10-Q 1 d395351d10q.htm FORM 10-Q FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

þ 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 number: 000-33411

 

 

NEW PEOPLES BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Virginia   31-1804543

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

67 Commerce Drive

Honaker, Virginia

  24260
(Address of principal executive offices)   (Zip Code)

(Registrant’s telephone number, including area code) (276) 873-7000

n/a

(Former name, former address and former fiscal year, if changed since last report)

 

 

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  þ    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 (§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  þ    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. (Check one):

 

Large accelerated filer ¨   Accelerated filer   ¨
Non-accelerated filer   ¨   Smaller reporting company   þ

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class

   Outstanding at August 13, 2012

Common Stock, $2.00 par value

   10,010,178

 

 

 


Table of Contents

NEW PEOPLES BANKSHARES, INC.

INDEX

 

         Page  

PART I

  FINANCIAL INFORMATION      2   

Item 1.

  Financial Statements      2   
  Consolidated Statements of Operations – Six Months Ended June 30, 2012 and 2011 (Unaudited)      2   
  Consolidated Statements of Operations – Three Months Ended June 30, 2012 and 2011 (Unaudited)      3   
  Consolidated Statements of Comprehensive Income (Loss) – Six Months Ended June 30, 2012 and 2011 (Unaudited)      4   
  Consolidated Balance Sheets – June 30, 2012 (Unaudited) and December 31, 2011      5   
  Consolidated Statements of Changes in Stockholders’ Equity Six Months Ended June 30, 2012 and 2011 (Unaudited)      6   
  Consolidated Statements of Cash Flows – 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      25   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      34   

Item 4.

  Controls and Procedures      34   

PART II

  OTHER INFORMATION      34   

Item 1.

  Legal Proceedings      34   

Item 1A.

  Risk Factors      34   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      34   

Item 3.

  Defaults upon Senior Securities      34   

Item 4.

  Mine Safety Disclosures      34   

Item 5.

  Other Information      35   

Item 6.

  Exhibits      35   

SIGNATURES

     36   


Table of Contents
Part I Financial Information

 

Item 1 Financial Statements

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

 

     2012     2011  

INTEREST AND DIVIDEND INCOME

    

Loans including fees

   $ 16,795      $ 21,402   

Federal funds sold

     1        9   

Interest-earning deposits with banks

     95        80   

Investments

     441        84   

Dividends on equity securities (restricted)

     55        50   
  

 

 

   

 

 

 

Total Interest and Dividend Income

     17,387        21,625   
  

 

 

   

 

 

 

INTEREST EXPENSE

    

Deposits

    

Demand

     54        89   

Savings

     120        324   

Time deposits below $100,000

     1,657        2,630   

Time deposits above $100,000

     1,112        1,574   

FHLB Advances

     331        444   

Other borrowings

     88        105   

Trust Preferred Securities

     247        200   
  

 

 

   

 

 

 

Total Interest Expense

     3,609        5,366   
  

 

 

   

 

 

 

NET INTEREST INCOME

     13,778        16,259   

PROVISION FOR LOAN LOSSES

     3,126        3,457   
  

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     10,652        12,802   
  

 

 

   

 

 

 

NONINTEREST INCOME

    

Service charges

     1,199        1,159   

Fees, commissions and other income

     1,188        1,019   

Insurance and investment fees

     232        191   

Net realized gains on sale of investment securities

     337        —     

Life insurance investment income

     145        176   
  

 

 

   

 

 

 

Total Noninterest Income

     3,101        2,545   
  

 

 

   

 

 

 

NONINTEREST EXPENSES

    

Salaries and employee benefits

     7,107        7,859   

Occupancy and equipment expense

     2,184        2,144   

Advertising and public relations

     211        183   

Data processing and telecommunications

     889        798   

FDIC insurance premiums

     845        1,096   

Other real estate owned and repossessed vehicles, net

     3,247        2,490   

Other operating expenses

     2,756        2,660   
  

 

 

   

 

 

 

Total Noninterest Expenses

     17,239        17,230   
  

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES

     (3,486     (1,883

INCOME TAX EXPENSE (BENEFIT)

     1,587        (757
  

 

 

   

 

 

 

NET LOSS

   $ (5,073   $ (1,126
  

 

 

   

 

 

 

Loss Per Share

    

Basic

   $ (0.51   $ (0.11
  

 

 

   

 

 

 

Fully Diluted

   $ (0.51   $ (0.11
  

 

 

   

 

 

 

Average Weighted Shares of Common Stock

    

Basic

     10,010,178        10,010,178   
  

 

 

   

 

 

 

Fully Diluted

     10,010,178        10,010,178   
  

 

 

   

 

 

 

The accompanying notes are an integral part of this statement.

 

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2012 AND 2011

(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

(UNAUDITED)

 

     2012     2011  

INTEREST AND DIVIDEND INCOME

    

Loans including fees

   $ 8,047      $ 10,514   

Federal funds sold

     1        —     

Interest-earning deposits with banks

     48        54   

Investments

     240        45   

Dividends on equity securities (restricted)

     29        28   
  

 

 

   

 

 

 

Total Interest and Dividend Income

     8,365        10,641   
  

 

 

   

 

 

 

INTEREST EXPENSE

    

Deposits

    

Demand

     28        44   

Savings

     58        138   

Time deposits below $100,000

     782        1,242   

Time deposits above $100,000

     525        769   

FHLB Advances

     150        223   

Other borrowings

     44        44   

Trust Preferred Securities

     125        92   
  

 

 

   

 

 

 

Total Interest Expense

     1,712        2,552   
  

 

 

   

 

 

 

NET INTEREST INCOME

     6,653        8,089   

PROVISION FOR LOAN LOSSES

     1,176        2,312   
  

 

 

   

 

 

 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     5,477        5,777   
  

 

 

   

 

 

 

NONINTEREST INCOME

    

Service charges

     642        607   

Fees, commissions and other income

     573        445   

Insurance and investment fees

     123        93   

Net realized gains on sale of investment securities

     265        —     

Life insurance investment income

     31        89   
  

 

 

   

 

 

 

Total Noninterest Income

     1,634        1,234   
  

 

 

   

 

 

 

NONINTEREST EXPENSES

    

Salaries and employee benefits

     3,509        3,946   

Occupancy and equipment expense

     1,085        1,119   

Advertising and public relations

     121        98   

Data processing and telecommunications

     450        392   

FDIC insurance premiums

     414        421   

Other real estate owned and repossessed vehicles, net

     1,273        2,246   

Other operating expenses

     1,400        1,395   
  

 

 

   

 

 

 

Total Noninterest Expenses

     8,252        9,617   
  

 

 

   

 

 

 

LOSS BEFORE INCOME TAXES

     (1,141     (2,606

INCOME TAX EXPENSE (BENEFIT)

     1,397        (931
  

 

 

   

 

 

 

NET LOSS

   $ (2,538   $ (1,675
  

 

 

   

 

 

 

Loss Per Share

    

Basic

   $ (0.25   $ (0.17
  

 

 

   

 

 

 

Fully Diluted

   $ (0.25   $ (0.17
  

 

 

   

 

 

 

Average Weighted Shares of Common Stock

    

Basic

     10,010,178        10,010,178   
  

 

 

   

 

 

 

Fully Diluted

     10,010,178        10,010,178   
  

 

 

   

 

 

 

The accompanying notes are an integral part of this statement.

 

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(IN THOUSANDS)

(UNAUDITED)

 

     2012     2011  

Net Loss

   $ (5,073   $ (1,126

Other comprehensive income (loss):

    

Investment Securities Activity

    

Unrealized gains (losses) arising during the period

     214        126   

Tax related to unrealized gains (losses)

     (73     (43

Reclassification of realized (gains) during the period

     (337     —     

Tax related to realized gains

     114        —     
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     (82     83   
  

 

 

   

 

 

 

Total comprehensive loss

   $ (5,155   $ (1,043
  

 

 

   

 

 

 

The accompanying notes are an integral part of this statement.

