XNAS:VBFC Village Bank and Trust Financial Corporation Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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• 10-Q • EX-31.1 • EX-31.2 • EX-32.1 • EX-101.SCH • EX-101.INS • EX-101.CAL • EX-101.DEF • EX-101.LAB • EX-101.PRE

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________

FORM 10-Q

 QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

 TRANSITION REPORT UNDER SECTION 13 OR 15(d)

OF THE EXCHANGE ACT

For the transition period from ______ to ______

____________

Commission file number: 0-50765

VILLAGE BANK AND TRUST FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Virginia	16-1694602
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

15521 Midlothian Turnpike, Midlothian, Virginia	23113
(Address of principal executive offices)	(Zip code)

804-897-3900
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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 S No £

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

Large Accelerated Filer £	Accelerated Filer £
Non-Accelerated Filer £ (Do not check if smaller reporting company)	Smaller Reporting Company x

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

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

4,251,795 shares of common stock, $4.00 par value, outstanding as of August 3, 2012

Village Bank and Trust Financial Corp.

Form 10-Q

TABLE OF CONTENTS

Part I – Financial Information

	Item 1. Financial Statements

	Consolidated Balance Sheets
	June 30, 2012 (unaudited) and December 31, 2011		3

	Consolidated Statements of Operations For the Three and Six Months Ended
	June 30, 2012 and 2011 (unaudited)		4

	Consolidated Statements of Comprehensive Income (Loss)
	For the Three and Six Months Ended June 30, 2012 and 2011 (unaudited)		5

	Consolidated Statements of Stockholders’ Equity For the Six Months Ended
	June 30, 2012 and 2011 (unaudited)		6

	Consolidated Statements of Cash Flows For the Six Months Ended
	June 30, 2012 and 2011 (unaudited)		7

	Notes to Condensed Consolidated Financial Statements (unaudited)		8

	Item 2. Management’s Discussion and Analysis of Financial Condition
		and Results of Operations	33

	Item 3. Quantitative and Qualitative Disclosures About Market Risk		56

	Item 4. Controls and Procedures		56

Part II – Other Information

	Item 1. Legal Proceedings		58

	Item 1A. Risk Factors		58

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		58

	Item 3. Defaults Upon Senior Securities		58

	Item 4. Mine Safety Disclosures		58

	Item 5. Other Information		58

	Item 6. Exhibits		58

Signatures			59

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Balance Sheet
June 30, 2012 (Unaudited) and December 31, 2011

	June 30,			December 31,
	2012			2011
Assets
Cash and due from banks	$	23,271,435		$	55,557,541
Federal funds sold		3,834,563			7,228,475
Total cash and cash equivalents		27,105,998			62,786,016
Investment securities available for sale		36,696,282			30,163,292
Loans held for sale		19,729,508			16,168,405
Loans
Outstandings		393,035,350			427,870,716
Allowance for loan losses		(14,865,722	)		(16,071,424	)
Deferred fees and costs		751,748			767,775
		378,921,376			412,567,067
Premises and equipment, net		26,286,493			26,826,524
Accrued interest receivable		1,910,147			2,046,524
Bank owned life insurance		6,159,335			6,065,305
Other real estate owned		17,677,080			9,177,167
Restricted equity securities		2,767,886			2,989,286
Other assets		7,208,307			12,914,733

	$	524,462,412		$	581,704,319

Liabilities and Stockholders' Equity
Liabilities
Deposits
Noninterest bearing demand	$	64,348,408		$	66,534,956
Interest bearing		386,071,500			418,986,096
Total deposits		450,419,908			485,521,052
Federal Home Loan Bank advances		29,000,000			37,750,000
Long-term debt - trust preferred securities		8,764,000			8,764,000
Other borrowings		5,062,344			5,778,661
Accrued interest payable		703,817			592,283
Other liabilities		5,458,402			7,050,681
Total liabilities		499,408,471			545,456,677

