XNAS:BKOR 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


 
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
 
Commission File Number: 000-52640


 
OAK RIDGE FINANCIAL SERVICES, INC
(Exact name of registrant as specified in its charter)
 

 
North Carolina
20-8550086
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
Post Office Box 2
2211 Oak Ridge Road
Oak Ridge, North Carolina 27310
(Address of principal executive offices)
 
(336) 644-9944
(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    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  x    No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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
 
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
 
The number of shares outstanding of each of the registrant’s classes of common stock, as of August 6, 2012, was as follows:
 
Class
 
Number of Shares
Common Stock, no par value
 
1,808,745



 
 

 
 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements represent expectations and beliefs of Oak Ridge Financial Services, Inc. (hereinafter referred to as the “Company”) including but not limited to the Company’s operations, performance, financial condition, growth or strategies. These forward-looking statements are identified by words such as “expects”, “anticipates”, “should”, “estimates”, “believes” and variations of these words and other similar statements. For this purpose, any statements contained in this form that are not statements of historical fact may be deemed to be forward-looking statements. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. These forward-looking statements involve estimates, assumptions, risks and uncertainties that could cause actual results to differ materially from current projections depending on a variety of important factors, including without limitation:
 
 
Revenues are lower than expected;
 
 
Credit quality deterioration which could cause an increase in the provision for credit losses;
 
 
Competitive pressure among depository institutions increases significantly;
 
 
Changes in consumer spending, borrowings and savings habits;
 
 
Technological changes and security and operations risks associated with the use of technology;
 
 
The cost of additional capital is more than expected;
 
 
A change in the interest rate environment reduces interest margins;
 
 
Asset/liability repricing risks, ineffective hedging and liquidity risks;
 
 
Counterparty risk;
 
 
General economic conditions, particularly those affecting real estate values, either nationally or in the market area in which we do or anticipate doing business, are less favorable than expected;
 
 
The effects of the Federal Deposit Insurance Corporation deposit insurance premiums and assessments;
 
 
The effects of and changes in monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board;
 
 
Volatility in the credit or equity markets and its effect on the general economy;
 
 
Demand for the products or services of the Company and the Bank of Oak Ridge, as well as their ability to attract and retain qualified people;
 
 
The costs and effects of legal, accounting and regulatory developments and compliance; and
 
 
Regulatory approvals for acquisitions cannot be obtained on the terms expected or on the anticipated schedule.
 
The Company undertakes no obligation to update any forward-looking statement, whether written or oral, that may be made from time to time, by or on behalf of the Company.
 
 
2

 
 
Oak Ridge Financial Services, Inc.
 
Table of Contents
 
Part 1: Financial Information
 
     
     
Item 1. Financial Statements
   
     
Consolidated Balance Sheets at June 30, 2012 (unaudited) and December 31, 2011
 
 
4
 
     
Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011(unaudited)
 
 
5
 
     
Consolidated Statements of Comprehensive Income (Loss) for the six months ended June 30, 2012 and 2011 (unaudited)
 
 
6
 
     
Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2012 and 2011 (unaudited)
 
 
7
 
     
Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)
 
 
8
 
     
Notes to Unaudited Consolidated Financial Statements
 
 
10
 
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
28
 
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
41
 
     
Item 4. Controls and Procedures
 
 
41
 
     
Part II. Other Information
 
     
     
Item 6. Exhibits
 
 
42
 
     
Signature Page
 
 
44
 
 
 
3

 
 
Consolidated Balance Sheets
June 30, 2012 (Unaudited) and December31, 2011 (Audited)
(Dollars in thousands)
 
 
 
2012
 
 
2011
 
     
Assets
 
     
 
     
Cash and due from banks
 
$
3,811
 
 
$
5,293
 
Interest-bearing deposits with banks
 
 
16,958
 
 
 
16,150
 
Total cash and cash equivalents
 
 
20,769
 
 
 
21,443
 
Time deposits
 
 
 
 
 
1,050
 
Securities available-for-sale
 
 
49,738
 
 
 
51,212
 
Securities held-to-maturity (fair values of $4,533 in 2012 and $5,204 in 2011)
 
 
4,667
 
 
 
5,211
 
Federal Home Loan Bank Stock, at cost
 
 
588
 
 
 
795
 
Loans held for sale
 
 
1,383
 
 
 
808
 
Loans, net of allowance for loan losses of $4,437 in 2012 and $4,446 in 2011
 
 
253,627
 
 
 
250,832
 
Property and equipment, net
 
 
9,805
 
 
 
9,973
 
Foreclosed assets
 
 
1,938
 
 
 
2,216
 
Accrued interest receivable
 
 
1,399
 
 
 
1,554
 
Bank owned life insurance
 
 
5,008
 
 
 
4,939
 
Other assets
 
 
2,621
 
 
 
