently with changes in rates within the general economy. Management constantly monitors the Company’s interest rate risk and has decided the current position is acceptable for a well-capitalized community bank operating in a rural environment.

Table II contains an analysis, which shows the re-pricing opportunities of earning assets and interest bearing liabilities as of March 31, 2012.

 

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Recent Accounting Pronouncements

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and International Financial Reporting Standards (IFRS). The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The Company has included the required disclosures in its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company has included the required disclosures in its consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangible – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.

 

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In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The amendments are being made to allow the Board time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has included the required disclosures in its consolidated financial statements.

Securities and Exchange Commission Web Site

The Securities and Exchange Commission maintains a Web site ( http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including Pioneer Bankshares, Inc.

 

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TABLE I

PIONEER BANKSHARES, INC.

NET INTEREST MARGIN ANALYSIS

(On a Fully Tax Equivalent Basis)

(Dollar Amounts in Thousands)

 

		Three Months Ended March 31, 2012												Three Months Ended March 31, 2011
		Average Balance				Income/ Expense				Rates				Average Balance				Income/ Expense				Rates
Interest Income
Loans 1
Commercial		$	7,163			$	105				5.86	%		$	5,476			$	91				6.65	%
Real estate			108,314				1,675				6.19	%			107,558				1,667				6.20	%
Installment			19,522				480				9.84	%			16,974				407				9.59	%
Credit card			651				25				15.36	%			620				25				16.13	%
Total Loans			135,650				2,285				6.74	%			130,628				2,190				6.71	%
Federal funds sold			1,615				2				0.50	%			5,455				3				0.22	%
Interest Bearing
Deposits			6,845				19				1.11	%			13,074				27				0.83	%
Securities
Taxable			7,003				28				1.60	%			3,756				27				2.88	%
Nontaxable 2			5,215				67				5.14	%			5,591				63				4.51	%
Total earning assets			156,328				2,401				6.14	%			158,504				2,310				5.83	%
Interest Expense
Demand deposits			28,157				40				0.57	%			25,666				44				0.69	%
Savings			12,543				3				0.10	%			16,029				13				0.32	%
Time deposits			66,608				257				1.54	%			69,584				293				1.68	%
Borrowings			9,761				22				0.90	%			9,256				25				1.08	%
Total Interest Bearing
Liabilities		$	117,069			$	322				1.10	%		$	120,535			$	375				1.24	%
Net Interest Income						$	2,079											$	1,935
Net Interest Margin											5.32	%											4.88	%

 

1	Nonaccrual loans are included in computing the average balances.

2	An incremental tax rate of 34% and a 70% dividend exclusion was used to calculate the tax equivalent income.

 

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TABLE II

PIONEER BANKSHARES, INC.

INTEREST SENSITIVITY ANALYSIS

MARCH 31, 2012

(Dollar Amounts in Thousands)

 

		0-3 Months				4-12 Months				1-5 Years				Over 5 Years				Not Classified				Total
Uses of Funds:
Loans 1		$	10,647			$	11,216			$	67,145			$	46,386			$	—			$	135,394
Interest bearing bank deposits			6,020				3,250				1,000				—				—				10,270
Investment securities 2			3,580				129				3,746				2,913				1,422				11,790
Restricted stock			—				—				—				—				891				891
Federal funds sold			3,499				—				—				—				—				3,499
Total			23,746				14,595				71,891				49,299				2,313				161,844
Sources of Funds:
Interest bearing demand deposits			28,224				—				—				—				—				28,224
Regular savings			13,090				—				—				—				—				13,090
Certificates of deposit $100,000 and over			4,283				16,270				6,320				122				—				26,995
Other certificates of deposit			5,939				22,257				12,143				419				—				40,758
Borrowings			1,500				2,500				5,000				—				—				9,000
Total		$	53,036			$	41,027			$	23,463			$	541			$	—			$	118,067
Discrete Gap		$	(29,290	)		$	(26,432	)		$	48,428			$	48,758			$	2,313			$	43,777
Cumulative Gap		$	(29,290	)		$	(55,722	)		$	(7,294	)		$	44,464			$	43,777
Ratio of Cumulative Gap To Total Earning Assets at March 31, 2012			-18.10	%			-34.43	%			-4.51	%			25.62	%			27.05	%
Ratio of Cumulative Gap To Total Earning Assets at December 31, 2011			-25.68	%			-38.71	%			-7.85	%			24.59	%			26.45	%

 

1	Nonaccrual loans are included in the loan totals.

2	Investment securities are reflected at fair value.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not Applicable

Item 4. Controls and Procedures

As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers such as Pioneer Bankshares, Inc. that file periodic reports under the Securities Exchange Act of 1934 (the “Act”) are required to include in those reports certain information concerning the issuer’s controls and procedures for complying with the disclosure requirements of the federal securities laws. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports it files or submits under the Act, is communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

The Company has established disclosure controls and procedures to ensure that material information related to Pioneer Bankshares, Inc. is made known to our principal executive officers, and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared. As required, the Company evaluates the effectiveness of these disclosure controls and procedures on a quarterly basis, and has done so as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are adequate and effective. There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2012, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II - Other Information

 

Item 1.

Legal Proceedings.

In the ordinary course of its operations, the Company and its subsidiaries are parties to various legal proceedings. Based on the information presently available, and after consultation with legal counsel, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business or the financial condition or results of operations of the Company.

 

Item 1A.

Risk Factors.

Not Applicable

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

The Company has a stock repurchase program authorized with 5,000 shares remaining available for repurchase. There have been no repurchase transactions during 2012.

 

Item 3.

Defaults Upon Senior Securities.

Not Applicable

 

Item 4.

Mine Safety Disclosures.

Not Applicable

 

Item 5.

Other Information.

Not Applicable

 

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Item 6.

Exhibits.

 

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith).
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith).
32		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Presentation Linkbase Document

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

				PIONEER BANKSHARES, INC.
				By: /s/ THOMAS R. ROSAZZA
Date: May 11, 2012				Thomas R. Rosazza
				President and Chief Executive Officer
Date: May 11, 2012				By: /s/ LORI G. HASSETT
				Lori G. Hassett
				Vice President and Chief Financial Officer

 

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