 

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS EXCEPT PER SHARE AND SHARE DATA)

 

     June 30,
2012
    December 31,
2011
 
     (Unaudited)     (Audited)  

ASSETS

    

Cash and due from banks

   $ 16,957      $ 18,306   

Interest-bearing deposits with banks

     54,029        72,170   

Federal funds sold

     2        77   
  

 

 

   

 

 

 

Total Cash and Cash Equivalents

     70,988        90,553   

Investment securities

    

Available-for-sale

     46,187        32,434   

Loans receivable

     554,103        597,816   

Allowance for loan losses

     (18,065     (18,380
  

 

 

   

 

 

 

Net Loans

     536,038        579,436   

Bank premises and equipment, net

     32,763        33,141   

Equity securities (restricted)

     3,348        3,573   

Other real estate owned

     11,597        15,092   

Accrued interest receivable

     2,648        3,067   

Life insurance investments

     11,801        11,351   

Goodwill and other intangibles

     81        123   

Deferred taxes

     5,645        7,220   

Other assets

     4,519        4,394   
  

 

 

   

 

 

 

Total Assets

   $ 725,615      $ 780,384   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits:

    

Demand deposits:

    

Noninterest bearing

   $ 108,799      $ 109,629   

Interest-bearing

     63,326        58,459   

Savings deposits

     91,820        94,569   

Time deposits

     405,392        445,658   
  

 

 

   

 

 

 

Total Deposits

     669,337        708,315   

Federal Home Loan Bank advances

     7,158        17,983   

Accrued interest payable

     1,954        1,796   

Accrued expenses and other liabilities

     1,502        1,471   

Other borrowings

     5,450        5,450   

Trust preferred securities

     16,496        16,496   
  

 

 

   

 

 

 

Total Liabilities

     701,897        751,511   
  

 

 

   

 

 

 

Commitments and contingencies

     —          —     

STOCKHOLDERS’ EQUITY

    

Common stock – $2.00 par value; 50,000,000 shares authorized;

     20,020        20,020   

10,010,178 shares issued and outstanding

    

Additional paid-in-capital

     21,689        21,689   

Retained earnings (deficit)

     (18,158     (13,085

Accumulated other comprehensive income

     167        249   
  

 

 

   

 

 

 

Total Stockholders’ Equity

     23,718        28,873   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 725,615      $ 780,384   
  

 

 

   

 

 

 

The accompanying notes are an integral part of this statement.

 

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NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(IN THOUSANDS INCLUDING SHARE DATA)

(UNAUDITED)

 

     Shares
of
Common
Stock
     Common
Stock
     Additional
Paid in
Capital
     Retained
Earnings
(Deficit)
    Accum-
ulated
Other
Compre-
hensive
Income
(Loss)
    Total
Shareholders’
Equity
    Compre-
hensive
Income
(Loss)
 

Balance, December 31, 2010

     10,010       $ 20,020       $ 21,689       $ (4,175   $ (11   $ 37,523     

Net loss

              (1,126       (1,126     (1,126

Unrealized gain on available-for-sale securities, net of $43 tax

                83        83        83   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2011

     10,010       $ 20,020       $ 21,689       $ (5,301   $ 72      $ 36,480        (1,043
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

     10,010       $ 20,020       $ 21,689       $ (13,085   $ 249      $ 28,873     

Net loss

              (5,073       (5,073     (5,073

Realized gains on available-for-sale securities, net of $114 tax

                (223     (223     (223

Unrealized gain on available-for-sale securities, net of $73 tax

                141        141        141   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

     10,010       $ 20,020       $ 21,689       $ (18,158   $ 167      $ 23,718        (5,155
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of this statement.

 

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Table of Contents

NEW PEOPLES BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(IN THOUSANDS)

(UNAUDITED)

 

     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net loss

   $ (5,073   $ (1,126

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation

     1,277        1,245   

Provision for loan losses

     3,126        3,457   

Income (less expenses) on life insurance

     (450     (176

Gain on sale of securities available-for-sale

     (337     —     

(Gain) loss on sale of fixed assets

     (5     152   

Loss on sale of foreclosed real estate

     201        47   

Adjustment of carrying value of foreclosed real estate

     2,316        1,869   

Accretion of bond premiums/discounts

     238        4   

Deferred tax expense

     1,617        631   

Amortization of core deposit intangible

     42        58   

Net change in:

    

Interest receivable

     419        332   

Other assets

     (125     (2,452

Accrued interest payable

     158        75   

Accrued expenses and other liabilities

     31        (325
  

 

 

   

 

 

 

Net Cash Provided by Operating Activities

     3,435        3,791   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Net decrease in loans

     35,911        30,655   

Purchase of securities available-for-sale

     (27,109     (2,455

Proceeds from sale and maturities of securities available-for-sale

     13,331        2,853   

Sale of Federal Home Loan Bank stock

     225        145   

Payments for the purchase of premises and equipment

     (915     (1,204

Proceeds from sales of premises and equipment

     21        168   

Proceeds from sales of other real estate owned

     5,339        2,655   
  

 

 

   

 

 

 

Net Cash Provided by Investing Activities

     26,803        32,817   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Repayment of line of credit borrowings

     —          (4,900

Net increase in other borrowings

     —          5,200   

Repayments to Federal Home Loan Bank

     (10,825     (5,600

Net change in:

    

Demand deposits

     4,037        10,544   

Savings deposits

     (2,749     (8,127

Time deposits

     (40,266     (27,344
  

 

 

   

 

 

 

Net Cash Used in Financing Activities

     (49,803     (30,227
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (19,565     6,381   

Cash and Cash Equivalents, Beginning of Period

     90,553        82,529   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 70,988      $ 88,910   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Paid During the Period for:

    

Interest

   $ 3,767      $ 5,441   

Taxes

   $ —        $ —     

Supplemental Disclosure of Non Cash Transactions:

    

Other real estate acquired in settlement of foreclosed loans

   $ 4,361      $ 3,362   

The accompanying notes are an integral part of this statement.

 

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Table of Contents

NEW PEOPLES BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1    NATURE OF OPERATIONS:

New Peoples Bankshares, Inc. (“The Company”) is a bank holding company whose principal activity is the ownership and management of a community bank. New Peoples Bank, Inc. (“Bank”) was organized and incorporated under the laws of the Commonwealth of Virginia on December 9, 1997. The Bank commenced operations on October 28, 1998, after receiving regulatory approval. As a state chartered member bank, the Bank is subject to regulation by the Virginia Bureau of Financial Institutions, the Federal Deposit Insurance Corporation and the Federal Reserve Bank. The Bank provides general banking services to individuals, small and medium size businesses and the professional community of southwestern Virginia, southern West Virginia, and eastern Tennessee. On June 9, 2003, the Company formed two wholly owned subsidiaries, NPB Financial Services, Inc. and NPB Web Services, Inc. On July 7, 2004 the Company established NPB Capital Trust I for the purpose of issuing trust preferred securities. On September 27, 2006, the Company established NPB Capital Trust 2 for the purpose of issuing additional trust preferred securities. NPB Financial Services, Inc. was a subsidiary of the Company until January 1, 2009 when it became a subsidiary of the Bank.

NOTE 2    ACCOUNTING PRINCIPLES:

The financial statements conform to U. S. generally accepted accounting principles and to general industry practices. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position at June 30, 2012, and the results of operations for the three month and six month periods ended June 30, 2012 and 2011. The notes included herein should be read in conjunction with the notes to financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for the three month and six month periods ended June 30, 2012 and 2011 are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions.

NOTE 3    FORMAL WRITTEN AGREEMENT:

Effective July 29, 2010, the Company and the Bank entered into a written agreement with the Federal Reserve Bank of Richmond (“Reserve Bank”) and the Virginia State Corporation Commission Bureau of Financial Institutions (the “Bureau”) called (the “Written Agreement”). At June 30, 2012, we believe we have not yet achieved full compliance with the Written Agreement but we have made progress in our compliance efforts under the Written Agreement and all of the written plans required to date, as discussed in the following paragraphs, have been submitted on a timely basis.