2,122
 
Total assets
 
$
351,543
 
 
$
352,155
 
     
Liabilities and Stockholders’ Equity
 
     
 
     
     
Liabilities
 
     
 
     
Deposits:
 
     
 
     
Noninterest-bearing
 
$
30,592
 
 
$
30,338
 
Interest-bearing
 
 
282,894
 
 
 
283,573
 
Total deposits
 
 
313,486
 
 
 
313,911
 
Junior subordinated notes related to trust preferred securities
 
 
8,248
 
 
 
8,248
 
Accrued interest payable
 
 
119
 
 
 
119
 
Other liabilities
 
 
2,360
 
 
 
1,929
 
Total liabilities
 
 
324,213
 
 
 
324,207
 
     
Stockholders’ equity
 
     
 
     
Preferred stock, Series A, 7,700 shares authorized and outstanding; no par value, $1,000 per share liquidation preference
 
 
7,220
 
 
 
7,075
 
Common stock, no par value; 50,000,000 shares authorized; 1,808,445 issued and outstanding in 2012 and 2011
 
 
15,944
 
 
 
15,925
 
Warrant
 
 
1,361
 
 
 
1,361
 
Retained earnings
 
 
1,413
 
 
 
2,418
 
Accumulated other comprehensive income
 
 
1,392
 
 
 
1,169
 
Total stockholders’ equity
 
 
27,330
 
 
 
27,948
 
Total liabilities and stockholders’ equity
 
$
351,543
 
 
$
352,155
 
 
See Notes to Consolidated Financial Statements
 
 
4

 
 
Consolidated Statements of Operations
For the three and six months ended June 30, 2012 and 2011 (Unaudited)
(Dollars in thousands except per share data)
 
    Three months ended June 30,     Six months ended June 30,  
   
2012
   
2011
   
2012
   
2011
 
Interest and dividend income
                       
Loans and fees on loans
  $ 3,376     $ 3,651     $ 6,810     $ 7,233  
Interest on deposits in banks
    16       19       29       40  
Federal Home Loan Bank stock dividends
    3       2       6       5  
Taxable investment securities
    574       722       1,280       1,556  
Total interest and dividend income
    3,969       4,394       8,125       8,834  
Interest expense
                               
Deposits
    571       830       1,245       1,723  
Short-term and long-term debt
    44       51       90       99  
Total interest expense
    615       881       1,335       1,822  
Net interest income
    3,354       3,513       6,790       7,012  
Provision for loan losses
    2,021       1,261       2,585       1,866  
Net interest income after provision for loan losses
    1,333       2,252       4,205       5,146  
Noninterest income
                               
Service charges on deposit accounts
    106       138       209       295  
Gain on sale of securities
          257             257  
Mortgage loan origination fees
    179       42       291       108  
Investment and insurance commissions
    285       273       546       475  
Fee income from accounts receivable financing
    172       207       336       415  
Debit card interchange income
    203       163       385       295  
Income earned on bank owned life insurance
    34       35       69       72  
Other service charges and fees
    20       22       87       40  
Total noninterest income
    999       1,137       1,923       1,957  
Noninterest expense
                               
Salaries
    1,626       1,427       3,314       2,892  
Employee benefits
    197       176       412       365  
Employee Stock Ownership Plan
          25             25  
Occupancy expense
    207       206       421       417  
Equipment expense
    225       217       435       427  
Data and item processing
    282       232       563       444  
Professional and advertising
    356       328       531       553  
Stationary and supplies
    94       104       171       226  
Net cost of foreclosed assets
    235       22       429       296  
Telecommunications expense
    84       57       153       110  
FDIC assessment
    78       146       154       278  
Accounts receivable financing expense
    52       65       101       131  
Other expense
    295       330       657       621  
Total noninterest expense
    3,731       3,335       7,341       6,785  
Income (loss) before income taxes
    (1,399 )     54       (1,213 )     318  
Income tax expense (benefit)
    (579 )     (23 )     (546 )     48  
Net income (loss)
  $ (820 )   $ 77     $ (667 )   $ 270  
Preferred stock dividends
    (97 )     (97 )     (193 )     (193 )
Accretion of discount
    (72 )     (66 )     (145 )     (133 )
Loss available to common stockholders
  $ (989 )   $ (86 )   $ (1,005 )   $ (56 )
Basic loss per common share
  $ (0.55 )   $ (0.05 )   $ (0.56 )   $ (0.03 )
Diluted loss per common share
  $ (0.55 )   $ (0.05 )   $ (0.56 )   $ (0.03 )
Basic weighted average common shares outstanding
    1,808,745       1,795,789       1,808,745       1,795,883  
Diluted weighted average common shares outstanding
    1,808,745       1,795,789       1,808,745       1,795,883  
 
 
See Notes to Consolidated Financial Statements
 
 
5

 

