PINX:NBOH National Bancshares Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

PINX:NBOH Fair Value Estimate
Premium
PINX:NBOH Consider Buying
Premium
PINX:NBOH Consider Selling
Premium
PINX:NBOH Fair Value Uncertainty
Premium
PINX:NBOH Economic Moat
Premium
PINX:NBOH Stewardship
Premium
 
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2012

OR

 

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

Commission File Number 0-14773

 

 

NATIONAL BANCSHARES CORPORATION

exact name of registrant as specified in its charter

 

 

 

Ohio   34-1518564
State of incorporation  

IRS Employer

Identification No.

112 West Market Street, Orrville, Ohio 44667

Address of principal executive offices

Registrant’s telephone number: (330) 682-1010

 

 

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 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 as defined in Rule 12b-2 of the Exchange Act. See definition 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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 14, 2012.

Common Stock, Without Par Value: 2,216,599 shares Outstanding

 

 

 


Table of Contents

NATIONAL BANCSHARES CORPORATION

Index

 

           

Page

Number

Part I. Financial Information   

Item 1.

     Financial Statements (Unaudited)   
     Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011    2
     Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2012 and 2011    3
     Condensed Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2012 and 2011    5
     Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011    6
     Notes to Consolidated Financial Statements (Unaudited)    7 -23

Item 2.

     Management’s Discussion and Analysis of Financial Condition and Results of Operations    23 -28

Item 3.

     Quantitative and Qualitative Disclosures About Market Risk    28 -29

Item 4T.

     Controls and Procedures    29
Part II. Other Information   

Item 1.

     Legal Proceedings – None    30

Item 1A.

     Risk Factors    30

Item 2.

     Unregistered Sales of Equity Securities and Use of Proceeds - None    30

Item 3.

     Defaults Upon Senior Securities – None    30

Item 4.

     Mine Safety Disclosures – None    30

Item 5.

     Other Information – None    30

Item 6.

     Exhibits    30
Signatures         31
Exhibits        


Table of Contents

Item 1. Financial Statements

NATIONAL BANCSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS (Unaudited)

 

(dollars in thousands)             
     Mar. 31,
2012
    Dec. 31,
2011
 

ASSETS

    

Cash and due from banks

   $ 23,125      $ 15,213   

Time deposits with other financial institutions

     —          246   

Securities available for sale

     145,930        150,175   

Restricted equity securities

     3,220        3,220   

Loans held for sale

     —          207   

Loans, net of allowance for loan losses:

    

March 31, 2012 - $3,184; December 31, 2011 - $3,163

     222,346        213,952   

Premises and equipment, net

     11,965        12,173   

Goodwill

     4,723        4,723   

Accrued interest receivable

     1,535        1,404   

Cash surrender value of life insurance

     2,665        2,649   

Other assets

     2,222        2,124   
  

 

 

   

 

 

 

Total assets

   $ 417,731      $ 406,086   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Deposits

    

Noninterest bearing

   $ 78,817      $ 70,810   

Interest bearing

     273,591        269,854   
  

 

 

   

 

 

 

Total deposits

     352,408        340,664   

Repurchase agreements

     9,816        10,168   

Federal Home Loan Bank advances

     8,000        8,000   

Accrued interest payable

     207        219   

Accrued expenses and other liabilities

     4,144        4,290   
  

 

 

   

 

 

 

Total liabilities

     374,575        363,341   

SHAREHOLDERS’ EQUITY

    

Common stock, no par value; 6,000,000 shares authorized; 2,289,528 shares issued

     11,447        11,447   

Additional paid-in capital

     4,836        4,815   

Retained earnings

     24,840        24,335   

Treasury stock, at cost (72,929 and 76,259 shares)

     (1,430     (1,495

Accumulated other comprehensive income

     3,463        3,643   
  

 

 

   

 

 

 

Total shareholders’ equity

     43,156        42,745   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 417,731      $ 406,086   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

