oak_10q-063012.htm

10-Q 1 oak_10q-063012.htm FORM 10-Q oak_10q-063012.htm

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.

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

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

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

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

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

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

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

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.

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.

(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.

(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.

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.

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.

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

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

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

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	$	36,825	$	—
Real estate construction and development		2,080		1,321		3,401		34,616		38,017		86
Residential, one-to-four families		688		1,765		2,453		86,076		88,529		50
Residential, 5 or more families		—		13		13		1,903		1,916		—
Other commercial real estate		531		5,171		5,702		83,499		89,201		131
Agricultural		—		—		—		2,738		2,738		—
Consumer		8		—		8		2,245		2,253		—

Total	$	3,381	$	8,756	$	12,137	$	247,342	$	259,479	$	267

The following table summarizes the past due loans by category as of December 31, 2011 (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	$	15	$	70	$	85	$	35,979	$	36,066	$	—
Real estate construction and development		816		690		1,506		39,789		41,295		—
Residential, one-to-four families		1,620		754		2,374		78,989		81,365		—
Residential, 5 or more families		—		793		793		5,352		6,143		—
Other commercial real estate		1,515		2,300		3,815		81,656		85,469		—
Agricultural		—		—		—		2,876		2,876		—
Consumer		13		—		13		2,111		2,124		—

Total	$	3,979	$	4,607	$	8,586	$	246,752	$	255,338	$	—

3. ALLOWANCE FOR LOAN LOSSES, CONTINUED

The following table summarizes the allowance for loan losses and recorded investment in loans as of June 30, 2012 (dollars in thousands):

	Allowance for Loan Losses						Recorded Investment in Loans
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Commercial	$	—	$	484	$	484	$	675	$	36,150	$	36,825
Real estate construction and development		101		1,560		1,661		3,675		34,342		38,017
Residential, one-to-four families		—		1,220		1,220		—		88,529		88,529
Residential, 5 or more families		—		136		136		1,068		848		1,916
Other commercial real estate		—		907		907		5,402		83,799		89,201
Agricultural		—		4		4		—		2,738		2,738
Consumer		—		25		25		—		2,253		2,253

Total	$	101	$	4,336	$	4,437	$	10,820	$	248,659	$	259,479

The following table summarizes the allowance for loan losses and recorded investment in loans as of December 31, 2011 (dollars in thousands):

	Allowance for Loan Losses						Recorded Investment in Loans
	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Commercial	$	—	$	200	$	200	$	1,275	$	34,789	$	36,066
Real estate construction and development		301		1,771		2,072		4,583		36,712		41,295
Residential, one-to-four families		1		874		875		1,230		80,133		81,365
Residential, 5 or more families		—		380		380		765		5,380		6,143
Other commercial real estate		72		820		892		6,240		79,231		85,469
Agricultural		—		4		4		—		2,876		2,876
Consumer		—		23		23		—		2,124		2,124

Total	$	374	$	4,072	$	4,446	$	14,093	$	241,245	$	255,338

3. ALLOWANCE FOR LOAN LOSSES, CONTINUED

Total nonaccrual loans will not equal loans individually evaluated for impairment as loans that are current or less than 90 days past due may still be considered impaired by management, even though it has been determined that there is no estimated loss of principal or interest on the underlying loan.

The following table presents impaired loans as of June 30, 2012 (dollars in thousands):

	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial	$	674	$	1,524	$	—
Real estate construction and development		2,411		3,172		—
Residential, one-to-four families		1,068		1,403		—
Residential, 5 or more families		—		—		—
Other commercial real estate		5,402		6,051		—
Agricultural		—		—		—
Consumer		—		—		—
Total impaired loans with no related allowance recorded	$	9,555	$	12,150	$	—
With an allowance recorded:
Commercial	$	—	$	—	$	—
Real estate construction and development		1,264		1,265		101
Residential, one-to-four families		—		—		—
Residential, 5 or more families		—		—		—
Other commercial real estate		—		—		—
Agricultural		—		—		—
Consumer		—		—		—
Total impaired loans with allowance recorded	$	1,264	$	1,265	$	101
Total
Commercial	$	674	$	1,524	$	—
Real estate construction and development		3,675		4,437		101
Residential, one-to-four families		1,068		1,403		—
Residential, 5 or more families		—		—		—
Other commercial real estate		5,402		6,051		—
Total impaired loans	$	10,819	$	13,415	$	101

The following table presents impaired loans as of December 31, 2011 (dollars in thousands):

	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial	$	1,275	$	1,275	$	—
Real estate construction and development		3,227		3,988		—
Residential, one-to-four families		1,206		1,206		—
Residential, 5 or more families		765		1,289		—
Other commercial real estate		6,017		6,547		—
Agricultural		—		—		—
Consumer		—		—		—
Total impaired loans with no related allowance recorded	$	12,490	$	14,305	$	—
With an allowance recorded:
Commercial	$	—	$	—	$	—
Real estate construction and development		1,355		1,355		301
Residential, one-to-four families		24		24		1
Residential, 5 or more families		—		—		—
Other commercial real estate		223		223		72
Agricultural		—		—		—
Consumer		—		—		—
Total impaired loans with allowance recorded	$	1,602	$	1,602	$	374
Total
Commercial	$	1,275	$	1,275	$	—
Real estate construction and development		4,583		5,343		301
Residential, one-to-four families		1,230		1,230		1
Residential, 5 or more families		765		1,289		—
Other commercial real estate		6,240		6,770		72
Total impaired loans	$	14,093	$	15,907	$	374

4. TROUBLED DEBT RESTRUCTURINGS

The total amount of troubled debt restructured loans outstanding as of June 30, 2012 was $5.7 million with no related reserves. There were no troubled debt restructured loans during the three- and six-months ended June 30, 2012. When restructuring loans the Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Reductions in the recorded investment are primarily due to the partial charge-off of the principal balance prior to modification.

There were no loans that were modified as troubled debt restructurings during the past twelve months for which there was a payment default during the three- and six-months ended June 30, 2012.

5. JUNIOR SUBORDINATED DEBENTURES

In 2007, the Company issued $8,248,000 of junior subordinated debentures to Oak Ridge Statutory Trust I (the “Trust”) in exchange for the proceeds of trust preferred securities issued by the Trust. The junior subordinated debentures are included in long-term debt and the Company’s equity interest in the Trust is included in other assets.

The Trust was created by the Company on September 28, 2007, at which time the Trust issued $8.0 million in aggregate liquidation amount of $1 par value preferred capital trust securities which mature September 28, 2037. Distributions are payable on the securities at the floating rate equal to the three-month London Interbank Offered Rate (“LIBOR”) plus 1.60%, and the securities may be prepaid at par by the Trust at any time after September 28, 2012. The principal assets of the Trust are $8.3 million of the Company’s junior subordinated debentures which mature on September 28, 2037, and bear interest at the floating rate equal to the three-month LIBOR plus 1.60%, and which are callable by the Company after September 28, 2012. All $248 thousand in the aggregate liquidation amount of the Trust’s common securities are held by the Company.

6. STOCK OPTION AND RESTRICTED STOCK PLANS

The Company has adopted both the Employee Stock Option Plan (Incentive Plan) and the Director Stock Option Plan (Nonstatutory Plan). Under each plan up to 178,937 shares may be issued for a total of 357,874 shares. Both of these plans expired on September 30, 2010. Options that were granted under both plans expire no more than 10 years from date of grant. Option exercise prices under both plans were set by a committee of the Board of Directors at the date of grant, but were not less than 100% of fair market value at the date of the grant. Options granted under either plan vest according to the terms of each particular grant.

During 2006, the Company adopted the Long-Term Stock Incentive Plan, which became effective on April 20, 2007. The Plan provides for the issuance of up to an aggregate of 500,000 shares of common stock in the form of stock options, restricted stock awards and performance unit awards. The Long-Term Stock Incentive Plan expires on April 20, 2017.

Compensation cost for the plans above charged to income for the six months ended June 30, 2012 and 2011 was approximately $19 thousand and $31 thousand, respectively.

Stock Options

Stock options may be issued as incentive stock options or as nonqualified stock options. The term of the option will be established at the time it is granted but shall not exceed ten years. Vesting will also be established at the time the option is granted. The exercise price may not be less than the fair market value of a share of common stock on the date the option is granted. It is the Company’s policy to issue new shares of stock to satisfy option exercises.