Consolidated Statements of Comprehensive Income (Loss)
For the Six months ended June 30, 2012 and 2011 (Unaudited)
(Dollars in thousands except per share data)
 
   
Three months ended June 30,
    Six months ended June 30,  
   
2012
   
2011
   
2012
   
2011
 
                         
Net income (loss)
  $ (820 )   $ 77     $ (667 )   $ 270  
Other comprehensive income:
                               
Unrealized holding gains (losses) on securities available-for-sale
    375       (484 )     363       (399 )
Tax effect
    (145 )     187       (140 )     154  
Unrealized holding gains (losses) on securities available-for-sale, net of tax amount
    230       (297 )     223       (245 )
Reclassification adjustment for realized gains
          257             257  
Tax effect
          (99 )           (99 )
Reclassification adjustment for realized gains, net of tax
          158             158  
Other comprehensive income (loss) net of tax
    230       (139 )     223       (87 )
Comprehensive income (loss)
  $ (590 )   $ (62 )   $ (444 )   $ 183  
 
 
See Notes to Consolidated Financial Statements
 
 
6

 
 
Consolidated Statements of Changes in Stockholders’ Equity
Six months ended June 30, 2012 and 2011 (Unaudited)
(Dollars in thousands except shares of common stock)
 
         
Common Stock
                         
   
Preferred
stock,
Series A
    Number     Amount    
Common
stock
warrant
   
Retained
earnings
    Accumulated
other
comprehensive
income (loss)
   
Total
 
Balance December 31, 2010
 
$
6,808
 
 
 
1,792,876
 
 
$
15,841
 
 
$
1,361
 
 
$
2,707
 
 
$
1,156
 
 
$
27,873
 
Net income
 
     
 
     
 
     
 
     
 
 
270
 
           
270
 
Other comprehensive loss
 
     
 
     
 
     
 
     
 
         
(87)
 
   
(87)
 
Preferred stock dividends
 
     
 
     
 
     
 
     
 
 
(193)
             
(193)
 
Stock Option Expense
                   
11
                             
11
 
Common stock issued pursuant to restricted stock awards
           
15,569
     
20
                             
20
 
Preferred stock accretion
 
 
133
 
 
     
 
     
 
     
 
 
(133)
             
 
Balance June 30, 2011
 
$
6,941
 
 
 
1,808,445
 
 
$
15,872
 
 
$
1,361
 
 
$
2,651
 
 
$
1,069
 
 
$
27,894
 
 
 
         
Common Stock
                         
   
Preferred
stock,
Series A
    Number     Amount    
Common
stock
warrant
   
Retained
earnings
   
Accumulated
other
comprehensive
income
   
Total
 
Balance December 31, 2011
 
$
7,075
 
 
 
1,808,445
 
 
$
15,925
 
 
$
1,361
 
 
$
2,418
 
 
$
1,169
 
 
$
27,948
 
Net loss
 
     
 
     
 
     
 
     
 
 
(667)
 
           
(667)
 
Other comprehensive income
 
     
 
     
 
     
 
     
 
         
223
 
   
223
 
Preferred stock dividends
 
     
 
     
 
     
 
     
 
 
(193)
             
(193)
 
Stock Option and restricted stock expense
                   
19
                             
19
 
Preferred stock accretion
 
 
145
 
 
     
 
     
 
     
 
 
(145)
             
 
Balance June 30, 2012
 
$
7,220
 
 
 
1,808,445
 
 
$
15,944
 
 
$
1,361
 
 
$
1,413
 
 
$
1,392
 
 
$
27,330
 
 
 
See Notes to Consolidated Financial Statements
 
 
7

 
 
Consolidated Statements of Cash Flows
Six months ended June 30, 2012 and 2011(Unaudited)
(Dollars in thousands)
 
 
 
2012
   
2011
 
Cash flows from operating activities
 
             
Net income (loss)
 
$
(667)
 
 
$
270
 
Adjustments to reconcile net income (loss) to net cash provided by operations:
 
             
Depreciation
 
 
460
 
   
433
 
Provision for loan losses
 
 
2,585
 
   
1,866
 
Gain on sale of securities
   
 
   
(257)
 
Loss (gain) on sale of property and equipment
 
 
(8)
 
   
4
 
Income earned on bank owned life insurance
 
 
(69)
     
(72)
 
Losses and writedowns on foreclosed assets
 
 
228
 
   
252
 
Deferred income tax (benefit) expense
 
 
(315)
 
   
543
 
Employee Stock Ownership Plan accrual
   
 
   
(875)
 
Origination of loans held for sale
 
 
(575)
     
 
Net accretion of discounts and premiums on securities
 
 
23
     
(58)
 
Changes in assets and liabilities:
 
             
Income taxes payable
 
 
(394)
     
(1,169)
 
Accrued income
 
 
155
     
(62)
 
Other assets
 
 
210
     
172
 
Accrued interest payable
 
 
 
