XNAS:FBSS Fauquier Bankshares Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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• FAUQUIER BANKSHARES, INC 10-Q 3-31-2012 • EXHIBIT 31.1 • EXHIBIT 31.2 • EXHIBIT 32.1 • EXHIBIT 32.2 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY SCHEMA DOCUMENT • XBRL TAXONOMY CALCULATION LINKBASE DOCUMENT • XBRL TAXONOMY DEFINITION LINKBASE DOCUMENT • XBRL TAXONOMY LABEL LINKBASE DOCUMENT • XBRL TAXONOMY PRESENTATION LINKBASE DOCUMENT

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 March 31, 2012

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 No.: 000-25805

Fauquier Bankshares, Inc.

(Exact name of registrant as specified in its charter)

Virginia		54-1288193
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

10 Courthouse Square, Warrenton, Virginia		20186
(Address of principal executive offices)		(Zip Code)

(540) 347-2700

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

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 o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company x

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yeso No x

The registrant had 3,695,160 shares of common stock outstanding as of May 4, 2012.

FAUQUIER BANKSHARES, INC.

INDEX

Part I. FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements	3

	Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011	3

	Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2012 and 2011	4

	Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March 31, 2012 and 2011	5

	Consolidated Statements of Changes in Shareholders’ Equity (unaudited) for the Three Months Ended March 31, 2012 and 2011	6

	Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2012 and 2011	7

	Notes to Consolidated Financial Statements	8

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	38

Part II. OTHER INFORMATION

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	38

Item 3.	Defaults Upon Senior Securities	38

Item 4.	Mine Safety Disclosures	38

Item 5.	Other Information	39

Item 6.	Exhibits	39

SIGNATURES		40

Index

Part I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

	March 31,			December 31,
	2012			2011
	(Unaudited)			(Audited)
Assets
Cash and due from banks	$	4,534,587		$	5,544,545
Interest-bearing deposits in other banks		40,143,034			66,607,776
Federal funds sold		7,906			7,904
Securities available for sale, net		56,511,993			47,649,479
Restricted investments		2,557,300			2,543,200
Loans		457,214,931			458,813,851
Allowance for loan losses		(6,877,319	)		(6,728,320	)
Net loans		450,337,612			452,085,531
Bank premises and equipment, net		15,076,195			14,788,611
Accrued interest receivable		1,464,358			1,533,758
Other real estate owned, net of allowance		1,776,000			1,776,000
Bank-owned life insurance		11,725,479			11,621,158
Other assets		10,077,679			10,066,086
Total assets	$	594,212,143		$	614,224,048

Liabilities
Deposits:
Noninterest-bearing	$	83,423,647		$	75,310,509
Interest-bearing:
NOW accounts		169,850,661			184,383,523
Savings accounts and money market accounts		106,853,421			107,004,349
Time deposits		151,051,549			163,871,068
Total interest-bearing		427,755,631			455,258,940
Total deposits		511,179,278			530,569,449

Federal Home Loan Bank advances		25,000,000			25,000,000
Company-obligated mandatorily redeemable capital securities		4,124,000			4,124,000
Other liabilities		5,853,350			6,959,739
Commitments and contingencies		-			-
Total liabilities		546,156,628			566,653,188

Shareholders' Equity
Common stock, par value, $3.13; authorized 8,000,000 shares; issued and outstanding: 2012: 3,695,160 shares including 31,423 nonvested shares: 2011: 3,669,758 shares including 32,572 nonvested shares		11,467,497			11,384,392
Retained earnings		38,118,777			37,503,865
Accumulated other comprehensive income (loss), net		(1,530,759	)		(1,317,397	)
Total shareholders' equity		48,055,515			47,570,860

Total liabilities and shareholders' equity	$	594,212,143		$	614,224,048

See accompanying Notes to Consolidated Financial Statements.

