UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2012

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

For the transition period from to

Commission File No. 0-24753

ECB Bancorp, Inc.

(Exact name of registrant as specified in its charter)

North Carolina

56-2090738

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

Post Office Box 337, Engelhard, North Carolina 27824

(Address of principal executive offices) (Zip Code)

(252) 925-5501

(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 Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

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

On August 10, 2012, there were 2,849,841 outstanding shares of Registrant’s common stock.

Table of Contents

Index


		Begins on Page
Part 1 – Financial Information

Item 1.	Financial Statements:

Consolidated Balance Sheets at June 30, 2012 (unaudited) and December 31, 2011			3
Consolidated Results of Operations for Three and Six Months Ended June 30, 2012 and 2011 (unaudited)			4
Consolidated Statements of Comprehensive Income for Three and Six Months Ended June 30, 2012 and 2011 (unaudited)			5
Consolidated Statements of Changes in Shareholders’ Equity for Six Months Ended June 30, 2012 and 2011 (unaudited)			6
Consolidated Statements of Cash Flows for Six Months Ended June 30, 2012 and 2011 (unaudited)			7
Notes to Consolidated Financial Statements			8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		56
Item 4.	Controls and Procedures		56

Part II – Other Information

Item 1.	Legal Proceedings		57
Item 1A.	Risk Factors		57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		57
Item 3.	Defaults upon Senior Securities		57
Item 4.	Mine Safety Disclosures		57
Item 5.	Other Information		57
Item 6.	Exhibits		57

Signatures			58
Exhibit Index			59
Certifications

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

June 30, 2012 and December 31, 2011

(Dollars in thousands, except per share data)


	June 30, 2012			December 31, 2011*
	(unaudited)
Assets
Non-interest bearing deposits and cash	$	16,890		$	18,363
Interest bearing deposits		61			63
Overnight investments		7,670			6,305

Total cash and cash equivalents		24,621			24,731


Investment securities
Available-for-sale, at market value (cost of $346,271 and $338,685 at June 30, 2012 and December 31, 2011, respectively)		350,779			339,450

Loans held for sale		3,059			2,866

Loans		506,257			496,542
Allowance for loan losses		(10,780	)		(12,092	)

Loans, net		495,477			484,450


Real estate and repossessions acquired in settlement of loans, net		7,661			6,573
Federal Home Loan Bank common stock, at cost		3,899			3,456
Bank premises and equipment, net		26,111			26,289
Accrued interest receivable		5,030			5,308
Bank owned life insurance		11,981			11,778
Other assets		15,648			16,376

Total	$	944,266		$	921,277


Liabilities and Shareholders’ Equity
Deposits
Demand, noninterest bearing	$	146,326		$	135,732
Demand, interest bearing		305,298			270,119
Savings		58,562			55,517
Time		285,302			336,277

Total deposits		795,488			797,645


Accrued interest payable		469			519
Short-term borrowings		42,101			11,679
Long-term obligations		18,000			25,500
Other liabilities		4,948			5,491

Total liabilities		861,006			840,834


Shareholders’ equity
Preferred stock, Series A		17,536			17,454
Common stock, par value $3.50 per share		9,974			9,974
Capital surplus		25,857			25,873
Warrants		878			878
Retained earnings		26,360			25,926
Accumulated other comprehensive income		2,655			338

Total shareholders’ equity		83,260			80,443

Total	$	944,266		$	921,277


Common shares outstanding		2,849,841			2,849,841
Common shares authorized		50,000,000			50,000,000
Preferred shares outstanding		17,949			17,949
Preferred shares authorized		2,000,000			2,000,000
Non-voting common shares authorized		2,000,000			2,000,000

*	Derived from audited consolidated financial statements.

See accompanying notes to consolidated financial statements.

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Results of Operations

For the three and six months ended June 30, 2012 and 2011 (unaudited)

(Dollars in thousands, except per share data)


	Three months ended June 30,					Six months ended June 30,
	2012		2011			2012		2011
Interest income:
Interest and fees on loans	$	6,404	$	7,329		$	12,773	$	14,686
Interest on investment securities:
Interest exempt from federal income taxes		249		117			484		245
Taxable interest income		1,774		2,163			3,656		4,100
Dividend income		14		9			25		18
Other interest income		4		14			6		21

Total interest income		8,445		9,632			16,944		19,070


Interest expense:
Deposits:
Demand accounts		390		505			796		1,062
Savings		60		74			155		127
Time		1,166		1,790			2,436		3,601
Short-term borrowings		95		73			176		142
Long-term obligations		76		145			195		325

Total interest expense		1,787		2,587			3,758		5,257

Net interest income		6,658		7,045			13,186		13,813
Provision for loan losses		866		1,273			866		5,203

Net interest income after provision for loan losses		5,792		5,772			12,320		8,610


Noninterest income:
Service charges on deposit accounts		945		828			1,802		1,593
Other service charges and fees		518		330			847		574
Mortgage origination fees		376		452			782		778
Net gain on sale of securities		279		858			324		884
Income from bank owned life insurance		102		74			203		148
Other operating (expense) income		1		(3	)		2		(7	)

Total noninterest income		2,221		2,539			3,960		3,970


Noninterest expenses:
Salaries		2,865		2,826			5,784		5,390
Retirement and other employee benefits		815		784			1,918		1,460
Occupancy		518		522			1,048		1,005
Equipment		603		513			1,193		1,072
Professional fees		343		271			562		542
Supplies		41		78			115		129
Telephone		184		189			382		358
FDIC insurance		203		201			407		527
Other outside services		92		162			192		343
Data processing and related expenses		346		83			742		153
Net cost of real estate and repossessions acquired in settlement of loans		463		79			1,147		97
Other operating expenses		784		949			1,685		1,825

Total noninterest expenses		7,257		6,657			15,175		12,901

Income (loss) before income taxes		756		1,654			1,105		(321	)

Income tax expense (benefit)		168		509			140		(382	)

Net income		588		1,145			965		61

Preferred stock dividends		225		224			449		448
Accretion of discount		41		41			82		82

Income (loss) available to common shareholders	$	322	$	880		$	434	($	469	)

Net income (loss) per common share—basic	$	0.11	$	0.31		$	0.15	($	0.16	)

Net income (loss) per common share—diluted	$	0.11	$	0.31		$	0.15	($	0.16	)

Weighted average common shares outstanding—basic		2,849,841		2,849,841			2,849,841		2,849,841

Weighted average common shares outstanding—diluted		2,849,841		2,849,841			2,849,841		2,849,841

See accompanying notes to consolidated financial statements.

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (unaudited)

For the three and six months ended June 30, 2012 and 2011

(Dollars in thousands)


	Three months ended June 30,						Six months ended June 30,
	2012			2011			2012			2011
	(Dollars in thousands)
Net income	$	588		$	1,145		$	965		$	61

Other comprehensive income:
Unrealized gains on available for sale securities arising during the period		3,093			4,404			4,067			4,247
Tax related to unrealized gains		(1,175	)		(1,696	)		(1,551	)		(1,635	)
Reclassification to realized gains		(279	)		(858	)		(324	)		(884	)
Tax related to realized gains		107			330			125			340

Defined benefit pension plan:
Prior service cost		—			—			—			7
Net loss arising during period		—			—			—			(116	)
Tax related to defined benefit pension plan		—			—			—			42

Total other comprehensive income		1,746			2,180			2,317			2,001

Total comprehensive income	$	2,334		$	3,325		$	3,282		$	2,062

See accompanying notes to consolidated financial statements.