NATIONAL BANCSHARES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)

 

 

 

(dollars in thousands, except per share data)             
     Three months ended  
     Mar. 31, 2012     Mar. 31, 2011  

Interest and dividend income

    

Loans, including fees

   $ 2,772      $ 2,518   

Securities:

    

Taxable

     612        739   

Nontaxable

     455        390   

Federal funds sold and other

     11        28   
  

 

 

   

 

 

 

Total interest and dividend income

     3,850        3,675   

Interest expense

    

Deposits

     392        485   

Short-term borrowings

     10        11   

Federal Home Loan Bank advances

     51        82   
  

 

 

   

 

 

 

Total interest expense

     453        578   
  

 

 

   

 

 

 

Net interest income

     3,397        3,097   

Provision for loan losses

     149        147   
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     3,248        2,950   

Noninterest income

    

Checking account fees

     256        266   

Visa check card interchange fees

     138        121   

Deposit and miscellaneous service fees

     100        75   

Mortgage banking activities

     70        37   

Securities gains, net

     —          5   

Loss on sale of other real estate owned

     (4     —     

Gain on sale of loans guaranteed by SBA

     —          128   

Other

     76        100   
  

 

 

   

 

 

 

Total noninterest income

     636        732   

Noninterest expense

    

Salaries and employee benefits

     1,493        1,494   

Data processing

     295        283   

Net occupancy

     353        367   

FDIC Assessment

     78        136   

Professional and consulting fees

     97        150   

Franchise tax

     99        93   

Maintenance and repairs

     64        77   

Amortization of intangibles

     —          21   

Telephone

     59        59   

Marketing

     60        60   

Director fees

     47        49   

Directors pension expense

     12        11   

Software expense

     67        54   

Postage and supplies

     79        74   

Other

     243        218   
  

 

 

   

 

 

 

Total noninterest expense

     3,046        3,146   
  

 

 

   

 

 

 

Income before income tax expense

     838        536   

Income tax expense

     138        49   
  

 

 

   

 

 

 

Net income

     700        487   

 

(Continued)

 

3


Table of Contents

NATIONAL BANCSHARES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)

 

 

(Continued)

     Three months ended  
     Mar. 31, 2012     Mar. 31, 2011  

Other comprehensive income (loss):

    

Unrealized appreciation (depreciation) in fair value of securities available for sale, net of taxes of $(93) and $193

     (180     371   

Reclassification adjustment for realized gains included in earnings, net of taxes of $0 and $2

     —          (3
  

 

 

   

 

 

 

Total other comprehensive income, net of taxes

     (180     368   
  

 

 

   

 

 

 

Comprehensive income

   $ 520      $ 855   
  

 

 

   

 

 

 

Weighted average basic common shares outstanding

     2,216,526        2,209,717   
  

 

 

   

 

 

 

Weighted average diluted common shares outstanding

     2,218,827        2,209,717   
  

 

 

   

 

 

 

Basic and diluted earnings per common share

   $ 0.32      $ 0.22   
  

 

 

   

 

 

 

Dividends declared per common share

   $ 0.08      $ 0.08   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

NATIONAL BANCSHARES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

 

 

(dollars in thousands, except per share data)

 

     Three months ended,  
     Mar. 31,
2012
    Mar. 31,
2011
 

Balance at beginning of period

   $ 42,745      $ 38,981   

Comprehensive income

    

Net income

     700        487   

Other comprehensive income

     (180     368   
  

 

 

   

 

 

 

Total comprehensive income

     520        855   

Stock awards issued from Treasury Shares (3,330 and 3,744 shares)

     48        50   

Compensation expense under stock-based compensation plans

     21        10   

Cash dividends declared ($0.08 per share in 2012 and 2011)

     (178     (177
  

 

 

   

 

 

 

Balance at end of period

   $ 43,156      $ 39,719   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

NATIONAL BANCSHARES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

 

(dollars in thousands, except per share data)