Stockholders' equity
Preferred stock, $4 par value, $1,000 liquidation preference		58,952			58,952
1,000,000 shares authorized, 14,738 shares issued and outstanding
Common stock, $4 par value - 10,000,000 shares issued and outstanding
4,251,795 shares issued and outstanding at June 30, 2012
4,243,378 shares issued and outstanding at December 31, 2011		17,007,180			16,973,512
Additional paid-in capital		40,704,021			40,732,178
Retained earnings (deficit)		(33,438,097	)		(21,895,557	)
Preferred stock warrant		732,479			732,479
Discount on preferred stock		(272,921	)		(346,473	)
Accumulated other comprehensive income (loss)		262,327			(7,449	)
Total stockholders' equity		25,053,941			36,247,642

	$	524,462,412		$	581,704,319


See accompanying notes to consolidated financial statements

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Operations
Three and Six Months Ended June 30, 2012 and 2011
(Unaudited)


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2012			2011		2012			2011
Interest income
Loans	$	5,614,263		$	6,767,421	$	11,513,471		$	13,808,189
Investment securities		215,196			352,798		365,545			653,124
Federal funds sold		11,621			20,481		32,553			38,804
Total interest income		5,841,080			7,140,700		11,911,569			14,500,117

Interest expense
Deposits		1,245,465			1,905,320		2,604,018			3,944,196
Borrowed funds		244,135			297,158		535,121			579,849
Total interest expense		1,489,600			2,202,478		3,139,139			4,524,045

Net interest income		4,351,480			4,938,222		8,772,430			9,976,072
Provision for loan losses		6,660,000			900,000		8,395,000			1,903,000
Net interest income (loss) after provision
for loan losses		(2,308,520	)		4,038,222		377,430			8,073,072

Noninterest income
Service charges and fees		540,335			498,432		1,047,978			871,382
Gain on sale of loans		2,191,229			1,636,240		3,941,892			3,008,918
Gain (loss) on sale of securities		99,470			19		263,677			63,144
Rental income		182,199			164,620		393,197			299,069
Other		121,896			106,554		211,855			201,072
Total noninterest income		3,135,129			2,405,865		5,858,599			4,443,585

Noninterest expense
Salaries and benefits		3,305,869			3,195,283		6,404,093			6,245,399
Occupancy		579,931			518,712		1,160,800			994,448
Equipment		202,616			224,150		407,980			444,220
Supplies		105,311			109,785		197,213			225,944
Professional and outside services		733,909			523,092		1,369,291			1,089,446
Advertising and marketing		47,983			111,584		124,046			234,423
Expenses related to foreclosed real estate		677,848			361,896		1,796,623			824,212
Other operating expenses		1,027,500			1,010,448		2,030,721			1,877,307
Total noninterest expense		6,680,967			6,054,950		13,490,767			11,935,399

Net income (loss) before income taxes		(5,854,358	)		389,137		(7,254,738	)		581,258
Income tax expense		3,881,914			132,306		3,881,914			241,706

Net income (loss)		(9,736,272	)		256,831		(11,136,652	)		339,552

Preferred stock dividends and amortization of discount		185,449			220,169		405,898			438,227
Net income (loss) available to common
shareholders	$	(9,921,721	)	$	36,662	$	(11,542,550	)	$	(98,675	)

Earnings (loss) per share, basic	$	(2.33	)	$	0.01	$	(2.72	)	$	(0.02	)
Earnings (loss) per share, diluted	$	(2.33	)	$	0.01	$	(2.72	)	$	(0.02	)

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Comprehensive Income (Loss)
Three and Six Months Ended June 30, 2012 and 2011
(Unaudited)

	For the Three Months Ended June 30,
	2012									2011
				Tax									Tax
				Expense									Expense
	Amount			(Benefit)			Total			Amount			(Benefit)			Total

Net Income (loss)	$	(5,854,358	)	$	3,881,914		$	(9,736,272	)	$	389,137		$	132,306		$	256,831

Other comprehensive income:
Unrealized holding gains arising during the period		1,046,534			355,821			690,712			(692,993	)		(235,618	)		(457,375	)
Reclassification adjustment for gains realized in income		(99,470	)		(33,820	)		(65,650	)		(19	)		(6	)		(13	)
Minimum pension adjustment		3,250			1,105			2,145			3,250			1,105			2,145
Total other comprehensive income		950,314			323,107			627,207			(689,762	)		(234,519	)		(455,243	)