Restricted Stock Awards

Restricted stock awards are subject to restrictions and the risk of forfeiture if conditions stated in the award agreement are not satisfied at the end of a restriction period. During the restriction period, restricted stock covered by the award will be held by the Company. If the conditions stated in the award agreement are satisfied at the end of the restriction period, the restricted stock will become unrestricted and the certificate evidencing the stock will be delivered to the employee.

A summary of the status of stock options as of June 30, 2012 and 2011, and changes during the years then ended, is presented below:

A summary of the status of outstanding stock options as of June 30, 2012 and 2011, and changes during the periods then ended, is presented below:

	2012				2011
	Number		Weighted Average Option Price		Number		Weighted Average Option Price
Options outstanding, beginning of year		232,190	$	9.68		318,708	$	9.47
Granted		—		—		—		—
Forfeited		—		—		—		—
Expired		—		—		(88,281)		8.80
Options outstanding, end of period		232,190	$	9.68		230,427	$	9.73

Information regarding the stock options outstanding and exercisable at June 30, 2012 is as follows (dollars in thousands):

Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Aggregate Intrinsic Value
$ 4.50		19,500	8.17 Years	$	4.82	$	—
$10.00-10.39		120,031	2.17 Years		10.00		—
$10.40-11.20		86,896	1.92 Years		10.68		—
		226,190	2.59 Years	$	9.81	$	—

6. STOCK OPTION AND RESTRICTED STOCK PLANS, CONTINUED

Information regarding the stock options outstanding and exercisable as of June 30, 2011 is as follows:

Range of Exercise Prices	Number Outstanding		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Aggregate Intrinsic Value
$10.00-10.39		119,794	3.17 Years		10.00		—
$10.40-11.20		86,896	2.92 Years		10.68		—
		206,690	3.06 Years	$	9.84	$	—

No options were granted or contractually vested for the six months ended June 30, 2012 and 2011.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company utilizes fair value measurements to record fair value adjustments for certain assets and to determine fair value disclosures. Available-for-sale securities and forward sale loan commitments are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record other assets at fair value, such as loans held-for-investment and certain other assets. These nonrecurring fair value adjustments usually involve writing the asset down to fair value or the lower of cost or market value.

Fair Value Hierarchy

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1	Valuation is based upon quoted prices for identical instruments traded in active markets.

Level 2	Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3	Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Following is a description of valuation methodologies used for assets recorded at fair value.

Available-for-Sale Investment Securities

Available-for-sale investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities and private label entities, municipal bonds and corporate debt securities. There have been no changes in valuation techniques for the quarter ended June 30, 2012. Valuation techniques are consistent with techniques used in prior periods.

7. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED

Mortgage Loans Held-for-Sale

Loans held-for-sale are carried at lower of cost or market value. The fair value of loans held-for-sale is based on what secondary markets are currently offering for portfolios with similar characteristics. The changes in fair value of the assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage loan held for sale. As such, the Company classifies loans measured at fair value on a nonrecurring basis as a Level 2 asset. At June 30, 2012 the cost of the Company's mortgage loans held-for-sale approximated the market value. Accordingly, the Company's loans held-for-sale are carried at cost. There have been no changes in valuation techniques for the quarter ended June 30, 2012. Valuation techniques are consistent with techniques used in prior periods.

Impaired Loans

The Company does not record loans held-for-investment at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with the Receivables topic of the FASB Accounting Standards Codification. The fair value of impaired loans is estimated using one of several methods, including collateral value (through appraisal processes), market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2012, all of the impaired loans were evaluated based on the fair value of the collateral. The Company records impaired loans as nonrecurring Level 3. There have been no changes in valuation techniques for the quarter ended June 30, 2012. Valuation techniques are consistent with techniques used in prior periods.

Other Real Estate Owned

Other real estate owned (“OREO”) is adjusted to fair value upon transfer of the loans to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral. When the fair value of the collateral is measured due to further deterioration in the value of the OREO since initial recognition, the Company records the foreclosed asset as nonrecurring Level 3. The current carrying value of OREO at June 30, 2012 is $2.1 million. At December 31, 2011 the carrying value of OREO was $2.2 million. There have been no changes in valuation techniques for the quarter ended June 30, 2012. Valuation techniques are consistent with techniques used in prior periods.

The following tables present assets measured at fair value on a recurring basis:

June 30, 2012 (Dollars in thousands)	Total		Level 1		Level 2		Level 3
Government-sponsored enterprise securities	$	1,094	$	—	$	1,094	$	—
FNMA or GNMA mortgage-backed securities		12,803		—		12,803		—
Private label mortgage-backed securities		10,215		—		10,215		—
Municipal securities		13,930		—		13,930		—
SBA debentures		11,196		—		11,196		—
Other domestic debt securities		500		—		—		500
Investment securities available-for-sale	$	49,738	$	—	$	49,238	$	500
Total assets at fair value	$	49,738	$	—	$	49,238	$	500
Total liabilities at fair value	$	—	$	—	$	—	$	—

December 31, 2011 (Dollars in thousands)	Total		Level 1		Level 2		Level 3
Government-sponsored enterprise securities	$	2,128	$	—	$	2,128	$	—
FNMA or GNMA mortgage-backed securities		16,049		—		16,049		—
Private label mortgage-backed securities		7,839		—		7,839		—
Municipal securities		12,971		1,914		11,057		—
SBA debentures		11,725		—		11,725		—
Other domestic debt securities		500		—		—		500
Investment securities available-for-sale	$	51,212	$	1,914	$	48,798	$	500
Total assets at fair value	$	51,212	$	1,914	$	48,798	$	500
Total liabilities at fair value	$	—	$	—	$	—	$	—

7. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED

Assets recorded at fair value on a nonrecurring basis

June 30, 2012 (Dollars in thousands)	Total		Level 1		Level 2		Level 3
Construction and development loans	$	1,264	$	—	$	—	$	1,264
Impaired loans receivable		1,264		—		—		1,264
Foreclosed assets		1,938		—		—		1,938
Total assets at fair value	$	3,202	$	—	$	—	$	3,202
Total liabilities at fair value	$	—	$	—	$	—	$	—

December 31, 2011 (Dollars in thousands)	Total		Level 1		Level 2		Level 3
Construction and development loans	$	702	$	—	$	—	$	702
Land and acquisition and development loans		653		—		—		653
Closed-end first lien loans secured by one-to-four family residential properties		24		—		—		24
Secured by nonfarm nonresidential properties		223		—		—		223
Impaired loans receivable		1,602		—		—		1,602
Foreclosed assets		2,216		—		—		2,216
Total assets at fair value	$	3,818	$	—	$	—	$	3,818
Total liabilities at fair value	$	—	$	—	$	—	$	—

The following table provides Quantitative Information about Level 3 Fair Value Measurements

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

Impaired Loans	$	1,264	Appraised Value	Appraisals and/or sales of comparable properties		n/a

Foreclosed assets	$	1,938	Appraised Value/ Comparable Sales/ Other Estimates from Independent Sources	Appraisals and/or sales of comparable properties/ Independent quotes/bids		n/a

7. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to other real estate owned. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

The following table presents the carrying values and estimated fair values of the Company’s financial instruments at June 30, 2012 and December 31, 2011 (dollars in thousands):

	June 30, 2012
	Carrying amount		Estimated fair value		Level 1		Level 2		Level 3
	(Amounts in thousands)
Financial assets:
Cash and cash equivalents	$	20,769	$	20,769	$	20,769	$	—	$	—
Securities, available-for-sale		49,738		49,738		—		49,238		500
Securities, held-to-maturity		4,667		4,533		—		4,533		—
Federal Home Loan Bank stock		588		588		588		—		—
Loans, net of allowance for loan losses		253,627		256,277		—		—		256,277
Bank owned life insurance		5,008		5,008		—		—		5,008
Financial liabilities:
Deposits		313,486		316,362		—		316,362		—
Junior subordinated notes related to trust preferred securities		8,248		8,248		—		—		8,248

	December 31, 2011
	Carrying amount		Estimated fair value		Level 1		Level 2		Level 3
	(Amounts in thousands)
Financial assets:
Cash and cash equivalents	$	21,443	$	21,443	$	21,443	$	—	$	—
Time deposits		1,050		1,050		—		1,050		—
Securities, available-for-sale		51,212		51,212		1,914		48,798		500
Securities, held-to-maturity		5,211		5,204		—		5,204		—
Federal Home Loan Bank stock		795		795		795		—		—
Loans, net of allowance for loan losses		250,832		254,148		—		—		254,148
Bank owned life insurance		4,939		4,939		—		—		4,939
Financial liabilities:
Deposits		313,911		318,708		—		318,708		—
Junior subordinated notes related to trust preferred securities		8,248		8,248		—		—		8,248

7. FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED

The table below presents reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (level 3) during 2011 and 2012.

