XNAS:OPOF Old Point Financial Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
 
or
 
o
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: 000-12896
 
OLD POINT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

VIRGINIA
 
54-1265373
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

1 West Mellen Street, Hampton, Virginia 23663
(Address of principal executive offices) (Zip Code)

(757) 728-1200
(Registrant's telephone number, including area code)

Not Applicable
(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 ¨ 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 ¨ No

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

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

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

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

4,959,009 shares of common stock ($5.00 par value) outstanding as of July 31, 2012
 


 
 

 
 
OLD POINT FINANCIAL CORPORATION

FORM 10-Q


PART I - FINANCIAL INFORMATION

   
Page
     
Item 1
1
     
 
 1
     
 
 2
     
 
 3
     
 
 4
     
 
 5
     
 
6
     
Item 2.
 27
     
Item 3.
37
     
Item 4.
38
     
 
PART II - OTHER INFORMATION
 
     
Item 1.
38
     
Item 1A.
38
     
Item 2.
38
     
Item 3.
38
     
Item 4.
39
     
Item 5.
39
     
Item 6.
39
     
 
40
 
 
i




Old Point Financial Corporation and Subsidiaries
 
   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(unaudited)
       
Assets
           
             
Cash and due from banks
  $ 15,148,990     $ 9,523,279  
Interest-bearing due from banks
    20,018,999       13,977,625  
Federal funds sold
    789,814       1,353,752  
Cash and cash equivalents
    35,957,803       24,854,656  
Securities available-for-sale, at fair value
    295,795,059       236,598,688  
Securities held-to-maturity (fair value approximates $620,607 and $1,525,624)
    615,000       1,515,000  
Restricted securities
    3,109,800       3,451,000  
Loans, net of allowance for loan losses of $7,670,969 and $8,497,731
    468,818,610       511,829,008  
Premises and equipment, net
    30,354,158       30,263,937  
Bank-owned life insurance
    22,042,954       21,593,464  
Foreclosed assets, net of valuation allowance of $1,948,783 and $1,851,160
    7,232,147       9,390,130  
Other assets
    8,393,304       10,007,712  
    $ 872,318,835     $ 849,503,595  
                 
Liabilities & Stockholders' Equity
               
                 
Deposits:
               
Noninterest-bearing deposits
  $ 173,578,871     $ 163,639,321  
Savings deposits
    243,832,145       232,348,196  
Time deposits
    306,764,574       294,891,492  
Total deposits
    724,175,590       690,879,009  
Overnight repurchase agreements
    22,763,918       35,000,910  
Term repurchase agreements
    1,176,004       1,480,103  
Federal Home Loan Bank advances
    35,000,000       35,000,000  
Accrued expenses and other liabilities
    1,813,264       1,278,858  
Total liabilities
    784,928,776       763,638,880  
                 
Commitments and contingencies
               
                 
Stockholders' equity:
               
Common stock, $5 par value, 10,000,000 shares authorized; 4,959,009 and 4,959,009 shares issued and outstanding
    24,795,045       24,795,045  
Additional paid-in capital
    16,365,313       16,309,983  
Retained earnings
    46,329,875       45,109,268  
Accumulated other comprehensive loss, net
    (100,174 )     (349,581 )
Total stockholders' equity
    87,390,059       85,864,715  
Total liabilities and stockholders' equity
  $ 872,318,835     $ 849,503,595  

See Notes to Consolidated Financial Statements.
 
 
- 1 -


Old Point Financial Corporation and Subsidiaries
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
   
(unaudited)
   
(unaudited)
 
Interest and Dividend Income:
                       
Interest and fees on loans
  $ 6,749,689     $ 8,190,911     $ 13,818,466     $ 16,593,318  
Interest on due from banks
    10,008       798       26,280       1,298  
Interest on federal funds sold
    460       5,911       763       14,156  
Interest on securities:
                               
Taxable
    1,379,414       896,051       2,600,900       1,798,769  
Tax-exempt
    148,232       38,073       242,209       77,407  
Dividends and interest on all other securities
    23,815       20,385       45,192       32,096  
Total interest and dividend income
    8,311,618       9,152,129       16,733,810       18,517,044  
                                 
Interest Expense:
                               
Interest on savings deposits
    94,184       103,162       188,239       208,349  
Interest on time deposits
    964,527       1,143,845       1,939,956       2,409,810  
Interest on federal funds purchased, securities sold under agreements to repurchase and other borrowings
    14,649       17,577       31,045       70,689  
Interest on Federal Home Loan Bank advances
    425,046       425,046       850,092       845,421  
Total interest expense
    1,498,406       1,689,630       3,009,332       3,534,269  
Net interest income
    6,813,212       7,462,499       13,724,478       14,982,775  
Provision for loan losses
    1,000,000       500,000       1,200,000       2,300,000  
Net interest income, after provision for loan losses
    5,813,212       6,962,499       12,524,478       12,682,775  
                                 