 

    

Three months ended

 
     Mar. 31,
2012
    Mar. 31,
2011
 

Net cash from operating activities

   $ 1,721      $ 344   

Cash flows from investing activities

    

Proceeds from time deposits with other financial institutions

     246        1,968   

Securities available for sale

    

Proceeds from maturities and repayments

     8,492        7,513   

Proceeds from sales

     —          1,114   

Purchases

     (4,964     (3,181

Purchases of property and equipment

     (12     (164

Proceeds from the sale of loans guaranteed by SBA

     —          1,832   

Proceeds from the sale of other real estate owned

     14        —     

Net change in loans

     (8,799     (4,846
  

 

 

   

 

 

 

Net cash from investing activities

     (5,023     4,236   

Cash flows from financing activities

    

Net change in deposits

     11,744        7,434   

Net change in short-term borrowings

     (352     (390

Repayments of Federal Home Loan Bank advances

     —          (3,000

Dividends paid

     (178     (176
  

 

 

   

 

 

 

Net cash from financing activities

     11,214        3,868   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     7,912        8,448   

Beginning cash and cash equivalents

     15,213        12,837   
  

 

 

   

 

 

 

Ending cash and cash equivalents

   $ 23,125      $ 21,285   
  

 

 

   

 

 

 

Supplemental Disclosures

    

Cash paid for interest

   $ 465      $ 607   

Cash paid for income taxes

   $ 310      $ —     

Supplemental noncash disclosures:

    

Transfer from loans to other real estate owned

   $ 324      $ 54   

Issuance of stock awards

   $ 48      $ 50   

Transfer from loans to loans held for sale

   $ —        $ 1,708   

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Basis of Presentation

(dollars in thousands)

Company Organization and Financial Presentation

The accompanying consolidated financial statements include the accounts of National Bancshares Corporation (the “Company”) and its wholly owned subsidiaries, First National Bank, Orrville, Ohio (the “Bank”) and NBOH Properties, LLC. All significant intercompany transactions and balances have been eliminated.

The Company provides a broad range of financial services to individuals and companies in Medina, Stark, Summit and Wayne Counties, Ohio. While the Company’s chief decision makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all the Company’s banking operations are considered by management to be aggregated in one reportable operating segment.

The consolidated financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

The consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, but do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements and footnotes in the Company’s annual report on Form 10-K for the year ended December 31, 2011. The Company believes the disclosures are adequate to make the information presented not misleading; however, the results of operations and other data presented for the periods presented are not necessarily indicative of results to be expected for the entire fiscal year.

Use of Estimates

To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses and fair values of financial instruments are particularly subject to change.

Cash Flows

Cash and cash equivalents include cash and deposits with other banks with original maturities under 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, repurchase agreements and other short-term borrowings.

Earnings Per Common Share

Earnings per common share is net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock options. 101,000 and 89,000 stock options were not considered in computing diluted earnings per common share for the three month periods ending March 31, 2012 and 2011, respectively, because they were antidilutive.

Adoption of New Accounting Standards

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 amendments in this guidance are effective for interim and annual reporting periods beginning after December 15, 2011. The adoption of this guidance has resulted in added disclosure in the consolidated financial statements.

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 amendments in this guidance are effective as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. Early adoption is permitted. The adoption of this amendment had no impact on the consolidated financial statements as the current presentation of comprehensive income is in compliance with this amendment.