(Dollars in thousands)	Available-for Sale Securities
Balance, January 1, 2012	$	500
Total gains or losses (realized/unrealized):
Included in earnings		—
Included in other comprehensive income		—
Purchases, issuances, and settlements		—
Transfers in to/out of Level 3		—
Balance, June 30, 2012	$	500

(Dollars in thousands)	Available-for Sale Securities
Balance, January 1, 2011	$	500
Total gains or losses (realized/unrealized):
Included in earnings		—
Included in other comprehensive income		—
Purchases, issuances, and settlements		—
Transfers in to/out of Level 3		—
Balance, June 30, 2011	$	500

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

Management’s discussion and analysis is intended to assist readers in understanding and evaluating our consolidated financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.

We are a commercial bank holding company, incorporated in 2007. The accompanying consolidated financial statements include the accounts and transactions of the Company and its wholly-owned subsidiary, the Bank. All significant intercompany transactions and balances are eliminated in consolidation.

The Bank was incorporated and began banking operations in 2000. The Bank is engaged in commercial banking predominantly in Guilford and Forsyth Counties, North Carolina. The Bank is operating under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina Commissioner of Banks. The Bank’s primary source of revenue is derived from loans to customers, who are predominantly individuals and small to medium size businesses in Guilford County.

Executive Overview

Executive Summary

For the first six months of 2012, with the continuing impact of a sluggish economy, management has continued to focus on managing credit quality, building liquidity sources and managing capital. As always, we continue our on-going efforts of meeting the financial services needs of our customers and communities, especially in this challenging economic environment.

Managing Credit Quality

Senior management continues to work closely with credit administration and our lending staff to insure that adequate resources are in place to proactively manage through the current slowdown in the real estate markets and overall economy. When problems are identified, management remains diligent in assessing the situation, moving quickly to minimize losses, while being sensitive to the borrower’s effectiveness as an operator, the long-term viability of the business or project, and the borrower’s commitment to working with the Bank to achieve an acceptable resolution of the credit. As the economic slowdown has continued, we have experienced a rise in non-performing assets, and we address each situation on a case-by-case basis. When faced with possible loss situations, management may determine it is in the shareholders’ best long-term interest to work with the borrower or oversee a viable project through to completion.

Building Liquidity Sources

Management has continued to focus on providing additional liquidity sources, both on-balance sheet and off. During the six months ended June 30, 2012, we had a continued shift in our deposit mix as noninterest-bearing and interest-bearing checking accounts increased $253 thousand and $4.5 million, respectively, from year end 2011 to June 30, 2012, driven by what we believe was a move away from large financial institutions to smaller community banks like ours.

Managing Capital

The Company was able to bolster its capital levels through its $7.7 million participation in the Capital Purchase Program (“CPP”) on January 30, 2009. Of the total $7.7 million CPP funds received, to date $5.0 million of the CPP funds have been contributed to the Bank as additional equity capital. Approximately $2.7 million in unused capital are retained by the Company but could be pushed down to the Bank if needed. With total risk-based capital levels at the Bank of 13.6% at June 30, 2012, the Bank is above the minimum 10% requirement to be classified as well-capitalized. If the remaining $2.7 million of available capital at the Company were contributed to the Bank as additional equity capital, the Bank’s total risk-based capital ratio would be 14.7% at June 30, 2012 and would place it well above the minimum well-capitalized requirement of 10%. Despite healthy capital levels, due to significant uncertainty surrounding the depth or the length of the current economic slowdown, management continues to be diligent in its efforts to maintain healthy levels of excess capital above minimum requirements. In early 2011, the Company’s Board of Directors and senior executives had two separate presentations with investment firms to look at the feasibility of raising common equity to allow the Company to repay the U.S. Treasury for its $7.7 million investment in the Company through the CPP. The Company has concluded that at the current time it is not feasible, due to weak equity market conditions, or preferable, due to the potential dilution of current shareholders, to raise equity in the open markets. However, the Company established an Employee Stock Ownership Plan (“ESOP”) in the second quarter of 2010 as one possible vehicle to generate equity. During the year ended December 31, 2010, the Company, at the request of the Board of Directors, made a $900,000 pre-tax ESOP liability by expensing the plan that may be converted to common equity of the Company at a later date. The Company believes that there are many advantages to an ESOP as a vehicle to raise capital, with the principal ones being favorable tax treatment of ESOP contributions, possible lower dilution to existing shareholders’ compared to an equity offering, and the promotion in our marketplace of every employee as a participant in the ESOP owning a part of the Company.

Our core strategies are to: (1) grow the loan portfolio while improving asset quality by either improving or disposing of problem assets; (2) increase noninterest income; (3) grow core deposits; (4) manage expenses; and (5) make strategic investments in personnel and technology to increase revenue and increase efficiency.

Challenges

We have grown steadily since the opening of the Bank in April of 2000, and our business has become more dynamic and complex in recent years as we have enhanced or added delivery channels, products and services, and lines of businesses. While the achievement of our strategic initiatives and established long-term financial goals is subject to many uncertainties and challenges, management has identified the challenges that are most relevant and most likely to have a near-term effect on operations, which are presented below:

•

Continuing to maintain our asset quality, especially in an uncertain and weak economic environment;

•

Addressing the challenges associated with a weak economic environment in our geographic market;

•

Improving efficiency and controlling noninterest expenses;

•

Maintaining our net interest margin in the current interest rate environment;

•

Increasing core deposits;

•

Increasing interest and noninterest revenue;

•

Controlling costs associated with the current heightened regulatory environment;

•

Volatility in the mortgage banking business;

•

Competition from bank and nonbank financial service providers; and

•

Intense price competition.

Comparison of Results of Operations for the Three- and six- Month Periods Ending June 30, 2012 and 2011

Net Income

The following table summarizes components of income and expense and the changes in those components for the three- and six-month periods ended June 30, 2012 as compared to the same period in 2011.

Condensed Consolidated Statements of Income (Dollars in thousands)

	For the Three Months Ended			Changes from the Prior Year						For the Six Months Ended			Changes from the Prior Year
	June 30, 2012			Amount			%			June 30, 2012			Amount			%

Total interest income	$	3,969		$	(425	)		(9.7	)	$	8,125		$	(709	)		(8.0	)
Total interest expense		615			(266	)		(30.2	)		1,335			(487	)		(26.7	)

Net interest income		3,354			(159	)		(4.5	)		6,790			(222	)		(3.2	)
Provision for loan losses		2,021			760			60.3			2,585			719			38.5
Net interest income after provision for loan losses		1,333			(919	)		(40.8	)		4,205			(941	)		(18.3	)
Noninterest income		999			(138	)		(12.1	)		1,923			(34	)		(1.7	)
Noninterest expense		3,731			396			11.9			7,341			556			8.2
Income before income taxes		(1,399	)		(1,453	)		(2690.7	)		(1,213	)		(1,531	)		(481.4	)
Income tax expense		(579	)		(556	)		(2,417.4	)		(546	)		(594	)		(1,237.5	)
Net income		(820	)		(897	)		(1,164.9	)		(667	)		(937	)		(347.0	)
Preferred stock dividend and accretion of discount		(169	)		(6	)		(3.7	)		(338	)		(12	)		(3.7	)
Net income (loss) available to common shareholders	$	(989	)	$	(903	)		(1,050.0	)	$	(1,005	)	$	(949	)		(1,694.6	)

Results of Operations

Net loss for the quarter ended June 30, 2012 was $820 thousand before preferred dividends, compared to net income of $77 thousand in the same period of 2011. Net loss to common shareholders for the three-month periods ending June 30, 2012 and 2011 were $989 thousand and $86 thousand, respectively. Basic and diluted loss per common share was $0.55 and $0.05 for the three-month periods ending June 30, 2012.