Under the terms of the Written Agreement, the Bank has agreed to develop and submit for approval within specified time periods written plans to: (a) strengthen board oversight of management and the Bank’s operation; (b) if appropriate after review, to strengthen the Bank’s management and board governance; (c) strengthen credit risk management policies; (d) enhance lending and credit administration; (e) enhance the Bank’s management of commercial real estate concentrations; (f) conduct ongoing review and grading of the Bank’s loan portfolio; (g) improve the Bank’s position with respect to loans, relationships, or other assets in excess of $1 million which are now or in the future become past due more than 90 days, which are on the Bank’s problem loan list, or which are adversely classified in any report of examination of the Bank; (h) review and revise, as appropriate, current policy and maintain sound processes for maintaining an adequate allowance for loan and lease losses; (i) enhance management of the Bank’s liquidity position and funds management practices; (j) revise its contingency funding plan; (k) revise its strategic plan; and (l) enhance the Bank’s anti-money laundering and related activities.

In addition, the Bank has agreed that it will: (a) not extend, renew, or restructure any credit that has been criticized by the Reserve Bank or the Bureau absent prior board of directors approval in accordance with the restrictions in the Written Agreement; (b) eliminate all assets or portions of assets classified as “loss” and thereafter charge off all assets classified as “loss” in a federal or state report of examination, unless otherwise approved by the Reserve Bank.

 

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Under the terms of the Written Agreement, both the Company and the Bank have agreed to submit capital plans to maintain sufficient capital at the Company, on a consolidated basis, and the Bank, on a stand-alone basis, and to refrain from declaring or paying dividends without prior regulatory approval. The Company has agreed that it will not take any other form of payment representing a reduction in the Bank’s capital or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without prior regulatory approval. The Company may not incur, increase or guarantee any debt without prior regulatory approval and has agreed not to purchase or redeem any shares of its stock without prior regulatory approval.

Under the terms of the Written Agreement, the Company and the Bank have appointed a committee to monitor compliance with the Written Agreement. The directors of the Company and the Bank have recognized and unanimously agree with the common goal of financial soundness represented by the Written Agreement and have confirmed the intent of the directors and executive management to diligently seek to comply with all requirements of the Written Agreement.

NOTE 4    CAPITAL REQUIREMENTS:

The Company and the Bank are subject to various capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined) to risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined).

As of June 30, 2012, the Company remained below the minimum capital requirements as a result of the Tier 1 leverage ratio decreasing to 3.72%, which was below the minimum requirement of 4.00%. As of June 30, 2012 the Bank was well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Company’s and Bank’s category.

The Company’s and the Bank’s actual capital amounts and ratios are presented in the table as of June 30, 2012 and December 31, 2011, respectively.

 

      Actual     Minimum Capital
Requirement
    Minimum to Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 

(Dollars are in thousands)

   Amount      Ratio     Amount      Ratio     Amount      Ratio  

June 30, 2012:

               

Total Capital to Risk Weighted Assets

               

The Company

   $ 41,632         9.07     36,726         8   $  N/A         N/A   

The Bank

     49,113         10.68     36,788         8     45,986         10

Tier 1 Capital Risk Weighted Assets:

               

The Company

     27,558         6.00     18,363         4     N/A         N/A   

The Bank

     43,213         9.40     18,394         4     27,591         6

Tier 1 Capital to Average Assets:

               

The Company

     27,558         3.72     29,666         4     N/A         N/A   

The Bank

     43,213         5.82     29,703         4     37,129         5

December 31, 2011:

               

Total Capital to Risk Weighted Assets

               

The Company

   $ 45,856         9.15     40,104         8   $  N/A         N/A   

The Bank

     53,070         10.56     40,189         8     50,236         10

Tier 1 Capital Risk Weighted Assets:

               

The Company

     32,941         6.57     20,052         4     N/A         N/A   

The Bank

     46,641         9.28     20,095         4     30,142         6

 

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Tier 1 Capital to Average Assets:

               

The Company

     33,461         4.23     31,658         4     N/A         N/A   

The Bank

     46,641         5.99     31,160         4     38,950         5

NOTE 5    INVESTMENT SECURITIES:

The amortized cost and estimated fair value of securities (all available-for-sale) are as follows:

 

(Dollars are in thousands)    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Approximate
Fair
Value
 

June 30, 2012

           

U.S. Government Agencies

   $ 26,012       $ 260       $ 56       $ 26,216   

Taxable municipals

     856         5         5         856   

Tax-exempt municipals

     —           —           —           —     

Mortgage backed securities

     19,066         92         43         19,115   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

   $ 45,934       $ 357       $ 104       $ 46,187   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

U.S. Government Agencies

   $ 21,405       $ 238       $ 10       $ 21,633   

Taxable municipals

     1,465         89         2         1,552   

Tax-exempt municipals

     1,043         11         —           1,054   

Mortgage backed securities

     8,144         67         16         8,195   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

   $ 32,057       $ 405       $ 28       $ 32,434   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table details unrealized losses and related fair values in the available-for-sale portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2012 and December 31, 2011.

 

      Less than 12 Months      12 Months or More      Total  
(Dollars are in thousands)    Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
 

June 30, 2012

                 

U.S. Government Agencies

   $ 7,125       $ 56       $ —         $ —         $ 7,125       $ 56   

Taxable municipals

     281         5         —           —           281         5   

Mtg. backed securities

     9,924         43         —           —           9,924         43   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

   $ 17,330       $ 104       $ —         $ —         $ 17,330       $ 104   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

                 

U.S. Government Agencies

   $ 5,592       $ 10       $ —         $ —         $ 5,592       $ 10   

Taxable municipals

     572         2         —           —           572         2   

Mtg. backed securities

     4,055         16         —           —           4,055         16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Securities AFS

   $ 10,219       $ 28       $ —         $ —         $ 10,219       $ 28   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2012, the available-for-sale portfolio included twenty one investments for which the fair market value was less than amortized cost. At December 31, 2011, the available-for-sale portfolio included eleven investments for which the fair market value was less than amortized cost. Management evaluates securities for other than temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial conditions and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. No securities had an other than temporary impairment.

The amortized cost and fair value of investment securities at June 30, 2012, by contractual maturity, are shown in the following schedule. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollars are in thousands)

Securities Available for Sale

   Amortized
Cost
     Fair
Value
     Weighted
Average
Yield
 

Due in one year or less

   $ —         $ —           —  

Due after one year through five years

     1,527         1,529         1.02

Due after five years through fifteen years

     11,764         11,771         1.75

Due after fifteen years

     32,643         32,887         2.21
  

 

 

    

 

 

    

 

 

 

Total

   $ 45,934       $ 46,187         2.05
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Investment securities with a carrying value of $19.6 million and $15.7 million at June 30, 2012 and December 31, 2011, were pledged to secure public deposits, overnight payment processing and for other purposes required by law.

The Bank, as a member of the Federal Reserve Bank and the Federal Home Loan Bank, is required to hold stock in each. These equity securities are restricted from trading and are recorded at a cost of $3.3 million and $3.6 million as of June 30, 2012 and December 31, 2011, respectively.

NOTE 6    LOANS:

Loans receivable outstanding are summarized as follows:

 

(Dollars are in thousands)    June 30, 2012      December 31, 2011  

Real estate secured:

     

Commercial

   $ 160,710       $ 170,789   

Construction and land development

     25,288         32,389   

Residential 1-4 family

     244,520         255,998   

Multifamily

     12,944         14,320   

Farmland

     38,099         40,106   
  

 

 

    

 

 

 

Total real estate loans

     481,561         513,602   

Commercial

     33,677         39,327   

Agriculture

     5,287         6,147   

Consumer installment loans

     33,381         38,522   

All other loans

     197         218   
  

 

 

    

 

 

 

Total loans

   $ 554,103       $ 597,816   
  

 

 

    

 

 

 

Loans receivable on nonaccrual status are summarized as follows:

 

(Dollars are in thousands)    June 30, 2012      December 31, 2011  

Real estate secured:

     

Commercial

   $ 20,703       $ 19,169   

Construction and land development

     2,621         5,583   

Residential 1-4 family

     3,744         4,829   

Multifamily

     1,664         2,101   

Farmland

     9,075         5,257   
  

 

 

    

 

 

 

Total real estate loans

     37,807         36,939   

Commercial

     2,757         4,522   

Agriculture

     750         854   

Consumer installment loans

     15         1   

All other loans

     —           —     
  

 

 

    

 

 

 

Total loans receivable on nonaccrual status

   $ 41,329       $ 42,316   
  

 

 

    

 

 

 

Total interest income not recognized on nonaccrual loans for six months ended June 30, 2012 and 2011 was $777 thousand and $1.1 million, respectively.

