XNAS:OVBC Ohio Valley Banc Corporation Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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United States
Securities and Exchange Commission
Washington, D.C. 20549

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number 0-20914


OHIO VALLEY BANC CORP.
(Exact name of registrant as specified in its charter)

Ohio
31-1359191
(State of Incorporation)
(I.R.S. Employer Identification No.)

420 Third Avenue
 
Gallipolis, Ohio
45631
(Address of principal executive offices)
(ZIP Code)

(740) 446-2631
(Issuer’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 o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No o

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

Large accelerated filer
o
 
Accelerated filer
x
Non-accelerated filer
o
 
Smaller reporting company
o

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

The number of common shares of the registrant outstanding as of August 9, 2012 was 4,029,439.

 
 

 


OHIO VALLEY BANC CORP.
Index

   
Page Number
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements (Unaudited)
 
 
Consolidated Balance Sheets
3
 
Consolidated Statements of Income and Comprehensive Income
4
 
Condensed Consolidated Statements of Changes in Shareholders’ Equity
5
 
Condensed Consolidated Statements of Cash Flows
6
 
Notes to the Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
24
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
40
Item 4.
Controls and Procedures
41
     
PART II.
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
42
Item 1A.
Risk Factors
42
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
43
Item 3.
Defaults Upon Securities
43
Item 4.
Mine Safety Disclosures
43
Item 5.
Other Information
43
Item 6.
Exhibits
43
     
Signatures
 
44
     
Exhibit Index
 
45






















 
2

 

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

OHIO VALLEY BANC CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)

   
June 30,
2012
   
December 31,
2011
 
   
UNAUDITED
       
ASSETS
           
Cash and noninterest-bearing deposits with banks
  $ 9,807     $ 8,914  
Interest-bearing deposits with banks
    63,916       42,716  
Total cash and cash equivalents
    73,723       51,630  
                 
Securities available for sale
    93,758       85,670  
Securities held to maturity
(estimated fair value: 2012 - $24,815; 2011 - $22,847)
    24,269       22,848  
Federal Home Loan Bank stock
    6,281       6,281  
                 
Total loans
    564,074       598,308  
    Less: Allowance for loan losses
    (7,527 )     (7,344 )
Net loans
    556,547       590,964  
                 
Premises and equipment, net
    8,919       9,216  
Other real estate owned
    3,292       4,256  
Accrued income receivable
    2,371       2,872  
Goodwill
    1,267       1,267  
Bank owned life insurance and annuity assets
    24,762       23,097  
Prepaid FDIC insurance
    1,079       1,609  
Other assets
    5,104       4,467  
Total assets
  $ 801,372     $ 804,177  
                 
LIABILITIES
               
Noninterest-bearing deposits
  $ 141,620     $ 138,143  
Interest-bearing deposits
    541,559       549,743  
Total deposits
    683,179       687,886  
                 
Other borrowed funds
    20,089       20,296  
Subordinated debentures
    13,500       13,500  
Accrued liabilities
    9,793       10,652  
Total liabilities
    726,561       732,334  
                 
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5)
    ----       ----  
                 
SHAREHOLDERS’ EQUITY
               
Common stock ($1.00 stated value per share, 10,000,000 shares authorized;
  2012 – 4,689,178 shares issued; 2011 - 4,686,295 shares issued)
    4,689       4,686  
Additional paid-in capital
    33,525       33,473  
Retained earnings
    50,923       48,435  
Accumulated other comprehensive income
    1,386       961  
Treasury stock, at cost (659,739 shares)
    (15,712 )     (15,712 )
Total shareholders’ equity
    74,811       71,843  
Total liabilities and shareholders’ equity
  $ 801,372     $ 804,177  



 
3

 

 
OHIO VALLEY BANC CORP.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (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, including fees
  $ 8,933     $ 10,090     $ 18,897     $ 21,389  
Securities
                               
Taxable
    446       473       872       918  
Tax exempt
    148       137       293       280  
Dividends
    67       70       138       141  
Other Interest
    63       47       122       114  
      9,657       10,817       20,322       22,842  
Interest expense:
                               
Deposits
    1,302       2,227       2,676       4,583  
Other borrowed funds
    123       164       248       358  
Subordinated debentures
    179       272       433       544  
      1,604       2,663       3,357       5,485  
Net interest income
    8,053       8,154       16,965       17,357  
Provision for loan losses
    524       759       1,840       3,703  
Net interest income after provision for loan losses
    7,529       7,395       15,125       13,654  
                                 
