CORRECTION OF ERRORS RELATED TO PURCHASE ACCOUNTING

12 Months Ended

Dec. 31, 2012

Accounting Changes and Error Corrections [Abstract]

CORRECTION OF ERRORS RELATED TO PURCHASE ACCOUNTING

2.     CORRECTION OF ERRORS RELATED TO PURCHASE ACCOUNTING

In December 2009, we acquired Greater Atlantic Bank from the FDIC.  We identified an error in the calculation of the FDIC indemnification asset and other purchase accounting errors, and on February 7, 2012, we filed a Form 8-K disclosing that we will restate our financial statements for year ended December 31, 2009, the interim quarterly periods and year ended December 31, 2010 and the interim quarterly periods through September 30, 2011.  Our Form 10-K for the year ended December 31, 2011 filed on April 16, 2012 describes the restatement in more detail.

Specifically, a redundant credit loss assumption was applied to the acquired residential and home equity loan portfolios for purposes of calculating the expected credit losses for these portfolios recoverable from the FDIC.  This error resulted in an overstatement of the FDIC indemnification asset.   The correction of the error resulted in the removal of the gain of $11.2 million as reported, as well as adjustments to other amounts originally reported in 2009.  We engaged a different advisor to assist with calculating the correct initial fair value of the indemnification asset; accretion of the acquired loan discount; calculation of estimated amounts due back to the FDIC in the event that losses do not achieve a specified level (the clawback liability); and other purchase accounting adjustments. Correcting the 2009 purchase accounting entries required adjustments to certain reported amounts in 2010 and 2011.

Restatement of the quarterly condensed financial information was also necessary.  See Footnote 22 to the consolidated financial statements.

Notes (a) through (e) below describe the restatement adjustments to the consolidated statements of comprehensive income and cash flows for the year ended December 31, 2010 presented in the following tables.

(a) Correct the initial fair value of the FDIC indemnification asset as of the date of acquisition in 2009, the carrying amount as of December 31, 2010 and the related accretion.

(b) Correct the accretion amounts for the accretable discount on the acquired loans. On the statement of cash flows as reported, the accretion of the loan discount was included in loan originations and payments, net with investing activities.

(c) Record a liability for amounts expected to be paid to the FDIC at the maturity of the indemnification agreement as credit losses are not expected to reach levels established in the Purchase and Assumption Agreement for the acquisition of Greater Atlantic Bank.  This liability was reflected at the net present value of expected cash outflows of $586 thousand, and is accreted through other operating expenses to the expected cash disbursement.

(d) Record the tax effects for the impact of the adjustments.

(e) Corrections to the statement of cash flows to reflect the impact of the aforementioned adjustments as well as to present the accretion of the loan discount in operating activities.

	Impact on Consolidated Statements of Comprehensive Income
				For the Year Ended
				December 31, 2010
	As Previously
	Reported			As Restated			Adjustment
Interest and dividend income :
Interest and fees on loans	$	30,333		$	33,450		$	3,117		b
Interest and dividends on taxable securities		2,635			2,635			-
Interest and dividends on other earning assets		205			205			-
Total interest and dividend income		33,173			36,290			3,117
Interest expense:
Interest on deposits		7,172			7,172			-
Interest on borrowings		1,341			1,341			-
Total interest expense		8,513			8,513			-
Net interest income		24,660			27,777			3,117
Provision for loan losses		9,025			9,025			-
Net interest income after provision for loan losses		15,635			18,752			3,117
Noninterest income (loss):
Account maintenance and deposit service fees		900			900			-
Income from bank-owned life insurance		554			554			-
Gain on sale of SBA loans		-			-			-
Bargain purchase gain on acquisitions		-			-			-
Net loss on other assets		(274	)		(274	)		-
Total other-than-temporary impairment losses (OTTI)		(288	)		(288	)		-
Portion of OTTI recognized in other comprehensive
income (before taxes)		-			-			-
Net credit related OTTI recognized in earnings		(288	)		(288	)		-
Gain on sales of securities available for sale		142			142			-
Other		341			341			-
Total noninterest income		1,375			1,375			-
Noninterest expenses:
Salaries and benefits		6,186			6,186			-
Occupancy expenses		2,101			2,101			-
Furniture and equipment expenses		591			591			-
Amortization of core deposit intangible		943			943			-
Virginia franchise tax expense		735			735			-
FDIC assessment		705			705			-
Data processing expense		587			587			-
Telephone and communication expense		403			403			-
Change in FDIC indemnification asset		281			(60	)		(341	)	a
Acquisition expenses		-			-			-
Other operating expenses		1,979			2,006			27		c
Total noninterest expenses		14,511			14,197			(314	)
Income (loss) before income taxes		2,499			5,930			3,431
Income tax expense (benefit)		698			1,876			1,178		d
Net income	$	1,801		$	4,054		$	2,253
Other comprehensive income:
Unrealized gain on available for sale securities	$	261		$	261		$	-
Realized amount on securities sold, net		(142	)		(142	)		-
Non-credit component of other-than-temporary impairment
on held-to-maturity securities		238			238			-
Accretion of amounts previously recorded upon transfer
to held-to-maturity from available-for sale		(123	)		(123	)		-
Net unrealized gain		234			234			-
Tax effect		79			79			-
Other comprehensive income		155			155			-
Comprehensive income	$	1,956		$	4,209		$	2,253
Earnings per share, basic and diluted	$	0.16		$	0.35		$	0.19