Index

Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

For the Three Months Ended March 31, 2012 and 2011

	2012		2011
Interest Income
Interest and fees on loans	$	6,120,665	$	6,505,194
Interest and dividends on securities available for sale:
Taxable interest income		265,969		240,107
Interest income exempt from federal income taxes		61,508		57,884
Dividends		21,633		10,690
Interest on federal funds sold		4		7
Interest on deposits in other banks		37,456		25,003
Total interest income		6,507,235		6,838,885

Interest Expense
Interest on deposits		815,082		1,007,396
Interest on federal funds purchased		14		13
Interest on Federal Home Loan Bank advances		246,813		244,246
Distribution on capital securities of subsidiary trusts		49,933		49,101
Total interest expense		1,111,842		1,300,756

Net interest income		5,395,393		5,538,129

Provision for loan losses		500,000		462,501

Net interest income after provision for loan losses		4,895,393		5,075,628

Other Income
Trust and estate income		341,557		301,868
Brokerage income		81,676		111,690
Service charges on deposit accounts		691,924		672,455
Other service charges, commissions and income		366,417		349,494
Total other-than-temporary impairment losses on securities		-		(228,306	)
Less: Portion of gain/(loss) recognized in other comprehensive income before taxes		-		(39,179	)
Net other-than-temporary impairment losses on securities		-		(189,127	)
Gain on sale of securities		401		1,013
Total other income		1,481,975		1,247,393

Other Expenses
Salaries and benefits		2,704,352		2,709,575
Occupancy expense of premises		471,558		476,141
Furniture and equipment		276,171		318,436
Marketing expense		164,726		137,516
Legal, audit and consulting expense		257,444		269,681
Data processing expense		311,618		295,359
Federal Deposit Insurance Corporation expense		117,146		197,797
(Gain) loss on sale or impairment and expense of other real estate owned		5,037		-
Other operating expenses		802,642		726,227
Total other expenses		5,110,694		5,130,732

Income before income taxes		1,266,674		1,192,289

Income tax expense		312,859		271,403

Net Income	$	953,815	$	920,886

Earnings per Share, basic	$	0.26	$	0.25

Earnings per Share, assuming dilution	$	0.26	$	0.25

Dividends per Share	$	0.12	$	0.12

See accompanying Notes to Consolidated Financial Statements.

Index

Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

For the Three Months Ended March 31, 2012 and 2011

	2012			2011
Net Income	$	953,815		$	920,886
Other comprehensive income (loss), net of tax:
Change in fair value of securities available-for-sale net of tax benefit of $28,659 in 2012 and tax of $17,293 in 2011		(55,632	)		33,569
Interest rate swap, net of tax benefit of $81,119 in 2012 and $18,157 in 2011		(157,466	)		35,247
Adjustment for reclassification for other than temporary impairment net of tax benefit of $64,304 in 2011		-			124,824
Adjustment for gain on sale of securities available for sale, net of taxes of $137 in 2012 and $344 in 2011		(264	)		(669)
Total other comprehensive income (loss) net of tax		(213,362	)		192,971
Comprehensive Income	$	740,453		$	1,113,857

See accompanying Notes to Consolidated Financial Statements.

Index

Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders' Equity

For the Three Months Ended March 31, 2012 and 2011

	Common Stock		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2010	$	11,277,346	$	34,892,905		$	(2,064,688	)	$	44,105,563
Net income				920,886						920,886
Other comprehensive income net of tax of $99,409						$	192,971			192,971

Cash dividends ($.12 per share)				(440,371	)					(440,371	)
Amortization of unearned compensation, restricted stock awards				35,279						35,279
Issuance of common stock - nonvested shares (10,914 shares)		34,161		(34,161	)					-
Issuance of common stock - vested shares (4,752 shares)		14,874		53,080						67,954
Exercise of stock options		58,011		91,558						149,569
Balance, March 31, 2011	$	11,384,392	$	35,519,176		$	(1,871,717	)	$	45,031,851

Balance, December 31, 2011	$	11,384,392	$	37,503,865		$	(1,317,397	)	$	47,570,860
Net income				953,815						953,815
Other comprehensive income net of tax of $109,915							(213,362	)		(213,362	)