Noninterest income:
                               
Service charges on deposit accounts
    460       553       910       1,093  
Trust fees
    51       56       100       115  
Income from bank owned life insurance and annuity assets
    200       182       394       361  
Mortgage banking income
    135       60       232       137  
Electronic refund check / deposit fees
    226       265       2,264       2,533  
Debit / credit card interchange income
    421       344       816       644  
Gain on sale of other real estate owned
    143       5       151       10  
Other
    338       222       586       453  
      1,974       1,687       5,453       5,346  
Noninterest expense:
                               
Salaries and employee benefits
    4,185       4,084       8,453       8,107  
Occupancy
    383       378       785       804  
Furniture and equipment
    235       282       472       562  
FDIC insurance
    275       285       566       612  
Data processing
    229       215       508       451  
Foreclosed assets, net
    65       31       175       57  
Other
    1,790       1,706       3,535       3,486  
      7,162       6,981       14,494       14,079  
                                 
Income before income taxes
    2,341       2,101       6,084       4,921  
Provision for income taxes
    622       546       1,743       1,333  
                                 
NET INCOME
  $ 1,719     $ 1,555     $ 4,341     $ 3,588  
                                 
Other comprehensive income:
                               
    Change in unrealized gain/losses on securities, net of taxes
    321       657       425       769  
                                 
Comprehensive income
  $ 2,040     $ 2,212     $ 4,766     $ 4,357  
                                 
Earnings per share
  $ .43     $ .39     $ 1.08     $ .90  


 
4

 
 
OHIO VALLEY BANC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(dollars in thousands, except share and per share data)
 
   
   
Three months ended
June 30,
   
Six months ended
 June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Balance at beginning of period
  $ 73,779     $ 69,433     $ 71,843     $ 68,128  
                                 
Comprehensive income:
                               
   Net income
    1,719       1,555       4,341       3,588  
   Change in unrealized gain on available for sale securities
    486       995       644       1,166  
   Income tax effect
    (165 )     (338 )     (219     (397
          Total comprehensive income
    2,040       2,212       4,766       4,357  
                                 
Proceeds from issuance of common stock through dividend
                               
reinvestment plan
    ----       ----       55       ----  
                                 
Cash dividends
    (1,008 )     (840 )     (1,853 )     (1,680 )
                                 
Balance at end of period
  $ 74,811     $ 70,805     $ 74,811     $ 70,805  
                                 
Cash dividends per share
  $ 0.25     $ 0.21     $ 0.46     $ 0.42  



























 
5

 


OHIO VALLEY BANC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (UNAUDITED)
(dollars in thousands)
 
             
   
Six months ended
June 30,
 
   
2012
   
2011
 
             
Net cash provided by operating activities:
  $ 6,116     $ 9,907  
                 
Investing activities:
               
Proceeds from maturities of securities available for sale
    17,755       13,306  
Purchases of securities available for sale
    (25,814 )     (27,534 )
Proceeds from maturities of securities held to maturity
    989       816  
Purchases of securities held to maturity
    (2,435 )     ----  
Net change in loans
    32,242       11,115  
Proceeds from sale of other real estate owned
    1,450       313  
Purchases of premises and equipment
    (227 )     (343 )
Purchases of bank owned life insurance
    (1,271 )     ----  
Net cash provided by (used in) investing activities
    22,689       (2,327 )
                 
Financing activities:
               
Change in deposits
    (4,707 )     (13,227 )
Proceeds from common stock through dividend reinvestment plan
    55       ----  
Cash dividends
    (1,853 )     (1,680 )
Change in securities sold under agreements to repurchase
    ----       (1,427 )
Proceeds from Federal Home Loan Bank borrowings
    500       ----  
Repayment of Federal Home Loan Bank borrowings
    (407 )     (3,403 )
Change in other short-term borrowings
    (300 )     372  
Net cash (used in) financing activities
    (6,712     (19,365
                 
Change in cash and cash equivalents
    22,093       (11,785 )
Cash and cash equivalents at beginning of period
    51,630       59,751  
Cash and cash equivalents at end of period
  $ 73,723     $ 47,966  
                 
Supplemental disclosure:
               