Total comprehensive income (loss)	$	(4,904,044	)	$	4,205,021		$	(9,109,065	)	$	(300,625	)	$	(102,213	)	$	(198,412	)

		For the Six Months Ended June 30,
		2012									2011
				Tax									Tax
				Expense									Expense
	Amount			(Benefit)			Total			Amount			(Benefit)			Total

Net Income (loss)	$	(7,254,738	)	$	3,881,914		$	(11,136,652	)	$	581,258		$	241,706		$	339,552

Other comprehensive income:
Unrealized holding gains arising during the period		665,929			226,416			439,513			1,103,971			375,350			728,621
Reclassification adjustment for gains realized in income		(263,677	)		(89,650	)		(174,027	)		(63,144	)		(21,469	)		(41,675	)
Minimum pension adjustment		6,500			2,210			4,290			6,500			2,210			4,290
Total other comprehensive income		408,752			138,976			269,776			1,047,327			356,091			691,236

Total comprehensive income (loss)	$	(6,845,986	)	$	4,020,890		$	(10,866,876	)	$	1,628,585		$	597,797		$	1,030,788


See accompanying notes to consolidated financial statements

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Stockholders' Equity
Six Months Ended June 30, 2012 and 2011
(Unaudited)

							Accumulated
			Additional	Retained		Discount on	Other
	Preferred	Common	Paid-in	Earnings		Preferred	Comprehensive
	Stock	Stock	Capital	(Deficit)	Warrant	Stock	Income (loss)	Total

Balance, December 31, 2005		7,418,472	9,191,567	585,416			(43,562)	17,151,893
Issuance of common stock		2,829,880	4,374,314	-			-	7,204,194
Stock based compensation		-	23,007	-			-	23,007
Minimum pension adjustment
(net of income taxes of
$75,112)		-	-	-			(145,806)	(145,806)
Balance, December 31, 2011	$ 58,952	$ 16,973,512	$ 40,732,178	$ (21,895,557)	$ 732,479	$ (346,473)	$ (7,449)	$ 36,247,642
Amortization of preferred stock							-	-
discount	-			(73,552)	-	73,552		-
Preferred stock dividend	-	-		(332,336)	-	-	-	(332,336)
Issuance of common stock	-	33,668	(33,668)	-	-	-	-	-
Stock based compensation			5,511					5,511
Minimum pension adjustment
(net of income taxes of $2,917)	-	-	-	-	-	-	4,290	4,290
Net income (loss)	-	-	-	(11,136,652)	-	-	-	(11,136,652)
Change in unrealized gain on
investment securities available-for-sale,
net of reclassification and tax effect	-	-	-	-	-	-	265,486	265,486

Balance, June 30, 2012	$ 58,952	$ 17,007,180	$ 40,704,021	$ (33,438,097)	$ 732,479	$ (272,921)	$ 262,327	$ 25,053,942

Balance, December 31, 2010	$ 58,952	$ 16,953,664	$ 40,633,581	$ (9,192,552)	$ 732,479	$ (492,456)	$ (373,474)	$ 48,320,194
Amortization of preferred stock							-	-
discount	-			(72,806)	-	72,806		-
Preferred stock dividend	-	-		(365,421)	-	-	-	(365,421)
Issuance of common stock	-	19,848	(19,848)	-	-	-	-	-
Stock based compensation			59,223					59,223
Minimum pension adjustment
(net of income taxes of $2,917)	-	-	-	-	-	-	4,290	4,290
Net income (loss)	-	-	-	339,552	-	-	-	339,552
Change in unrealized gain on
investment securities available-for-sale,
net of reclassification and tax effect	-	-	-	-	-	-	686,946	686,946

Balance, June 30, 2011	$ 58,952	$ 16,973,512	$ 40,672,956	$ (9,291,227)	$ 732,479	$ (419,650)	$ 317,762	$ 49,044,784