Noninterest Income:
                               
Income from fiduciary activities
    793,005       759,924       1,619,651       1,530,896  
Service charges on deposit accounts
    1,073,004       1,055,175       2,103,309       2,066,753  
Other service charges, commissions and fees
    880,032       820,528       1,677,061       1,558,372  
Income from bank-owned life insurance
    225,201       203,196       448,881       404,916  
Gain on sale of available-for-sale securities, net
    769,474       50,955       1,083,869       50,955  
Other operating income
    140,132       59,944       215,962       143,072  
Total noninterest income
    3,880,848       2,949,722       7,148,733       5,754,964  
                                 
Noninterest Expense:
                               
Salaries and employee benefits
    5,219,885       4,895,566       10,180,162       9,525,369  
Occupancy and equipment
    1,069,180       1,050,379       2,162,933       2,135,885  
Data processing
    391,376       338,796       773,903       666,399  
FDIC insurance
    286,314       266,297       567,152       671,479  
Customer development
    202,992       217,834       406,888       439,470  
Legal and audit expense
    224,182       219,628       408,112       363,027  
Other outside service fees
    140,981       157,122       293,367       300,838  
Advertising
    146,594       142,375       291,612       286,534  
Employee professional development
    187,643       178,896       329,984       312,207  
Postage and courier expense
    118,984       119,979       243,311       243,284  
Foreclosed assets expense
    96,312       117,348       167,365       247,870  
Loss on write-down/sale of foreclosed assets
    380,050       268,595       636,634       457,550  
Other operating expense
    482,157       525,907       1,034,665       1,015,879  
Total noninterest expense
    8,946,650       8,498,722       17,496,088       16,665,791  
Income before income taxes
    747,410       1,413,499       2,177,123       1,771,948  
Income tax expense
    109,203       378,238       460,615       391,994  
Net income
  $ 638,207     $ 1,035,261     $ 1,716,508     $ 1,379,954  
                                 
Basic Earnings per Share:
                               
Average shares outstanding
    4,959,009       4,954,970       4,959,009       4,946,210  
Net income per share of common stock
  $ 0.13     $ 0.21     $ 0.35     $ 0.28  
                                 
Diluted Earnings per Share:
                               
Average shares outstanding
    4,959,009       4,954,970       4,959,009       4,946,210  
Net income per share of common stock
  $ 0.13     $ 0.21     $ 0.35     $ 0.28  
 
See Notes to Consolidated Financial Statements.
 
 
- 2 -

 
Old Point Financial Corporation
   
Three Months Ended
 
Six Months Ended
   
June 30,
 
June 30,
   
2012
 
2011
 
2012
 
2011
   
(unaudited)
   
(unaudited)
 
                         
Net income
  $ 638,207     $ 1,035,261     $ 1,716,508     $ 1,379,954  
Other comprehensive income, net of tax
                               
Unrealized gains on securities
                               
Unrealized holding gains arising during the period
    2,813,975       2,850,091       2,198,789       3,050,927  
Less reclassification adjustment for gains recognized in income
    (769,474 )     (50,955 )     (1,083,869 )     (50,955 )
Less tax expense
    (1,040,470 )     (974,575 )     (865,513 )     (1,042,859 )
Net unrealized gains on securities
    1,004,031       1,824,561       249,407       1,957,113  
                                 
Other comprehensive income
    1,004,031       1,824,561       249,407       1,957,113  
Comprehensive income
  $ 1,642,238     $ 2,859,822     $ 1,965,915     $ 3,337,067  

See Notes to Consolidated Financial Statements.
 
 
- 3 -


Old Point Financial Corporation and Subsidiaries
                           
Accumulated
       
   
Shares of
         
Additional
         
Other
       
   
Common
   
Common
   
Paid-in
   
Retained
   
Comprehensive
       
(unaudited)
 
Stock
   
Stock
   
Capital
   
Earnings
   
Loss
   
Total
 
                                     
SIX MONTHS ENDED JUNE 30, 2012
                                   
                                     
Balance at beginning of period
    4,959,009     $ 24,795,045     $ 16,309,983     $ 45,109,268     $ (349,581 )   $ 85,864,715  
Net income
    0       0       0       1,716,508       0       1,716,508  
Other comprehensive income, net of tax
    0       0       0       0       249,407       249,407  
Stock compensation expense
    0       0       55,330       0       0       55,330  
Cash dividends ($0.10 per share)
    0       0       0       (495,901 )     0       (495,901 )
                                                 