 

	Impact on Consolidated Statements Cash Flows
	For the Year Ended
	December 31, 2010
	As Previously
	Reported			As Restated			Adjustment
Operating activities:
Net income (loss)	$	1,801		$	4,054		$	2,253
Adjustments to reconcile net income (loss) to net cash and
cash equivalents provided  by operating activities:
Depreciation		537			537			-
Amortization of core deposit intangible		943			943			-
Other amortization , net		109			109			-
Accretion of loan discount		-			(5,781	)		(5,781	)	b
Decrease (increase) in FDIC indemnification asset		281			(60	)		(341	)	a
Provision for loan losses		9,025			9,025			-
Earnings on bank-owned life insurance		(554	)		(554	)		-
Stock based compensation expense		82			82			-
Gain on sale of loans		-			-			-
Impairment on securities		288			288			-
Gain on sales of securities		(142	)		(142	)		-
Gain on branch acquisition		-			-			-
Gain on Greater Atlantic acquisition		-			-			-
Net loss on other real estate owned		274			274			-
Provision for deferred income taxes		-			(1,724	)		(1,724	)	e
Net (increase) decrease in other assets		(113	)		(328	)		(215	)	e
Net increase (decrease) in other liabilities		(3,912	)		(3,885	)		27		e
Net cash and cash equivalents provided by operating activities		8,619			2,838			(5,781	)
Investing activities:
Purchases of securities available-for-sale		-			-
Proceeds from sales of securities available for sale		4,728			4,728			-
Proceeds from paydowns, maturities and calls of securities available for sale		2,857			2,857			-
Purchases of securities held to maturity		-			-			-
Proceeds from paydowns, maturities and calls of securities held to maturity		12,892			12,892			-
Loan originations and payments, net		(9,633	)		(3,852	)		5,781		b
Proceeds from sale of SBA loans		-			-			-
Net cash received in branch acquisition		-			-			-
Net cash received in Greater Atlantic acquisition		-			-			-
Net increase in stock in Federal Reserve Bank and Federal Home Loan Bank		(410	)		(410	)		-
Proceeds from sale of other real estate owned		2,570			2,570			-
Purchases of bank premises and equipment		(1,971	)		(1,971	)		-
Net cash and cash equivalents provided by investing activities		11,033			16,814			5,781
Financing activities:
Net decrease in deposits		(24,817	)		(24,817	)		-
Proceeds from Federal Home Loan Bank advances		5,000			5,000			-
Repayment of Federal Home Loan Bank advances		-			-			-
Net increase (decrease) in securities sold under agreement to repurchase and								-
other short-term borrowings		1,888			1,888			-
Issuance of common stock, net of issuance costs		-			-			-
Additional cost of 2009 common stock issuance		(48	)		(48	)		-
Net cash and cash equivalents used in financing activities		(17,977	)		(17,977	)		-
Increase (decrease) in cash and cash equivalents		1,675			1,675			-
Cash and cash equivalents at beginning of period		8,070			8,070			-
Cash and cash equivalents at end of period	$	9,745		$	9,745		$	-
Supplemental disclosure of cash flow information
Cash payments for:
Interest	$	8,851		$	8,851			-
Income taxes		1,557			1,557			-
Supplemental schedule of noncash investing and financing activities
Transfer from non-covered loans to other real estate owned		3,209			3,209			-
Transfer from covered loans to other real estate owned		676			676			-