 

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The following table presents information concerning the Company’s investment in loans considered impaired as of June 30, 2012 and December 31, 2011:

 

As of June 30, 2012

(Dollars are in thousands)

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

With no related allowance recorded:

             

Real estate secured:

             

Commercial

   $ 30,406       $ 539      $ 27,096       $ 30,208       $ —     

Construction and land development

     5,340         59        4,054         8,913         —     

Residential 1-4 family

     8,421         218        8,330         8,580         —     

Multifamily

     994         36        1,205         1,205         —     

Farmland

     8,433         (88     8,828         9,182         —     

Commercial

     3,116         40        2,791         3,369         —     

Agriculture

     579         8        617         617         —     

Consumer installment loans

     68         7        140         140         —     

All other loans

     —           —          —           —           —     

With an allowance recorded:

             

Real estate secured:

             

Commercial

     14,739         151        16,677         17,339         3,778   

Construction and land development

     2,091         38        1,620         1,763         284   

Residential 1-4 family

     6,274         85        4,421         4,503         690   

Multifamily

     1,200         9        1,787         1,831         490   

Farmland

     5,658         37        4,352         4,436         788   

Commercial

     1,723         9        1,445         1,477         244   

Agriculture

     504         —          263         271         64   

Consumer installment loans

     93         3        60         60         18   

All other loans

     —           —          —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 89,639       $ 1,151      $ 83,686       $ 93,894       $ 6,356   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

As of December 31, 2011

(Dollars are in thousands)

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

With no related allowance recorded:

             

Real estate secured:

             

Commercial

   $ 32,370       $ 1,356      $ 31,633       $ 33,175       $ —     

Construction and land development

     14,288         125        6,954         12,838         —     

Residential 1-4 family

     6,406         315        8,221         8,296         —     

Multifamily

     619         31        613         613         —     

Farmland

     13,005         435        10,364         10,554         —     

Commercial

     2,958         60        3,529         4,070         —     

Agriculture

     396         1        521         817         —     

Consumer installment loans

     4         1        9         9         —     

All other loans

     —           —          —           —           —     

With an allowance recorded:

             

Real estate secured:

             

Commercial

     9,887         691        14,482         14,973         2,794   

Construction and land development

     2,917         87        2,289         2,310         474   

Residential 1-4 family

     5,111         277        6,473         6,764         1,052   

Multifamily

     —           —          —           —           —     

Farmland

     2,354         119        4,192         4,192         605   

Commercial

     1,982         75        1,857         1,857         649   

 

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Table of Contents

Agriculture

     758         28         641         641         448   

Consumer installment loans

     41         3         43         43         24   

All other loans

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 93,096       $ 3,604       $ 91,821       $ 101,152       $ 6,046   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

An age analysis of past due loans receivable was as follows:

 

As of June 30, 2012

(Dollars are in thousands)

   Loans
30-59
Days
Past
Due
     Loans
60-89
Days
Past
Due
     Loans
90 or
More
Days
Past
Due
     Total
Past
Due
Loans
     Current
Loans
     Total
Loans
     Accruing
Loans
90 or
More
Days
Past
Due
 

Real estate secured:

                    

Commercial

   $ 5,386       $ 1,314       $ 10,422       $ 17,122       $ 143,588       $ 160,710       $ —     

Construction and land development

     730         142         510         1,382         23,906         25,288         48   

Residential 1-4 family

     8,275         1,964         4,006         14,245         230,275         244,520         2,880   

Multifamily

     163         1,842         —           2,005         10,939         12,944         —     

Farmland

     533         506         7,057         8,096         30,003         38,099         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     15,087         5,768         21,995         42,850         438,711         481,561         2,928   

Commercial

     377         73         2,134         2,584         31,093         33,677         62   

Agriculture

     162         15         306         483         4,804         5,287         —     

Consumer installment Loans

     666         59         58         783         32,598         33,381         47   

All other loans

     12         3         7         22         175         197         7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 16,304       $ 5,918       $ 24,500       $ 46,722       $ 507,381       $ 554,103       $ 3,044   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

As of December 31, 2011

(Dollars are in thousands)

   Loans
30-59
Days
Past
Due
     Loans
60-89
Days
Past
Due
     Loans
90 or
More
Days
Past
Due
     Total
Past
Due
Loans
     Current
Loans
     Total
Loans
     Accruing
Loans
90 or
More
Days
Past
Due
 

Real estate secured:

                    

Commercial

   $ 9,754       $ 2,294       $ 7,771       $ 19,819       $ 150,970       $ 170,789       $ —     

Construction and land development

     595         238         5,280         6,113         26,276         32,389         —     

Residential 1-4 family

     9,471         1,412         4,101         14,984         241,014         255,998         1,129   

Multifamily

     —           1,777         218         1,995         12,325         14,320         —     

Farmland

     2,841         624         3,800         7,265         32,841         40,106         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     22,661         6,345         21,170         50,176         463,426         513,602         1,129   

Commercial

     551         34         2,938         3,523         35,804         39,327         117   

Agriculture

     268         88         458         814         5,333         6,147         3   

Consumer installment Loans

     822         133         221         1,176         37,346         38,522         222   

All other loans

     26         9         33         68         150         218         33   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 24,328       $ 6,609       $ 24,820       $ 55,757       $ 542,059       $ 597,816       $ 1,504   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company categorizes loans receivable into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans and leases individually by classifying the loans receivable as to credit risk. The Company uses the following definitions for risk ratings:

Pass – Loans in this category are considered to have a low likelihood of loss based on relevant information analyzed about the ability of the borrowers to service their debt and other factors.

Special Mention – Loans in this category are currently protected but are potentially weak, including adverse trends in borrower’s operations, credit quality or financial strength. Those loans constitute an undue and unwarranted credit risk but not to the point of justifying a substandard classification. The credit risk may be relatively minor yet constitute an unwarranted risk in light of the circumstances. Special mention loans have potential weaknesses which may, if not checked or corrected, weaken the loan or inadequately protect the Company’s credit position at some future date.

 

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Table of Contents

Substandard – A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable.

Based on the most recent analysis performed, the risk category of loans receivable was as follows:

 

As of June 30, 2012

(Dollars are in thousands)

   Pass      Special
Mention
     Substandard      Doubtful      Total  

Real estate secured:

              

Commercial

   $ 105,571       $ 18,353       $ 36,642       $ 144       $ 160,710   

Construction and land development

     18,039         1,300         5,949         —           25,288   

Residential 1-4 family

     198,904         15,348         28,958         1,310         244,520   

Multifamily

     9,759         465         2,720         —           12,944   

Farmland

     22,954         1,725         13,420         —           38,099   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     355,227         37,191         87,689         1,454         481,561   

Commercial

     25,109         4,635         3,236         697         33,677   

Agriculture

     4,118         234         932         3         5,287   

Consumer installment loans

     31,567         608         1,128         78         33,381   

All other loans

     197         —           —           —           197   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 416,218       $ 42,668       $ 92,985       $ 2,232       $ 554,103   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011

(Dollars are in thousands)

   Pass     

Special

Mention

     Substandard      Doubtful      Total  

Real estate secured:

              

Commercial

   $ 112,694       $ 18,377       $ 39,573       $ 145       $ 170,789   

Construction and land development

     23,203         1,224         7,962         —           32,389   

Residential 1-4 family

     209,863         17,137         27,730         1,268         255,998   

Multifamily

     11,727         1,909         684         —           14,320   

Farmland

     21,715         4,957         13,022         412         40,106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     379,202         43,604         88,971         1,825         513,602   