                 
Cash paid for interest
  $ 3,530     $ 5,592  
Cash paid for income taxes
    2,790       330  
Non-cash transfers from loans to other real estate owned
    335       227  
Other real estate owned sales financed by the Bank
    930       209  


 
6

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION:  The accompanying consolidated financial statements include the accounts of Ohio Valley Banc Corp. (“Ohio Valley”) and its wholly-owned subsidiaries, The Ohio Valley Bank Company (the “Bank”), Loan Central, Inc. (“Loan Central”), a consumer finance company, and Ohio Valley Financial Services Agency, LLC (“Ohio Valley Financial Services”), an insurance agency.  Ohio Valley and its subsidiaries are collectively referred to as the “Company”.  All material intercompany accounts and transactions have been eliminated in consolidation.
 
These interim financial statements are prepared by the Company without audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at June 30, 2012, and its results of operations and cash flows for the periods presented.  The results of operations for the six months ended June 30, 2012 are not necessarily indicative of the operating results to be anticipated for the full fiscal year ending December 31, 2012.  The accompanying consolidated financial statements do not purport to contain all the necessary financial disclosures required by U.S. generally accepted accounting principles (“US GAAP”) that might otherwise be necessary in the circumstances.  The Annual Report of the Company for the year ended December 31, 2011 contains consolidated financial statements and related notes which should be read in conjunction with the accompanying consolidated financial statements.

The consolidated financial statements for 2011 have been reclassified to conform to the presentation for 2012.  These reclassifications had no effect on the net results of operations.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:  The accounting and reporting policies followed by the Company conform to US GAAP.  The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements.  Actual results could differ from those estimates.  Areas involving the use of management’s estimates and assumptions that are more susceptible to change in the near term involve the allowance for loan losses, mortgage servicing rights, deferred tax assets, the fair value of certain securities, the fair value of financial instruments and the determination and carrying value of impaired loans and other real estate owned.

INDUSTRY SEGMENT INFORMATION:  Internal financial information is primarily reported and aggregated in two lines of business, banking and consumer finance.

EARNINGS PER SHARE:  Earnings per share are computed based on net income divided by the weighted average number of common shares outstanding during the period.  The weighted average common shares outstanding were 4,029,439 and 4,000,056 for the three months ended June 30, 2012 and 2011, respectively.  Weighted average common shares outstanding were 4,028,694 and 4,000,056 for the six months ended June 30, 2012 and 2011, respectively.  Ohio Valley had no dilutive effect and no potential common shares issuable under stock options or other agreements for any period presented.
 
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS:
 
In May, 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles.  Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  The effect of adopting this standard did not have a material effect on the Company’s operating results or financial condition, but the additional disclosures are included in Note 2 – Fair Value of Financial Instruments.

 
7

 
In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholder’s equity.  The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The adoption of this amendment changed the presentation of the statement of comprehensive income for the Company to one continuous statement instead of presented as part of the consolidated statement of shareholder’s equity.

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair values:

Level 1:  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access as of the measurement date.

Level 2:  Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3:  Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The following is a description of the Company’s valuation methodologies used to measure and disclose the fair values of its financial assets on a recurring or nonrecurring basis:

Securities:  The fair values for securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value.  Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses.  For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.  Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification.  Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.  These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

 
8

 
Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company.  Once received, a member of management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with management’s own assumptions of fair value based on factors that include recent market data or industry-wide statistics.  On an as-needed basis, the Company reviews the fair value of collateral, taking into consideration current market data, as well as all selling costs that are typically in the range of 10%.

Mortgage Servicing Rights: On a quarterly basis, loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount.  If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value.  Fair value is determined at a tranche level, based on discounted cash flows (Level 3).

Assets Measured on a Recurring Basis
Assets measured at fair value on a recurring basis are summarized below:

   
Fair Value Measurements at June 30, 2012, Using
 
 
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable
 Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                 
U.S. Treasury securities
    ----     $ 1,501       ----  
U.S. Government sponsored entity securities
    ----       1,005       ----  
Agency mortgage-backed securities, residential
    ----       91,253       ----  

   
Fair Value Measurements at December 31, 2011, Using
 
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable
 Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                 
U.S. Treasury securities
    ----     $ 5,513       ----  
U.S. Government sponsored entity securities
    ----       2,559       ----  
Agency mortgage-backed securities, residential
    ----       77,598       ----  

There were no transfers between Level 1 and Level 2 during 2012 or 2011.