Balance at end of period
    4,959,009     $ 24,795,045     $ 16,365,313     $ 46,329,875     $ (100,174 )   $ 87,390,059  
                                                 
SIX MONTHS ENDED JUNE 30, 2011
                                         
                                                 
Balance at beginning of period
    4,936,989     $ 24,684,945     $ 16,026,062     $ 42,809,769     $ (2,569,127 )   $ 80,951,649  
Net income
    0       0       0       1,379,954       0       1,379,954  
Other comprehensive income, net of tax
    0       0       0       0       1,957,113       1,957,113  
Exercise of stock options
    18,270       91,350       144,455       0       0       235,805  
Stock compensation expense
    0       0       55,087       0       0       55,087  
Cash dividends ($0.10 per share)
    0       0       0       (494,613 )     0       (494,613 )
                                                 
Balance at end of period
    4,955,259     $ 24,776,295     $ 16,225,604     $ 43,695,110     $ (612,014 )   $ 84,084,995  

See Notes to Consolidated Financial Statements.
 
 
- 4 -

 
Old Point Financial Corporation and Subsidiaries
   
Six Months Ended
 
   
June 30,
 
   
2012
   
2011
 
   
(unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 1,716,508     $ 1,379,954  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    938,719       918,871  
Provision for loan losses
    1,200,000       2,300,000  
Net gain on sale of available-for-sale securities
    (1,083,869 )     (50,955 )
Net amortization of securities
    572,773       116,601  
Net (gain) loss on disposal of premises and equipment
    52       (1,750 )
Net loss on write-down/sale of foreclosed assets
    636,634       457,550  
Income from bank owned life insurance
    (448,881 )     (404,916 )
Stock compensation expense
    55,330       55,087  
Deferred tax expense
    20,688       175,725  
Decrease in other assets
    1,379,570       65,965  
Increase in other liabilities
    534,406       243,929  
Net cash provided by operating activities
    5,521,930       5,256,061  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchases of available-for-sale securities
    (186,286,377 )     (44,356,861 )
Purchases of held-to-maturity securities
    0       (1,700,000 )
Proceeds from sales of restricted securities
    341,200       429,300  
Proceeds from maturities and calls of securities
    37,873,835       36,906,936  
Proceeds from sales of available-for-sale securities
    91,005,155       23,658,000  
Decrease in loans made to customers
    41,245,918       41,934,009  
Proceeds from sales of foreclosed assets
    2,170,889       724,220  
Purchases of premises and equipment
    (1,028,992 )     (1,273,961 )
Net cash provided by (used in) investing activities
    (14,678,372 )     56,321,643  
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Increase in noninterest-bearing deposits
    9,939,550       23,422,875  
Increase (decrease) in savings deposits
    11,483,949       (851,882 )
Increase (decrease) in time deposits
    11,873,082       (21,341,725 )
Decrease in federal funds purchased, repurchase agreements and other borrowings
    (12,541,091 )     (59,021,778 )
Proceeds from exercise of stock options
    0       235,805  
Cash dividends paid on common stock
    (495,901 )     (494,613 )
Net cash provided by (used in) financing activities
    20,259,589       (58,051,318 )
                 
Net increase in cash and cash equivalents
    11,103,147       3,526,386  
Cash and cash equivalents at beginning of period
    24,854,656       28,431,149  
Cash and cash equivalents at end of period
  $ 35,957,803     $ 31,957,535  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
Cash payments for:
               
Interest
  $ 3,021,805     $ 3,706,361  
Income tax
  $ 600,000     $ 0  
                 
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
               
Unrealized gain on securities available-for-sale
  $ 377,890     $ 2,965,323  
Loans transferred to foreclosed assets
  $ 564,480     $ 1,540,310  

See Notes to Consolidated Financial Statements.
 
 
- 5 -



Note 1. General
The accompanying unaudited consolidated financial statements of Old Point Financial Corporation (the Company) and its subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. All significant intercompany balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments and reclassifications of a normal and recurring nature considered necessary to present fairly the financial positions at June 30, 2012 and December 31, 2011, the results of operations and statement of comprehensive income for the three and six months ended June 30, 2012 and 2011, and statements of changes in stockholders’ equity and cash flows for the six months ended June 30, 2012 and 2011. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year.

These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2011 annual report on Form 10-K. Certain previously reported amounts have been reclassified to conform to current period presentation.