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2012 and 2011
(Unaudited)
	Six Months Ended June 30,
	2012			2011
Cash Flows from Operating Activities
Net income (loss)	$	(11,136,652	)	$	339,552
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization		764,926			716,443
Deferred income taxes		(4,290,620	)		(3,710,085	)
Valuation allowance on deferred tax asset		6,281,101			-
Provision for loan losses		8,395,000			1,903,000
Write-down of other real estate owned		943,560			427,237
Gain on securities sold		(263,678	)		(63,144	)
Gain on loans sold		(3,941,892	)		(3,008,918	)
Loss on sale of other real estate owned		43,618			86,824
Stock compensation expense		5,511			59,223
Proceeds from sale of mortgage loans		140,739,661			114,982,327
Origination of mortgage loans for sale		(140,358,872	)		(104,077,018	)
Amortization of premiums and accrection of discounts on securities, net		130,888			56,757
(Increase) decrease in interest receivable		136,377			(231,244	)
Increase in bank owned life insurance		(94,030	)		(100,228	)
Decrease in other assets		5,901,368			4,188,569
Increase in interest payable		111,534			82,335
Decrease in other liabilities		(4,021,112	)		1,176,406
Net cash provided by (used in) operating activities		(653,312	)		12,828,036

Cash Flows from Investing Activities
Purchases of available for sale securities		(36,395,416	)		(62,377,306	)
Proceeds from the sale or calls of available for sale securities		28,804,399			803,100
Proceeds from maturities and principal payments of available for sale securities		1,593,068			62,996,221
Net decrease in loans		14,634,257			5,347,767
Proceeds from sale of other real estate owned		1,129,343			2,382,588
Purchases of premises and equipment		(224,896	)		(579,743	)
Net cash provided by investing activities		9,540,755			8,572,627

Cash Flows from Financing Activities
Net increase (decrease) in deposits		(35,101,144	)		6,964,761
Net increase (decrease) in Federal Home Loan Bank Advances		(8,750,000	)		10,000,000
Net increase (decrease) in other borrowings		(716,317	)		1,568,180
Net cash provided by (used in) financing activities		(44,567,461	)		18,532,941

Net increase (decrease) in cash and cash equivalents		(35,680,018	)		39,933,604
Cash and cash equivalents, beginning of period		62,786,016			12,012,311

Cash and cash equivalents, end of period	$	27,105,998		$	51,945,915

Supplemental Schedule of Non Cash Activities
Real estate owned assets acquired in settlement of loans	$	10,616,434		$	2,850,739
Dividends on preferred stock accrued	$	332,336		$	-

See accompanying notes to consolidated financial statements.

Village Bank and Trust Financial Corp. and Subsidiary

Notes to Condensed Consolidated Financial Statements

Three and Six Months Ended June 30, 2012 and 2011 (Unaudited)

Note 1 - Principles of presentation

Village Bank and Trust Financial Corp. (the “Company”) is the holding company of Village Bank (the “Bank”). The consolidated financial statements include the accounts of the Company, the Bank and the Bank’s three wholly-owned subsidiaries, Village Bank Mortgage Company, Village Insurance Agency, Inc., and Village Financial Services Company. All material intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying condensed consolidated financial statements of the Company have been prepared on the accrual basis in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. The results of operations for the three and six month periods ended June 30, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012. The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements that are presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the Securities and Exchange Commission.

Note 2 - Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and statements of income for the period. Actual results could differ significantly from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses and the related provision.

Note 3 - Earnings (loss) per common share

The following table presents the basic and diluted earnings per share computations:

	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
Numerator
Net income (loss) - basic and diluted	$	(9,736,272	)	$	256,831	$	(11,136,652	)	$	339,552
Preferred stock dividend and accretion		185,449			220,169		405,898			438,227
Net income (loss) available to common
shareholders	$	(9,921,721	)	$	36,662	$	(11,542,550	)	$	(98,675	)

Denominator
Weighted average shares outstanding - basic		4,250,579			4,243,378		4,250,579			4,242,665
Dilutive effect of common stock options and
restricted stock awards		-			-		-			-

Weighted average shares outstanding - diluted		4,250,579			4,243,378		4,250,579			4,242,665

Earnings (loss) per share - basic and diluted
Earnings (loss) per share - basic	$	(2.33	)	$	0.01	$	(2.72	)	$	(0.02	)
Effect of dilutive common stock options		-			-		-			-

Earnings (loss) per share - diluted	$	(2.33	)	$	0.01	$	(2.72	)	$	(0.02	)

Outstanding options and warrants to purchase common stock were considered in the computation of diluted earnings per share for the periods presented. Stock options for 261,530 shares of common stock were not included in computing diluted earnings per share for the three and six months ended June 30, 2012 because their effects were anti-dilutive. Warrants for 499,029 shares of common stock were not included in computing earnings per share in 2012 and 2011 because their effects were also anti-dilutive.