Net loss for the six month period ended June 30, 2012 was $667 thousand before preferred dividends, compared to net income of $270 thousand in the same period of 2011. Net loss to common shareholders for the six-month periods ending June 30, 2012 and 2011 were $1.0 million and $56 thousand, respectively. Basic and diluted loss per common share was $0.56 and $0.03 for the six-month periods ending June 30, 2012.

Net Interest Income

Net interest income (the difference between the interest earned on assets, such as loans and investment securities and the interest paid on liabilities, such as deposits and other borrowings) is our primary source of operating income. Net interest income for the three months ended June 30, 2012 was $3.4 million, a decrease of $159 thousand or 4.5% when compared to net interest income of $3.5 million for the three months ended June 30, 2011.

The level of net interest income is determined primarily by the average balances (volume) of interest-earning assets and interest-bearing liabilities and the various rate spreads between our interest-earning assets and our interest-bearing liabilities. Changes in net interest income from period to period result from increases or decreases in the volume of interest-earning assets and interest-bearing liabilities, increases or decreases in the average interest rates earned and paid on such assets and liabilities, the ability to manage the interest-earning asset portfolio (which includes loans), and the availability of particular sources of funds, such as noninterest bearing deposits.

Interest income decreased $425 thousand or 9.7% for the three months ended June 30, 2012 compared to the same three months of 2011. The decrease for the three months ended June 30, 2012 is primarily due to decreases on rates earned on these assets. The yield on average earning assets decreased 58 basis points for the three months ending June 30, 2012 to 4.70% from the same period in 2011. Management attributes the decrease in the yield on our earning assets to the decline in offering rates on new and renewed loans, as well as a decrease in the yield on investment securities.

Our average cost of funds during the three months ended June 30, 2012 was 0.76%, a decrease of 46 basis points when compared to 1.22% for the three months ended June 30, 2011. Average rates paid on deposits decreased 51 basis points from 1.23% for the three months ended June 30, 2011 to 0.72% for the three months ended June 30, 2012, while our average cost of borrowed funds increased 94 basis points during the three months ended June 30, 2012 compared to the same period in 2011. Total interest expense decreased $266 thousand or 30.2% during the three months ended June 30, 2012 compared to the same period in 2011, primarily the result of decreased market rates paid on these liabilities.

The banking industry uses two key ratios to measure profitability of net interest income: net interest rate spread and net interest margin. The net interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest-bearing liabilities. The net interest rate spread does not consider the impact of non-interest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is defined as net interest income as a percentage of total average earning assets and takes into account the positive effects of investing non-interest bearing deposits in earning assets.

Our annualized net interest margin for the three months ended June 30, 2012 was 4.03% compared to 4.28% for the same period in 2011, while our net interest spread for the three months ended June 30, 2012 was 3.94% compared to 4.06% for the same period in 2011.

Net interest income for the six months ended June 30, 2012 was $6.8 million, a decrease of $222 thousand or 3.2% when compared to net interest income of $7.0 million for the six months ended June 30, 2011.

Interest income decreased $709 thousand or 8.0% for the six months ended June 30, 2012 compared to the same six months of 2011. The decrease for the six months ended June 30, 2012 is primarily due to decreases on rates earned on these assets. The yield on average earning assets decreased 52 basis points for the six months ending June 30, 2012 to 4.82% from the same period in 2011. Management attributes the decrease in the yield on our earning assets to the decline in offering rates on new and renewed loans, as well as a decrease in the yield on investment securities.

Our average cost of funds during the six months ended June 30, 2012 was 0.83%, a decrease of 44 basis points when compared to 1.27% for the six months ended June 30, 2011. Average rates paid on deposits decreased 49 basis points from 1.28% for the six months ended June 30, 2011 to 0.79% for the six months ended June 30, 2012, while our average cost of borrowed funds increased 102 basis points during the six months ended June 30, 2012 compared to the same period in 2011. Total interest expense decreased $487 thousand or 26.7% during the six months ended June 30, 2012 compared to the same period in 2011, primarily the result of decreased market rates paid on these liabilities.

Our annualized net interest margin for the six months ended June 30, 2012 was 4.09% compared to 4.29% for the same period in 2011, while our net interest spread for the six months ended June 30, 2012 was 3.99% compared to 4.07% for the same period in 2011.

Management plans to continue to improve net interest income by growing our balance sheet while maintaining a constant or improving interest margin, however, it will be difficult to improve net interest income in the future if the growth in earning assets does not occur and we are unable to maintain or increase the yield on average earning assets while maintaining or decreasing the cost of funds on borrowings.

Noninterest Income

Noninterest income decreased 12.1% and 1.7% for the three- and six-month periods, respectively, ending June 30, 2012 compared to the same period in 2011.

Sources of Noninterest Income (Dollars in thousands)

	For the Three Months Ended		Changes from the Prior Year						For the Six Months Ended		Changes from the Prior Year
	June 30, 2012		Amount			%			June 30, 2012		Amount			%
Service charge on deposit accounts	$	106	$	(32	)		(23.2	)	$	209	$	(86	)		(29.2	)
Gain on sale of securities		—		(257	)		(100.0	)		—		(257	)		(100.0	)
Mortgage loan origination fees		179		137			326.2			291		183			169.4
Investment and insurance commissions		285		12			4.4			546		71			14.9
Fee income from accounts receivable financing		172		(35	)		(16.9	)		336		(79	)		(19.0	)
Debit card interchange income		203		40			24.5			385		90			30.5
Income earned on bank owned life insurance		34		(1	)		(2.9	)		69		(3	)		(4.2	)
Other service charges and fees		20		(2	)		(9.1	)		87		47			117.5
Total noninterest income	$	999	$	(138	)		(12.1	)	$	1,923	$	(34	)		(1.7	)

Noninterest income decreased $138 thousand or 12.1% to $999 thousand for the three months ended June 30, 2012 compared to $1.1 million for the same period in 2011. The increase in noninterest income in the three months ended June 30, 2012 is primarily due to increases in mortgage loan origination fees, investment and insurance commissions and debit card interchange income, offset by decreases in service charges on deposit accounts, gain on sale of securities, fee income from accounts receivable financing, income earned on bank owned life insurance, and other service charges and fees. Service charges on deposit accounts decreased $32 thousand for the three months ended June 30, 2012 as compared to the same period in 2011. The primary reason for this decline were decreases in non sufficient funds fees due to a greater customer awareness of such fees and regulations regarding such fees that affect the entire banking industry. Gains on sale of securities were $257 thousand in the three months ended June 30, 2011 with no gains during the same period in 2012. Mortgage loan origination fees increased $137 thousand for the three months ended June 30, 20112 as compared to the same periods in 2011. The primary reason for this increase were new mortgage loan officers hired near the end of 2011 that were more productive than those employed by the Bank during the three months ended June 30, 2011. Investment and insurance commissions increased $12 thousand for the three months ended June 30, 2012 as compared to the same periods in 2011, largely due to the continued growth in 2012 of recurring investment commission income as compared to 2011. Fee income from accounts receivable financing decreased $35 thousand for the three months ended June 30, 2012 as compared to the same period in 2011. The primary reason for the decrease was lower receivables of existing clients and fewer clients in 2012 as compared to 2011. Debit card interchange income increased $40 thousand for the three months ended June 30, 2012 as compared to the same period in 2011. The primary reason for the increase was the continued growth of consumer checking accounts with debit cards at the Bank during 2011 and the first six months of 2012.

Noninterest income decreased $34 thousand or 1.7% to $1.9 million for the six months ended June 30, 2012 compared to $2.0 million for the same period in 2011. The increase in noninterest income in the six months ended June 30, 2012 is primarily due to increases in mortgage loan origination fees, investment and insurance commissions, debit card interchange income, and other service charges and fees, offset by decreases in service charges on deposit accounts, gain on sale of securities, fee income from accounts receivable financing, and income earned on bank owned life insurance. Service charges on deposit accounts decreased $86 thousand for the six months ended June 30, 2012 as compared to the same period in 2011. The primary reason for this decline were decreases in non sufficient funds fees due to a greater customer awareness of such fees and regulations regarding such fees that affect the entire banking industry. Gains on sale of securities were $257 thousand in the six months ended June 30, 2011 with no gains during the same period in 2012. Mortgage loan origination fees increased $183 thousand for the six months ended June 30, 20112 as compared to the same periods in 2011. The primary reason for this increase were new mortgage loan officers hired near the end of 2011 that were more productive than those employed by the Bank during the six months ended June 30, 2011. Investment and insurance commissions increased $71 thousand for the six months ended June 30, 2012 as compared to the same periods in 2011, largely due to the continued growth in 2012 of recurring investment commission income as compared to 2011. Fee income from accounts receivable financing decreased $79 thousand for the six months ended June 30, 2012 as compared to the same period in 2011. The primary reason for the decrease was lower receivables of existing clients and fewer clients in 2012 as compared to 2011. Debit card interchange income increased $90 thousand for the six months ended June 30, 2012 as compared to the same period in 2011. The primary reason for the increase was the continued growth of consumer checking accounts with debit cards at the Bank during 2011 and the first six months of 2012. Other service charges and fees increased by $47 thousand for the six months ended June 30, 2012 as compared to the same period in 2011. The primary reason for the increase was a reimbursement in excess of actual expenses from a previously charged off loan.