AVAILABLE INFORMATION
The Company maintains a website on the Internet at www.oldpoint.com. The Company makes available free of charge, on or through its website, its proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (SEC). The information available on the Company’s Internet website is not part of this Form 10-Q or any other report filed by the Company with the SEC. The public may read and copy any documents the Company files at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company’s SEC filings can also be obtained on the SEC’s website on the Internet at www.sec.gov.

SUBSEQUENT EVENTS
In accordance with ASC 855-10/SFAS 165, the Company evaluates subsequent events that have occurred after the balance sheet date but before the financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) nonrecognized, or those that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.

The Company is expanding the building of a current branch office. The Company signed a contract with a general contractor on April 19, 2012. The contract entitles the contractor to a fee of $2.1 million for Phase I of the construction, which includes site work and construction of the building shell. As of the writing of this quarterly report on Form 10-Q, $319 thousand had been disbursed to the contractor. The Company anticipates that the project will likely cost between $13.0 million and $15.0 million over the next one to two years.

In July 2012, the Company was notified of the death of a past employee for whom the Company holds a bank-owned life insurance policy. The Company anticipates receiving a payout from this policy within the next few months, of which $468 thousand will be credited to income. Bank-owned life insurance on the balance sheet will be reduced by the amount of this policy.

Other than those discussed above, the Company did not identify any recognized or nonrecognized subsequent events that would have required adjustment to or disclosure in the financial statements.
 
 
- 6 -


Note 2. Securities
Amortized costs and fair values of securities held-to-maturity as of the dates indicated are as follows:

         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(in thousands)
 
June 30, 2012
                       
Obligations of  U.S. Government agencies
  $ 470     $ 4     $ 0     $ 474  
Obligations of state and political subdivisions
    145       2       0       147  
Total
  $ 615     $ 6     $ 0     $ 621  
                                 
December 31, 2011
                               
Obligations of  U.S. Government agencies
  $ 1,370     $ 8     $ 0     $ 1,378  
Obligations of state and political subdivisions
    145       3       0       148  
Total
  $ 1,515     $ 11     $ 0     $ 1,526  
 
Amortized costs and fair values of securities available-for-sale as of the dates indicated are as follows:

         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
   
(in thousands)
 
June 30, 2012
                       
Obligations of  U.S. Government agencies
  $ 40,676     $ 1,164     $ 0     $ 41,840  
Obligations of state and political subdivisions
    27,457       323       (296 )     27,484  
Mortgage-backed securities
    223,379       1,536       (37 )     224,878  
Money market investments
    1,593       0       0       1,593  
Total
  $ 293,105     $ 3,023     $ (333 )   $ 295,795  
                                 
December 31, 2011
                               
U.S. Treasury securities
  $ 250     $ 0     $ 0     $ 250  
Obligations of  U.S. Government agencies
    117,848       1,706       0       119,554  
Obligations of state and political subdivisions
    11,999       266       (4 )     12,261  
Mortgage-backed securities
    102,884       396       (52 )     103,228  
Money market investments
    1,306       0       0       1,306  
Total
  $ 234,287     $ 2,368     $ (56 )   $ 236,599  
 
OTHER-THAN-TEMPORARILY IMPAIRED SECURITIES
Management assesses whether the Company intends to sell or it is more-likely-than-not that the Company will be required to sell a security before recovery of its amortized cost basis less any current-period credit losses. For debt securities that are considered other-than-temporarily impaired and that the Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, the Company separates the amount of the impairment into the amount that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and is the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of future expected cash flows is due to factors that are not credit related and is recognized in other comprehensive income.
 
 
- 7 -


The present value of expected future cash flows is determined using the best-estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to accrete an asset-backed or floating rate security. The methodology and assumptions for establishing the best-estimate cash flows vary depending on the type of security. The asset-backed securities cash flow estimates are based on bond specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds, and structural support, including subordination and guarantees.

The Company has a process in place to identify debt securities that could potentially have a credit impairment that is other than temporary. This process involves monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios, financial statements, revenue forecasts, and cash flow projections as indicators of credit issues. On a quarterly basis, management reviews all securities to determine whether an other-than-temporary decline in value exists and whether losses should be recognized. Management considers relevant facts and circumstances in evaluating whether a credit or interest rate-related impairment of a security is other-than-temporary. Relevant facts and circumstances considered include: (a) the extent and length of time the fair value has been below cost; (b) the reasons for the decline in value; (c) the financial position and access to capital of the issuer, including the current and future impact of any specific events; and (d) for fixed maturity securities, the Company’s intent to sell a security or whether it is more-likely-than-not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity and for equity securities, the Company’s ability and intent to hold the security for a period of time that allows for the recovery in value.