Assets Measured on a Nonrecurring Basis
Assets measured at fair value on a nonrecurring basis are summarized below:

   
Fair Value Measurements at June 30, 2012, Using
 
 
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable
Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                 
Impaired Loans:
                 
  Commercial real estate:
             
 
 
     Owner-occupied
    ----       ----     $ 2,407  
     Nonowner-occupied
    ----       ----       409  
                         
Mortgage servicing rights
    ----       ----       417  

 
9

 
 
   
Fair Value Measurements at December 31, 2011, Using
 
 
 
 
Assets:
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable
Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Impaired Loans:
                 
  Commercial real estate:
                 
     Owner-occupied
    ----       ----     $ 290  
     Nonowner-occupied
    ----       ----       1,959  
     Construction
    ----       ----       587  
                         
Mortgage servicing rights
    ----       ----       430  
                         
Other real estate owned:
                       
  Commercial real estate:
                       
     Construction
    ----       ----       1,814  
  Commercial and industrial
    ----       ----       1,134  

The portion of impaired loans at June 30, 2012 with specific allocations of the allowance for loan losses had a carrying amount of $4,661 and was measured for impairment using the income and comparable sales approach.  This measurement resulted in a valuation allowance of $1,845 at June 30, 2012, which contributed to an increase of $1,946 in provision for loan loss expense during the six months ended June 30, 2012. This increase was larger than the increase of $1,306 in provision for loan loss expense from impaired loans during the six months ended June 30, 2011. The portion of impaired loans at December 31, 2011 with specific allocations of the allowance for loan losses had a carrying amount of $3,491. The loans were measured for impairment using the income approach. This measurement resulted in a valuation allowance of $655 at December 31, 2011.

During the six months ended June 30, 2012, there was no change in valuation adjustments recorded on mortgage servicing rights measured at fair value.  Mortgage servicing rights, which are carried at lower of cost or fair value, were carried at their fair value of $417, which is made up of the outstanding balance of $560, net of a valuation allowance of $143 at June 30, 2012. This fair value is slightly less than the fair value of $430 at December 31, 2011, made up of the outstanding balance of $573, net of a valuation allowance of $143.  This decrease in mortgage servicing rights from December 31, 2011 to June 30, 2012 is largely due to amortization that is recorded in proportion to and over the period of the mortgage servicing rights’ estimated future servicing income of the underlying loans.

During the six months ended June 30, 2012, there was no other real estate owned measured at fair value less costs to sell.  Other real estate owned that was measured at fair value less costs to sell at December 31, 2011 had a net carrying amount of $2,948, which was made up of the outstanding balance of $4,214, net of a valuation allowance of $1,266, which resulted in a corresponding write-down of $1,266 for the year ended December 31, 2011.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2012:
   
 
Fair Value
 
 
Valuation Technique(s)
 
Unobservable Input(s)
 
 
Range
   
(Weighted Average)
 
Impaired Loans:
                     
  Commercial real estate:
                     
     Owner-occupied
  $ 2,152  
Income approach
Adjustment for differences between the comparable sales
 
from -10%
to     -20%
      -18%  
         
Income approach
Capitalization rate
 
from 7%
to    10%
         
     Owner-occupied
    255  
Income approach
Capitalization rate
    10%          
     Nonowner-occupied
    409  
Income approach
Capitalization rate
    10%          


 
10

 

The carrying amounts and estimated fair values of financial instruments at June 30, 2012 and December 31, 2011 are as follows:
Fair Value Measurements at June 30, 2012 Using:
   
Carrying
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial Assets:
                             
Cash and cash equivalents
  $ 73,723     $ 73,723     $ ----     $ ----     $ 73,723  
Securities available for sale
    93,758       ----       93,758       ----       93,758  
Securities held to maturity
    24,269       ----       11,917       12,898       24,815  
Federal Home Loan Bank stock
    6,281       N/A       N/A       N/A       N/A  
Loans
    564,074       ----       ----       581,056       581,056  
Accrued interest receivable
    2,371       ----       554       1,817       2,371  
                                         
Financial liabilities:
                                       
Deposits
    683,179       142,421       543,059       ----       685,480  
Other borrowed funds
    20,089       ----       20,574       ----       20,574  
Subordinated debentures
    13,500       ----       10,304       ----       10,304  
Accrued interest payable
    1,721       ----       1,721       ----       1,721  