   
34
 
Other liabilities
 
 
438
 
   
3
 
Net cash provided by operating activities
 
 
2,071
 
   
1,084
 
     
Cash flows from investing activities
 
             
Activity in available-for-sale securities:
 
             
Purchases
 
 
(6,249)
 
   
(9,120)
 
Sales
   
 
   
2,195
 
Maturities and repayments
 
 
7,821
 
   
5,421
 
Activity in held-to-maturity securities:
 
             
Maturities and repayments
 
 
786
 
   
1,211
 
Time deposit maturities
 
 
1,050
     
1,514
 
Redemptions of Federal Home Loan Bank stock
   
207
     
93
 
Net decrease (increase) in loans
 
 
(6,203)
 
   
1,576
 
Purchases of property and equipment
 
 
(312)
     
(367)
 
Proceeds from sale of property and equipment
 
 
28
 
   
2
 
Proceeds from sale of foreclosed assets
 
 
745
 
   
756
 
Net cash used in investing activities
 
 
(2,127)
 
   
3,281
 
     
Cash flows from financing activities
 
             
Net decrease in deposits
 
 
(425)
 
   
(900)
 
Dividends paid on preferred stock
 
 
(193)
     
(193)
 
Net cash used in financing activities
 
 
(618)
 
   
(1,093)
 
Net decrease in cash and cash equivalents
 
 
(674)
 
   
3,272
 
Cash and cash equivalents, beginning
 
 
21,443
 
   
14,156
 
Cash and cash equivalents, ending
 
$
20,769
 
 
$
17,428
 
 
See Notes to Consolidated Financial Statements
 
 
8

 
 
Consolidated Statements of Cash Flows
Six months ended June 30, 2012 and 2011 (Unaudited)
(Dollars in thousands)
 
 
 
2012
 
 
2011
 
Supplemental disclosure of cash flow information
 
     
 
     
Cash paid for:
 
     
 
     
Interest
 
$
1,335
 
 
$
1,788
 
Taxes
 
$
125
 
 
$
693
 
 
 
     
 
     
Non-cash investing and financing activities
 
     
 
     
Foreclosed assets acquired in settlement of loans
 
$
803
 
 
$
714
 
 
See Notes to Consolidated Financial Statements
 
 
9

 
 
Notes to Consolidated Financial Statements
 
1.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
(A)       Consolidation
 
The consolidated financial statements include the accounts of Oak Ridge Financial Services, Inc. (“Oak Ridge”) and its wholly-owned subsidiary, Bank of Oak Ridge (the “Bank”) (collectively referred to hereafter as the “Company”). The Bank has one wholly-owned subsidiary, Oak Ridge Financial Corporation, which is currently inactive. All significant inter-company transactions and balances have been eliminated in consolidation.
 
(B)       Basis of Financial Statement Presentation
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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 the reported amounts of income and expenses for the periods presented. In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the six month period ended June 30, 2012, in conformity with GAAP. Actual results could differ significantly from those estimates. Operating results for the six month period ended June 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012.
 
The consolidated balance sheet as of December 31, 2011 has been derived from audited financial statements. The unaudited financial statements of the Company have been prepared in accordance with instructions from Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) considered necessary for a fair presentation have been included.
 
The organization and business of the Company, accounting policies followed by the Company and other relevant information are contained in the notes to the financial statements filed as part of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “Annual Report”). This quarterly report should be read in conjunction with the Annual Report.
 
Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and the valuation of the deferred tax asset.
 
Substantially all of the Company’s loan portfolio consists of loans in its market area. Accordingly, the ultimate collectability of a substantial portion of the Company’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions. The regional economy is diverse and is influenced by the manufacturing and retail segment of the economy.
 
While management uses available information to recognize loan and foreclosed real estate losses, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as a part of their routine examination process, periodically review the Company’s allowances for loan losses. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examinations. Because of these factors, it is reasonably possible that the allowances for loan losses may change materially in the near term.
 
(C)       Business
 
Oak Ridge is a bank holding company incorporated in North Carolina in April of 2007. The principal activity of Oak Ridge is ownership of the Bank. The Bank provides financial services through its branch network located in Guilford County, North Carolina. The Bank competes with other financial institutions and numerous other non-financial services commercial entities offering financial services products. The Bank is further subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. The Company has no foreign operations, and the Company’s customers are principally located in Guilford County, North Carolina, and adjoining counties.
 
 
10

 
 
(D)       Critical Accounting Policies
 
The Company’s financial statements are prepared in accordance with GAAP. The notes to the audited financial statements included in the Annual Report contain a summary of its significant accounting policies. Management believes the Company’s policies with respect to the methodology for the determination of the allowance for loan losses, and asset impairment judgments, such as the recoverability of intangible assets, involve a higher degree of complexity and require management to make difficult and subjective judgments that often require assumptions or estimates about highly uncertain matters. Accordingly, the Company considers the policies related to those areas as critical.
 