The Company has not recorded impairment charges on securities for the quarter ended June 30, 2012 or the year ended December 31, 2011.

TEMPORARILY IMPAIRED SECURITIES
The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses that are deemed to be temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of the dates indicated. The Company had no held-to-maturity securities with unrealized losses at June 30, 2012 or December 31, 2011.

   
June 30, 2012
 
   
Less Than Twelve Months
   
More Than Twelve Months
   
Total
 
   
Gross
         
Gross
         
Gross
       
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
 
   
Losses
   
Value
   
Losses
   
Value
   
Losses
   
Value
 
   
(in thousands)
 
Securities Available-for-Sale
                                   
Obligations of state and political subdivisions
  $ 296     $ 12,632     $ 0     $ 0     $ 296     $ 12,632  
Mortgage-backed securities
    37       25,738       0       0       37       25,738  
Total securities available-for-sale
  $ 333     $ 38,370     $ 0     $ 0     $ 333     $ 38,370  
 
   
December 31, 2011
 
   
Less Than Twelve Months
   
More Than Twelve Months
   
Total
 
   
Gross
         
Gross
         
Gross
       
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
 
   
Losses
   
Value
   
Losses
   
Value
   
Losses
   
Value
 
   
(in thousands)
 
Securities Available-for-Sale
                                   
Obligations of state and political subdivisions
  $ 4     $ 1,706     $ 0     $ 0     $ 4     $ 1,706  
Mortgage-backed securities
    52       29,364       0       0       52       29,364  
Total securities available-for-sale
  $ 56     $ 31,070     $ 0     $ 0     $ 56     $ 31,070  

 
- 8 -


Obligations of state and political subdivisions
The Company’s portfolio of obligations of state and political subdivisions had twenty-five investments with unrealized losses at June 30, 2012 and two investments with unrealized losses at December 31, 2011. The unrealized losses were caused by increases in market interest rates. Because the Company does not intend to sell the investments and management believes it is unlikely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider the investments to be other-than-temporarily impaired at June 30, 2012 or December 31, 2011.

Mortgage-backed securities
The Company’s portfolio of mortgage-backed securities had two investments with unrealized losses at June 30, 2012 and three investments with unrealized losses as of December 31, 2011. The unrealized losses were caused by increases in market interest rates. Because the Company does not intend to sell the investments, and management believes it is unlikely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2012 or December 31, 2011.

Restricted Securities
The restricted security category is comprised of stock in the Federal Home Loan Bank of Atlanta (FHLB) and the Federal Reserve Bank (FRB). These stocks are classified as restricted securities because their ownership is restricted to certain types of entities and the securities lack a market. Therefore, FHLB and FRB stock is carried at cost and evaluated for impairment. When evaluating these stocks for impairment, their value is determined based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Restricted stock is viewed as a long-term investment and management believes that the Company has the ability and the intent to hold this stock until its value is recovered.

Note 3. Loans and the Allowance for Loan Losses
The following is a summary of the balances in each class of the Company’s loan portfolio as of the dates indicated:

   
June 30,
   
December 31,
 
   
2012
   
2011
 
   
(in thousands)
 
Mortgage loans on real estate:
           
Residential 1-4 family
  $ 77,533     $ 77,588  
Commercial
    272,968       288,108  
Construction
    13,957       19,981  
Second mortgages
    15,571       16,044  
Equity lines of credit
    33,520       34,220  
Total mortgage loans on real estate
    413,549       435,941  
Commercial loans
    29,665       35,015  
Consumer loans
    14,878       17,041  
Other
    18,398       32,330  
Total loans
    476,490       520,327  
Less: Allowance for loan losses
    (7,671 )     (8,498 )
Loans, net of allowance and deferred fees
  $ 468,819     $ 511,829  
 
Overdrawn deposit accounts are reclassified as loans and included in the Other category in the table above. Overdrawn deposit accounts totaled $751 thousand and $583 thousand at June 30, 2012 and December 31, 2011, respectively.
 
 
- 9 -

 
CREDIT QUALITY INFORMATION
The Company uses internally-assigned risk grades to estimate the capability of borrowers to repay the contractual obligations of their loan agreements as scheduled or at all. The Company’s internal risk grade system is based on experiences with similarly graded loans. Credit risk grades are updated at least quarterly as additional information becomes available, at which time management analyzes the resulting scores to track loan performance.

The Company’s internally assigned risk grades are as follows:
 
·
Pass: Loans are of acceptable risk.
 