Commercial

     32,018         2,045         4,227         1,037         39,327   

Agriculture

     4,743         678         726         —           6,147   

Consumer installment loans

     36,107         900         1,484         31         38,522   

All other loans

     218         —           —           —           218   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 452,288       $ 47,227       $ 95,408       $ 2,893       $ 597,816   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

NOTE 7    ALLOWANCE FOR LOAN LOSSES:

The following table details activity in the allowance for loan losses by portfolio segment for the period ended June 30, 2012. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

As of June 30, 2012

(Dollars are in thousands)

   Beginning
Balance
     Charge
Offs
    Recoveries      Advances      Provisions     Ending
Balance
 

Real estate secured:

               

Commercial

   $ 5,671       $ (1,679   $ 1       $ —         $ 3,073      $ 7,066   

Construction and land development

     3,848         (280     69         —           (734     2,903   

Residential 1-4 family

     3,759         (679     24         —           235        3,339   

Multifamily

     148         —          —           —           426        574   

Farmland

     951         (187     —           —           383        1,147   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total real estate loans

     14,377         (2,825     94         —           3,383        15,029   

Commercial

     1,883         (625     55         —           291        1,604   

Agriculture

     486         (2     11         —           (78     417   

Consumer installment loans

     781         (174     25         —           (140     492   

All other loans

     2         —          —           —           (1     1   

Unallocated

     851         —          —           —           (329     522   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 18,380       $ (3,626   $ 185       $ —         $ 3,126      $ 18,065   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

     Allowance for Loan Losses      Recorded Investment in Loans  

As of June 30, 2012

(Dollars are in thousands)

   Individually
Evaluated
for Impairment
     Collectively
Evaluated  for

Impairment
     Total      Individually
Evaluated  for
Impairment
     Collectively
Evaluated for
Impairment
     Total  

Real estate secured:

                 

Commercial

   $ 3,778       $ 3,288       $ 7,066       $ 43,773       $ 116,937       $ 160,710   

Construction and land development

     284         2,619         2,903         5,674         19,614         25,288   

Residential 1-4 family

     690         2,649         3,339         12,751         231,769         244,520   

Multifamily

     490         84         574         2,992         9,952         12,944   

Farmland

     788         359         1,147         13,180         24,919         38,099   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     6,030         8,999         15,029         78,370         403,191         481,561   

Commercial

     244         1,360         1,604         4,236         29,441         33,677   

Agriculture

     64         353         417         880         4,407         5,287   

Consumer installment loans

     18         474         492         200         33,181         33,381   

All other loans

     —           1         1         —           197         197   

Unallocated

     —           522         522         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,356       $ 11,709       $ 18,065       $ 83,686       $ 470,417       $ 554,103   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table details activity in the allowance for loan losses by portfolio segment for the period ended December 31, 2011. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

As of December 31, 2011

(Dollars are in thousands)

   Beginning
Balance
     Charge
Offs
    Recoveries      Advances      Provisions     Ending
Balance
 

Real estate secured:

               

Commercial

   $ 5,141       $ (4,147   $ 877       $ —         $ 3,800      $ 5,671   

Construction and land development

     4,913         (7,245     1,296         153         4,731        3,848   

Residential 1-4 family

     1,699         (1,299     141         —           3,218        3,759   

Multifamily

     42         —          —           —           106        148   

Farmland

     922         (511     66         —           474        951   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total real estate loans

     12,717         (13,202     2,380         153         12,329        14,377   

Commercial

     3,281         (2,480     140         —           942        1,883   

Agriculture

     1,120         (1,031     18         —           379        486   

Consumer installment loans

     1,733         (694     123         —           (381     781   

All other loans

     —           —          —           —           2        2   

Unallocated

     6,163         —          —           —           (5,312     851   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 25,014       $ (17,407   $ 2,661       $ 153       $ 7,959      $ 18,380   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

     Allowance for Loan Losses      Recorded Investment in Loans  

As of December 31, 2011

(Dollars are in thousands)

   Individually
Evaluated  for
Impairment
     Collectively
Evaluated for
Impairment
     Total      Individually
Evaluated  for
Impairment
     Collectively
Evaluated for
Impairment
     Total  

Real estate secured:

                 

Commercial

   $ 2,794       $ 2,877       $ 5,671       $ 46,115       $ 124,674       $ 170,789   

Construction and land development

     474         3,374         3,848         9,243         23,146         32,389   

Residential 1-4 family

     1,052         2,707         3,759         14,694         241,304         255,998   

Multifamily

     —           148         148         613         13,707         14,320   

Farmland

     605         346         951         14,556         25,550         40,106   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     4,925         9,452         14,377         85,221         428,381         513,602   

Commercial

     649         1,234         1,883         5,386         33,941         39,327   

Agriculture

     448         38         486         1,162         4,985         6,147   

Consumer installment loans

     24         757         781         52         38,470         38,522   

All other loans

     —           2         2         —           218         218   

Unallocated

     —           851         851         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,046       $ 12,334       $ 18,380       $ 91,821       $ 505,995       $ 597,816   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In determining the amount of our allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions, as well as the requirements of the written agreement and other regulatory input. If our assumptions prove to be incorrect, our current allowance may not be sufficient to cover future loan losses and we may experience significant increases to our provision.

 

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Table of Contents

NOTE 8    TROUBLED DEBT RESTRUCTURINGS:

The following table presents information related to loans modified as troubled debt restructurings during the six and three months ended June 30, 2012 and 2011.

 

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

Troubled Debt Restructurings

(Dollars are in thousands)

   # of
Loans
     Pre-Mod.
Recorded
Investment
     Post-Mod.
Recorded
Investment
     # of
Loans
     Pre-Mod.
Recorded
Investment
     Post-Mod.
Recorded
Investment
 

Real estate secured:

                 

Commercial

     7       $ 991       $ 988         5       $ 3,779       $ 3,770   

Construction and land Development

     —           —           —           1         29         29   

Residential 1-4 family

     35         2,052         2,038         4         329         329   

Multifamily

     —           —           —           —           —           —     

Farmland

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     42         3,043         3,026         10         4,137         4,128   

Commercial

     —           —           —           1         37         35   

Agriculture

     —           —           —           1         300         300   

Consumer installment loans

     3         25         21         4         67         65   

All other loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     45       $ 3,068       $ 3,047         16       $ 4,541       $ 4,528   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

Troubled Debt Restructurings

(Dollars are in thousands)

   # of
Loans
     Pre-Mod.
Recorded
Investment
     Post-Mod.
Recorded
Investment
     # of
Loans
     Pre-Mod.
Recorded
Investment
     Post-Mod.
Recorded
Investment
 

Real estate secured:

                 

Commercial

     —         $ —         $ —           3       $ 803       $ 803   

Construction and land Development

     —           —           —           1         29         29   

Residential 1-4 family

     34         2,002         1,989         3         205         205   

Multifamily

     —           —           —           —           —           —     

Farmland

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     34         2,002         1,989         7         1,037         1,037   

Commercial

     —           —           —           —           —           —     

Agriculture

     —           —           —           —           —           —     

Consumer installment loans

     —           —           —           —           —           —     

All other loans

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     34       $ 2,002       $ 1,989         7       $ 1,037       $ 1,037   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the six months ended June 30, 2012, the Company modified 45 loans that were considered to be troubled debt restructurings. We extended the terms for 6 of these loans and the interest rate was lowered for 35 of these loans. During the six months ended June 30, 2011, the Company modified 16 loans that were considered to be troubled debt restructurings. We extended the terms for 11 of these loans and the interest rate was lowered for 8 of these loans.

 

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Table of Contents

The following table presents information related to loans to modified as a troubled debt restructurings that defaulted during the six and three months ended June 30, 2012 and 2011, and within twelve months of their modification date. A troubled debt restructuring is considered to be in default once it becomes 90 days or more past due following a modification.