The allowance for loan losses (“AFLL”) is established through provisions for losses charged against income. Loan amounts deemed to be uncollectible are charged against the AFLL, and subsequent recoveries, if any, are credited to the allowance. The AFLL represents management’s estimate of the amount necessary to absorb estimated probable losses in the loan portfolio. Management’s periodic evaluation of the adequacy of the AFLL is based on individual loan reviews, past loan loss experience, economic conditions in the Company’s market areas, the fair value and adequacy of underlying collateral, and the growth and loss attributes of the loan portfolio. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Thus, future changes to the AFLL may be necessary based on the impact of changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s AFLL. Such agencies may require the Company to recognize adjustments to the AFLL based on their judgments about information available to them at the time of their examination.
 
The AFLL related to loans that are identified for evaluation and deemed impaired is based on discounted cash flows using the loan’s initial effective interest rate, the loan’s observable market price, or the fair value of the collateral for collateral dependent loans. Another component of the AFLL covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is also maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
 
(E)       Net Income Per Common Share
 
The computation of diluted earnings per common share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares.
 
In computing diluted net income per common share, it is assumed that all dilutive stock options are exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and the number of shares bought back is added to the number of weighted-average common shares outstanding during the period. The sum is used as the denominator to calculate diluted net income per share for the Company. As of June 30, 2012 and 2011 the warrant issued to the U.S. Treasury, covering approximately 164,000 shares, was not included in the computation of diluted net income per share for the period because its exercise price exceeded the average market price of the Company’s stock for the period.
 
At June 30, 2012 and 2011, all exercisable options had an exercise price greater than the average market price for the year and were not included in computing diluted earnings per share.
 
(F)       Reclassifications
 
Certain prior year amounts have been reclassified in the consolidated financial statements to conform with the current year presentation. The reclassifications had no effect on previously reported net income or stockholders’ equity.
 
 
11

 
 
(G)       Recent Accounting Pronouncements
 
The following is a summary of recent authoritative pronouncements:

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

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

The Comprehensive Income topic of the ASC was amended in June 2011.  The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and requires consecutive presentation of the statement of net income and other comprehensive income.  The amendments were applicable to the Company on January 1, 2012 and have been applied retrospectively.  In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements.  Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates future requirements.
 
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
 
(H)       Subsequent Events
 
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued.
 
 
12

 
 
2.         INVESTMENT SECURITIES
 
The amortized cost and fair value of securities, with gross unrealized gains and losses, follows (dollars in thousands):
 
 
 
June 30, 2012
 
 
 
Amortized
Cost
 
 
Gross
Unrealized
Gains
 
 
Gross
Unrealized
Losses
   
Fair
Value
 
Available-for-sale
 
     
 
     
 
             
Government-sponsored enterprise securities
 
$
1,026
 
 
$
68
 
 
$
 
 
$
1,094
 
FNMA or GNMA mortgage-backed securities
 
 
12,517
 
 
 
426
 
 
 
(140)
     
12,803
 
Private label mortgage-backed securities
 
 
9,997
 
 
 
345
 
 
 
(127)
     
10,215
 
Municipal securities
 
 
12,928
 
 
 
1,002
 
 
 
     
13,930
 
SBA debentures
 
 
10,505
 
 
 
691
 
 
 
 
   
11,196
 
Other domestic debt securities
 
 
500
 
 
 
 
 
 
 
   
500
 
Total securities available-for-sale
 
$
47,473
 
 
$
2,532
 
 
$
(267)
   
$
49,738
 
 
 
     
 
     
 
             
Held-to-maturity
 
     
 
     
 
             
Private label mortgage-backed securities
 
$
4,667
 
 
$
97
 
 
$
(231)
   
$
4,533
 
Total securities available-for-sale
 
$
4,667
 
 
$
97
 
 
$
(231)
   
$
4,533
 
 
 
  
December 31, 2011
 
 
  
Amortized
Cost
 
  
Gross
Unrealized
Gains
 
  
Gross
Unrealized
Losses
   
Fair
Value
 
Available-for-sale
  
     
  
     
  
             
Government-sponsored enterprise securities
  
$
2,029
  
  
$
99
  
  
$
—  
  
 
$
2,128
  
FNMA or GNMA mortgage-backed securities
  
 
15,703
  
  
 
488
  
  
 
(142)
  
   
16,049
  
Private label mortgage-backed securities
  
 
7,582
  
  
 
278
  
  
 
     (21)
  
   
7,839
  
Municipal securities
  
 
12,292
  
  
 
679
  
  
 
—  
  
   
12,971
  
SBA debentures
  
 
11,204
  
  
 
521
  
  
 
—  
     
11,725
  
Other domestic debt securities
  
 
500
  
  
 
—  
  
  
 