Noninterest Expense

Noninterest expense increased 11.9% and 8.2% for the three- and six-month periods, respectively, ending June 30, 2012 compared to the same period in 2011.

Sources of Noninterest Expense (Dollars in thousands)

	For the Three Months Ended		Changes from the Prior Year						For the Six Months Ended		Changes from the Prior Year
	June 30, 2012		Amount			%			June 30, 2012		Amount			%
Salaries	$	1,626	$	199			13.9		$	3,314	$	422			14.6
Employee benefits		197		21			11.9			412		47			12.9
Employee Stock Ownership Plan		—		(25	)		(100.0	)		—		(25	)		(100.0	)
Occupancy expense		207		1			.5			421		4			1.0
Equipment expense		225		8			3.7			435		8			1.9
Data and items processing		282		50			21.6			563		119			26.8
Professional and advertising		356		28			8.5			531		(22	)		(4.0	)
Stationary and supplies		94		(10	)		(9.6	)		171		(55	)		(24.3	)
Net cost of foreclosed assets		235		213			968.2			429		133			44.9
Telecommunications expense		84		27			47.4			153		43			39.1
FDIC assessment		78		(68	)		(46.6	)		154		(124	)		(44.6	)
Accounts receivable financing expense		52		(13	)		(20.0	)		101		(30	)		(22.9	)
Other expense		295		(35	)		(10.6	)		657		36			5.8
Total noninterest expense	$	3,731	$	396			11.9		$	7,341	$	556			8.2

Salary expense for the three months ended June 30, 2012 increased $199 thousand as compared to the same prior year period. The increases were due to regular salary increases and market adjustments that went into effect for all employees on January 1, 2012, as well as new positions that were added after June 30, 2011 through June 30, 2012.

Employee benefits for the three months ended June 30, 2012 increased $21 thousand over the same prior year period. The principal reason for this increase was increases in health care premiums for the Bank and its employees that went into effect on June 1, 2011, as well as a higher number of employees during the three months ended June 30, 2012 as compared to the same period in 2011.

Occupancy and Equipment expenses for the three months ended June 30, 2012 were relatively unchanged compared to the same prior year period.

Data and other processing expenses increased $50 thousand over the same prior year period, primarily due to increased expenses associated with higher levels of debit card interchange income, and to a lesser extent, enhancements to the Bank’s internet banking bill payment systems as well as the purchase of other internet based products in the second half of 2011.

Professional and advertising expenses for the three months ended June 30, 2012 increased $28 thousand over the same prior year period. The majority of the increase was due to higher legal fees mostly related to past due loans for the three months ended June 30, 2012 compared to the same period in 2011.

Stationary and supplies expenses for the three months ended June 30, 2012 decreased $10 thousand over the same prior year period. The decline was caused by decreases in mailings to customers.

Net cost of foreclosed assets for the three months ended June 30, 2012 increased $213 thousand over the same prior year period. Increases in writedowns of foreclosed assets and related expenses in the three months ended June 30, 2012 compared to the same period in 2011 caused the total increase.

Telecommunications expense for the three months ended June 30, 2012 increased $27 thousand over the same prior year period. The increase was caused by an upgrade of the Bank’s telecommunication capacity in 2012.

FDIC assessment for the three months ended June 30, 2012 decreased $68 thousand over the same prior year period. The FDIC assessment expense is primarily due to the expensing of a prepaid asset that was established in 2009 when FDIC insured banks were required to pay an estimated three years of FDIC assessments in order to replenish the FDIC insurance fund. The Bank’s assessment was based on an annualized average rate of growth of 5% in the Bank’s deposits during that time. The Bank’s actual rate of growth has been less than 5% which has resulted in a smaller expense than originally projected. Some of the decrease was also related to the adoption of a new assessment formula by the FDIC, effective in the second quarter of 2011.

Accounts receivable financing expense for the three months ended June 30, 2012 decreased $13 thousand over the same prior year period. Most of the decline is attributable to the decline in fee income from accounts receivable financing during over the same periods from 2011 to 2012.

Other expense for the three months ended June 30, 2012 decreased $35 thousand over the same prior year period. The primary reason for the decreases were lower training and education expenses in the three months ended June 30, 2012 as compared to the same period in 2011.

Salary expense for the six months ended June 30, 2012 increased $422 thousand as compared to the same prior year period. The increases were due to regular salary increases and market adjustments that went into effect for all employees on January 1, 2012, as well as new positions that were added after June 30, 2011 through June 30, 2012.

Employee benefits for the six months ended June 30, 2012 increased $47 thousand over the same prior year period. The principal reason for this increase was increases in health care premiums for the Bank and its employees that went into effect on June 1, 2011, as well as a higher number of employees during the six months ended June 30, 2012 as compared to the same period in 2011.

Occupancy and Equipment expenses for the six months ended June 30, 2012 were relatively unchanged compared to the same prior year period.

Data and other processing expenses increased $119 thousand over the same prior year period, primarily due to increased expenses associated with higher levels of debit card interchange income, and to a lesser extent, enhancements to the Bank’s internet banking bill payment systems as well as the purchase of other internet based products in the second half of 2011.

Professional and advertising expenses for the six months ended June 30, 2012 were relatively unchanged compared to the same prior year period. Stationary and supplies expenses for the six months ended June 30, 2012 decreased $55 thousand over the same prior year period. The decline was caused by decreases in mailings to customers.

Net cost of foreclosed assets for the six months ended June 30, 2012 increased $133 thousand over the same prior year period. Increases in writedowns of foreclosed assets and related expenses in the six months ended June 30, 2012 compared to the same period in 2011 caused the total increase.

Telecommunications expense for the six months ended June 30, 2012 increased $43 thousand over the same prior year period. The increase was caused by an upgrade of the Bank’s telecommunication capacity in 2012.

FDIC assessment for the six months ended June 30, 2012 decreased $124 thousand over the same prior year period. The FDIC assessment expense is primarily due to the expensing of a prepaid asset that was established in 2009 when FDIC insured banks were required to pay an estimated three years of FDIC assessments in order to replenish the FDIC insurance fund. The Bank’s assessment was based on an annualized average rate of growth of 5% in the Bank’s deposits during that time. The Bank’s actual rate of growth has been less than 5% which has resulted in a smaller expense than originally projected. Some of the decrease was also related to the adoption of a new assessment formula by the FDIC, effective in the second quarter of 2011.

Accounts receivable financing expense for the six months ended June 30, 2012 decreased $30 thousand over the same prior year period. Most of the decline is attributable to the decline in fee income from accounts receivable financing during over the same periods from 2011 to 2012.

Other expense for the six months ended June 30, 2012 increased $36 thousand over the same prior year period. The primary reason for the increase were higher appraisal expenses in 2012 as compared to 2011, offset by lower training and education expenses during the same period.

Income Taxes

Income tax expense for the six months ended June 30, 2012 decreased $594 thousand over the same period in 2011. The primary reason was the net loss before income tax expense in 2012 as compared to 2011, as well as the deductibility of interest for tax purposes of municipal securities that were purchased mostly in the last quarter of 2011 and first six months of 2012.

Income tax expense for the three months ended June 30, 2012 decreased $556 thousand over the same period in 2011. The primary reason was the net loss before income tax expense in 2012 as compared to 2011, as well as the deductibility of interest for tax purposes of municipal securities that were purchased mostly in the last quarter of 2011 and first six months of 2012.