Note 4 – Investment securities available for sale

At June 30, 2012 and December 31, 2011, all of our securities were classified as available-for-sale. The following table presents the composition of our investment portfolio at the dates indicated (dollars in thousands).

					Gross		Gross			Estimated
	Par		Amortized		Unrealized		Unrealized			Fair		Average
	Value		Cost		Gains		Losses			Value		Yield
June 30, 2012

US Government Agencies
More than ten years	$	15,300	$	18,264	$	472	$	-		$	18,736		3.27	%
		15,300		18,264		472		-			18,736		3.27	%
Mortgage-backed securities
One to five years		3		3		-		-			3		0.01	%
More than ten years		11,363		11,961		64		(10	)		12,016		1.51	%
Total		11,366		11,964		64		(10	)		12,019		1.51	%

Municipals
Five to ten years		3,500		4,137		5		-			4,142		2.56	%
More than ten years		1,550		1,784		15		-			1,799		3.52	%
Total		5,050		5,921		20		-			5,941		2.85	%

Total investment securities	$	31,716	$	36,149	$	557	$	(10	)	$	36,696		2.63	%

December 31, 2011

US Government Agencies
More than ten years	$	2,000	$	2,000	$	1	$	-		$	2,001		3.81	%

Mortgage-backed securities
One to five years		11		11		-		-			11		0.01	%
More than ten years		19,870		20,621		220		(49	)		20,792		1.83	%
Total		19,881		20,632		220		(49	)		20,803		1.83	%

Other investments
More than ten years		7,356		7,386		-		(27	)		7,359		0.55	%

Total investment securities	$	29,237	$	30,018	$	221	$	(76	)	$	30,163		1.65	%

Investment securities available for sale that have an unrealized loss position at June 30, 2012 and December 31, 2011 are detailed below (dollars in thousands).

	Securities in a loss					Securities in a loss
	Position for less than					Position for more than
	12 Months					12 Months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
June 30, 2012	(in Thousands)
Mortgage-backed securities	$	2,331	$	(10	)	$	3	$	-		$	2,334	$	(10	)

Total	$	2,331	$	(10	)	$	3	$	-		$	2,334	$	(10	)

December 31, 2011
US Treasuries	$	7,358	$	(27	)	$	-	$	-		$	7,358	$	(27	)
Mortgage-backed securities		10,221		(47	)		205		(2	)		10,426		(49	)

Total	$	17,579	$	(74	)	$	205	$	(2	)	$	17,784	$	(76	)

Management does not believe that any individual unrealized loss as of June 30, 2012 and December 31, 2011 is other than a temporary impairment. These unrealized losses are primarily attributable to changes in interest rates. As of June 30, 2012, management does not have the intent to sell any of the securities classified as available for sale and management believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost.

Note 5 – Loans and allowance for loan losses

The following table presents the composition of our loan portfolio (excluding mortgage loans held for sale) at the dates indicated (dollars in thousands).

	June 30, 2012						December 31, 2011
	Amount			%			Amount			%
Construction and land development
Residential	$	7,442			1.89	%	$	7,906			1.85	%
Commercial		55,828			14.20	%		72,621			16.97	%
Total construction and land development		63,270			16.09	%		80,527			18.82	%
Commercial real estate
Farmland		2,447			0.62	%		2,465			0.58	%
Commercial real estate - owner occupied		100,149			25.48	%		105,592			24.68	%
Commercial real estate - non-owner occupied		55,891			14.22	%		54,059			12.63	%
Multifamily		6,960			1.77	%		6,680			1.56	%
Total commercial real estate		165,447			42.09	%		168,796			39.45	%
Consumer real estate
Home equity lines		28,365			7.22	%		30,687			7.17	%
Secured by 1-4 family residential, secured by first deeds of trust		84,775			21.58	%		93,219			21.79	%
Secured by 1-4 family residential, secured by second deeds of trust		10,095			2.57	%		12,042			2.81	%
Total consumer real estate		123,235			31.37	%		135,948			31.77	%
Commercial and industrial loans (except those secured by real estate)		37,529			9.55	%		37,734			8.82	%
Consumer and other		3,554			0.90	%		4,865			1.14	%