 

7


Table of Contents

Note 2 – Securities

(dollars in thousands)

Securities consist of the following at March 31, 2012 and December 31, 2011:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Mar. 31, 2012

          

U.S. Government and federal agency

   $ 2,276       $ 22       $ —        $ 2,298   

State and municipal

     53,797         3,200         (9     56,988   

Mortgage-backed: residential

     84,588         2,084         (47     86,625   

Equity securities

     23         —           (4     19   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 140,684       $ 5,306       $ (60   $ 145,930   
  

 

 

    

 

 

    

 

 

   

 

 

 

Dec. 31, 2011

          

U.S. Government and federal agency

   $ 2,430       $ 16       $ —        $ 2,446   

State and municipal

     53,841         3,592         (10     57,423   

Mortgage-backed: residential

     88,362         2,060         (136     90,286   

Equity securities

     23         —           (3     20   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 144,656       $ 5,668       $ (149   $ 150,175   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     For the three months ended  
     March 31,
2012
     March 31,
2011
 

Sales of available for sale securities were as follows:

     

Proceeds

   $ —         $ 1,114   

Gross gains

     —           5   

Gross losses

     —           —     

The tax provision related to net realized gains and losses for the three months ended March 31, 2012 and 2011 was $0 and $2.

The fair value of securities at March 31, 2012 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

 

      Amortized Cost      Fair Value  

Due in one year or less

   $ 2,176       $ 2,177   

Due from one to five years

     5,951         6,173   

Due from five to ten years

     19,715         21,099   

Due after ten years

     28,231         29,837   

Mortgage-backed: residential

     84,588         86,625   

Equity securities

     23         19   
  

 

 

    

 

 

 

Total

   $ 140,684       $ 145,930   
  

 

 

    

 

 

 

Securities pledged at March 31, 2012 and December 31, 2011 had a fair value of $84,983 and $63,941 and were pledged to secure public deposits and repurchase agreements.

At March 31, 2012 and December 31, 2011, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

 

8


Table of Contents

Securities with unrealized losses at March 31, 2012 and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

 

     Less than 12 months     12 months or more     Total  

Mar. 31, 2012

   Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

State and municipal

   $ 880       $ (5   $ 321       $ (4   $ 1,201       $ (9

Mortgage-backed: residential

     11,413         (47     —           —          11,413         (47

Equity securities

     23         (4     —           —          23         (4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 12,316       $ (56   $ 321       $ (4   $ 12,637       $ (60
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
      Less than 12 months     12 months or more     Total  

Dec. 31, 2011

   Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

State and municipal

   $ 366       $ (3   $ 891       $ (7   $ 1,257       $ (10

Mortgage-backed: residential

     22,639         (136     —           —          22,639         (136

Equity securities

     20         (3     —           —          20         (3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 23,025       $ (142   $ 891       $ (7   $ 23,916       $ (149
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Management believes the unrealized losses of securities as of March 31, 2012 are the result of fluctuations in interest rates and do not reflect deterioration in the credit quality of the securities. Accordingly management considers these unrealized losses to be temporary in nature. The Company does not have the intent to sell and does not believe it is more likely than not the Company will be required to sell these securities before their recovery. The fair value of debt securities is expected to recover as the securities approach their maturity date.

 

9


Table of Contents

Note 3 – Loans and Allowance for Loan Losses

(dollars in thousands)

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2012:

 

Mar. 31, 2012

   Commercial      Commercial
Real Estate
     Residential
Real Estate
    Home
Equity
    Consumer     Total  

Beginning balance

   $ 788       $ 1,408       $ 861      $ 66      $ 40      $ 3,163   

Provision for loan losses

     34         20         (7     113        (11     149   

Loans charged-off

     —           —           (41     (91     —          (132

Recoveries

     —           —           —          —          4        4   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 822       $ 1,428       $ 813      $ 88      $ 33      $ 3,184   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2011:

 

Mar. 31, 2011

   Commercial      Commercial
Real Estate
     Residential
Real Estate
    Home
Equity
    Consumer     Unallocated     Total  

Beginning balance

   $ 460       $ 1,267       $ 675      $ 100      $ 53      $ 30      $ 2,585   

Provision for loan losses

     34         3         117        (1     19        (25     147   

Loans charged-off

     —           —           (3     —          (12     —          (15

Recoveries

     —           —           —          1        2        —          3   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 494       $ 1,270       $ 789      $ 100      $ 62      $ 5      $ 2,720   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The recorded investment in loans includes the principal balance outstanding, net of unearned and deferred income and including accrued interest receivable. The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2012 and December 31, 2011:

 

Mar. 31, 2012

   Commercial      Commercial
Real Estate
     Residential
Real Estate
     Home
Equity
     Consumer      Total  

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 175       $ 183       $ 171       $ —         $ —         $ 529   

Collectively evaluated for impairment

     647         1,245         642         88         33         2,655   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 822       $ 1,428       $ 813       $ 88       $ 33       $ 3,184   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Recorded investment in loans:

                 

Loans individually evaluated for impairment

   $ 575       $ 2,394       $ 306       $ —         $ —         $ 3,275   

Loans collectively evaluated for impairment

     34,433         72,715         78,076         30,382         7,311         222,917   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 35,008       $ 75,109       $ 78,382       $ 30,382       $ 7,311       $ 226,192   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

Dec. 31, 2011

                                                

Allowance for loan losses:

                    

Ending allowance balance attributable to loans:

                    

Individually evaluated for impairment

   $ 151       $ 183       $ 182       $ —         $ —         $ —         $ 516   

Collectively evaluated for impairment

     637         1,225         679         66         40         —           2,647   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 788       $ 1,408       $ 861       $ 66       $ 40       $ —         $ 3,163   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Recorded investment in loans:

                    

Loans individually evaluated for impairment

   $ 597       $ 2,420       $ 320       $ —         $ —         $ —         $ 3,337   

Loans collectively evaluated for impairment

     32,984         69,290         74,230         30,288         7,698         —           214,490   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 33,581       $ 71,710       $ 74,550       $ 30,288       $ 7,698       $ —         $ 217,827   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

11


Table of Contents

The impact on interest income of impaired loans was immaterial to the consolidated statements of income for the three month periods ending March 31, 2012 and 2011.

Impaired loans are generally measured for impairment using the fair value of the collateral supporting the loan. Evaluating impaired loan collateral is based on level 3 inputs utilizing outside appraisals adjusted by management for sales costs and other assumptions regarding market conditions to arrive at fair value.

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2012 and December 31, 2011:

 

             Mar. 31, 2012             Mar. 31, 2012
Three-month

Average
Recorded
Investment
 
     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance for
Loan Losses
Allocated
    

With no related allowance recorded:

           

Real estate:

           

Commercial and land development

   $ 398       $ 398       $ —         $ 402   

One-to-four family

     45         45         —           46   

Real estate construction:

           

Commercial and land development

     1,234         1,234         —           1,244   

Commercial

     29         29         —           29   

With an allowance recorded:

           

Real estate:

           

Commercial and land development

     762         762         183         762   

One-to-four family

     261         261         171         262   

Commercial

     546         546         175         546   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,275       $ 3,275       $ 529       $ 3,291   
  

 

 

    

 

 

    

 

 

    

 

 

 
             Dec. 31, 2011             Mar. 31, 2011
Three-month
Average
Recorded
Investment
 
     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance for
Loan Losses
Allocated
    

Dec. 31, 2011

           

With no related allowance recorded:

           

Real estate:

           

Commercial and land development

   $ 406       $ 406       $ —         $ 486   

One-to-four family

     46         46         —           51   

Real estate construction:

           

Commercial and land development

     1,252         1,252         —           1,316   

Commercial

     29         29         —           406   

With an allowance recorded:

           

Real estate:

           

Commercial and land development

     762         762         183         925   

One-to-four family

     274         274         182         1,087   

Commercial

     568         568         151         198   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,337       $ 3,337       $ 516       $ 4,469   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

12


Table of Contents

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2012 and December 31, 2011:

 

     Mar. 31, 2012      Dec. 31, 2011  
     Nonaccrual      Loans Past Due
90 or More  Days
Still Accruing
     Nonaccrual      Loans Past Due
90 or More  Days
Still Accruing
 