 

Troubled Debt Restructurings    For the six months ended
June 30, 2012
     For the six months ended
June 30, 2011
 
That Subsequently Defaulted      
During the Period    # of
Loans
     Recorded
Investment
     # of
Loans
     Recorded
Investment
 
(Dollars are in thousands)            

Real estate secured:

           

Commercial

     4       $ 2,029         —         $ —     

Construction and land development

     —           —           —           —     

Residential 1-4 family

     1         113         —           —     

Multifamily

     —           —           —           —     

Farmland

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     5         2,142         —           —     

Commercial

     —           —           —           —     

Agriculture

     1         300         —           —     

Consumer installment loans

     —           —           —           —     

All other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     6       $ 2,442         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
Troubled Debt Restructurings    For the three months ended
June 30, 2012
     For the three months ended
June 30, 2011
 
That Subsequently Defaulted      
During the Period    # of
Loans
     Recorded
Investment
     # of
Loans
     Recorded
Investment
 
(Dollars are in thousands)            

Real estate secured:

           

Commercial

     1       $ 274         —         $ —     

Construction and land development

     —           —           —           —     

Residential 1-4 family

     —           —           —           —     

Multifamily

     —           —           —           —     

Farmland

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate loans

     1         274         —           —     

Commercial

     —           —           —           —     

Agriculture

     —           —           —           —     

Consumer installment loans

     —           —           —           —     

All other loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 274         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

In determination of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings in its estimate. The Company evaluates all troubled debt restructurings for possible further impairment. As a result, the allowance may be increased, adjustments may be made in the allocation of the allowance, or charge-offs may be taken to further writedown the carrying value of the loan. At June 30, 2012 there were $26.8 million in loans that are classified as troubled debt restructurings compared to $29.1 million at December 31, 2011.

 

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Table of Contents

NOTE 9    EARNINGS PER SHARE:

Basic earnings per share computations are based on the weighted average number of shares outstanding during each year. Dilutive earnings per share reflect the additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued relate to outstanding options and are determined by the Treasury method. For the three and six months ended June 30, 2012 and 2011, potential common shares were anti-dilutive and were not included in the calculation. Basic and diluted net loss per common share calculations follows:

 

(Amounts in Thousands, Except

Share and Per Share Data)

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

Net loss

   $ (2,538   $ (1,675   $ (5,073   $ (1,126

Weighted average shares outstanding

     10,010,178        10,010,178        10,010,178        10,010,178   

Dilutive shares for stock options

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average dilutive shares outstanding

     10,010,178        10,010,178        10,010,178        10,010,178   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic loss per share

   $ (0.25   $ (0.17   $ (0.51   $ (0.11

Diluted loss per share

   $ (0.25   $ (0.17   $ (0.51   $ (0.11

 

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Table of Contents

NOTE 10    FAIR VALUES:

Accounting Standards Codification (“ASC”) 820,“Fair Value Measurements and Disclosures” provides a framework for measuring fair value under generally accepted accounting principles and requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available for sale investment securities) or on a nonrecurring basis (for example, impaired loans and other real estate acquired through foreclosure).

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair Value Measurements and Disclosures also establishes fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an exchange market, as well as U. S. Treasury, other U. S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly structured or long-term derivative contracts.

Investment Securities Available for Sale – Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices. The Company’s available for sale securities, totaling $46.2 million and $32.4 million at June 30, 2012 and December 31, 2011, respectively, are the only assets whose fair values are measured on a recurring basis using Level 2 inputs from an independent pricing service.

Loans – The Company does not record loans at fair value on a recurring basis. The Company is predominantly an asset based lender with real estate serving as collateral on a substantial majority of loans. From time to time a loan is considered impaired and an allowance for loan losses is established. Loans which are deemed to be impaired and require a reserve are primarily valued on a non-recurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which management evaluates and determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, or an appraised value does not include estimated costs of disposition and management must make an estimate, the Company records the impaired loan as nonrecurring Level 3. The aggregate carrying amount of impaired loans carried at fair value were $77.3 million and $85.8 million at June 30, 2012 and December 31, 2011, respectively.

Foreclosed Assets Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Foreclosed assets are carried at the lower of the carrying value or fair value. Fair value is based upon independent observable market prices or appraised values of the collateral with a third party estimate of disposition costs, which the Company considers to be level 2 inputs. When the appraised value is not available, management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, or an appraised value does not include estimated costs of disposition and management must make an estimate, the Company records the foreclosed asset as nonrecurring Level 3. The aggregate carrying amounts of foreclosed assets were $11.6 million and $15.1 million at June 30, 2012 and December 31, 2011, respectively.

 

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Table of Contents

Assets and liabilities measured at fair value are as follows as of June 30, 2012 (for purpose of this table the impaired loans are shown net of the related allowance):

 

(Dollars are in thousands)    Quoted market
price in active
markets

(Level 1)
     Significant other
observable  inputs

(Level 2)
     Significant
unobservable
inputs

(Level 3)
 

(On a recurring basis)

        

Available for sale investments

        

U.S. Government Agencies

   $ —         $ 26,216       $ —     

Taxable municipals

     —           856         —     

Mortgage backed securities

     —           19,115         —     

(On a non-recurring basis)

        

Other real estate owned

     —           —           11,597   

Impaired loans:

        

Real estate secured:

        

Commercial

     —           —           39,995   

Construction and land development

     —           —           5,390   

Residential 1-4 family

     —           —           12,061   

Multifamily

     —           —           2,502   

Farmland

     —           —           12,392   

Commercial

     —           —           3,992   

Agriculture

     —           —           816   

Consumer installment loans

     —           —           182   

All other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 46,187       $ 88,927   
  

 

 

    

 

 

    

 

 

 

Assets and liabilities measured at fair value are as follows as of December 31, 2011 (for purpose of this table the impaired loans are shown net of the related allowance):

 

(Dollars are in thousands)    Quoted market
price in active
markets

(Level 1)
     Significant other
observable  inputs

(Level 2)
     Significant
unobservable
inputs

(Level 3)
 

(On a recurring basis)

        

Available for sale investments

        

U.S. Government Agencies

   $ —         $ 21,633       $ —     

Taxable municipals

     —           1,552         —     

Tax-exempt municipals

     —           1,054         —     

Mortgage backed securities

     —           8,195         —     

(On a non-recurring basis)

        

Other real estate owned

     —           —           15,092   

Impaired loans:

        

Real estate secured:

        

Commercial

     —           —           43,321   

Construction and land development

     —           —           8,769   

Residential 1-4 family

     —           —           13,642   

Multifamily

     —           —           613   

Farmland

     —           —           13,951   

Commercial

     —           —           4,737   

Agriculture

     —           —           714   

Consumer installment loans

     —           —           28   

All other loans

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 32,434       $ 100,867   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

For the six months ended June 30, 2012 and 2011, the changes in other real estate owned Level 3 assets measured at fair value on a nonrecurring basis are summarized as follows (dollars in thousands):

 

(Dollars are in thousands)    June 30, 2012
Other Real
Estate Owned
    June 30, 2011
Other Real
Estate Owned
 

Balance, January 1

   $ 15,092      $ 12,346   

Acquired in settlement of loans

     4,361        3,362   

Proceeds from sale of other real estate owned

     (5,339     (2,655

Gain (Loss) on sale of other real estate owned

     (201     (47

Adjustments to carrying value

     (2,316     (1,869
  

 

 

   

 

 

 

Balance, June 30

   $ 11,597      $ 11,137   
  

 

 

   

 

 

 

For the six months ended June 30, 2012 and 2011, the changes in Level 3 assets measured at fair value on a nonrecurring basis are summarized as follows (dollars in thousands):

 

June 30, 2012

(Dollars are in thousands)

   Other Real
Estate Owned
    Impaired Loans     Total  

Balance, January 1

   $ 15,092      $ 85,775      $ 100,867   

Transfers into Level 3

     4,361        (8,445     (4,084

Included in earnings

     (2,517     —          (2,517

Sales and other reductions

     (5,339     —          (5,339
  

 

 

   

 

 

   

 

 

 

Balance, June 30

   $ 11,597      $ 77,330      $ 88,927   
  

 

 

   

 

 

   

 

 

 

 

June 30, 2011

(Dollars are in thousands)

   Other Real
Estate Owned
    Impaired Loans      Total  

Balance, January 1

   $ 12,346      $ 77,815       $ 90,161   

Transfers into Level 3

     3,362        8,084         11,446   

Included in earnings

     (1,916     —           (1,916

Sales and other reductions

     (2,655     —           (2,655
  

 

 

   

 

 

    

 

 

 

Balance, June 30

   $ 11,137      $ 85,899       $ 97,036   
  

 

 

   

 

 

    

 

 

 

For Level 3 assets measured at fair value on a recurring or non-recurring basis as of June 30, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

 

(Dollars in thousands)

   Fair Value at
June 30,
2012
     Valuation
Technique
   Significant
Unobservable Inputs
   Significant
Unobservable
Input Value

Impaired Loans

   $ 77,330       Appraised

Value/Discounted

Cash

Flows/Market

Value of Note

   Appraisals and/or

sales of comparable
properties/Independent
quotes

   n/a

Other Real Estate Owned

   $ 11,597       Appraised

Value/Comparable
Sales/Other

Estimates from
Independent

Sources

   Appraisal and/or sales
of comparable
properties/Independent
quotes/bids
   n/a

 

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Fair Value of Financial Instruments

Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument.