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity

Six months ended June 30, 2012 and 2011 (unaudited)

(Dollars in thousands, except per share data)


	Preferred stock, Series A		Common Stock				Common stock warrants		Capital surplus		Retained earnings			Accumulated other comprehensive income			Total
	Preferred stock, Series A		Number		Amount		Common stock warrants		Capital surplus		Retained earnings			Accumulated other comprehensive income			Total
Balance January 1, 2011	$	17,288		2,849,841	$	9,974	$	878	$	25,852	$	28,554		$	(1,652	)	$	80,894

Other comprehensive income		—		—		—		—		—		—			2,001			2,001

Net income		—		—		—		—		—		61						61

Stock based compensation		—		—		—		—		11					—			11

Preferred stock accretion		82		—		—		—		—		(82	)		—			—

Cash dividends on preferred stock		—		—		—		—		—		(448	)		—			(448	)

Cash dividends ($0.07 per share)		—		—		—		—		—		(199	)		—			(199	)


Balance June 30, 2011	$	17,370		2,849,841	$	9,974	$	878	$	25,863	$	27,886		$	349		$	82,320


	Preferred stock, Series A		Common Stock				Common stock warrants		Capital surplus			Retained earnings			Accumulated other comprehensive income		Total
	Preferred stock, Series A		Number		Amount		Common stock warrants		Capital surplus			Retained earnings			Accumulated other comprehensive income		Total
Balance January 1, 2012	$	17,454		2,849,841	$	9,974	$	878	$	25,873		$	25,926		$	338	$	80,443

Other comprehensive income		—		—		—		—		—			—			2,317		2,317

Net income		—		—		—		—		—			965			—		965

Stock based compensation		—		—		—		—		(16	)					—		(16	)

Preferred stock accretion		82		—		—		—		—			(82	)		—		—

Cash dividends on preferred stock		—		—		—		—		—			(449	)		—		(449	)


Balance June 30, 2012	$	17,536		2,849,841	$	9,974	$	878	$	25,857		$	26,360		$	2,655	$	83,260

See accompanying notes to consolidated financial statements.

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Six months ended June 30, 2012 and 2011 - (unaudited)

(Dollar amounts in thousands)


	Six months ended June 30,
	2012			2011
Cash flows from operating activities:
Net income	$	965		$	61
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		757			724
Amortization of premium on investment securities, net		2,502			1,408
Provision for loan losses		866			5,203
Gain on sale of securities		(324	)		(884	)
Stock based compensation (benefit)		(16	)		11
Decrease in accrued interest receivable		278			736
Impairment of real estate and repossessions acquired in settlement of loans		683			—
Loss on sale of real estate and repossessions acquired in settlement of loans		142			26
Income from Bank owned life insurance		(203	)		(148	)
Originations of mortgage loans held for sale		(31,210	)		(29,425	)
Proceeds from sale of loans held for sale		31,017			32,117
Decrease in other assets		728			1,697
Increase (decrease) in accrued interest payable		(50	)		17
Decrease in other liabilities, net		(1,969	)		(1,993	)

Net cash provided by operating activities		4,166			9,550

Cash flows from investing activities:
Proceeds from sales of investment securities classified as available-for-sale		74,073			56,536
Proceeds from maturities of investment securities classified as available-for-sale		24,049			25,908
Purchases of investment securities classified as available-for-sale		(107,886	)		(104,492	)
Purchases of premises and equipment		(579	)		(828	)
Purchase (sale) of Federal Home Loan Bank common stock		(443	)		539
Proceeds from disposal of real estate and repossessions acquired in settlement of loans and real estate held for sale		909			1,449
Net loan (originations) repayments		(14,715	)		17,953

Net cash used by investing activities		(24,592	)		(2,935	)

Cash flows from financing activities:
Net increase (decrease) in deposits		(2,157	)		26,833
Net increase (decrease) in borrowings		22,922			(4,798	)
Dividends paid to common shareholders		—			(199	)
Dividends paid on preferred stock		(449	)		(448	)

Net cash provided by financing activities		20,316			21,388

Increase (decrease) in cash and cash equivalents		(110	)		28,003
Cash and cash equivalents at beginning of period		24,731			20,166

Cash and cash equivalents at end of period	$	24,621		$	48,169

Cash paid during the period:
Interest	$	3,808		$	5,240
Taxes		—			—
Supplemental disclosures of noncash financing and investing activities:
Unrealized gains on available-for-sale securities, net of deferred taxes	$	2,317		$	2,068
Transfer from loans to real estate and repossessions acquired in settlement of loans		2,822			3,989
Transfer from long-term to short-term borrowings		7,500			7,000

See accompanying notes to consolidated financial statements.

ECB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(1) Basis of Presentation

The consolidated financial statements include the accounts of ECB Bancorp, Inc. (“Bancorp”) and its wholly-owned subsidiary, The East Carolina Bank (the “Bank”) (Bancorp and the Bank are collectively referred to hereafter as the “Company”). The Bank has one wholly-owned subsidiary, ECB Financial Services, Inc., which formerly provided courier services to the Bank but is currently inactive. All intercompany transactions and balances are eliminated in consolidation. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of income and expenses for the periods presented. Actual results could differ from those estimates.

Management makes a number of estimates and assumptions relating to reported amounts of assets, liabilities, revenues and expenses in the preparation of the financial statements and disclosures. Estimates and assumptions that are most significant to the Company are related to the determination of the allowance for loan losses, asset impairment valuation, postretirement and benefit plan accounting and income taxes.

All adjustments considered necessary for a fair presentation of the results for the interim periods presented have been included (such adjustments are normal and recurring in nature). The notes to consolidated financial statements in Bancorp’s annual report on Form 10-K should be referenced when reading these unaudited interim financial statements. Operating results for the period ended June 30, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012 or any other period.

Loans

Loans are generally stated at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses and any deferred fees or costs. Loan origination fees net of certain direct loan origination costs are deferred and amortized as a yield adjustment over the contractual life of the related loans using the level-yield method.

Impaired loans are defined as those which management believes it is probable we will not collect all amounts due according to the contractual terms of the loan agreement, as well as those loans whose terms have been modified in a troubled debt restructuring.

Interest on loans is recorded based on the principal amount outstanding. The Company ceases accruing interest on loans (including impaired loans) when, in management’s judgment, the collection of interest appears doubtful or the loan is past due 90 days or more. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Management may return a loan classified as nonaccrual to accrual status when the obligation has been brought current, has performed in accordance with its contractual terms over an extended period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Troubled debt restructurings (“TDRs”) are loans in which the borrower is experiencing financial difficulty at the time of restructure, and the Company has granted an economic concession to the borrower. Prior to modifying a borrower’s loan terms, the Company performs an evaluation of the borrower’s financial condition and ability to service under the potential modified loan terms. The types of concessions generally granted are extensions of the loan maturity date, reductions in the original contractual interest rate and forgiveness of principal. The Company measures the impairment loss of a TDR using the methodology for individually impaired loans. If a loan is accruing at the time of modification, the loan remains on accrual status and is subject to the Company’s charge-off and nonaccrual policies. If a loan is on nonaccrual before it is determined to be a TDR then the loan remains on nonaccrual. TDRs may be returned to accrual status if there has been at least a six month sustained period of repayment performance by the borrower.