Cash dividends ($.12 per share)				(443,419	)					(443,419	)
Amortization of unearned compensation, restricted stock awards				34,468						34,468
Issuance of common stock - nonvested shares (13,074 shares)		40,922		(40,922	)
Issuance of common stock - vested shares (13,477 shares)		42,183		110,970						153,153
Balance, March 31, 2012	$	11,467,497	$	38,118,777		$	(1,530,759	)	$	48,055,515

See accompanying Notes to Consolidated Financial Statements

Index

Fauquier Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2012 and 2011

(Unaudited)

	2012			2011
Cash Flows from Operating Activities
Net income	$	953,815		$	920,886
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		280,521			303,682
Provision for loan losses		500,000			462,501
(Gain) on sale and call of securities		(401	)		(1,013	)
Loss on impairment of securities		-			189,127
Amortization of security premiums, net		6,235			24,968
Amortization of unearned compensation, net of forfeiture		34,468			35,279
Changes in assets and liabilities:
(Increase) in other assets		(115,167	)		(195,357	)
(Decrease) increase in other liabilities		(1,166,406	)		126,928
Net cash provided by operating activities		493,065			1,867,001

Cash Flows from Investing Activities
Proceeds from maturities, calls and principal payments of securities available for sale		3,945,970			3,081,822
Purchase of securities available for sale		(12,899,010	)		(5,350,526	)
Purchase of premises and equipment		(568,105	)		(322,455	)
Purchase of restricted securities		(14,100	)		-
Net decrease in loans		1,247,919			4,882,418
Net cash (used in) provided by investing activities		(8,287,326	)		2,291,259

Cash Flows from Financing Activities
Net increase (decrease) in demand deposits, NOW accounts and savings accounts		(6,570,652	)		2,138,481
Net (decrease) in certificates of deposit		(12,819,519	)		(7,681,936	)
Cash dividends paid on common stock		(443,419	)		(440,371	)
Issuance of common stock		153,153			217,523
Net cash (used in) financing activities		(19,680,437	)		(5,766,303	)

(Decrease) in cash and cash equivalents		(27,474,698	)		(1,608,043	)

Cash and Cash Equivalents
Beginning		72,160,225			47,182,499

Ending	$	44,685,527		$	45,574,456

Supplemental Disclosures of Cash Flow Information
Cash payments for
Interest	$	1,104,541		$	1,291,761

Income taxes	$	-		$	-

Supplemental Disclosures of Noncash Investing Activities
Unrealized gain on securities available for sale, net of tax effect	$	(55,896	)	$	157,724
Foreclosed assets acquired in settlement of loans	$	-		$	412,000
Unrealized gain (loss) on interest rate swap, net of taxes	$	(157,466	)	$	35,247

See accompanying Notes to Consolidated Financial Statements.

Index

FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1.

General

The consolidated financial statements include the accounts of Fauquier Bankshares, Inc. (“the Company”) and its wholly-owned subsidiaries: The Fauquier Bank (“the Bank”) and Fauquier Statutory Trust II; and the Bank's wholly-owned subsidiary, Fauquier Bank Services, Inc. In consolidation, significant intercompany financial balances and transactions have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial positions as of March 31, 2012 and December 31, 2011 and the results of operations for the three ended March 31, 2012 and 2011. The notes included herein should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results expected for the full year.

Recent Accounting Pronouncements

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

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

Index

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

In September 2011, the FASB issued ASU 2011-08, “Intangible – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2010. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11 , " Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities." This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company is currently assessing the impact that ASU 2011-11 will have on its consolidated financial statements.

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

Index

Note 2.