The following summary presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments presented below. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of June 30, 2012 and December 31, 2011. This table excludes financial instruments for which the carrying amount approximates fair value. The carrying value of cash and due from banks, federal funds sold, interest-bearing deposits, deposits with no stated maturities, trust preferred securities and accrued interest approximates fair value. The remaining financial instruments were valued based on the present value of estimated future cash flows, discounted at various rates in effect for similar instruments during the months of June 2012 and December 2011.

 

                   Fair Value Measurements  

(Dollars are in thousands)

   Carrying
Amount
     Fair
Value
     Quoted market
price in active
markets

(Level 1)
     Significant
other
observable
inputs
(Level 2)
     Significant
unobservable
inputs

(Level 3)
 

June 30, 2012

              

Financial Instruments – Assets

              

Net Loans

   $ 536,038       $ 539,064       $ —         $ 461,734       $ 77,330   

Financial Instruments – Liabilities

              

Time Deposits

     405,392         409,577         —           409,577         —     

FHLB Advances

     7,158         7,158         —           7,158         —     

December 31, 2011

              

Financial Instruments – Assets

              

Net Loans

   $ 579,436       $ 588,888       $ —         $ 493,661       $ 85,775   

Financial Instruments – Liabilities

              

Time Deposits

     445,658         451,312         —           451,312         —     

FHLB Advances

     17,983         17,756         —           17,756         —     

NOTE 11    RECENT ACCOUNTING DEVELOPMENTS:

The following is a summary of recent authoritative announcements:

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

ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments were effective for the Company beginning January 1, 2012 and had no effect on the financial statements except for expanded disclosures.

 

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The Comprehensive Income topic of the ASC was amended in June 2011. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and requires consecutive presentation of the statement of net income and other comprehensive income. The amendments 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 or cash flows.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Caution About Forward Looking Statements

We make forward looking statements in this quarterly report that are subject to risks and uncertainties. These forward looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, business strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements.

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements contain the Company’s expectations, plans, future financial performance, and other statements that are not historical facts. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar importance. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws and regulations applicable to the Company. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

Because of these uncertainties, our actual future results may be materially different from the results indicated by these forward looking statements. In addition, our past results of operations do not necessarily indicate our future results.

Written Agreement

The Company and the Bank entered into a written agreement with the Federal Reserve Bank of Richmond and the Virginia Bureau of Financial Institutions. Under this Agreement, the Bank has agreed to develop and submit for approval within specified time periods written plans to: (a) strengthen board oversight of management and the Bank’s operation; (b) if appropriate after review, to strengthen the Bank’s management and board governance; (c) strengthen credit risk management policies; (d) enhance lending and credit administration; (e) enhance the Bank’s management of commercial real estate concentrations; (f) conduct ongoing review and grading of the Bank’s loan portfolio; (g) improve the Bank’s position with respect to loans, relationships, or other assets in excess of $1 million which are now or in the future become past due more than 90 days, which are on the Bank’s problem loan list, or which are adversely classified in any report of examination of the Bank; (h) review and revise, as appropriate, current policy and maintain sound processes for maintaining an adequate allowance for loan and lease losses; (i) enhance management of the Bank’s liquidity position and funds management practices; (j) revise its contingency funding plan; (k) revise its strategic plan; and (l) enhance the Bank’s anti-money laundering and related activities.

In addition, the Bank has agreed that it will: (a) not extend, renew, or restructure any credit that has been criticized by the Reserve Bank or the Bureau absent prior board of directors approval in accordance with the restrictions in the Agreement; (b) eliminate all assets or portions of assets classified as “loss” and thereafter charge off all assets classified as “loss” in a federal or state report of examination, which has been done.

The Company and the Bank have agreed to submit capital plans to maintain sufficient capital at the Company, on a consolidated basis, and the Bank, on a stand-alone basis, and to refrain from declaring or paying dividends without prior regulatory approval. The Company has agreed that it will not take any other form of payment representing a reduction in the Bank’s capital or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without prior regulatory approval. The Company may not incur, increase or guarantee any debt without prior regulatory approval and has agreed not to purchase or redeem any shares of its stock without prior regulatory approval.

Under the terms of the Agreement, the Company and the Bank have appointed a committee to monitor compliance. The directors of the Company and the Bank have recognized and unanimously agree with the common goal of financial soundness represented by the Agreement and have confirmed the intent of the directors and executive management to diligently seek to comply with all requirements of the Written Agreement.

 

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Written Agreement Progress Report

At June 30, 2012, we believe we have not yet achieved full compliance with the Agreement but we have made progress in our compliance efforts under the Agreement. We are aggressively working to comply with the Agreement and have timely submitted each required plan by its respective deadline. We have hired an independent consultant to assist us in these efforts and the following actions have taken place:

 

  1. With regard to corporate governance, we have established a weekly Director’s Loan Committee to oversee all loan approvals and all loan renewals, extensions and approvals for loans risk rated Special Mention or worse, as well as, exposures exceeding the Chief Credit Officer’s lending authority. This has enabled the Board to increase its oversight of the Bank’s largest credit exposures and problem credits, and enhanced the monitoring and compliance with all loan policies and procedures. Secondly, we have enhanced our reporting of credit quality to the board. Furthermore, we have adopted formal charters for our Nominating, Compliance, Compensation, and Loan Committees. A corporate governance policy was adopted by the Board of Directors on April 23, 2012.

 

  2. The requirement to assess the Board and management has been completed by an independent party. A report has been issued to the Board and recommendations are being followed. In September 2010, our President and CEO was added as a member of the Board and in November 2010, Eugene Hearl was added as a member of the Board. Mr. Hearl has over 40 years banking experience as President and CEO for two community banks and Regional President of a large regional financial institution.

In addition, training is a key initiative of both the Board of Directors and employees. Further training of the Board and employees has been implemented and will be ongoing.

A formal management succession plan has been developed and approved by the Board of Directors.

 

  3. In the month of September 2010, a newly revised strategic plan and a capital plan were completed and submitted to our regulators. The 2011 Budget was submitted to our regulators in the fourth quarter of 2010.

A newly revised strategic plan for the years 2012 through 2014 was completed and submitted to the regulators in November 2011. The 2012 Budget was submitted to our regulators also in the fourth quarter of 2011.

In accordance with our capital plan, we have begun a common stock offering in July 2012 to existing shareholders followed by an offering to the public during the third quarter of 2012. We anticipate the closing of the offering to be on October 15, 2012 although it may be extended to no later than December 31, 2012.

 

  4. Loan policies have been revised; an online approval and underwriting system for loans has been implemented; underwriting, monitoring and management of credits and collections have been enhanced; frequency of external loan reviews increased; and the focus on problem loans intensified at all levels in the organization. As a result, we are more timely in identifying problem loans. In the future, continuing these procedures should strengthen asset quality substantially. Further training of lending personnel is ongoing regarding proper risk grading of credits and identification of problem credits.