·
Other Assets Especially Mentioned (OAEM): Loans have potential weaknesses that deserve management’s close attention.
 
·
Substandard: Loans reflect significant deficiencies due to several adverse trends of a financial, economic or managerial nature.
 
·
Doubtful: Loans have all the weaknesses inherent in a substandard loan with added characteristics that make collection or liquidation in full based on currently existing facts, conditions and values highly questionable or improbable.
 
·
Loss: Loans have been charged off because they are considered uncollectible and of such little value that their continuance as bankable assets is not warranted.

The following table presents credit quality exposures by internally assigned risk ratings as of the dates indicated:

Credit Quality Information
As of June 30, 2012
(in thousands)

   
Pass
   
OAEM
   
Substandard
   
Doubtful
   
Total
 
Mortgage loans on real estate:
                             
Residential 1-4 family
  $ 74,284     $ 1,110     $ 2,139     $ 0     $ 77,533  
Commercial
    244,896       15,630       12,442       0       272,968  
Construction
    10,369       389       3,199       0       13,957  
Second mortgages
    15,141       0       430       0       15,571  
Equity lines of credit
    32,718       234       568       0       33,520  
Total mortgage loans on real estate
    377,408       17,363       18,778       0       413,549  
Commercial loans
    26,498       2,149       1,018       0       29,665  
Consumer loans
    14,761       0       117       0       14,878  
Other
    18,398       0       0       0       18,398  
Total
  $ 437,065     $ 19,512     $ 19,913     $ 0     $ 476,490  
 
Credit Quality Information
As of December 31, 2011
(in thousands)

   
Pass
   
OAEM
   
Substandard
   
Doubtful
   
Total
 
Mortgage loans on real estate:
                             
Residential 1-4 family
  $ 74,839     $ 677     $ 2,072     $ 0     $ 77,588  
Commercial
    258,610       11,803       17,695       0       288,108  
Construction
    19,548       396       37       0       19,981  
Second mortgages
    15,212       0       832       0       16,044  
Equity lines of credit
    33,390       182       648       0       34,220  
Total mortgage loans on real estate
    401,599       13,058       21,284       0       435,941  
Commercial loans
    29,455       4,295       1,265       0       35,015  
Consumer loans
    16,955       0       86       0       17,041  
Other
    32,330       0       0       0       32,330  
Total
  $ 480,339     $ 17,353     $ 22,635     $ 0     $ 520,327  
 
As of June 30, 2012 and December 31, 2011 the Company did not have any loans internally classified as Loss.
 
 
- 10 -

 
AGE ANALYSIS OF PAST DUE LOANS BY CLASS
All classes of loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Interest and fees continue to accrue on past due loans until the date the loan is placed in nonaccrual status, if applicable. The following table includes an aging analysis of the recorded investment in past due loans as of the dates indicated. Also included in the table below are loans that are 90 days or more past due as to interest and principal and still accruing interest, because they are well-secured and in the process of collection. Loans in nonaccrual status that are also past due are included in the aging categories in the table below.
 
Age Analysis of Past Due Loans at June 30, 2012

   
30 - 59 Days Past Due
   
60 - 89 Days Past Due
   
90 or More
Days Past
Due
   
Total Past
Due
   
Total
Current
Loans (1)
   
Total
Loans
   
Recorded Investment
> 90 Days
Past Due
and
Accruing
 
   
(in thousands)
 
Mortgage loans on real estate:
                                         
Residential 1-4 family
  $ 519     $ 381     $ 284     $ 1,184     $ 76,349     $ 77,533     $ 130  
Commercial
    1,710       2,979       0       4,689       268,279       272,968       0  
Construction
    36       0       3,021       3,057       10,900       13,957       0  
Second mortgages
    71       0       201       272       15,299       15,571       0  
Equity lines of credit
    267       0       368       635       32,885       33,520       0  
Total mortgage loans on real estate
    2,603       3,360       3,874       9,837       403,712       413,549       130  
Commercial loans
    196       29       0       225       29,440       29,665       0  
Consumer loans
    161       91       1       253       14,625       14,878       1  
Other
    68       9       4       81       18,317       18,398       4  
Total
  $ 3,028     $ 3,489     $ 3,879     $ 10,396     $ 466,094     $ 476,490     $ 135  

(1)
For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.