Allowance for Loan Losses

The allowance for loan losses (AFLL) is established through provisions for losses charged against income. Loan amounts deemed to be uncollectible are charged against the AFLL, and subsequent recoveries, if any, are credited to the allowance. The AFLL represents management’s estimate of the amount necessary to absorb estimated probable losses in the loan portfolio. Management’s periodic evaluation of the adequacy of the allowance is based on individual loan reviews, past loan loss experience, economic conditions in the Company’s market areas, the fair value and adequacy of underlying collateral, and the growth and loss attributes of the loan portfolio. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Thus, future changes to the AFLL may be necessary based on the impact of changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s AFLL. Such agencies may require the Company to recognize adjustments to the AFLL based on their judgments about information available to them at the time of their examination.

In evaluating the allowance for loan losses, the Company prepares an analysis of its current loan portfolio through the use of historical loss rates, homogeneous risk analysis grouping to include probabilities for loss in each group by risk grade, estimation of years to impairment in each homogeneous grouping, analysis of internal credit processes, past due loan portfolio performance and overall economic conditions, both regionally and nationally.

Historical loss calculations for each homogeneous risk group are based on a three year average loss ratio calculation with the most recent quarter’s loss history included in the model. The impact is to more quickly recognize and increase the loss history in a respective grouping. For those groups with little or no loss history, management increases the historical factor through a positive adjustment to more accurately represent current economic conditions and their potential impact on that particular loan group.

Homogeneous loan groups are assigned risk factors based on their perceived loss potential, current economic conditions and on their respective risk ratings. The probability of loss is increased as the risk grade increases within each risk grouping to more accurately reflect the Bank’s exposure in that particular group of loans. The Bank utilizes a system of eight possible risk ratings. The risk ratings are established based on perceived probability of loss. Most loans risk rated “substandard”, “doubtful” and “loss” are removed from their homogeneous group and individually analyzed for impairment. Some smaller loans risk rated “substandard”, “doubtful” and “loss” with balances less than $100 thousand are not removed from their homogeneous group and individually analyzed for impairment. Other groups of loans based on loan size may be selected for impairment review. Loans are considered impaired if, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is based on either the fair value of the underlying collateral, the present value of the future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, or the estimated market value of the loan. In measuring the fair value of the collateral, management uses a comparison to the recent selling price of similar assets, which is consistent with those that would be utilized by unrelated third parties.

A portion of the Bank’s AFLL is not allocated to any specific category of loans. This general portion of the allowance reflects the elements of imprecision and estimation risk inherent in the calculation of the overall allowance. Due to the subjectivity involved in determining the overall allowance, including the portion determined through general qualitative and quantitative internal and external factors, the general portion may fluctuate from period to period based on management’s evaluation of the factors affecting the assumptions used in calculating the allowance, including historical loss experience, current and expected economic conditions and geographic conditions. While the Company believes that our management uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the AFLL, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the final determination. Because these factors and management’s assumptions are subject to change, the allocation is not necessarily indicative of future loan portfolio performance.

Unsecured loans are charged-off in full against the Company’s AFLL as soon as the loan becomes uncollectible. Unsecured loans are considered uncollectible when no regularly scheduled monthly payment has been made within three months, the loan matured over 90 days ago and has not been renewed or extended or the borrower files for bankruptcy. Secured loans are considered uncollectible when the liquidation of collateral is deemed to be the most likely source of repayment. Once secured loans reach 90 days past due, they are placed into non-accrual status. If the loan is deemed to be collateral dependent, the principal balance is written down immediately to reflect the current market valuation based on current independent appraisal. Included in the write-down is the estimated expense to liquidate the property and typically an additional allowance for the foreclosure discount.

Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued.

(2) Net Income Per Common Share

Basic net income per common share is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. For purposes of basic net income per common share, restricted stock is considered “contingently issuable” and is not included in the weighted average number of common shares outstanding.

Diluted net income per common share is computed by assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. Restricted stock is considered outstanding for purposes of diluted net income per common share. The amount of compensation cost attributed to future services and not yet recognized is considered “proceeds” using the treasury stock method. Restricted stock had no dilutive effect on earnings per common share for the six or three-month periods ended June 30, 2012 and June 30, 2011 as there were no shares outstanding during these periods.

In computing diluted net income per common share, it is assumed that all dilutive stock options are exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and the number of shares bought back is added to the number of weighted average common shares outstanding during the period. The sum is used as the denominator to calculate diluted net income per common share for the Company. Diluted weighted average shares outstanding did not increase for the six and three months ended June 30, 2012 or June 30, 2011 as there was no dilutive impact of options for the periods. There were 3,500 options outstanding for both the six and three months ended June 30, 2012, that were not included in the computation of diluted net income per share because the exercise price was above the average market value of the Company’s stock for the periods. As of June 30, 2012, the warrant, covering approximately 145 thousand shares, issued to the U.S. Treasury Department was not included in the computation of net income per share for either the six or three-month period because its exercise price exceeded the average market price of the company’s stock for the periods. For the six month period ending June 30, 2011, the warrant, covering approximately 145 thousand shares, issued to the U.S. Treasury Department and 28,513 options were not included in the computation of diluted earnings per common share as the effect would have been anti-dilutive. For the three month period ending June 30, 2011, the warrant, covering approximately 145 thousand shares, issued to the U.S. Treasury Department and 28,513 options were not included in the computation of diluted earnings per common share because the exercise price exceeded the average market price of the Company’s stock for that period.

The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Net Income (Loss) Per Common Share for the six months ended June 30.


	Six months ended June 30, 2012 (dollars in thousands, except per share data)
	Income (Numerator)		Shares (Denominator)		Per Share Amount
Basic net income per common share	$	434		2,849,841	$	0.15

Effect of dilutive securities		—		—

Diluted net income per common share	$	434		2,849,841	$	0.15


	Six months ended June 30, 2011 (dollars in thousands, except per share data)
	Income (Numerator)			Shares (Denominator)		Per Share Amount
Basic net loss per common share	$	(469	)		2,849,841	$	(0.16	)

Effect of dilutive securities		—			—

Diluted net loss per common share	$	(469	)		2,849,841	$	(0.16	)

The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Net Income Per Common Share for the three months ended June 30.


	Three months ended June 30, 2012 (dollars in thousands, except per share data)
	Income (Numerator)		Shares (Denominator)		Per Share Amount
Basic net income per common share	$	322		2,849,841	$	0.11

Effect of dilutive securities		—		—

Diluted net income per common share	$	322		2,849,841	$	0.11


	Three months ended June 30, 2011 (dollars in thousands, except per share data)
	Income (Numerator)		Shares (Denominator)		Per Share Amount
Basic net income per common share	$	880		2,849,841	$	0.31

Effect of dilutive securities		—		—

Diluted net income per common share	$	880		2,849,841	$	0.31

(3) Comprehensive Income

Comprehensive income is defined as the change in equity during a period for non-owner transactions and is divided into net income (loss) and other comprehensive income. Other comprehensive income includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards. The components of comprehensive income for the periods have been presented in the consolidated statements of comprehensive income.

(4) Recent Accounting Pronouncements

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of financial information by the Company.

In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03. The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control. The other criteria to assess effective control were not changed. The amendments were effective for the Company on January 1, 2012 and had no effect on the Company’s financial statements.

ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments were effective for the Company beginning January 1, 2012 and are included in Note 9.

The Comprehensive Income topic of the ASC was amended in June 2011 by ASU 2011-05. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and requires consecutive presentation of the statement of net income and other comprehensive income. The amendments were applicable to the Company on January 1, 2012 and have been applied retrospectively. In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements. Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates future requirements.

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

(5) Investment Securities

The following is a summary of the securities portfolio by major classification:


	June 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)

Securities available-for-sale:

Obligations of states and political subdivisions	$	36,655	$	1,181	$	(57	)	$	37,779

Mortgage-backed securities		131,169		1,831		(201	)		132,799

SBA-backed securities		137,445		2,270		(113	)		139,602

Corporate bonds		41,002		337		(740	)		40,599

	$	346,271	$	5,619	$	(1,111	)	$	350,779


	December 31, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)

Securities available-for-sale:

Government-sponsored enterprises and FFCB bonds	$	1,003	$	29	$	—		$	1,032

Obligations of states and political subdivisions		27,855		863		—			28,718

Mortgage-backed securities		130,949		1,460		(117	)		132,292

SBA-backed securities		146,195		774		(332	)		146,637

Corporate bonds		32,683		88		(2,000	)		30,771

	$	338,685	$	3,214	$	(2,449	)	$	339,450

Gross realized gains and losses on sales of securities for the three and six-month periods ended June 30, 2012 and June 30, 2011 were as follows:


	Six months ended June 30, (Dollars in thousands)
	2012			2011
Gross realized gains	$	433		$	971
Gross realized losses		(109	)		(87	)

Net realized gains	$	324		$	884


	Three months ended June 30, (Dollars in thousands)
	2012			2011
Gross realized gains	$	362		$	945
Gross realized losses		(83	)		(87	)

Net realized gains	$	279		$	858

Analysis of Certain Investments in Debt and Equity Securities for Other Than Temporary Impairment

The following tables set forth the amount of unrealized losses at June 30, 2012 and December 31, 2011 (that is, the amount by which cost or amortized cost exceeds fair value), and the related fair value of investments with unrealized losses, none of which are

considered to be other-than-temporarily impaired. The tables are segregated into investments that have been in a continuous unrealized-loss position for less than 12 months from those that have been in a continuous unrealized-loss position for 12 months or longer.


	June 30, 2012
	Less Than 12 Months				12 Months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)

Obligations of states and political subdivisions	$	5,032	$	57	$	—	$	—	$	5,032	$	57

Mortgage-backed securities		20,968		201		—		—		20,968		201

SBA-backed securities		19,996		113		—		—		19,996		113

Corporate bonds		15,356		252		8,173		488		23,529		740


Total	$	61,352	$	623	$	8,173	$	488	$	69,525	$	1,111


	December 31, 2011
	Less Than 12 Months				12 Months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)

Mortgage-backed securities	$	25,011	$	81	$	2,880	$	36	$	27,891	$	117

SBA-backed securities		62,543		332		—		—		62,543		332

Corporate bonds		11,824		485		13,755		1,515		25,579		2,000


Total	$	99,378	$	898	$	16,635	$	1,551	$	116,013	$	2,449

As of June 30, 2012 and December 31, 2011, management concluded that the unrealized losses presented above, which consisted of twenty-five securities at June 30, 2012 and fifty securities at December 31, 2011, are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Bank has the intent to hold these investments for a time necessary to recover their cost and it is not likely that the Bank would be required to sell prior to recovery. The twenty-five securities at June 30, 2012 were comprised of three obligations of states and political subdivisions, five mortgage-backed securities, ten corporate bonds and seven SBA-backed securities. The fifty securities at December 31, 2011 were comprised of twelve mortgage-backed securities, twelve corporate bonds and twenty-six SBA-backed securities. The losses above are on debt securities that have contractual maturity dates and are primarily related to market interest rates. All unrealized losses on investment securities are not considered to be other-than-temporary, because they are related to changes in interest rates, lack of liquidity and demand in the general investment market and do not affect the expected cash flows of the underlying collateral or the issuer. The Bank’s mortgage-backed securities are all backed by government sponsored enterprises or agencies. The Bank does not own any private label mortgage-backed securities.

At June 30, 2012 and December 31, 2011, the balance of Federal Home Loan Bank (“FHLB”) of Atlanta stock held by the Bank was $3.9 million and $3.5 million, respectively. The FHLB paid a dividend for the first quarter of 2012 with an annualized rate of 1.51%. The dividend rate was equal to average three-month LIBOR for the period of January 1, 2012 to March 31, 2012 plus 1.00%, and was applicable to capital stock held during that period. Management believes that its investment in FHLB stock was not other-than-temporarily impaired as of June 30, 2012 or December 31, 2011. However, there can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks will not also cause a decrease in the value of the FHLB stock held by the Bank.

The aggregate amortized cost and fair value of the available-for-sale securities portfolio at June 30, 2012 by remaining contractual maturity are as follows:


	Amortized Cost		Fair Value
	(Dollars in thousands)

Obligations of states and political subdivisions:

Due in one through five years	$	1,605		1,704

Due in five through ten years		20,196		20,930

Due after ten years		14,854		15,145

Mortgage-backed securities:

Due in one through five years		1,044		1,044

Due in five through ten years		27,230		27,488

Due after ten years		102,896		104,267

SBA-backed securities:

Due in five through ten years		5,190		5,224

Due after ten years		132,255		134,378

Corporate bonds:

Due in one through five years		23,326		23,271

Due in five through ten years		17,675		17,328


Total securities	$	346,271	$	350,779

Securities with an amortized cost of $186.6 million at June 30, 2012 are pledged as collateral. Of this total, securities with an amortized cost of $60.8 million and fair value of $62.3 million are pledged as collateral for FHLB advances.

The aggregate amortized cost and fair value of the available-for-sale securities portfolio at December 31, 2011 by remaining contractual maturity are as follows:


	Amortized Cost		Fair Value
	(Dollars in thousands)
Government-sponsored enterprises and FFCB bonds:

Due in one through five years	$	3	$	28

Due in five through ten years		1,000		1,004

Obligations of states and political subdivisions:

Due in one year or less		250		252

Due in one through five years		961		1,033

Due in five through ten years		11,768		12,083

Due after ten years		14,876		15,350

Mortgage-backed securities:

Due in five through ten years		7,415		7,490

Due after ten years		123,534		124,802

SBA-backed securities:

Due in five through ten years		2,967		3,007

Due after ten years		143,228		143,630

Corporate bonds:

Due in one year through five years		13,338		13,081

Due in five through ten years		19,345		17,690


Total securities	$	338,685	$	339,450

Securities with an amortized cost of $197.6 million at December 31, 2011 were pledged as collateral. Of this total, securities with an amortized cost of $47.4 million and fair value of $48.0 million were pledged as collateral for FHLB advances.

(6) Loans

Loans at June 30, 2012 and December 31, 2011 classified by type are as follows:


	June 30, 2012		December 31, 2011

Real estate loans:

Construction and land development	$	63,041	$	67,232

Secured by farmland		27,677		29,947

Secured by residential properties		107,545		110,238

Secured by nonfarm, nonresidential properties		198,221		203,287

Consumer installment		6,028		6,485

Credit cards and related plans		1,723		1,660

Commercial and all other loans:

Commercial and industrial		54,989		45,649

Loans to finance agricultural production		36,840		21,524

All other loans		10,237		10,587

		506,301		496,609

Less deferred fees and costs, net		44		67

	$	506,257	$	496,542


Included in the above:

Nonaccrual loans	$	18,204	$	15,973

Restructured loans ¹		10,439		10,138

1.	Restructured loans include loans restructured and still accruing. The Company is not committed to advance additional funds on restructured loans.