 

  5. Enhanced loan concentration identification and new procedures for monitoring and managing concentrations have been implemented. Loan concentration targets have been established and efforts continue to reduce higher risk concentrations. In particular, construction and development loans and commercial real estate loans have been reduced and continue to decrease toward acceptable levels as determined by the new policies.

 

  6. To strengthen management of credit quality and loan production, we added a new Chief Credit Officer, Stephen Trescot, in the first quarter of 2011 who brings vast credit administration experience to our management team. Sharon Borich, our former Chief Credit Officer, assumed the role of Senior Lending Officer with oversight of loan production and business development which is her area of expertise. In addition to new lending policies and procedures, the management of all real estate development projects and draws has been centralized. We have segregated the duties of lenders for greater specialization of commercial and retail lending responsibilities. As a result we have formed a Commercial Loan division that is supervised by the Senior Vice President and Senior Lending Officer. The retail loans are primarily the responsibility of branch personnel who report to branch managers and respective area managers.

The credit analysis function has been restructured and is a part of credit administration. The credit analysis function and independent appraisal reviews are now lead by a former seasoned lender who serves as Vice President and Credit Officer. This individual oversees a staff of four credit analysts and a certified licensed appraiser who serves as Appraisal Review Manager. The credit analysts review new and renewed loan

 

26


Table of Contents

relationships of $250 thousand or more prior to approval and annually reviews relationships of $500 thousand or more. The independent Appraisal Review Manager reviews the quality of appraisals on behalf of the Bank by reviewing the methods, assumptions, and value conclusions of internal and external appraisals. In addition, this data is used to determine whether an external appraiser should be utilized for future work.

 

  7. We have retained an independent third party to perform loan reviews on a quarterly basis in 2010 and 2011 and have engaged them to perform this function in June 2012 and December 2012. The third party loan review company has also conducted two loan portfolio stress tests for the Bank to obtain a better understanding of potential loan losses over a two year period.

 

  8. To support the focus on problem credit management the Bank further developed, in March, 2011, a Special Assets department which reports to the Chief Credit Officer. Presently, the department has four workout specialists/Vice Presidents, one Vice President managing other real estate owned properties, an analyst, and two support personnel. Substantially all the relationships in the Bank with total commitments in excess of $500,000 which are risk rated Special Mention or worse are assigned to this department. This department is organizationally structured to manage workout situations, collections, other real estate owned, nonperforming assets, watch list credits, and the Bank’s legal department. New reporting and monitoring is conducted monthly by this division. Material changes to Special Asset credits are reported to the Board at the time of occurrence and, quarterly, the Board receives written action plans and status updates of the Bank’s twenty largest problem credits. A quarterly management watch list committee has been established to actively manage and monitor these credits.

 

  9. A new allowance for loan loss model was implemented and reviewed independently during 2010. The Board has approved a new allowance for loan loss policy. We have shifted duties for maintaining the allowance for loan loss model and credit reporting to a more experienced employee. The allowance for loan loss and the methodology supporting the results are approved quarterly by the Audit Committee of the Board of Directors, and ratified by the Board.

 

  10. We have significantly increased our asset based liquidity sources throughout 2010, 2011 and 2012 to meet financial obligations. A new liquidity risk management policy has been adopted and a revised contingency funding plan has been created. We have lost all of our federal funds lines of credit, but we have added an internet certificate of deposit funding source to increase contingent funding sources. We believe that we have adequate liquidity in normal and stressed situations. We are further developing an investment portfolio, as well. The investment portfolio has grown to $46.2 million at June 30, 2012 from $4.7 million at December 31, 2010.

 

  11. In the fourth quarter of 2009, we ceased the declaration of dividends from the Bank to the Company. We also deferred interest payments on our trust preferred securities issuances.

 

  12. Anti-money laundering and bank secrecy act programs and training have been enhanced.

Overview

The Company had net loss for the quarter ended June 30, 2012 of $2.5 million as compared to a net loss of $1.7 million for the quarter ended June 30, 2011. Year-to-date June 30, 2012, the Company had a net loss of $5.1 million as compared to a net loss of $1.1 million for the same period in 2012. Basic net loss per share was $0.25 for the quarter ended June 30, 2012 as compared to basic net loss of $0.17 for the quarter ended June 30, 2011. Basic net loss per share was $0.51 for the six months ended June 30, 2012 as compared to net loss per share of $0.11 for the six months ended June 30, 2011. The net loss year-to-date is primarily the result of other real estate owned expenses of $3.2 million, of which $2.3 million is the result of other real estate owned properties writedowns, $3.1 million in loan loss provision, and a deferred tax valuation allowance of $2.9 million.

Total assets decreased to $725.6 million, or 7.02%, from $780.4 million at December 31, 2011. We intentionally are reducing our asset size in an attempt to improve our capital position and manage our net interest margin by reducing higher cost funding. We foresee total assets to continue shrinking in the near future as we manage to maintain a well-capitalized status under regulatory guidelines at the Bank level and return to well-capitalized on a consolidated basis. Depending upon the success of the common stock offering being conducted in the third and fourth quarters 2012, we may not shrink the Bank at the rate as in the recent past.

At June 30, 2012, the Company remained below the minimum capital requirement for regulatory well-capitalized status as a result of the Tier 1 leverage ratio decreasing to 3.72%, which was below the minimum requirement of 4.00%. At December 31, 2011, the ratio was 4.23%. The Tier 1 risk based ratio was 6.00% at June 30, 2012, compared to 6.57% at December 31, 2011. The Total risked based capital ratio was 9.07% at June 30, 2012, compared to 9.15% at December 31, 2011. We anticipate returning the Company to well capitalized status in the third quarter when we convert the $5.5 million notes payable to two Board members to common stock subject to regulatory approval which we anticipate receiving in the third quarter of 2012.

 

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Table of Contents

At June 30, 2012 the Bank remains well capitalized under the regulatory framework for prompt corrective action. The following ratios existed at June 30, 2012 for the Bank: Tier 1 leverage ratio of 5.82%, Tier 1 risk based capital ratio of 9.40%, and Total risk based capital ratio of 10.68%. The ratios were as follows at December 31, 2011: Tier 1 leverage ratio of 5.99%, Tier 1 risk based capital ratio of 9.28%, and Total risk based capital ratio of 10.56%.

In the second quarter of 2012, we experienced a decrease in our net interest margin to 4.02%, as compared to 4.28% for the same period in 2011. This is reflected in the $1.4 million decrease in net interest income during the second quarter of 2012 as compared to the same period in 2011 primarily related to the decreased loan portfolio and due to a one-time adjustment in which we reversed approximately $500 thousand in nonaccrual interest income from interest income and reduced the investment in nonaccrual loans.

Total loans decreased to $554.1 million at June 30, 2012 from $597.8 million at year end 2011. This is the result of charge offs of $3.6 million for the first half of 2012, resolution of problem loans, decreased loan demand, tighter underwriting guidelines, and the intentional shrinking of the loan portfolio to increase regulatory capital ratios. We continue to serve our customers, and although the total loan portfolio has shrunk, we have renewed existing credits and have made new loans to qualified borrowers as well. We anticipate continued decreases in the loan portfolio in the near future as we reduce our exposure to certain credit and market risks and decrease nonperforming loans. Increased focus is being made by the lending personnel to further develop new and existing lending relationships and will help slow the pace of total loans declining. Total deposits decreased $39.0 million from $708.3 million at December 31, 2011 to $669.3 million at June 30, 2012 as we have experienced shrinkage in time deposits due to the interest rate environment.

The deterioration of the residential and commercial real estate markets, as well as the extended recessionary period, have resulted in increases to our nonperforming assets. However, we are identifying potential problems early in an effort to minimize losses. The ratio of nonperforming assets to total assets is 7.69% at June 30, 2012 to 7.55% at December 31, 2011. Nonperforming assets, which include nonaccrual loans, other real estate owned and past due loans greater than 90 days still accruing interest, decreased to $56.0 million at June 30, 2012 from $58.9 million at December 31, 2011. The majority of these assets are real estate development projects and commercial real estate secured loans. We are working aggressively to reduce these totals primar