Age Analysis of Past Due Loans at December 31, 2011
 
   
30 - 59 Days Past Due
   
60 - 89 Days Past Due
   
90 or More
Days Past
Due
   
Total Past
Due
   
Total
Current
Loans (1)
   
Total
Loans
   
Recorded Investment
 > 90 Days
Past Due
and
Accruing
 
   
(in thousands)
 
Mortgage loans on real estate:
                                         
Residential 1-4 family
  $ 75     $ 0     $ 627     $ 702     $ 76,886     $ 77,588     $ 0  
Commercial
    0       0       1,123       1,123       286,985       288,108       510  
Construction
    148       0       0       148       19,833       19,981       0  
Second mortgages
    104       0       469       573       15,471       16,044       0  
Equity lines of credit
    159       0       369       528       33,692       34,220       0  
Total mortgage loans on real estate
    486       0       2,588       3,074       432,867       435,941       510  
Commercial loans
    101       0       0       101       34,914       35,015       0  
Consumer loans
    58       89       2       149       16,892       17,041       2  
Other
    44       0       5       49       32,281       32,330       5  
Total
  $ 689     $ 89     $ 2,595     $ 3,373     $ 516,954     $ 520,327     $ 517  
 
(1) 
For purposes of this table, Total Current Loans includes loans that are 1 - 29 days past due.
 
Past due loans increased $7.0 million between December 31, 2011 and June 30, 2012. Of this increase, $4.7 million was due to increases in nonaccrual loans that were also past due. Of the $6.8 million in past due nonaccrual loans at June 30, 2012, all but $964 thousand have been written down to their net realizable value. At December 31, 2011, loans past due, excluding loans on nonaccrual status, were at $1.3 million or 0.25% of total loans, the lowest level of the previous four year-ends. The historically low levels seen at December 31, 2011 are difficult to maintain, and at June 30, 2012 past dues not including nonaccrual loans were still within acceptable levels at $3.6 million or 0.76% of total loans.
 
 
- 11 -


NONACCRUAL LOANS
The Company generally places non-consumer loans in nonaccrual status when the full and timely collection of interest or principal becomes uncertain, part of the principal balance has been charged off and no restructuring has occurred or the loan reaches 90 days past due, unless the credit is well-secured and in the process of collection. Under regulatory rules, consumer loans, which are loans to individuals for household, family and other personal expenditures, and loans secured by 1-4 family residential properties are not required to be placed in nonaccrual status. Although consumer loans and loans secured by 1-4 family residential property are not required to be placed in nonaccrual status, the Company may place a consumer loan or loan secured by 1-4 family residential property in nonaccrual status, if necessary to avoid a material overstatement of interest income.

Generally, consumer loans not secured by real estate are placed in nonaccrual status only when part of the principal has been charged off. These loans are charged off or written down to the net realizable value of the collateral when deemed uncollectible, due to bankruptcy or other factors, or when they reach 90 days past due based on loan product, industry practice, terms and other factors.

When management places a loan in nonaccrual status, the accrued unpaid interest receivable is reversed against interest income and the loan is accounted for by the cash or cost recovery method, until it qualifies for return to accrual status. Generally, management returns a loan to accrual status if (a) all delinquent interest and principal payments become current under the terms of the loan agreement or (b) the loan is both well-secured and in the process of collection and collectability is no longer doubtful.

The following table presents loans in nonaccrual status by class of loan as of the dates indicated:

Nonaccrual Loans by Class
(in thousands)

   
June 30, 2012
   
December 31, 2011
 
             
Mortgage loans on real estate:
           
Residential 1-4 family
  $ 496     $ 748  
Commercial
    4,509       6,719  
Construction
    3,163       0  
Second mortgages
    201       499  
Equity lines of credit
    368       368  
Total mortgage loans on real estate
    8,737       8,334  
Commercial loans
    103       129  
Consumer loans
    8       12  
Total
  $ 8,848     $ 8,475  
 
The following table presents the interest income that the Company would have earned under the original terms of its nonaccrual loans and the actual interest recorded by the Company on nonaccrual loans for the periods presented:

   
Six Months Ended June 30,
 
   
2012
   
2011
 
   
(in thousands)
 
Interest income that would have been recorded under original loan terms
  $ 499     $ 723  
Actual interest income recorded for the period
    87       194  
Reduction in interest income on nonaccrual loans
  $ 412     $ 529  