Total Loans		393,035			100.0	%		427,870			100.0	%
Deferred loan cost (unearned income), net		752						768
Less: Allowance for loan losses		(14,866	)					(16,071	)

	$	378,921					$	412,567

The Company assigns risk rating classifications to its loans. These risk ratings are divided into the following groups:

Risk rated 1 to 4 loans are considered of sufficient quality to preclude an adverse rating. 1-4 assets generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral;

Risk rated 5 loans are defined as having potential weaknesses that deserve management’s close attention;

Risk rated 6 loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any, and;

Risk rated 7 loans have all the weaknesses inherent in substandard loans, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

The following tables provide information on the risk rating of loans at the dates indicated:

	June 30, 2012
	Risk Rated		Risk Rated		Risk Rated		Risk Rated		Total
		1-4		5		6		7	Loans

Construction and land development
Residential	$	6,197,776	$	671,709	$	572,439	$	-	$	7,441,924
Commercial		29,535,994		1,403,600		24,388,336		500,472		55,828,402
Total construction and land development		35,733,770		2,075,309		24,960,775		500,472		63,270,326

Commercial real estate
Farmland		1,397,310				1,049,489		-		2,446,799
Commercial real estate - owner occupied		73,149,268		11,261,166		15,480,900		257,898		100,149,232
Commercial real estate - non-owner occupied		25,607,380		11,142,004		19,141,489		-		55,890,873
Multifamily		4,702,665		1,091,058		1,166,632		-		6,960,355
Total commercial real estate		104,856,623		23,494,228		36,838,510		257,898		165,447,259

Consumer real estate
Home equity lines		22,888,912		2,267,061		3,134,202		75,000		28,365,175
Secured by 1-4 family residential, secured by first deeds of trust		58,547,748		7,258,617		18,968,098		-		84,774,463
Secured by 1-4 family residential, secured by second deeds of trust		8,218,980		419,994		1,456,145		-		10,095,119
Total consumer real estate		89,655,640		9,945,672		23,558,445		75,000		123,234,757

Commercial and industrial loans (except those secured by real estate)		29,206,043		1,732,430		5,740,435		850,305		37,529,213

Consumer and other		3,311,242		182,600		59,953		-		3,553,795

Total Loans	$	262,763,318	$	37,430,239	$	91,158,118	$	1,683,675	$	393,035,350

	December 31, 2011

	Risk Rated		Risk Rated		Risk Rated		Risk Rated		Total
		1-4		5		6		7	Loans

Construction and land development
Residential	$	4,943,061			$	2,963,404	$	-	$	7,906,465
Commercial		44,315,474		-		28,305,063		-		72,620,537
Total construction and land development		49,258,535		-		31,268,467		-		80,527,002

Commercial real estate
Farmland		2,464,981		-		-		-		2,464,981
Commercial real estate - owner occupied		46,958,816		16,352,920		42,280,412		-		105,592,148
Commercial real estate - non-owner occupied		37,581,904		3,036,887		13,440,358		-		54,059,149
Multifamily		5,511,882		-		1,167,446		-		6,679,328
Total commercial real estate		92,517,583		19,389,807		56,888,216		-		168,795,606

Consumer real estate
Home equity lines		26,403,850		1,373,002		2,910,374		-		30,687,226
Secured by 1-4 family residential, secured by first deeds of trust		80,670,887		6,052,128		6,495,783		-		93,218,798
Secured by 1-4 family residential, secured by second deeds of trust		9,960,928		706,484		1,374,651		-		12,042,063
Total consumer real estate		117,035,665		8,131,614		10,780,808		-		135,948,087

Commercial and industrial loans (except those secured by real estate)		31,322,834		4,289,037		2,122,645		-		37,734,516

Consumer and other		3,508,768		384,387		972,350		-		4,865,505