   
December 31, 2011
 
   
Carrying
Value
   
Fair
Value
 
Financial Assets:
           
Cash and cash equivalents
  $ 51,630     $ 51,630  
Securities available for sale
    85,670       85,670  
Securities held to maturity
    22,848       22,847  
Federal Home Loan Bank stock
    6,281       N/A  
Loans
    590,964       599,782  
Accrued interest receivable
    2,872       2,872  
                 
Financial liabilities:
               
Deposits
    687,886       690,607  
Other borrowed funds
    20,296       20,565  
Subordinated debentures
    13,500       11,085  
Accrued interest payable
    1,894       1,894  

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

Cash and Cash Equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Federal Home Loan Bank stock: It is not practical to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability.

Securities Held to Maturity:  The fair values for securities held to maturity are determined in the same manner as securities held for sale and discussed earlier in this note.  Level 3 securities consist of nonrated municipal bonds and tax credit (“QZAB”) bonds.

Loans: Fair values of loans are estimated as follows:  The fair value of fixed rate loans is estimated by discounting future cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification.  For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification.  Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Deposit Liabilities: The fair values disclosed for noninterest-bearing deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

 
11

 
Other Borrowed Funds: The carrying values of the Company’s short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification. The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Subordinated Debentures: The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Accrued Interest Receivable and Payable: The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification.

Off-balance Sheet Instruments:  Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

In addition, other assets and liabilities that are not defined as financial instruments were not included in the disclosures below, such as premises and equipment and life insurance contracts.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

NOTE 3 – SECURITIES

The following table summarizes the amortized cost and estimated fair value of the available for sale and held to maturity securities portfolio at June 30, 2012 and December 31, 2011 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income for available for sale securities and gross unrecognized gains and losses for held to maturity securities:
 
 
 
Securities Available for Sale
 
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair Value
 
June 30, 2012
                       
  U.S. Treasury securities
  $ 1,501     $ ----     $ ----     $ 1,501  
  U.S. Government sponsored entity securities
    1,011       ----       (6 )     1,005  
  Agency mortgage-backed securities, residential
    89,146       2,127       (21 )     91,252  
      Total securities
  $ 91,658     $ 2,127     $ (27 )   $ 93,758  
                                 
December 31, 2011
                               
  U.S. Treasury securities
  $ 5,510     $ 3     $ ----     $ 5,513  
  U.S. Government sponsored entity securities
    2,501       58       ----       2,559  
  Agency mortgage-backed securities, residential
    76,203       1,407       (12 )     77,598  
      Total securities
  $ 84,214     $ 1,468     $ (12 )   $ 85,670  

 
12

 
 


 
Securities Held to Maturity
 
Amortized Cost
   
Gross Unrecognized Gains
   
Gross Unrecognized Losses
   
Estimated
Fair Value
 
June 30, 2012
                       
  Obligations of states and political subdivisions
  $ 24,249     $ 616     $ (70 )   $ 24,795  
  Agency mortgage-backed securities, residential
    20       ----       ----       20  
      Total securities
  $ 24,269     $ 616     $ (70 )   $ 24,815  
                                 
December 31, 2011
                               
  Obligations of states and political subdivisions
  $ 22,825     $ 558     $ (559 )   $ 22,824  
  Agency mortgage-backed securities, residential
    23       ----       ----       23  
      Total securities
  $ 22,848     $ 558     $ (559 )   $ 22,847  

The amortized cost and estimated fair value of the securities portfolio at June 30, 2012, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay the debt obligations prior to their contractual maturities.  Securities not due at a single maturity are shown separately.