 
- 12 -


TROUBLED DEBT RESTRUCTURINGS
The Company’s loan portfolio also includes certain loans that have been modified in a troubled debt restructuring (TDR), where economic concessions have been granted to borrowers who are experiencing financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reduction in the interest rate below current market rates, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. A TDR that is on nonaccrual status or is 30 days or more past due is considered to be nonperforming. Beginning with the second quarter of 2012, the Company changed its method for determining when a TDR is considered to be nonperforming. Prior to the second quarter of 2012, the Company classified TDRs as nonperforming at the time of restructure and a TDR could only be returned to performing status after considering the borrower’s sustained repayment performance in accordance with the restructured terms for a reasonable period, generally six months. Beginning with the second quarter of 2012, the Company defines a TDR as nonperforming only if the TDR is in nonaccrual status or 30 days or more past due at the report date. The reason for this change is that the Company found that some new TDRs were being classified as nonperforming solely because six months had not yet passed since the restructuring. As a result, under the previous system, even loans which had favorable repayment performance in accordance with the restructured terms for a reasonable period prior to the restructuring were being classified as nonperforming TDRs because there was no opportunity to measure their performance after the restructuring.

When the Company modifies a loan, management evaluates any possible impairment as stated in the impaired loan section below.

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-02 “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” (ASU 2011-02). The following table presents TDRs during the period indicated, by class of loan:

Troubled Debt Restructurings by Class
For the Six Months Ended June 30, 2012
(dollars in thousands)

   
Number of Modifications
   
Recorded Investment Prior to Modification
   
Recorded Investment After Modification
   
Current Investment on
June 30, 2012
 
Mortgage loans on real estate:
                       
Commercial
    2     $ 3,019     $ 2,461     $ 2,373  
Second mortgages
    1       111       145       140  
Total mortgage loans on real estate
    3       3,130       2,606       2,513  
Total
    3     $ 3,130     $ 2,606     $ 2,513  
 
The loans in the table above were given principal reductions, with the principal forgiveness on all loans in the table totaling $525 thousand. One loan was also given a below-market rate for debt with similar risk characteristics.

In the first six months of 2012, there were no TDRs for which there was a payment default where the default occurred within twelve months of restructuring.

IMPAIRED LOANS
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans and certain loans modified in a troubled debt restructuring. When management identifies a loan as impaired, the impairment is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, except when the sole or remaining source of repayment for the loan is the operation or liquidation of the collateral. In these cases, management uses the current fair value of the collateral, less selling costs when foreclosure is probable, instead of the discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

When the ultimate collectability of the total principal of an impaired loan is in doubt and the loan is in nonaccrual status, all payments are applied to principal under the cost-recovery method. For financial statement purposes, the recorded investment in the loan is the actual principal balance reduced by payments that would otherwise have been applied to interest. When reporting information on these loans to the applicable customers, the unpaid principal balance is reported as if payments were applied to principal and interest under the original terms of the loan agreements. Therefore, the unpaid principal balance reported to the customer would be higher than the recorded investment in the loan for financial statement purposes. When the ultimate collectability of the total principal of the impaired loan is not in doubt and the loan is in nonaccrual status, contractual interest is credited to interest income when received under the cash-basis method.
 
 
- 13 -


The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable, as of the dates presented. Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized for the periods presented. The average balances are calculated based on daily average balances.
 
Impaired Loans by Class
(in thousands)
 
   
As of June 30, 2012
   
Six Months Ended
June 30, 2012
 
         
Recorded Investment
                   
   
Unpaid
Principal Balance
   
Without Valuation Allowance
   
With
Valuation Allowance
   
Associated Allowance
   
Average Recorded Investment
   
Interest
Income Recognized
 
Mortgage loans on real estate:
                                   
Residential 1-4 family
  $ 686     $ 670     $ 0     $ 0     $ 705     $ 30  
Commercial
    9,968       5,196       4,509       947       10,864       355  
Construction
    3,166       3,163       0       0       3,539       109  
Second mortgages
    360       350       0       0       551       26  
Equity lines of credit
    371       368       0       0       367       17  
Total mortgage loans on real estate
  $ 14,551     $ 9,747     $ 4,509     $ 947     $ 16,026     $ 537  
Commercial loans
    120       103       0       0       108       4  
Consumer loans
    25       8       17       17       27       1  
Total
  $ 14,696     $ 9,858     $ 4,526     $ 964     $ 16,161     $ 542  
 
Impaired Loans by Class
(in thousands)

   
As of December 31, 2011
   
For the Year Ended December 31, 2011
 
         
Recorded Investment
                   
   
Unpaid
Principal Balance
   
Without Valuation Allowance
   
With
Valuation Allowance
   
Associated Allowance
   
Average Recorded Investment
   
Interest
Income Recognized
 
Mortgage loans on real estate:
                                   
Residential 1-4 family
  $ 486     $ 391     $ 91     $ 6     $ 3,753     $ 554  
Commercial
    8,263       4,734       3,371       968       8,911       456  
Construction
    0       0       0       0