There were no loans outstanding that were past due ninety days or more that were still accruing at June 30, 2012 or December 31, 2011.

The Company, through its normal lending activity, originates and maintains loans receivable that are substantially concentrated in the Eastern region of North Carolina, where its offices are located. The Company’s policy calls for collateral or other forms of repayment assurance to be received from the borrower at the time of loan origination. Such collateral or other form of repayment assurance is subject to changes in economic value due to various factors beyond the control of the Company, and such changes could be significant.

The Bank’s loan policies and procedures establish the basic guidelines governing its lending operations. The guidelines address the type of loans that the Bank seeks, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans or credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrower’s total outstanding indebtedness to the Bank, including any indebtedness as a guarantor. The policies are reviewed and approved at least annually by the Board of Directors of the Bank. The Bank supplements its own supervision of the loan underwriting and approval process with periodic loan reviews by independent, outside professionals experienced in loan review. On an annual basis, the Board of Directors of the Bank determines officers lending authority. Authorities may include loans, letters of credit, overdrafts, uncollected funds and such other authorities as determined by the Board of Directors.

Responsibility for loan underwriting resides with the Chief Credit Officer position. This position is responsible for loan underwriting and approval. This is accomplished through individual lender approval authorities with supervision by Credit Policy Officers who review and approve loans which exceed the lender’s authority. Also, all Special Mention and Classified loans are reviewed quarterly. Detailed, written action plans are updated by the lenders and those plans are reviewed by a joint committee consisting of Regional Managers, Credit Policy Officers, CCO, Commercial Banking Manager and Special Assets Manager.

The following describe the risk characteristics relevant to each of the portfolio segments.

Real Estate Loans. Our real estate loan classification includes all loans secured by real estate. Real estate loans include loans made to purchase, construct or improve residential or commercial real estate, and for real estate development purposes. However, many of our real estate loans, while secured by real estate, were made for various other commercial, agricultural and consumer purposes (which may or may not be related to our real estate collateral). This generally reflects our efforts to reduce credit risk by taking real estate as primary or additional collateral, whenever possible, without regard to loan purpose. Substantially all of our real estate loans are secured by real property located in or near our banking markets. We make long-term residential mortgage loans through our mortgage department. These loans are held for sale and we generally hold these loans for a short period of time of approximately ten days. This allows us to make long-term residential loans available to our customers and generate fee income but avoid most risks associated with those loans.

Construction and land development loans involve special risks because loan funds are advanced on the security of houses or other improvements that are under construction and are of uncertain value before construction is complete. For that reason, it is more difficult to evaluate accurately the total loan funds required to complete a project and the related loan-to-value ratios. To reduce these risks, we generally limit loan amounts to 85% of the projected “as built” appraised values of our collateral on completion of construction. For larger projects, we include amounts for contingencies in our construction cost estimates. We generally require a qualified permanent financing commitment from an outside lender unless we have agreed to convert the construction loan to permanent financing ourselves.

Loans secured by farmland are made to agricultural customers for the purpose of acquisition or improvement of farmland. The loans are typically secured by land which is cultivated for primarily row- crop production and related interests, such as grain elevator facilities and farming operations buildings. Repayment of loans secured by farmland may depend on successful crop production or other farm related operations.

Residential loans may be made at fixed or variable interest rates, and they generally have maturities that do not exceed five years and provide for payments based on amortization schedules of less than twenty years. Loans with a maturity of more than five years or that is based on an amortization schedule of more than five years generally will include contractual provisions that allow us to call the loan in full, or provide for a “balloon” payment in full, at the end of a period of no more than five years.

Nonfarm and nonresidential loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Repayment of commercial real estate loans may depend on the successful operation of income producing properties, a business, or a real estate project and, therefore, may, to a greater extent than in the case of other loans, be subject to the risk of adverse conditions in the economy generally or in the real estate market in particular.

Consumer Installment Loans, Credit Cards and Related Plans. Our consumer installment loans consist primarily of loans for various consumer purposes, as well as the outstanding balances of non-real estate secured consumer revolving credit accounts. A majority of these loans are secured by liens on various personal assets of the borrowers, but they also may be made on an unsecured basis. Consumer loans generally are made at fixed interest rates and with maturities or amortization schedules that generally do not exceed five years. Consumer installment loans involve greater risks than other loans, particularly in the case of loans that are unsecured or secured by depreciating assets. When damage or depreciation reduces the value of our collateral below the unpaid balance of a defaulted loan, repossession may not result in repayment of the entire outstanding loan balance. The resulting deficiency may not warrant further substantial collection efforts against the borrower. In connection with consumer lending in general, the success of our loan collection efforts is highly dependent on the continuing financial stability of our borrowers, and our collection of consumer installment loans may be more likely to be adversely affected by a borrower’s job loss, illness, personal bankruptcy or other change in personal circumstances than is the case with other types of loans.

Commercial and Industrial and Agricultural Loans. Our commercial and industrial loan and loans to finance agriculture includes loans to small- and medium-sized businesses and individuals for working capital, equipment purchases and various other business and agricultural purposes. These loans generally are secured by business assets, such as inventory, accounts receivable, equipment or similar assets, but they also may be made on an unsecured basis. Commercial and industrial loans typically are made on the basis of the borrower’s ability to make repayment from business cash flow. As a result, the ability of borrowers to repay commercial loans may be substantially dependent on the success of their businesses, and the collateral for commercial loans may depreciate over time and cannot be appraised with as much precision as real estate.

At June 30, 2012 and December 31, 2011, included in mortgage, commercial, and residential loans were loans collateralized by owner-occupied residential real estate of approximately $49.5 million and $53.2 million, respectively.

Loans with a book value of approximately $25.0 million at June 30, 2012 are pledged as eligible collateral for FHLB advances. Loans with a book value of approximately $25.8 million at December 31, 2011 were pledged as eligible collateral for FHLB advances.