   
Available for Sale
   
Held to Maturity
 
 
Debt Securities:
 
Amortized Cost
   
Estimated
Fair Value
   
Amortized Cost
   
Estimated
Fair Value
 
                         
  Due in one year or less
  $ 1,501     $ 1,501     $ 421     $ 427  
  Due in over one to five years
    1,011       1,005       3,663       3,733  
  Due in over five to ten years
    ----       ----       10,778       10,982  
  Due after ten years
    ----       ----       9,387       9,653  
  Agency mortgage-backed securities, residential
    89,146       91,252       20       20  
      Total debt securities
  $ 91,658     $ 93,758     $ 24,269     $ 24,815  

The following table summarizes the investment securities with unrealized losses at June 30, 2012 and December 31, 2011 by aggregated major security type and length of time in a continuous unrealized loss position:
Less Than 12 Months
 
12 Months or More
 
Total
June 30, 2012
 
 
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
 Loss
 
Securities Available for Sale
                                   
U.S. Government sponsored
                                   
  entity securities
  $ 1,005     $ (6 )   $ ----     $ ----     $ 1,005     $ (6 )
Agency mortgage-backed
                                               
  securities, residential
    12,387       (21 )     ----       ----       12,387       (21 )
    Total available for sale
  $ 13,392     $ (27 )   $ ----     $ ----     $ 13,392     $ (27 )

   
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrecognized Loss
   
Fair
Value
   
Unrecognized Loss
   
Fair
Value
   
Unrecognized Loss
 
Securities Held to Maturity
                                   
Obligations of states and
                                   
  political subdivisions
  $ 2,927     $ (37 )   $ 1,595     $ (33 )   $ 4,522     $ (70 )
    Total held to maturity
  $ 2,927     $ (37 )   $ 1,595     $ (33 )   $ 4,522     $ (70 )


 
13

 

Less Than 12 Months
 
12 Months or More
 
Total
 
December 31, 2011
 
 
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
 Loss
 
Securities Available for Sale
                                   
Agency mortgage-backed
                                   
  securities, residential
  $ 7,621     $ (12 )   $ ----     $ ----     $ 7,621     $ (12 )
    Total available for sale
  $ 7,621     $ (12 )   $ ----     $ ----     $ 7,621     $ (12 )

 
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrecognized Loss
   
Fair
Value
   
Unrecognized Loss
   
Fair
Value
   
Unrecognized Loss
 
Securities Held to Maturity
                                   
Obligations of states and
                                   
  political subdivisions
  $ 664     $ (21 )   $ 3,557     $ (538 )   $ 4,221     $ (559 )
    Total held to maturity
  $ 664     $ (21 )   $ 3,557     $ (538 )   $ 4,221     $ (559 )

Unrealized losses on the Company's debt securities have not been recognized into income because the issuers' securities are of high credit quality and management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery.  Management does not believe any individual unrealized loss at June 30, 2012 represents an other-than-temporary impairment.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are comprised of the following:
 
June 30,
   
December 31,
 
   
2012
   
2011
 
Residential real estate
  $ 233,130     $ 238,490  
Commercial real estate:
               
    Owner-occupied
    110,271       132,303  
    Nonowner-occupied
    49,898       53,681  
    Construction
    23,740       21,471  
Commercial and industrial
    45,982       45,200  
Consumer:
               
    Automobile
    42,284       45,702  
    Home equity
    19,164       20,507  
    Other
    39,605       40,954  
      564,074       598,308  
Less:  Allowance for loan losses
    7,527       7,344  
                 
Loans, net
  $ 556,547     $ 590,964  

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2012 and 2011:

June 30, 2012
 
 
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
and Industrial
   
Consumer
   
Total
 
Allowance for loan losses:
                             
    Beginning balance
  $ 1,491     $ 3,423     $ 623     $ 1,310     $ 6,847  
    Provision for loan losses
    18       1,004       (319 )     (179 )     524  
    Loans charged off
    (85 )     (62 )     ----       (298 )     (445 )
    Recoveries
    19       4       349       229       601  
    Total ending allowance balance
  $ 1,443     $ 4,369     $ 653     $ 1,062     $ 7,527  
 
 
June 30, 2011
 
 
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
and Industrial
   
Consumer
   
Total
 
Allowance for loan losses:
                             
    Beginning balance
  $ 1,337     $ 4,251     $ 1,140     $ 1,324     $ 8,052  
    Provision for loan losses
    489       (116 )     421       (35 )     759  
    Loans charged off
    (722 )     (1,547 )     (862 )     (330 )     (3,461 )
    Recoveries
    29       804       71       225       1,129  
    Total ending allowance balance
  $ 1,133     $ 3,392     $ 770     $ 1,184     $ 6,479  

 
14

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2012 and 2011:

June 30, 2012
 
 
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
and Industrial
   
Consumer
   
Total
 
Allowance for loan losses:
                             