Real estate:

           

Commercial and land development

   $ 1,160       $ —         $ 1,168       $ —     

One-to-four family

     370         179         438         181   

Home equity

     —           27         382         —     

Real estate construction:

           

Commercial and land development

     1,234         —           1,252         —     

Commercial

     574         —           596         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,338       $ 206       $ 3,836       $ 181   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the aging of the recorded investment in past due loans as of March 31, 2012 by class of loans:

 

     30 - 59
Days
Past Due (1)
     60 - 89
Days

Past  Due
     90 or More
Days
Past Due (2)
     Total
Past Due
     Loans Not
Past Due (3)
     Total  

Real estate:

                 

Commercial and land development

   $ —         $ —         $ 922       $ 922       $ 68,809       $ 69,731   

One-to-four family

     550         58         503         1,111         56,700         57,811   

Home equity

     48         —           27         75         30,307         30,382   

Multifamily

     —           —           —           —           19,930         19,930   

Real estate construction:

                 

Commercial and land development

     —           —           396         396         4,982         5,378   

One-to-four family

     —           —           —           —           641         641   

Commercial

     11         —           575         586         34,422         35,008   

Consumer:

                 

Auto:

                 

Direct

     —           —           —           —           1,966         1,966   

Indirect

     63         1         —           64         4,232         4,296   

Other

     4         —           —           4         1,045         1,049   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 676       $ 59       $ 2,423       $ 3,158       $ 223,034       $ 226,192   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes $23 of loans on nonaccrual status.
(2) All loans are nonaccrual status except for $206 of loans past due 90 or more days still on accrual.
(3) Includes $1,098 of loans on nonaccrual status.

 

13


Table of Contents

The following table presents the aging of the recorded investment in past due loans as of December 31, 2011 by class of loans:

 

     30 - 59
Days
Past Due (1)
     60 - 89
Days
Past Due
     90 or More
Days

Past  Due (2)
     Total
Past Due
     Loans Not
Past Due (3)
     Total  

Real estate:

                 

Commercial and land development

   $ —         $ 30       $ 922       $ 952       $ 65,940       $ 66,892   

One-to-four family

     245         297         572         1,114         55,754         56,868   

Home equity

     —           —           382         382         29,906         30,288   

Multifamily

     —           —           —           —           17,001         17,001   

Real estate construction:

                 

Commercial and land development

     856         —           396         1,252         3,566         4,818   

One-to-four family

     —           —           —           —           681         681   

Commercial

     37         —           597         634         32,947         33,581   

Consumer:

                 

Auto:

                 

Direct

     1         —           —           1         2,071         2,072   

Indirect

     17         —           —           17         4,629         4,646   

Other

     14         —           —           14         966         980   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,170       $ 327       $ 2,869       $ 4,366       $ 213,461       $ 217,827   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes $856 of loans on nonaccrual status.
(2) All loans are nonaccrual status except for $181 of loans past due 90 or more days still on accrual.
(3) Includes $292 of loans on nonaccrual status.

Troubled Debt Restructuring

As of March 31, 2012, certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

The Corporation has two commercial loans with balances of $1,661 that were individually evaluated for impairment whose loan terms have been modified in troubled debt restructurings as of March 31, 2012 and December 31, 2011. $325 and $300 of specific reserves have been allocated for these loans as of March 31, 2012 and December 31, 2011. The Corporation has not committed to lend any additional amounts as of period ending March 31, 2012 and December 31, 2011 to customers with outstanding loans that are classified as troubled debt restructurings.

There have been no new loans classified as troubled debt restructurings for the three month period ending March 31, 2012. Both commercial loans that were modified as troubled debt restructurings experienced payment default within the last twelve months. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Corporation’s internal underwriting policy.