(7) Credit Quality of Loans and Allowance for Loan Losses

The following tables summarize the balances by loan category of the allowance for loan losses with changes arising from charge-offs, recoveries and provision expense for the six months ending June 30, 2012 and 2011, and the three months ending June 30, 2012 and 2011:

Allowance for Loan Losses

As of and for the Six Months Ended June 30, 2012


Allowance for Credit Losses	Real Estate Construction and Land Development			Real Estate Secured by Farmland			Real Estate Secured by Residential Properties			Real Estate Secured by Nonfarm Nonresidential			Consumer Installment			Credit Cards and Related Plans			Commercial and Industrial			Loans to Finance Agricultural Production			All Other Loans			General Qualitative & Quantitative Portion			Total
	(Dollars in thousands)

Beginning balance	$	3,655		$	15		$	2,418		$	1,740		$	46		$	18		$	555		$	115		$	26		$	3,504		$	12,092
Charge-offs		(913	)		—			(278	)		(892	)		(43	)		(17	)		(421	)		—			(99	)		—			(2,663	)
Recoveries		337			—			47			2			13			3			12			—			71			—			485
Provisions		176			(2	)		202			200			134			65			505			(14	)		41			(441	)		866

Ending Balance	$	3,255		$	13		$	2,389		$	1,050		$	150		$	69		$	651		$	101		$	39		$	3,063		$	10,780

Ending Balance: individually evaluated for impairment	$	575		$	—		$	617		$	180		$	—		$	—		$	20		$	—		$	—		$	—		$	1,392

Ending Balance: collectively evaluated for impairment	$	2,680		$	13		$	1,772		$	870		$	150		$	69		$	631		$	101		$	39		$	3,063		$	9,388


Loans
Ending Balance	$	62,944		$	27,627		$	107,695		$	198,007		$	6,160		$	1,723		$	55,005		$	36,856		$	10,240		$	—		$	506,257

Ending Balance: individually evaluated for impairment	$	8,797		$	356		$	7,614		$	15,093		$	—		$	—		$	417		$	—		$	—		$	—		$	32,277

Ending Balance: collectively evaluated for impairment	$	54,147		$	27,271		$	100,081		$	182,914		$	6,160		$	1,723		$	54,588		$	36,856		$	10,240		$	—		$	473,980

Allowance for Loan Losses

As of and for the Three Months Ended June 30, 2012


Allowance for Credit Losses	Real Estate Construction and Land Development			Real Estate Secured by Farmland			Real Estate Secured by Residential Properties			Real Estate Secured by Nonfarm Nonresidential			Consumer Installment			Credit Cards and Related Plans			Commercial and Industrial			Loans to Finance Agricultural Production			All Other Loans			General Qualitative & Quantitative Portion			Total
	(Dollars in thousands)

Beginning balance	$	3,100		$	15		$	2,486		$	1,565		$	150		$	68		$	505		$	122		$	28		$	3,346		$	11,385
Charge-offs		(694	)		—			(176	)		(654	)		(2	)		(14	)		(64	)		—			(47	)		—			(1,651	)
Recoveries		111			—			20			1			12			3			2			—			31			—			180
Provisions		738			(2	)		59			138			(10	)		12			208			(21	)		27			(283	)		866

Ending Balance	$	3,255		$	13		$	2,389		$	1,050		$	150		$	69		$	651		$	101		$	39		$	3,063		$	10,780

Ending Balance: individually evaluated for impairment	$	575		$	—		$	617		$	180		$	—		$	—		$	20		$	—		$	—		$	—		$	1,392

Ending Balance: collectively evaluated for impairment	$	2,680		$	13		$	1,772		$	870		$	150		$	69		$	631		$	101		$	39		$	3,063		$	9,388


Loans
Ending Balance	$	62,944		$	27,627		$	107,695		$	198,007		$	6,160		$	1,723		$	55,005		$	36,856		$	10,240		$	—		$	506,257

Ending Balance: individually evaluated for impairment	$	8,797		$	356		$	7,614		$	15,093		$	—		$	—		$	417		$	—		$	—		$	—		$	32,277

Ending Balance: collectively evaluated for impairment	$	54,147		$	27,271		$	100,081		$	182,914		$	6,160		$	1,723		$	54,588		$	36,856		$	10,240		$	—		$	473,980

Allowance for Loan Losses

As of and for the Six Months Ended June 30, 2011


Allowance for Credit Losses	Real Estate Construction and Land Development			Real Estate Secured by Farmland		Real Estate Secured by Residential Properties			Real Estate Secured by Nonfarm Nonresidential			Consumer Installment			Credit Cards and Related Plans			Commercial and Industrial			Loans to Finance Agricultural Production			All Other Loans			General Qualitative & Quantitative Portion		Total
	(Dollars in thousands)

Beginning balance	$	6,168		$	28	$	3,450		$	1,007		$	12		$	21		$	882		$	18		$	139		$	1,522	$	13,247
Charge-offs		(1,917	)		—		(704	)		(43	)		(15	)		(9	)		(338	)		—			(122	)		—		(3,148	)
Recoveries		6			—		2			—			2			1			78			—			57			—		146
Provisions		3,210			5		1,491			168			31			175			—			(3	)		100			26		5,203

Ending Balance	$	7,467		$	33	$	4,239		$	1,132		$	30		$	188		$	622		$	15		$	174		$	1,548	$	15,448

Ending Balance: individually evaluated for impairment	$	1,931		$	—	$	1,124		$	585		$	—		$	170		$	249		$	—		$	—		$	—	$	4,059

Ending Balance: collectively evaluated for impairment	$	5,536		$	33	$	3,115		$	547		$	30		$	18		$	373		$	15		$	174		$	1,548	$	11,389


Loans
Ending Balance	$	84,291		$	33,641	$	117,458		$	211,556		$	5,191		$	2,422		$	47,780		$	23,715		$	16,633		$	—	$	542,687

Ending Balance: individually evaluated for impairment	$	16,331		$	—	$	8,762		$	5,508		$	—		$	200		$	511		$	—		$	—		$	—	$	31,312

Ending Balance: collectively evaluated for impairment	$	67,960		$	33,641	$	108,696		$	206,048		$	5,191		$	2,222		$	47,269		$	23,715		$	16,633		$	—	$	511,375

Allowance for Loan Losses

As of and for the Three Months Ended June 30, 2011


Allowance for Credit Losses	Real Estate Construction and Land Development			Real Estate Secured by Farmland		Real Estate Secured by Residential Properties			Real Estate Secured by Nonfarm Nonresidential			Consumer Installment			Credit Cards and Related Plans			Commercial and Industrial			Loans to Finance Agricultural Production		All Other Loans			General Qualitative & Quantitative Portion		Total
	(Dollars in thousands)

Beginning balance	$	7,587		$	29	$	4,002		$	1,118		$	16		$	189		$	1,132		$	15	$	130		$	1,001	$	15,219
Charge-offs		(644	)		—		(255	)		(43	)		(6	)		—			(84	)		—		(56	)		—		(1,088	)
Recoveries		6			—		1			—			—			1			15			—		21			—		44
Provisions		518			4		491			57			20			(2	)		(441	)		—		79			547		1,273

Ending Balance	$	7,467		$	33	$	4,239		$	1,132		$	30		$	188		$	622		$	15	$	174		$	1,548	$	15,448

Ending Balance: individually evaluated for impairment	$	1,931		$	—	$	1,124		$	585		$	—		$	170		$	249		$	—	$	—		$	—	$	4,059

Ending Balance: collectively evaluated for impairment	$	5,536		$	33	$	3,115		$	547		$	30		$	18		$	373		$	15	$	174		$	1,548	$	11,389


Loans
Ending Balance	$	84,291		$	33,641	$	117,458		$	211,556		$	5,191		$	2,422		$	47,780		$	23,715	$	16,633		$	—	$	542,687

Ending Balance: individually evaluated for impairment	$	16,331		$	—	$	8,762		$	5,508		$	—		$	200		$	511		$	—	$	—		$	—	$	31,312

Ending Balance: collectively evaluated for impairment	$	67,960		$	33,641	$	108,696		$	206,048		$	5,191		$	2,222		$	47,269		$	23,715	$	16,633		$	—	$	511,375

Loans are closely monitored by management for changes in quality. This monitoring includes assessing the appropriateness of the credit quality indicator in relation to the risk of the loan. Management uses the following indicators to grade the risk of each loan based on a system of eight possible ratings. These indicators are included in the Company’s loan policy which is reviewed and updated at least annually.