Analysis of Financial Condition at June 30, 2012 and December 31, 2011

Loans Receivable

As of June 30, 2012, loans, net of allowance for loan losses, increased to $253.6 million, up 1.1% from $250.8 million at December 31, 2011. The increase is due to increased calling efforts of the Bank’s commercial loan officers and branch managers.

Allowance for Loan Losses

We consider the allowance for loan losses adequate to cover estimated probable loan losses relating to the loans outstanding as of each reporting period. The procedures and methods used in the determination of the allowance necessarily rely upon various judgments and assumptions about economic conditions and other factors affecting our loans. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Those agencies may require us to recognize adjustments to the allowance for loan losses based on their judgments about the information available to them at the time of their examinations. No assurance can be given that we will not in any particular period sustain loan losses that are sizable in relation to the amount reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings.

The following table summarizes the balances of loans outstanding, average loans outstanding, changes in the allowance arising from charge-offs and recoveries by category and additions to the allowance that have been charged to expense.

Analysis of the Allowance for Loan Losses (Dollars in thousands)

	At June 30,
	2012			2011
Allowance for loan losses at beginning of period	$	4,446		$	4,375
Loans charged off:
Real estate – Construction & Development		(400)			(1,055)
Residential 1-4 Families		(1,056)			(218)
Residential 5 or More Families		—			—
Other Commercial Real Estate		(400)			—
Commercial		(861)			(585)
Consumer		(13)			(14)

Total charge-offs		(2,730)			(1,872)

Recoveries:
Real estate – Construction & Development		1			123
Residential 1-4 Families		2			—
Residential 5 or More Families		95			—
Other Commercial Real Estate		36			—
Commercial		—			—
Consumer		2			8

Total recoveries		136			131

Net charge-offs		(2,594)			(1,741	)
Provision for loan losses		2,585			1,866

Allowance for loan losses at end of period	$	4,437		$	4,500

Total loans outstanding at end of period	$	259,479		$	252,679

Average loans outstanding	$	258,531		$	255,234

Ratios:
Ratio of annualized net loan charge-offs to average loans outstanding		2.01	%		1.36	%
Ratio of allowance for loan losses to loans outstanding at period-end		1.71			1.78

At June 30, 2012, our allowance for loan losses as a percentage of loans was 1.72%, down from 1.74% at December 31, 2011 and 1.78% at June 30, 2011. The decrease in the allowance as a percentage of loans from June 30, 2011 to June 30, 2012 is primarily due to a decline in the specific reserves allocated to impaired loans, offset by an increase in the general allowance due to increased historical charge offs. In evaluating the allowance for loan losses, we prepare an analysis of our current loan portfolio through the use of historical loss rates, homogeneous risk analysis grouping to include probabilities for loss in each group by risk grade, estimation of years to impairment in each homogeneous grouping, analysis of internal credit processes, and past due loan portfolio performance and overall economic conditions, both regionally and nationally.

Historical loss calculations for each homogeneous risk group are based on a weighted average loss ratio calculation. The most previous quarter’s loss history is used in the loss history and is adjusted to reflect current losses in the homogeneous risk groups. Current losses translate into a higher loss ratio which is further increased by the associated risk grades within the group. The impact is to more quickly recognize and increase the loss history in a respective grouping, resulting in an increase in the allowance for that particular homogeneous group. For those groups with little or no loss history, management bases the historical factor based on current economic conditions and their potential impact on that particular loan group.

Loans are considered impaired if, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is based on either the fair value of the underlying collateral, the present value of the future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, or the estimated market value of the loan. In measuring the fair value of the collateral, management uses a comparison to the recent selling price of similar assets, which is consistent with those that would be utilized by unrelated third parties.

While we believe that our management uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net income could be significantly affected if circumstances differ substantially from the assumptions used in making the final determination. Because these factors and management’s assumptions are subject to change, the allocation is not necessarily indicative of future loan portfolio performance.

Loans are charged-off against the Bank’s allowance for loan losses as soon as the loan becomes uncollectible. Unsecured loans are considered uncollectible when no regularly scheduled monthly payment has been made within three months, the loan matured over 90 days ago and has not been renewed or extended or the borrower files for bankruptcy. Secured loans are considered uncollectible when the liquidation of collateral is deemed to be the most likely source of repayment. Once secured loans reach 90 days past due, they are placed into non-accrual status unless the loan is considered to be well secured and in process of collection. If the loan is deemed to be collateral dependent, the principal balance is either written down immediately or reserved as a write-down in the Bank’s allowance model to reflect the current market valuation based on an independent appraisal which may be adjusted by management based on more recent market conditions. Included in the write-down is the estimated expense to liquidate the property and typically an additional allowance for the foreclosure discount. Generally, if the loan is unsecured the loan must be charged-off in full, while if it is secured the loan is charged down to the net liquidation value of the collateral.

Net charge-offs of $2.6 million in the first six months of 2012 increased by $853 thousand when compared to the same period in 2011. Net charge-offs from real estate secured loans were $1.7 million and $1.3 million in 2012 and 2011, respectively. Net charge-offs from commercial loans were $861 thousand in the first six months of 2012 compared to $462 thousand during the same period in 2011. Net charge-offs from loans to individuals was $11 thousand in the first six months of 2012, net charge offs from loans to individuals were $6 thousand in the same period in 2012.

Asset quality remains a top priority for us. For the six months ended June 30, 2012, annualized net loan charge-offs were 2.01% of average loans compared to annualized net charge-offs of 1.36% for the six months ended June 30, 2011. The ratio of annualized net charge-offs to average loans increased mainly due to a higher than normal level of loan recoveries in the three months ended June 30, 2011. Total charge offs increased to $2.7 million from $1.9 million during the six months ended June 30, 2012 and 2011, respectively. The ratio of our allowance for loan losses to nonperforming loans decreased to 49% as of June 30, 2012 compared to 97% at December 31, 2011. The decrease is the result of our allowance remaining essentially unchanged from December 31, 2011 to June 30, 2012 and our nonperforming loans increasing approximately 95% during the same period. Although nonperforming loans have increased significantly from December 31, 2011 to June 30, 2012, the outstanding balance of impaired loans has declined from $14.1 million to $10.8 million, and the associated specific reserves allocated to impaired loans has declined from $324 thousand to $101 thousand. Additionally, historical loss calculations for each homogeneous risk group of loans not considered impaired is based on a weighted average loss ratio calculation over the most recent two-year period. Although our weighted average losses have been increasing, the loan balances in the categories with among the highest loss ratios have been declining mostly due to those losses, which has resulted in a lower overall estimated loan loss estimate in these homogenous risk groups of loans not considered impaired.

Nonaccrual loans increased from $4.6 million as of December 31, 2011 to $8.8 million as of June 30, 2012. Most of the increase was associated with loans that were current and classified as substandard as of December 31, 2011 migrating to nonaccrual status as of June 30, 2012. Although nonaccrual loans increased in the first six months of 2012, loans classified substandard and lower declined from $15.0 million as of December 31, 2011 to $11.6 million as of June 30, 2012. The decline is primarily due to charging down and disposing of these assets. To a lesser extent the decrease is related to an upgrade of assets classified substandard or lower as of December 31, 2011 to special mention or higher as of June 30, 2012.

Loans Considered Impaired

We review our nonperforming loans and other groups of loans based on loan size or other factors for impairment. At June 30, 2012, we had loans totaling $10.8 million (which includes $9.6 million in nonperforming loans) which were considered to be impaired compared to $14.1 million at December 31, 2011. Loans are considered impaired if, based on current information, circumstances or events, it is probable that the Bank will not collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. However, treating a loan as impaired does not necessarily mean that we expect to incur a loss on that loan, and our impaired loans may include loans that currently are performing in accordance with their terms. For example, if we believe it is probable that a loan will be collected, but not according to its original agreed upon payment schedule, we may treat that loan as impaired even though we expect that the loan will be repaid or collected in full. As indicated in the table below, when we believe a loss is probable on a non-collateral dependent impaired loan, a portion of our reserve is allocated to that probable loss. If the loan is deemed to be collateral dependent, the principal balance is written down immediately, or a portion of our reserve is allocated to that probable loss, to reflect the current market valuation based on a current independent appraisal.

The following table sets forth the number and volume of loans net of previous charge-offs considered impaired and their associated reserve allocation, if any, at June 30, 2012.