—  
  
   
500
  
Total securities available-for-sale
  
$
49,310
  
  
$
2,065
  
  
$
(163)
   
$
51,212
  
 
  
     
  
     
  
             
Held-to-maturity
  
     
  
     
  
             
Private label mortgage-backed securities
  
$
5,211
  
  
$
288
  
  
$
(295)
   
$
5,204
  
Total securities available-for-sale
  
$
5,211
  
  
$
288
  
  
$
(295)
   
$
5,204
  
 
Sub-investment grade available-for-sale and held-to-maturity private label mortgage-backed securities are analyzed on a quarterly basis for impairment by utilizing an independent third party that performs an analysis of the estimated principal the Bank is expected to collect in a number of different economic scenarios. The result of this analysis determines whether the Bank records an impairment loss on these securities. The Bank did not record impairment charges during the six months ended June 30, 2012 or the six months ended June 30, 2011. The Bank has recorded gross impairment charges of $177 thousand as of June 30, 2012.
 
The Bank had approximately $588 thousand at June 30, 2012 and $795 thousand at December 31, 2011 of investments in stock of the Federal Home Loan Banks (“FHLB”), which is carried at cost. On May 16, 2012, FHLB paid a dividend for the second quarter of 2012 based on an annualized dividend rate of 1.51%. Management believes that its investment in FHLB stock was not other-than-temporarily impaired as of June 30, 2012. However, there can be no assurance that the impact of recent or future legislation on the FHLB will not also cause a decrease in the value of the FHLB stock held by the Company. Investment securities with amortized costs of $4.7 million and $3.8 million at June 30, 2012 and December 31, 2011, respectively, were pledged as collateral on public deposits or for other purposes as required or permitted by law.
 
The Company had no gross realized gains on the sale of securities for the six months ended June 30, 2012 and gross realized gains of $257 thousand for the six months ended June 30, 2011.
 
 
13

 
 
The following tables detail unrealized losses and related fair values in the Company’s held-to-maturity and available-for-sale investment securities portfolios at June 30, 2012 and December 31, 2011. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of June 30, 2012 and December 31, 2011 (dollars in thousands).
 
2.           INVESTMENT SECURITIES, CONTINUED

 
 
Less Than 12 Months
   
12 Months or Greater
   
Total
 
 
 
Fair
Value
 
 
Unrealized
Losses
   
Fair
Value
 
 
Unrealized
Losses
   
Fair
Value
 
 
Unrealized
Losses
 
June 30, 2012
 
     
 
             
 
             
 
     
Available-for-sale
 
     
 
             
 
             
 
     
Government sponsored enterprise securities
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
FNMA or GNMA mortgage-backed securities
 
 
1,582
 
 
 
(11)
     
3,798
 
 
 
(129)
 
   
5,380
 
 
 
(140)
 
Private label mortgage-backed securities
 
 
3,708
 
 
 
(127)
     
 
 
 
 
   
3,708
 
 
 
(127)
 
Municipal Securities
 
 
 
 
 
     
 
 
 
 
   
 
 
 
 
SBA debentures
 
 
 
 
 
 
   
 
 
 
 
   
 
 
 
 
Other domestic debt securities
 
 
 
 
 
 
   
 
 
 
 
   
 
 
 
 
Total temporarily impaired securities
 
$
5,290
 
 
$
(138)
   
$
3,798
 
 
$
(129)
 
 
$
9,088
 
 
$
(267)
 
 
 
     
 
             
 
             
 
     
Held-to-maturity
 
     
 
             
 
             
 
     
Private label mortgage-backed securities
 
$
826
 
 
$
(115)
   
$
1,750
 
 
$
(116)
   
$
2,576
 
 
$
(231)
 
Total temporarily impaired securities
 
$
826
 
 
$
(115)
   
$
1,750
 
 
$
(116)
   
$
2,576
 
 
$
(231)
 
 
 
 
Less Than 12 Months
   
12 Months or Greater
   
Total
 
 
 
Fair
Value
 
 
Unrealized
Losses
   
Fair
Value
 
 
Unrealized
Losses
   
Fair
Value
 
 
Unrealized
Losses
 
December 31, 2011
 
     
 
             
 
             
 
     
Available-for-sale
 
     
 
             
 
             
 
     
Government sponsored enterprise securities
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
 
$
 
FNMA or GNMA mortgage-backed securities
 
 
4,196
 
 
 
(83)
 
   
2,632
 
 
 
(59)
 
   
6,828
 
 
 
(142)
 
Private label mortgage-backed securities
 
 
3,167
 
 
 
(21)
 
   
 
 
 
 
   
3,167
 
 
 
(21)
 
SBA debentures
 
 
 
 
 
     
 
 
 
 
   
 
 
 
 
Other domestic debt securities
 
 
 
 
 
 
   
 
 
 
 
   
 
 
 