Pass: Include loans that are risk rated one through three. The primary source of repayment for pass loans is very likely to be sufficient, with secondary sources readily available; strong financial position; minimal risk; profitability, liquidity and capitalization are better than industry norms.

Weak Pass: Include loans that are risk rated four. The asset quality for weak pass assets is generally acceptable. Primary source of loan repayment is acceptable and secondary sources are likely to be realized, if needed; acceptable business credit, but borrowers operations, cash flow, or financial condition evidence more than average risk; requires above average levels of supervision and attention from Loan Officer. The source of increased risk has been identified, can be effectively managed/corrected, and the increased risk is not significant to warrant a more severe rating.

Special Mention: Include loans that are risk rated five. A special mention asset is considered to be high risk due to potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard: Include loans that are risk rated six through eight. Loans rated as substandard are considered to be very high risk. A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weakness that jeopardizes the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

The following tables present loans as of June 30, 2012 and December 31, 2011 classified by risk type:

Credit Quality Indicators

As of June 30, 2012


	Pass		Weak Pass		Special Mention		Substandard		Total
	(Dollars in thousands)
Real Estate—Construction and Land Development Loans	$	27,929	$	19,992	$	5,682	$	9,341	$	62,944
Real Estate—Secured by Farmland		21,265		3,326		2,680		356		27,627
Real Estate—Secured by Residential Properties		59,344		29,079		10,488		8,784		107,695
Real Estate—Secured by Nonfarm Nonresidential		87,857		71,532		19,611		19,007		198,007
Consumer Installment		4,071		1,741		284		64		6,160
Credit Cards and Related Plans		871		580		270		2		1,723
Commercial and Industrial		29,978		19,737		3,627		1,663		55,005
Loans to Finance Agriculture Production		28,582		7,917		357		—		36,856
All Other Loans		5,826		4,390		24		—		10,240

Total	$	265,723	$	158,294	$	43,023	$	39,217	$	506,257

Credit Quality Indicators

As of December 31, 2011


	Pass		Weak Pass		Special Mention		Substandard		Total
	(Dollars in thousands)
Real Estate—Construction and Land Development Loans	$	27,833	$	23,237	$	4,853	$	11,204	$	67,127
Real Estate—Secured by Farmland		22,008		4,430		3,452		—		29,890
Real Estate—Secured by Residential Properties		60,121		31,146		12,302		6,805		110,374
Real Estate—Secured by Nonfarm Nonresidential		90,099		75,384		18,663		18,917		203,063
Consumer Installment		4,025		2,212		254		129		6,620
Credit Cards and Related Plans		850		529		279		3		1,661
Commercial and Industrial		25,133		16,146		2,686		1,714		45,679
Loans to Finance Agriculture Production		16,473		3,290		584		1,192		21,539
All Other Loans		3,171		7,393		25		—		10,589

Total	$	249,713	$	163,767	$	43,098	$	39,964	$	496,542

The following tables summarize the past due loans by category as of June 30, 2012 and December 31, 2011:

Past Due Loans

As of June 30, 2012


	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total
	(Dollars in thousands)
Real Estate Construction and Land Development	$	178	$	76	$	5,271	$	5,525	$	57,419	$	62,944
Real Estate Secured by Farmland		—		156		200		356		27,271		27,627
Real Estate Secured by Residential Properties		211		222		2,312		2,745		104,950		107,695
Real Estate Secured by Nonfarm Nonresidential		2,430		210		6,401		9,041		188,966		198,007
Consumer Installment		20		2		7		29		6,131		6,160
Credit Cards and Related Plans		2		—		—		2		1,721		1,723
Commercial and Industrial		101		—		151		252		54,753		55,005
Loans to Finance Agricultural Production		—		—		—		—		36,856		36,856
All Other Loans		—		—		—		—		10,240		10,240

Total	$	2,942	$	666	$	14,342	$	17,950	$	488,307	$	506,257

Non-Accrual Loans Included in above Total	$	1,941	$	529	$	14,342	$	16,812	$	1,392	$	18,204

Past Due Loans

As of December 31, 2011


	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total
	(Dollars in thousands)
Real Estate Construction and Land Development	$	447	$	198	$	6,142	$	6,787	$	60,340	$	67,127
Real Estate Secured by Farmland		—		—		—		—		29,890		29,890
Real Estate Secured by Residential Properties		1,055		993		1,278		3,326		107,048		110,374
Real Estate Secured by Nonfarm Nonresidential		2,357		—		4,446		6,803		196,260		203,063
Consumer Installment		65		—		22		87		6,533		6,620
Credit Cards and Related Plans		2		2		—		4		1,657		1,661
Commercial and Industrial		294		—		205		499		45,180		45,679
Loans to Finance Agricultural Production		—		—		—		—		21,539		21,539
All Other Loans		—		—		—		—		10,589		10,589

Total	$	4,220	$	1,193	$	12,093	$	17,506	$	479,036	$	496,542


Non-Accrual Loans Included in above Total	$	1,426	$	588	$	12,093	$	14,107	$	1,866	$	15,973

The following tables summarize impaired loans as of June 30, 2012, June 30, 2011 and December 31, 2011. The recorded investment balance includes the loan balance, deferred fees that have yet to be recognized and accrued interest. The deferred fees that have yet to be recognized are not material amounts.

Impaired Loans


	Balance at June 30, 2012						Six Months Ended June 30, 2012				Three Months Ended June 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Real Estate Construction and Land Development	$	5,750	$	7,219	$	—	$	5,791	$	49	$	5,552	$	22
Real Estate Secured by Farmland		356		356		—		119		3		237		2
Real Estate Secured by Residential Properties		2,180		2,329		—		1,830		28		2,074		14
Real Estate Secured by Nonfarm Nonresidential		11,682		12,835		—		8,227		93		9,303		40
Consumer Installment		—		—		—		—		—		—		—
Credit Cards and Related Plans		—		—		—		—		—		—		—
Commercial and Industrial		219		217		—		300		12		296		9
Loans to Finance Agricultural Production		—		—		—		293		9		—		—
All Other Loans		—		—		—		—		—		—		—


Total impaired loans with no related allowance	$	20,187	$	22,956	$	—	$	16,560	$	194	$	17,462	$	87

With an allowance recorded:
Real Estate Construction and Land Development	$	3,055	$	3,472	$	575	$	3,321	$	28	$	2,738	$	11
Real Estate Secured by Farmland		—		—		—		—		—		—		—
Real Estate Secured by Residential Properties		5,444		5,431		617		5,286		80		5,441		38
Real Estate Secured by Nonfarm Nonresidential		3,430		3,423		180		7,622		87		6,468		27
Consumer Installment		—		—		—		—		—		—		—
Credit Cards and Related Plans		—		—		—		—		—		—		—
Commercial and Industrial		199		199		20		124		5		67		2
Loans to Finance Agricultural Production		—		—		—		—		—		—		—
All Other Loans		—		—		—		—		—		—		—


Total impaired loans with related allowance recorded	$	12,128	$	12,525	$	1,392	$	16,353	$	200	$	14,714	$	78

Total
Construction and Land Development	$	8,805	$	10,691	$	575	$	9,112	$	77	$	8,290	$	33
Residential		7,624		7,760		617		7,116		108		7,515		52
Commercial		15,886		17,030		200		16,685		209		16,371		80
Consumer		—		—		—		—		—		—		—