Analysis of Loans Considered Impaired (Dollars in thousands)

As of June 30, 2012 (dollars in thousands):

	Number of Loans		Loan Balances Outstanding		Allocated Reserves
Non-accrual loans		17	$	7,096	$	—
Restructured loans		4		2,523		—
Total nonperforming loans		21	$	9,619	$	—
Other impaired loans with allocated reserves		2		1,022		101
Impaired loans without allocated reserves		2		178		—
Total impaired loans		25	$	10,819	$	101

As of December 31, 2011 (dollars in thousands):

	Number of Loans		Loan Balances Outstanding		Allocated Reserves
Non-accrual loans		10	$	3,476	$	25
Restructured loans		8		4,591		103
Total nonperforming loans		18	$	8,067	$	128
Other impaired loans with allocated reserves		2		1,206		246
Impaired loans without allocated reserves		7		4,820		—
Total impaired loans		27	$	14,093	$	374

As of June 30, 2012 there was $1.0 million in other impaired loans with allocated reserves which represent two loans to a building contractor. As of December 31, 2011 there was $1.2 million in other impaired loans with allocated reserves which represent three loans to two building contractors.

Investment Portfolio

Our available-for-sale investment securities totaled $49.7 million at June 30, 2012, compared to $51.2 million at December 31, 2011. The overall decrease was due to repayments and maturities of approximately $7.8 million, accretion of discount of approximately $300 thousand, purchases of $6.2 million, and an increase in the unrealized gain of $363 thousand. Our held-to-maturity investment securities totaled $4.7 million at June 30, 2012 and $5.2 million at December 31, 2011, with the decline between these two periods resulting from principal payments and accretion of a discount of approximately $544 thousand. Investable funds not otherwise utilized are temporarily invested as Federal Funds sold or as interest-bearing balances at other banks, the level of which is affected by such considerations as near-term loan demand and liquidity needs. 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 on these securities. The result of this analysis determines whether the Bank records an impairment loss on these securities. There were no impairment charges on subinvestment grade securities for the six months ended June 30, 2012 and June 30, 2011.

Deposits

Deposits decreased to $313.5 million, or 0.1% as of June 30, 2012 compared to deposits of $313.9 million at December 31, 2011. Noninterest-bearing deposits increased $254 thousand, or 0.8%, from December 31, 2011 to June 30, 2012, and total interest-bearing deposits decreased $679 thousand during the same period of time.

Borrowings

Short-term debt includes sweep accounts, advances from the FHLB having maturities of one year or less, Federal Funds purchased and repurchase agreements. The Company had no short-term debt at June 30, 2012 and December 31, 2011. At June 30, 2012 we had Federal Funds purchased lines of credit totaling $6.0 million. These lines are intended for short-term borrowings and are subject to restrictions limiting the frequency and terms of advances. The Company had no outstanding balances under these lines of credit at June 30, 2012 and December 31, 2011.

Long-term debt consists of advances from FHLB with maturities greater than one year. The Company had no long-term borrowings from the FHLB at June 30, 2012 and December 31, 2011. There was no long-term debt outstanding as June 30, 2012, as the Bank repaid these borrowings out of existing liquidity during the three months ended September 30, 2011.

Junior Subordinated Debentures

In 2007, the Company issued $8.2 million of junior subordinated debentures to the Trust in exchange for the proceeds of trust preferred securities issued by the Trust. The junior subordinated debentures are included in long-term debt and the Company’s equity interest in the Trust is included in other assets. Junior subordinated debentures totaled $8.2 million on June 30, 2012 and December 31, 2011.

The junior subordinated debentures pay interest quarterly at an annual rate, reset quarterly, equal to LIBOR plus 1.60%. The debentures are redeemable on September 17, 2012 or afterwards, in whole or in part, on any December 17, March 17, September 17 or September 17. Redemption is mandatory at September 17, 2037. The Bank guarantees the trust preferred securities through the combined operations of the junior subordinated debentures and other related documents. The Bank’s obligations under the guarantee are unsecured and subordinate to the senior and subordinated indebtedness of the Bank.

The trust preferred securities presently qualify as Tier 1 regulatory capital and are reported in Federal Reserve regulatory reports as a minority consolidated interest in a consolidated subsidiary. On March 1, 2005, the Federal Reserve Board issued a final rule stating that trust preferred securities will continue to be included in Tier 1 capital, subject to stricter quantitative and qualitative standards. For bank holding companies, trust preferred securities will continue to be included in Tier 1 capital up to 25% of core capital elements (including trust preferred securities) net of goodwill less any associated deferred tax liability.

Liquidity

Liquidity refers to our continuing ability to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses and provide funds for payment of dividends, debt service and other operational requirements. Liquidity is immediately available from five major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of Federal Funds sold; (c) lines for the purchase of Federal Funds from other banks; (d) lines of credit established at the FHLB, less existing advances; and (e) our investment securities portfolio. All our debt securities are of investment grade quality and, if the need arises, can promptly be liquidated on the open market or pledged as collateral for short-term borrowing.

Consistent with our general approach to liquidity management, loans and other assets of the Bank are funded primarily using a core of local deposits, proceeds from retail repurchase agreements and excess Bank capital. In the first six months of 2012, the Bank’s brokered and internet generated time deposits decreased $3.8 million to $52.8 million as the Bank chose to raise these funds at lower rates than local time deposits. Of the total brokered deposits of $52.8 million as of June 30, 2012, $27.1 million were time deposits to customers within the Bank’s market issued under the Certificate of Deposit Account Registry Service.

We are a member of the FHLB of Atlanta. Membership, along with a blanket collateral commitment of our one-to-four family residential mortgage loan portfolio, our home equity line of credit portfolio, and selected investment securities provided us the ability to draw up to $24.9 million and $18.4 million of advances from the FHLB at June 30, 2012 and December 31, 2011, respectively. The Company had no outstanding FHLB advances at June 30, 2012 and December 31, 2011.

As a requirement for membership, we invest in stock of the FHLB in the amount of 1.0% of our outstanding residential loans or 5.0% of our outstanding advances from the FHLB, whichever is greater. That stock is pledged as collateral for any FHLB advances drawn by us. At June 30, 2012 and December 31, 2011, we owned 5,875 and 7,949 shares of the FHLB’s $100 par value capital stock, respectively.

We also had unsecured Federal Funds lines in the aggregate amount of $6.0 million available to us at June 30, 2012 under which we can borrow funds to meet short-term liquidity needs. At September 30, 2011, we did not have any advances under these Federal Funds lines. Another source of funding available is loan participations sold to other commercial banks (in which we retain the servicing rights). As of June 30, 2012, we had $199 thousand in loan participations sold. We believe that our liquidity sources are adequate to meet our operating needs.

Capital Resources and Shareholders’ Equity

As of June 30, 2012, our total shareholders’ equity was $27.3 million (consisting of common shareholders’ equity of $20.1 million and preferred stock of $7.2 million) compared with total shareholders’ equity of $27.9 million as of December 31, 2011 (consisting of common shareholders’ equity of $20.9 million and preferred stock of $7.0 million).

Common shareholders’ equity decreased by approximately $800 thousand to $20.1 million at June 30, 2012 from $20.9 million at December 31, 2011. We experienced a decrease of $667 thousand due to our net loss, payment of dividends of $193 thousand on preferred shares, and accretion of discount of $145. These decreases were offset by increases due to a net change in other comprehensive income of $223 thousand associated with our available-for-sale securities portfolio, and an increase in common stock of $19 thousand associated with the expensing of restricted stock and stock options.

The Bank is subject to minimum capital requirements. As the following table indicates, at June 30, 2012, all capital ratios place the Bank in excess of the minimum necessary to be considered “well-capitalized” under bank regulatory guidelines.

	At June 30, 2012
	Actual Ratio			Minimum Requirement			Well-Capitalized Requirement
Total risk-based capital ratio		13.6	%		8.0	%		10.0	%
Tier 1 risk-based capital ratio		12.3	%		4.0	%		6.0	%
Leverage ratio		8.8	%		4.0	%		5.0	%

Recent Accounting Pronouncements

Please refer to Note 1 (G) of our consolidated financial statements for a summary of recent authoritative pronouncements that could impact our accounting, reporting, and/or disclosure of financial information.