 
Total temporarily impaired securities
 
$
7,363
 
 
$
(104)
   
$
2,632
 
 
$
(59)
 
 
$
9,995
 
 
$
(163)
 
 
 
     
 
             
 
             
 
     
Held-to-maturity
 
     
 
             
 
             
 
     
Private label mortgage-backed securities
 
$
 
 
$
 
 
$
1,835
 
 
$
(295)
   
$
1,835
 
 
$
(295)
 
Total temporarily impaired securities
 
$
 
 
$
 
 
$
1,835
 
 
$
(295)
   
$
1,835
 
 
$
(295)
 
 
At June 30, 2012, the unrealized losses in the available-for-sale portfolio relate to six FNMA mortgage-backed-securities. All of these securities are above investment grade and management believes the deterioration in value is attributable to changes in market interest rates. The Company expects these securities to be paid in full and that any temporary impairment will be fully recoverable prior to or at maturity. Additionally, there are two available-for-sale private label mortgage-backed securities with market values less than amortized cost. These securities are rated AAA, by Standard and Poor’s. Therefore, the Company believes the deterioration in value is attributable to changes in market rates, and expects these security to be paid in full and that any temporary impairment will be fully recoverable prior to or at maturity. Lastly, there are three held-to-maturity private label mortgage-backed securities with credit ratings of B3, Caa2 and Caa2 by Moody’s as of June 30, 2012. Sub-investment grade available-for-sale and held-to-maturity private label mortgage-backed securities are analyzed on a quarterly basis for impairment by utilizing an independent third party that performs an analysis of the estimated principal the Company is expected to collect over the life of these securities. The result of this analysis determines whether the Company records an impairment loss on these securities. The most recent impairment testing performed as of June 30, 2012 indicated that projected principal repayments on these private label mortgage-backed-securities were in excess of their recorded values on that same date. As of June 30, 2012, management does not have the intent to sell any of the securities classified as available-for-sale in the table above and believes it is more likely than not that the Company will not have to sell any such securities before a recovery of the cost. The unrealized losses are largely due to increases in the market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or re-pricing date or if market yields for such securities decline.
 
 
14

 
 
2.           INVESTMENT SECURITIES, CONTINUED
 
At December 31, 2011, the unrealized losses in the available-for-sale portfolio relate to five FNMA mortgage-backed-securities. All of these securities are above investment grade and management believes the deterioration in value is attributable to changes in market interest rates. The Company expects these securities to be paid in full and that any temporary impairment will be fully recoverable prior to or at maturity.  In the held-to-maturity portfolio there are two held-to-maturity mortgage-backed securities with credit ratings of B. The private label held-to-maturity securities are rated Caa2 by Moody’s as of December 31, 2011.  Subinvestment grade available-for-sale and held-to-maturity private label mortgage-backed securities are analyzed on a quarterly basis for impairment by utilizing an independent third party that performs an analysis of the estimated principal the Bank is expected to collect over the life of these securities. The result of this analysis determines whether the Bank records an impairment loss on these securities. The most recent impairment testing performed as of December 31, 2011 indicated that projected principal repayments on both securities were in excess of their recorded values on that same date. As of December 31, 2011, management does not have the intent to sell any of the securities classified as available-for-sale in the table above and believes it is more likely than not that the Company will not have to sell any such securities before a recovery of the cost. The unrealized losses are largely due to increases in the market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or re-pricing date or if market yields for such securities decline.
 
Maturities of mortgage-backed securities are presented based on contractual amounts. Actual maturities will vary as the underlying loans prepay. The scheduled maturities of securities at June 30, 2012 were as follows (dollars in thousands):
 
 
 
Available-for-Sale
 
 
Held-to-Maturity
 
 
 
Amortized
Cost
 
 
Fair
Value
 
 
Amortized
Cost
 
 
Fair
Value
 
Due in one year or less
 
$
 
 
$
 
 
$
 
 
$
 
Due after one year through five years
 
 
2,293
 
 
 
2,374
 
 
 
 
 
 
 
Due after five years through ten years
 
 
15,165
 
 
 
16,096
 
 
 
 
 
 
 
Due after ten years
 
 
30,015
 
 
 
31,268
 
 
 
4,667
 
 
 
4,533
 
 
 
$
47,473
 
 
$
49,738
 
 
$
4,667
 
 
$
4,533
 
 
 
15

 
 
3.       ALLOWANCE FOR LOAN LOSSES
 
The following table summarizes the balances by loan category of the allowance for loan losses with changes arising from charge-offs, recoveries and provision expense for the six months ending June 30, 2012 and 2011 (dollars in thousands):
 
For the six months ended June 30, 2012
 
Allowance for Loan Losses
 
Commercial
   
Real estate Construction and Development
   
Residential,
one-to-four
families
   
Residential, 5 or more
families
   
Other commercial real estate
   
Agricultural
   
Consumer
   
Total
 
Allowance for credit losses:
                                               