Securities

The amortized cost and fair value of securities available for sale, with unrealized gains and losses follows:

	March 31, 2012
			Gross Unrealized		Gross Unrealized
	Amortized Cost		Gains		(Losses)			Fair Value
Obligations of U.S. Government corporations and agencies	$	47,735,941	$	851,915	$	(50,492	)		48,537,364
Obligations of states and political subdivisions		6,789,999		557,393		-			7,347,392
Corporate bonds		3,815,864		-		(3,539,396	)		276,468
Mutual funds		339,430		11,339		-			350,769
	$	58,681,234	$	1,420,647	$	(3,589,888	)	$	56,511,993

	December 31, 2011
			Gross Unrealized		Gross Unrealized
	Amortized Cost		Gains		(Losses)			Fair Value
Obligations of U.S. Government corporations and agencies	$	38,811,926	$	761,577	$	(1,672	)		39,571,831
Obligations of states and political subdivisions		6,791,235		604,331		(1,930	)		7,393,636
Corporate bonds		3,793,807		-		(3,458,833	)		334,974
Mutual funds		337,060		11,978		-			349,038
	$	49,734,028	$	1,377,886	$	(3,462,435	)	$	47,649,479

The amortized cost and fair value of securities available for sale, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

	March 31, 2012
	Amortized Cost		Fair Value
Due in one year or less	$	1,016,394	$	1,018,407
Due after one year through five years		14,997,818		15,029,029
Due after five years through ten years		11,018,650		11,562,585
Due after ten years		31,308,942		28,551,203
Equity securities		339,430		350,769
		58,681,234		56,511,993

There were no impairment losses on securities during the quarter ended March 31, 2012 and $189,000 during the quarter ended March 31, 2011.

During the quarter ended March 31, 2012, two securities were called totaling a fair value of $2.0 million, resulting in a gain of $401.

Index

The following table shows the Company securities with gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2012 and December 31, 2011, respectively.

	Less than 12 Months					12 Months or More					Total
March 31, 2012	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)

Obligations of U.S. Government, corporations and agencies	$	7,948,340	$	(50,492	)	$	-	$	-		$	7,948,340	$	(50,492	)
Obligations of states and political subdivisions		-		-			-		-			-		-
Corporate bonds		-		-			276,468		(3,539,396	)		276,468		(3,539,396	)
Total temporary impaired securities	$	7,948,340	$	(50,492	)	$	276,468	$	(3,539,396	)	$	8,224,808	$	(3,589,888	)

	Less than 12 Months					12 Months or More					Total
December 31, 2011	Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)			Fair Value		Unrealized (Losses)

Obligations of U.S. Government, corporations and agencies	$	1,997,300	$	(1,672	)	$	-	$	-		$	1,997,300	$	(1,672	)
Obligations of states and political subdivisions		514,895		(1,930	)		-		-			514,895		(1,930	)
Corporate bonds							334,974		(3,458,833	)		334,974		(3,458,833	)
Total temporary impaired securities	$	2,512,195	$	(3,602	)	$	334,974	$	(3,458,833	)	$	2,847,169	$	(3,462,435	)

The nature of securities which were temporarily impaired for a continuous 12 month period or more at March 31, 2012 consisted of four corporate bonds with a cost basis net of other-than-temporary impairment (“OTTI”) totaling $3.8 million and a temporary loss of approximately $3.5 million. The method for valuing these four corporate bonds came from Moody's Analytics. Moody’s Analytics employs a two-step discounted cash-flow valuation process. The first step is to evaluate the financial condition of the individual creditors in order to estimate the credit quality of the collateral pool and the structural supports. Step two is to apply a discount rate to the cash flows to calculate a value. These four corporate bonds are the “Class B” or subordinated “mezzanine” tranche of pooled trust preferred securities. The trust preferred securities are collateralized by the interest and principal payments made on trust preferred capital offerings by a geographically diversified pool of approximately 60 different financial institutions per bond. They have an estimated maturity of 25 years. These bonds could have been called at par on the five year anniversary date of issuance, which has already passed for all four bonds. The bonds reprice every three months at a fixed rate index above the three-month London Interbank Offered Rate (“LIBOR”). These bonds have sufficient collateralization and cash flow projections to satisfy their valuation based on the cash flow portion of the OTTI test under authoritative accounting guidance as of March 31, 2012. All four bonds totaling $276,000 at fair value, are greater than 90 days past due, and are classified as nonperforming corporate bond investments in the nonperforming asset table in Note 3.