    Beginning balance
  $ 1,730     $ 3,623     $ 636     $ 1,355     $ 7,344  
    Provision for loan losses
    295       1,896       (407 )     56       1,840  
    Loans charged off
    (678 )     (1,158 )     (70 )     (817 )     (2,723 )
    Recoveries
    96       8       494       468       1,066  
    Total ending allowance balance
  $ 1,443     $ 4,369     $ 653     $ 1,062     $ 7,527  

June 30, 2011
 
 
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
and Industrial
   
Consumer
   
Total
 
Allowance for loan losses:
                             
    Beginning balance
  $ 1,051     $ 3,083     $ 3,795     $ 1,457     $ 9,386  
    Provision for loan losses
    1,014       985       1,605       99       3,703  
    Loans charged off
    (969 )     (1,587 )     (4,701 )     (747 )     (8,004 )
    Recoveries
    37       911       71       375       1,394  
    Total ending allowance balance
  $ 1,133     $ 3,392     $ 770     $ 1,184     $ 6,479  

The following table presents the balance in the allowance for loan losses and the recorded investment of loans by portfolio segment and based on impairment method as of June 30, 2012 and December 31, 2011:

June 30, 2012
 
 
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
and Industrial
   
Consumer
   
Total
 
Allowance for loan losses:
                             
    Ending allowance balance attributable to loans:
                             
        Individually evaluated for impairment
  $ 128     $ 1,845     $ ----     $ ----     $ 1,973  
        Collectively evaluated for impairment
    1,315       2,524       653       1,062       5,554  
            Total ending allowance balance
  $ 1,443     $ 4,369     $ 653     $ 1,062     $ 7,527  
                                         
Loans:
                                       
        Loans individually evaluated for impairment
  $ 1,454     $ 13,104     $ ----     $ 242     $ 14,800  
        Loans collectively evaluated for impairment
    231,676       170,805       45,982       100,811       549,274  
            Total ending loans balance
  $ 233,130     $ 183,909     $ 45,982     $ 101,053     $ 564,074  

December 31, 2011
 
 
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
and Industrial
   
Consumer
   
Total
 
Allowance for loan losses:
                             
    Ending allowance balance attributable to loans:
                             
        Individually evaluated for impairment
  $ 130     $ 525     $ ----     $ ----     $ 655  
        Collectively evaluated for impairment
    1,730       2,968       636       1,355       6,689  
            Total ending allowance balance
  $ 1,860     $ 3,493     $ 636     $ 1,355     $ 7,344  
                                         
Loans:
                                       
        Loans individually evaluated for impairment
  $ 1,505     $ 9,733     $ 334     $ ----     $ 11,572  
        Loans collectively evaluated for impairment
    225,404       209,303       44,866       107,163       586,736  
            Total ending loans balance
  $ 226,909     $ 219,036     $ 45,200     $ 107,163     $ 598,308  


 
15

 

The following table presents information related to loans individually evaluated for impairment by class of loans:

Six months ended June 30, 2012
 
 
Unpaid Principal Balance
   
Recorded
Investment
   
Allowance for Loan Losses Allocated
   
Average Impaired Loans
   
Interest Income Recognized
   
Cash Basis Interest Recognized
 
With no related allowance recorded:
                                   
    Residential real estate
  $ 1,174     $ 1,034     $ ----     $ 886     $ 18     $ 13  
    Commercial real estate:
                                               
        Owner-occupied
    7,410       7,159       ----       5,631       264       244  
        Nonowner-occupied
    1,790       889       ----       934       24       23  
        Construction
    675       395       ----       488       6       6  
    Consumer:
                                               
        Automobile
    22       22       ----       15       1       1  
        Home equity
    220       220       ----       147       5       5  
With an allowance recorded:
                                               
    Residential real estate
    420       420       128       420       17       13  
    Commercial real estate:
                                               
        Owner-occupied
    3,614       3,614       1,207       3,529       77       69  
        Nonowner-occupied
    1,298       1,047       638       1,198       18       17  
            Total
  $ 16,623     $ 14,800     $ 1,973     $ 13,248     $ 430     $ 391  

Six months ended June 30, 2011
 
 
Unpaid Principal Balance
   
Recorded
Investment
   
Allowance for Loan Losses Allocated
   
Average Impaired Loans
   
Interest Income Recognized
   
Cash Basis Interest Recognized
 
With no related allowance recorded:
                                   
    Residential real estate