Recent Laws and Regulations

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Act”) was signed into law on July 21, 2010. The Act is a significant piece of legislation that will have major effects on the financial services industry, including the organization, financial condition and operations of banks and bank holding companies. Management is currently evaluating the impact of the Act; however, uncertainty remains as to its operational impact, which could have a material adverse impact on the Company’s business, results of operations and financial condition. Many of the provisions of the Act are aimed at financial institutions that are significantly larger than us. Notwithstanding this, there are many other provisions that we are subject to and will have to comply with, including any new rules applicable to us promulgated by the Bureau of Consumer Financial Protection, a new regulatory body dedicated to consumer protection. As rules and regulations are promulgated by the agencies responsible for implementing and enforcing the Act, we will have to address each to ensure compliance with applicable provisions of the Act and compliance costs are expected to increase.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Pursuant to Item 305(e) of Regulation S-K, the Company, as a smaller reporting company, is not required to provide the information required by this Item.

ITEM 4. Controls and Procedures

The Company’s management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively) have concluded based on their evaluation as of the end of the period covered by this Report, that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer of the Company, as appropriate to allow timely decisions regarding required disclosure.

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f). A system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

Under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the Company’s management has evaluated the effectiveness of its internal control over financial reporting as of June 30, 2012 based on the criteria established in a report entitled “Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission” and the interpretive guidance issued by the SEC in Release No. 34-55929. Based on this evaluation, the Company’s management has evaluated and concluded that the Company’s internal control over financial reporting was effective as of June 30, 2012.

Changes in Internal Control Over Financial Reporting.

There was no change in the Company’s internal control over financial reporting that occurred during the three and six months ended June 30, 2012 that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information

ITEM 6. EXHIBITS

15(a) Exhibits

Exhibit (3)(i)	Articles of Incorporation, incorporated herein by reference to Exhibit (3)(i) to the Form 8-K filed with the SEC on May 10, 2007.

Exhibit (3)(ii)	Bylaws, incorporated herein by reference to Exhibit (3)(ii) to the Form 8-K filed with the SEC on May 10, 2007.

Exhibit (4)(i)	Specimen Stock Certificate, incorporated herein by reference to Exhibit 4 to the Form 8-K filed with the SEC on May 10, 2007.

Exhibit (4)(ii)	Articles of Amendment, filed with the North Carolina Department of the Secretary of State on January 28, 2009, incorporated herein by reference to Exhibit 4.1 of the Current Report on Form 8-K filed with the SEC on February 2, 2009.

Exhibit (4)(iii)	Form of Certificate for the Fixed Rate Cumulative Perpetual Preferred Stock, Series A, incorporated herein by reference to Exhibit 4.2 of the Current Report on Form 8-K filed with the SEC on February 2, 2009.

Exhibit (4)(iv)	Warrant for Purchase of Shares of Common Stock issued by the Company to the United States Department of the Treasury on January 30, 2009, incorporated herein by reference to Exhibit 4.3 of the Current Report on Form 8-K filed with the SEC on February 2, 2009.

Exhibit (10)(i)	Employment Agreement with Ronald O. Black, as amended, incorporated herein by reference to Exhibit (10)(i) to the Form 8-K filed with the SEC on March 28, 2008.

Exhibit (10)(ii)	Employment Agreement with L. William Vasaly, III, as amended, incorporated herein by reference to Exhibit (10)(ii) to the Form 8-K filed with the SEC on March 28, 2008.

Exhibit (10)(iii)	Employment Agreement with Thomas W. Wayne, as amended, incorporated herein by reference to Exhibit (10)(iii) to the Form 8-K filed with the SEC on March 28, 2008.

Exhibit (10)(iv)	Outparcel Ground Lease between J.P. Monroe, L.L.C. and Bank of Oak Ridge dated June 1, 2002, incorporated herein by reference to Exhibit (10)(iv) to the Form 8-K filed with the SEC on March 28, 2008.

Exhibit (10)(v)	Ground and Building Lease between KRS of Summerfield, LLC and Bank of Oak Ridge dated September 25, 2002, incorporated herein by reference to Exhibit (10)(v) to the Form 8-K filed with the SEC on March 28, 2008.

Exhibit (10)(vi)	Ground Lease between Friendly Associates XVIII LLLP and Bank of Oak Ridge dated September 13, 2004, incorporated herein by reference to Exhibit (10)(vi) to the Form 8-K filed with the SEC on March 28, 2008.

Exhibit (10)(vii)	Bank of Oak Ridge Second Amended and Restated Director Stock Option Plan (amended March 16, 2004; approved by stockholders June 8, 2004), incorporated herein by reference to Exhibit 10(ix) to the Form 8-K filed with the SEC on March 28, 2008.

Exhibit (10)(viii)	Bank of Oak Ridge Second Amended and Restated Employee Stock Option Plan (amended March 16, 2004; approved by stockholders June 8, 2004), incorporated herein by reference to Exhibit (10)(x) to the Form 8-K filed with the SEC on March 28, 2008.

Exhibit (10)(ix)	Salary Continuation Agreements with Ronald O. Black, L. William Vasaly III and Thomas W. Wayne dated January 20, 2006, incorporated herein by reference to Exhibits (10)(ix) to (10)(xi) to Form 8-K filed with the SEC on March 28, 2008.

Exhibit (10)(x)	Amended Endorsement Split Dollar Agreement between Bank of Oak Ridge and Ronald O. Black, incorporated herein by reference to Exhibit (10)(xiii) to the Form 8-K filed with the SEC on December 21, 2007.

Exhibit (10)(xi)	Amended Endorsement Split Dollar Agreement between Bank of Oak Ridge and L. William Vasaly III, incorporated herein by reference to Exhibit (10)(xiv) to the Form 8-K filed with the SEC on December 21, 2007.

Exhibit (10)(xii)	Amended Endorsement Split Dollar Agreement between Bank of Oak Ridge and Thomas W. Wayne, incorporated herein by reference to Exhibit (10)(xv) to the Form 8-K filed with the SEC on December 21, 2007.

Exhibit (10)(xiii)	Indemnification Agreement, incorporated herein by reference to Exhibit (10)(xvi) to the Form 8-K filed with the SEC on March 7, 2008.

Exhibit (10)(xiv)	Contract for the Purchase and Sale of Real Property, incorporated herein by reference to Exhibit 99.1 to the Form 8-K filed with the SEC on January 14, 2008.

15(a) Exhibits

Exhibit (10)(xv)	Oak Ridge Financial Services, Inc. Long-Term Stock Incentive Plan, incorporated herein by reference to Exhibit (10)(xiii) to the Form 10-QSB filed with the SEC on May 15, 2007.

Exhibit (10)(xvi)	Bank of Oak Ridge 2012 Semi-Annual Incentive Plan, incorporated herein by reference to Exhibit 10 (xvi) filed with the SEC on March 26, 2012.

Exhibit (10)(xvii)	Letter Agreement, dated January 30, 2009, between the Company and the United States Department of the Treasury, with respect to the issuance and sale of the Fixed Rate Cumulative Perpetual Preferred Stock, Series A and the Warrant, incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K filed with the SEC on February 2, 2009.

Exhibit (10)(xviii)	Form of Employment Agreement Amendment, dated January 30, 2009 among the Company, the Bank and the senior executive officers, incorporated herein by reference to Exhibit 10.2 of the Current Report on Form 8-K filed with the SEC on February 2, 2009.

Exhibit (10)(xix)	Bank of Oak Ridge Employee Stock Ownership Plan and Trust effective January 1, 2010, incorporated herein by reference to Exhibit 99.1 of the Current Report in Form 8-k filed with the SEC on September 24, 2010.

Exhibit (14)	Code of Ethics for Senior Officers Policy incorporated herein by reference to Exhibit 14 to the Form 8-K filed with the SEC on March 28, 2008.

Exhibit (31)(i)	Certification of Ronald O. Black.

Exhibit (31)(ii)	Certification of Thomas W. Wayne.

Exhibit (32)	Certificate of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350.

Exhibit (101)	The following materials from the Company’s 10-Q Report for the quarterly period ended June 30, 2012, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income (Loss) (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text.*

*	Furnished, not filed

Oak Ridge Financial Services, Inc.

Signatures

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

				Oak Ridge Financial Services, Inc.
				(Registrant)

Date: August 14, 2012				/s/ Ronald O. Black
				Ronald O. Black
				President and Chief Executive Officer
				(Duly Authorized Representative)

Date: August 14, 2012				/s/ Thomas W. Wayne
				Thomas W. Wayne
				Chief Financial Officer
				(Duly Authorized Representative)