Total impaired loans	$	32,315	$	35,481	$	1,392	$	32,913	$	394	$	32,176	$	165

Impaired Loans


	Balance at June 30, 2011						Six Months Ended June 30, 2011				Three Months Ended June 30, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Real Estate Construction and Land Development	$	7,995	$	11,610	$	—	$	7,819	$	82	$	7,105	$	33
Real Estate Secured by Farmland		—		—		—		—		—		—		—
Real Estate Secured by Residential Properties		3,860		4,222		—		3,846		38		3,855		22
Real Estate Secured by Nonfarm Nonresidential		2,501		2,544		—		1,517		24		2,183		17
Consumer Installment		—		—		—				—				—
Credit Cards and Related Plans		—		—		—		—		—		—		—
Commercial and Industrial		175		449		—		366		7		298		2
Loans to Finance Agricultural Production		—		—		—		—		—		—		—
All Other Loans		—		—		—		—		—		—		—


Total impaired loans with no related allowance	$	14,531	$	18,825	$	—	$	13,548	$	151	$	13,441	$	74

With an allowance recorded:
Real Estate Construction and Land Development	$	8,267	$	9,996	$	1,931	$	8,206	$	86	$	8,791	$	40
Real Estate Secured by Farmland		—		—		—		—		—		—		—
Real Estate Secured by Residential Properties		5,042		4,901		1,124		3,912		39		4,904		28
Real Estate Secured by Nonfarm Nonresidential		3,011		3,076		585		3,245		51		3,089		24
Consumer Installment		—		—		—		—		—		—		—
Credit Cards and Related Plans		201		200		170		200		6		200		3
Commercial and Industrial		301		300		249		404		8		358		2
Loans to Finance Agricultural Production		—		—		—		—		—		—		—
All Other Loans		—		—		—		—		—		—		—


Total impaired loans with related allowance recorded	$	16,822	$	18,473	$	4,059	$	15,967	$	190	$	17,342	$	97

Total
Construction and Land Development	$	16,262	$	21,606	$	1,931	$	16,025	$	168	$	15,896	$	73
Residential		8,902		9,123		1,124		7,758		77		8,759		50
Commercial		5,988		6,369		834		5,532		90		5,928		45
Consumer		201		200		170		200		6		200		3

Total impaired loans	$	31,353	$	37,298	$	4,059	$	29,515	$	341	$	30,783	$	171

Impaired Loans

As of December 31, 2011


	Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)

With no related allowance recorded:
Real Estate Construction and Land Development	$	6,280	$	11,137	$	—
Real Estate Secured by Farmland		—		—		—
Real Estate Secured by Residential Properties		2,135		2,611		—
Real Estate Secured by Nonfarm Nonresidential		7,075		7,484		—
Consumer Installment		—		—		—
Credit Cards and Related Plans		—		—		—
Commercial and Industrial		379		500		—
Loans to Finance Agricultural Production		1,109		1,110		—
All Other Loans		—		—		—

Total impaired loans with no related allowance	$	16,978	$	22,842	$	—

With an allowance recorded:
Real Estate Construction and Land Development	$	3,806	$	3,794	$	637
Real Estate Secured by Farmland		—		—		—
Real Estate Secured by Residential Properties		3,391		3,382		480
Real Estate Secured by Nonfarm Nonresidential		6,976		6,957		1,181
Consumer Installment		—		—		—
Credit Cards and Related Plans		—		—		—
Commercial and Industrial		186		186		165
Loans to Finance Agricultural Production		—		—		—
All Other Loans		—		—		—

Total impaired loans with related allowance recorded	$	14,359	$	14,319	$	2,463

Total
Construction and Land Development	$	10,086	$	14,931	$	637
Residential		5,526		5,993		480
Commercial		15,725		16,237		1,346
Consumer		—		—		—

Total impaired loans	$	31,337	$	37,161	$	2,463

The following table presents nonaccrual loans as of June 30, 2012 and December 31, 2011 by loan category:

Nonaccrual Loans


	June 30, 2012		December 31, 2011
	(Dollars in thousands)
Real Estate Construction and Land Development	$	5,716	$	6,795
Real Estate Secured by Farmland		356		—
Real Estate Secured by Residential Properties		2,620		2,113
Real Estate Secured by Nonfarm Nonresidential		9,328		6,767
Consumer Installment		7		22
Credit Cards and Related Plans		—		—
Commercial and Industrial		177		276
Loans to Finance Agricultural Production		—		—
All Other Loans		—		—

Total	$	18,204	$	15,973

Interest income not recognized due to loans being on nonaccrual status during the three and six month period ended June 30, 2012 was approximately $250 thousand and $451 thousand, respectively. Interest income not recognized due to loans being on nonaccrual status during the three and six month period ended June 30, 2011 was approximately $217 thousand and $408 thousand, respectively.

Troubled Debt Restructurings

Loans which management identifies as impaired generally will be nonperforming loans or restructured loans (also known as “troubled debt restructurings” or “TDRs”). As a result of adopting the amendments in ASU 2011-02, the Company reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they are considered TDRs under the amended guidance. The Company identified no loans as TDRs which the allowance for loan losses had previously been measured under a general allowance methodology. TDRs are treated as impaired loans in determining the adequacy of the allowance for loan loss.

For the three and six months ended June 30, 2012 the following table presents a breakdown of the types of concessions made by loan class. The recorded investment balances presented are balances at the time of concessions.


	Three Months ended June 30, 2012						Six Months ended June 30, 2012
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
					(Dollars in thousands)
Below market interest rate:
Real Estate Secured by Residential Properties		—	$	—	$	—		1	$	1,943	$	1,943

Total below market interest rate		—	$	—	$	—		1	$	1,943	$	1,943

Extended payment terms:
Real Estate construction and land development		1	$	503	$	503		1	$	503	$	503
Commercial and Industrial		1		18		18		1		18		18

Total Extended Payment Terms		2	$	521	$	521		2	$	521	$	521

Total		2	$	521	$	521		3	$	2,464	$	2,464

The following table presents the successes and failures of the types of modifications within the previous twelve months as of June 30, 2012. The recorded investment balances presented are as of June 30, 2012.


	Paid in Full				Paying as Restructured				Converted to Non-accrual				Foreclosure/Default
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment		Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
	(Dollars in thousands)
Below market interest rate		—	$	—		3	$	3,202		1	$	617		—	$	—
Extended payment terms		—		—		8		1,858		—		—		—		—
Forgiveness of principal		—		—		—		—		—		—		—		—

Total		—		—		11	$	5,060		1		617		—		—

There was one loan with a recorded investment of $617 thousand that is included in the table above that was placed on non-accrual in a prior period. While the loan was not ninety days past due, it was moved into nonaccrual status due to payment concerns. There were no loans that were restructured during the twelve months ending on June 30, 2012 as a result of payment default.

(8) Benefit Plans

Postretirement Benefits

The Company has a postretirement benefit plan whereby the Company pays postretirement health care benefits for certain of its retirees that have met minimum age and service requirements. Net periodic postretirement benefit cost for the six- and three-month periods ended June 30, 2012 and 2011 includes the following components.


	Six months ended June 30, (Dollars in thousands)
	2012	2011
Components of net periodic cost:
Service cost	$

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

ECB BANCORP INC 10-Q