Additional information regarding each of the pooled trust preferred securities as of March 31, 2012 follows:

Cost, net of OTTI loss		Fair Value		Percent of Underlying Collateral Performing	Percent of Underlying Collateral in Deferral	Percent of Underlying Collateral in Default	Estimated incremental defaults required to break yield (1)	Current Moody's Rating	Cumulative Amount of OTTI Loss		Cumulative Other Comprehensive Loss, net of tax benefit
$	374,426	$	5,994	50.0 %	25.7 %	24.3 %	broken	C	$	625,574	$	243,165
	1,624,770		226,845	67.7 %	17.1 %	15.2 %	broken	Ca		375,230		922,630
	1,271,911		29,507	61.5 %	30.9 %	7.6 %	broken	Ca		728,089		819,987
	544,757		14,122	64.0 %	22.3 %	13.7 %	broken	C		455,243		350,219
$	3,815,864	$	276,468						$	2,184,136	$	2,336,001

(1)

A break in yield for a given tranche investment means that defaults and/or deferrals have reached such a level that the specific tranche would not receive all of the contractual principal and interest cash flow by its maturity, resulting in not a temporary shortfall, but an actual loss. This column represents the percentage of additional defaults among the currently performing collateral that would result in other-than-temporary loss.

Index

The Company monitors these pooled trust preferred securities in its portfolio as to additional collateral issuer defaults and deferrals, which as a general rule, indicate that additional impairment may have occurred. Due to the continued stress on banks in general, and the issuer banks in particular, as a result of overall economic conditions, the Company anticipates having to recognize additional impairment in future periods; however the extent, timing, and probability of any additional impairment cannot be reasonably estimated at this time.

The following roll forward reflects the amount related to credit losses recognized in earnings (in accordance with FASB Accounting Standards Codification (“ASC”) 320-10-35-34D:

Beginning balance as of December 31, 2011	$	2,206,193
Add: Amount related to the credit loss for which an other-than- temporary impairment was not previously recognized		-
Add: Increases to the amount related to the credit loss for which an other-than temporary impairment was previously recognized		-
Less: Realized losses for securities sold		-
Less: Securities for which the amount previously recognized in other comprehensive income was recognized in earnings because the Company intends to sell the security or more likely than not will be required to to sell the security before recovery of its amortized cost basis.		-
Less: Increases in cash flows expected to be collected that are recognized over the remaining life of the security (See FASB ASC 320-10-35-35)		22,057
Ending balance as of March 31, 2012	$	2,184,136

The carrying value of securities pledged to secure deposits and for other purposes amounted to $41.0 million and $37.3 million at March 31, 2012 and December 31, 2011, respectively.

The Company’s restricted investments include an equity investment in the Federal Home Loan Bank of Atlanta (“FHLB”). FHLB stock is generally viewed as a long-term investment and as a restricted investment which is carried at cost because there is no market for the stock other than the FHLB or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than recognizing temporary declines in value. The Company does not consider this investment to be other-than-temporarily impaired at March 31, 2012, and no impairment has been recognized.

Index

Note 3.

Loans and Allowance for Loan Losses

Allowance for Loan Losses and Recorded Investment in Loans Receivable

	As of December 31, 2011 and for the Three Months Ended March 31, 2012
	Commercial and Industrial			Commercial Real Estate			Commercial Construction			Consumer			Residential Real Estate			Home Equity Line of Credit			Unallocated			Total
Allowance for Loan Losses
Beginning balance at 12/31/2011	$	794,647		$	2,898,784		$	195,376		$	31,279		$	1,584,277		$	697,835		$	526,122		$	6,728,320
Charge-offs		(87,967	)		(46,185	)		-			(45,965	)		(27	)		(177,244	)		-			(357,388	)
Recoveries		2,786			-			-			2,100			1,451			50			-			6,387
Provision		79,036			(87,517	)		(48,378	)		40,152			285,028			297,539			(65,860	)		500,000
Ending balance at 3/31/2012	$	788,502		$	2,765,082		$	146,998		$	27,566		$	1,870,729		$	818,180		$	460,262		$	6,877,319