Beginning balance
  $ 200     $ 2,072     $ 875     $ 380     $ 892     $ 4     $ 23     $ 4,446  
Charge-offs
    (861 )     (400 )     (1,056 )           (400 )           (13 )     (2,730 )
Recoveries
          1       2       95       36             2       136  
Provision
    1,145       (12 )     1,399       (339 )     379             13       2,585  
                                                                 
Ending balance
  $ 484     $ 1,661     $ 1,220     $ 136     $ 907       4     $ 25     $ 4,437  


For the six months ended June 30, 2011

Allowance for Loan Losses
 
Commercial
   
Real estate Construction and Development
   
Residential,
one-to-four
families
   
Residential,
5 or more
families
   
Other commercial real estate
   
Agricultural
   
Consumer
   
Total
 
Allowance for credit losses:
                                               
Beginning balance
  $ 815     $ 1,970     $ 1,237     $ 120     $ 208     $ 1     $ 24     $ 4,375  
Charge-offs
    (585 )     (1,055 )     (218 )                       (14 )     (1,872 )
Recoveries
    123                                     8       131  
Provision
    132       1,310       (82 )     (16 )     514       1       7       1,866  
                                                                 
Ending balance
  $ 485     $ 2,225     $ 937     $ 104     $ 722     $ 2     $ 25     $ 4,500  
 
 
16

 
 
3.    ALLOWANCE FOR LOAN LOSSES, CONTINUED
The following tables list the loan grades utilized by the Company that serve as credit quality indicators. Loans graded as pass are generally loans that require either minimal or no supervision by the Bank and are supported by either or both the borrower(s) and guarantor(s) debt capacity and liquidity. Loans graded special mention are generally characterized by negative conditions, that if not remedied, will be inadequate to protect the Bank’s credit position at some future date. Loans graded as substandard are those where the Bank is inadequately protected by sound net worth and paying capacity of the borrower(s) and guarantor(s). The total balance does not include the undisbursed portion of construction loans in process for loans graded Pass.

As of June 30, 2012 (dollars in thousands):
 
 
 
Pass
 
 
Special
Mention
 
 
Substandard
and lower
 
 
Total
 
Commercial
 
$
32,677
 
 
$
3,359
 
 
$
789
 
 
$
36,825
 
Real estate construction and development
 
 
28,479
 
 
 
5,710
 
 
 
3,828
 
 
 
38,017
 
Residential, one-to-four families
 
 
84,993
 
 
 
1,976
 
 
 
1,561
 
 
 
88,530
 
Residential, 5 or more families
 
 
1,575
 
 
 
328
 
 
 
13
 
 
 
1,916
 
Other commercial real estate
 
 
76,825
 
 
 
6,962
 
 
 
5,413
 
 
 
89,200
 
Agricultural
 
 
2,738
 
 
 
 
 
 
 
 
 
2,738
 
Consumer
 
 
2,245
 
 
 
8
 
 
 
 
 
 
2,253
 
 
 
     
 
     
 
     
 
     
Total
 
$
229,532
 
 
$
18,343
 
 
$
11,604
 
 
$
259,479
 
  
As of December 31, 2011 (dollars in thousands):
 
 
 
Pass
 
 
Special
Mention
 
 
Substandard
and lower
 
 
Total
 
Commercial
 
$
32,467
 
 
$
1,957
 
 
$
1,642
 
 
$
36,066
 
Real estate construction and development
 
 
28,969
 
 
 
8,283
 
 
 
4,043
 
 
 
41,295
 
Residential, one-to-four families
 
 
76,638
 
 
 
2,829
 
 
 
1,898
 
 
 
81,365
 
Residential, 5 or more families
 
 
4,502
 
 
 
848
 
 
 
793
 
 
 
6,143
 
Other commercial real estate
 
 
73,999
 
 
 
4,846
 
 
 
6,624
 
 
 
85,469
 
Agricultural
 
 
2,876
 
 
 
 
 
 
 
 
 
2,876
 
Consumer
 
 
2,111
 
 
 
13
 
 
 
 
 
 
2,124
 
 
 
     
 
     
 
     
 
     
Total
 
$
221,562
 
 
$
18,776
 
 
$
15,000
 
 
$
255,338
 
 
 
17

 
 
3.     ALLOWANCE FOR LOAN LOSSES, CONTINUED

The following table summarizes the past due loans by category as of June 30, 2012 (dollars in thousands):
 
 
 
30-89
Days
Past Due
 
 
Greater than
90 Days Past
Due
(Nonaccrual)
 
 
Total
Past
Due
 
 
Current
 
 
Total
loans
 
 
Past due
90 days
or more
and still
accruing
 
Commercial
 
$
74
 
 
$
486
 
 
$
560
 
 
$
36,265
 
 
$