Ending balances individually evaluated for impairment	$	440,500		$	-		$	-		$	-		$	207,700		$	-		$	-		$	648,200

Ending balances collectively evaluated for impairment	$	348,002		$	2,765,082		$	146,998		$	27,566		$	1,663,029		$	818,180		$	460,262		$	6,229,119

Loans Receivable
Individually evaluated for impairment	$	789,571		$	4,787,000		$	-		$	-		$	3,241,148		$	443,754					$	9,261,473
Collectively evaluated for impairment		28,012,825			199,734,061			33,966,156			4,889,579			137,032,147			44,318,690						447,953,458
Ending balance at 3/31/2012	$	28,802,396		$	204,521,061		$	33,966,156		$	4,889,579		$	140,273,295		$	44,762,444					$	457,214,931

	As of and for the Period Ended December 31, 2011
	Commercial and Industrial			Commercial Real Estate		Commercial Construction		Consumer			Residential Real Estate			Home Equity Line of Credit			Unallocated		Total
Allowance for Loan Losses
Beginning balance at 12/31/2010	$	792,796		$	2,320,692	$	150,513	$	314,580		$	1,622,830		$	1,105,782		$	-	$	6,307,193
Charge-offs		(599,320	)		-		-		(60,251	)		(596,607	)		(471,752	)		-		(1,727,930	)
Recoveries		11,750			160,724		-		39,863			-			3,382			-		215,719
Provision		589,421			417,368		44,863		(262,913	)		558,054			60,423			526,122		1,933,338
Ending balance at 12/31/2011	$	794,647		$	2,898,784	$	195,376	$	31,279		$	1,584,277		$	697,835		$	526,122	$	6,728,320

Ending balances individually evaluated for impairment	$	434,844		$	-	$	-	$	-		$	207,700		$	37,000		$	-	$	679,544

Ending balances collectively evaluated for impairment	$	359,803		$	2,898,784	$	195,376	$	31,279		$	1,376,577		$	660,835		$	526,122	$	6,048,776

Loans Receivable
Individually evaluated for impairment	$	1,029,765		$	4,455,999	$	-	$	-		$	3,324,388		$	564,996				$	9,375,148
Collectively evaluated for impairment		28,030,939			196,964,153		38,111,739		5,451,186			135,721,739			45,158,947					449,438,703
Ending balance at 12/31/2011	$	29,060,704		$	201,420,152	$	38,111,739	$	5,451,186		$	139,046,127		$	45,723,943				$	458,813,851

Index

Credit Quality Indicators

	As of March 31, 2012
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Consumer		Residential Real Estate		Home Equity Line of Credit		Total
Grade:
Pass	$	20,967,615	$	151,541,940	$	33,966,156	$	4,700,590	$	123,501,621	$	39,620,907	$	374,298,829
Special mention		2,513,121		29,172,472		-		112,879		8,457,385		2,877,851		43,133,708
Substandard		4,868,558		23,806,649		-		76,110		7,311,964		2,263,686		38,326,967
Doubtful		453,102		-		-		-		1,002,325		-		1,455,427
Loss		-		-		-		-		-		-		-
Total	$	28,802,396	$	204,521,061	$	33,966,156	$	4,889,579	$	140,273,295	$	44,762,444	$	457,214,931

	As of December 31, 2011
	Commercial and Industrial		Commercial Real Estate		Commercial Construction		Consumer		Residential Real Estate		Home Equity Line of Credit		Total
Grade:
Pass	$	20,794,642	$	149,140,329	$	38,111,739	$	5,289,040	$	128,181,706	$	42,532,255	$	384,049,711
Special mention		2,901,436		27,414,713		-		82,624		3,422,104		1,067,145		34,888,022
Substandard		4,814,459		24,795,110		-		79,522		6,261,650		2,013,489		37,964,230
Doubtful		550,167		70,000		-		-		1,180,667		111,054		1,911,888
Loss		-		-		-		-		-		-		-
Total	$	29,060,704	$	201,420,152	$	38,111,739	$	5,451,186	$	139,046,127	$	45,723,943	$	458,813,851

Age Analysis of Past Due Loans Receivable

	As of March 31, 2012
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Financing Receivables		Carrying Amount > 90 Days and A ccruing		Nonaccruals
Commercial and industrial	$	943,917	$	-	$	135,802	$	1,079,719	$	27,722,677	$	28,802,396	$	-	$	789,573
Commercial real estate		2,900,669		74,431		265,813		3,240,913		201,280,148		204,521,061		-		601,251
Commercial construction		-		-		-		-		33,966,156		33,966,156		-		-
Consumer		126,560		30,140		-		156,700		4,732,879		4,889,579		-		-
Residential real estate		725,149		990,061		1,201,718		2,916,928		137,356,367		140,273,295		85,955		2,889,903
Home equity line of credit		579,807		129,790		357,473		1,067,070		43,695,374		44,762,444		-		565,526
Total	$	5,276,102	$	1,224,422	$	1,960,806	$	8,461,330	$	448,753,601	$	457,214,931	$	85,955	$	4,846,253

	As of December 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Financing Receivables		Carrying Amount > 90 Days and Accruing		Nonaccruals
Commercial and industrial	$	216,059	$	164,011	$	441,960	$	822,030	$	28,238,674	$	29,060,704	$	-	$	986,927
Commercial real estate		1,655,903		946,185		252,490		2,854,578		198,565,574		201,420,152		-		252,490
Commercial construction		371,235		-		-		371,235		37,740,504		38,111,739		-		-
Consumer		139,389		29,398		17,525		186,312		5,264,874		5,451,186		-		3,707
Residential real estate		1,463,022		992,914		1,683,649		4,139,585		134,906,542		139,046,127		101,347		2,928,567
Home equity line of credit		348,105		150,031		53,942		552,078		45,171,865		45,723,943		-		450,248
Total	$	4,193,713	$	2,282,539	$	2,449,566	$	8,925,818	$	449,888,033	$	458,813,851	$	101,347	$	4,621,939

Index

Impaired Loans Receivable

	March 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	198,457	$	198,457	$	-	$	207,724	$	1,240
Commercial real estate		4,787,000		4,787,000		-		4,797,196		102,966
Commercial construction		-		-		-		-		-
Residential real estate		1,970,979		1,970,979		-		1,977,100		1,717

With an allowance recorded
Commercial and industrial		591,114		591,114		440,500		591,539		506
Commercial real estate		-		-		-		-		-
Commercial construction		-		-		-		-		-
Residential real estate		1,713,923		1,713,923		207,700		1,726,487		2,824

Total
Commercial and industrial		789,571		789,571		440,500		799,263		1,746
Commercial real estate		4,787,000		4,787,000		-		4,797,196		102,966
Commercial construction		-		-		-		-		-
Residential real estate		3,684,902		3,684,902		207,700		3,703,587		4,541
Total	$	9,261,473	$	9,261,473	$	648,200	$	9,300,046	$	109,253

	December 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	345,763	$	345,763	$	-	$	363,522	$	16,884
Commercial real estate		4,455,998		4,455,998		-		4,516,083		377,074
Commercial construction		-		-		-		-		-
Residential real estate		2,038,951		2,038,951		-		2,082,239		40,409

With an allowance recorded:
Commercial and industrial		684,002		684,002		434,844		728,455		19,742
Commercial real estate		-		-		-		-		-
Commercial construction		-		-		-		-		-
Residential real estate		1,850,434		1,850,434		244,700		1,907,718		52,879

Total:
Commercial and industrial		1,029,765		1,029,765		434,844		1,091,977		36,626
Commercial real estate		4,455,998		4,455,998		-		4,516,083		377,074
Commercial construction		-		-		-		-		-
Residential real estate		3,889,385		3,889,385		244,700		3,989,957		93,288
Total	$	9,375,148	$	9,375,148	$	679,544	$	9,598,017	$	506,988

No additional funds are committed to be advanced in connection with impaired loans.