Credit Quality Indicators: The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends and other information specific to each borrower. The Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as commercial, commercial real estate loans, and loans to commercial enterprises secured by one-to-four family residential properties. This analysis is performed on an annual basis or more frequently if management becomes aware of information affecting a borrower’s ability to fulfill its obligation. The Corporation uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

14


Table of Contents

Substandard. Loans classified as substandard are inadequately protected by the current financial condition and paying capacity of the obligor or of the collateral securing the loan. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt with a distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of March 31, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

Mar. 31, 2012

   Pass      Special
Mention
     Substandard      Doubtful      Total  

Real estate:

              

Commercial and land development

   $ 63,951       $ 2,202       $ 3,578       $ —         $ 69,731   

One-to-four family

     —           19         326         —           345   

Real estate construction:

              

Commercial and land development

     3,311         195         1,872         —           5,378   

Commercial

     32,298         1,008         1,702         —           35,008   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 99,560       $ 3,424       $ 7,478       $ —         $ 110,462   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Dec. 31, 2011

   Pass      Special
Mention
     Substandard      Doubtful      Total  

Real estate:

              

Commercial and land development

   $ 61,706       $ 1,986       $ 3,200       $ —         $ 66,892   

One-to-four family

     —           263         1,129         —           1,392   

Real estate construction:

              

Commercial and land development

     3,104         196         1,518         —           4,818   

Commercial

     29,744         2,442         1,395         —           33,581   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 94,554       $ 4,887       $ 7,242       $ —         $ 106,683   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of March 31, 2012 and December 31, 2011:

 

            Consumer                    Residential Real Estate                

Mar. 31, 2012

   Direct      Indirect      Other      Construction      Multifamily      One-to-four
Family
     Home
Equity
     Total  

Performing

   $ 1,966       $ 4,296       $ 1,049       $ 641       $ 19,930       $ 56,963       $ 30,355       $ 115,200   

Nonperforming

     —           —           —           —           —           503         27         530   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,966       $ 4,296       $ 1,049       $ 641       $ 19,930       $ 57,466       $ 30,382       $ 115,730   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
            Consumer                    Residential Real Estate                

Dec. 31, 2011

   Direct      Indirect      Other      Construction      Multifamily      One-to-four
Family
     Home
Equity
     Total  

Performing

   $ 2,072       $ 4,646       $ 980       $ 681       $ 17,001       $ 54,904       $ 29,906       $ 110,190   

Nonperforming

     —           —           —           —           —           572         382         954   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,072       $ 4,646       $ 980       $ 681       $ 17,001       $ 55,476       $ 30,288       $ 111,144   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

Note 4 – Interest-Rate Swaps

(dollars in thousands)

The Company utilizes interest-rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position, not for speculation. The notional amount of the interest-rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest-rate swap agreements.

The Company implemented a program in 2009 whereby it lends to its borrowers at a fixed rate with the loan agreement containing a two-way yield maintenance provision. The program has one participant as of March 31, 2012. If the borrower prepays the loan, the yield maintenance provision will result in a prepayment penalty or benefit depending on the interest rate environment at the time of the prepayment. This provision represents an embedded derivative which is required to be bifurcated from the host loan contract. As a result of bifurcating the embedded derivative, the Company records the transaction with the borrower as a floating rate loan and a pay floating / receive fixed interest-rate swap. To offset the risk of the interest-rate swap with the borrower, the Company enters into an interest-rate swap with an outside counterparty that mirrors the terms of the interest-rate swap between the Company and the borrower. Both interest-rate swaps are carried as freestanding derivatives with their changes in fair value reported in current earnings. The interest-rate swaps are not designated as hedges. The change in the fair value of the interest-rate swap between the Company and its borrower was a decrease of $1 for the three months ended March 31, 2012, which was offset by an equal increase in value during the three months ended March 31, 2012 on the interest-rate swap with an outside counterparty, with the result that there was no impact on income as of March 31, 2012.

Summary information about the interest-rate swaps not designated as hedges between the Company and its borrower as of March 31, 2012 is as follows:

 

Notional amount

   $ 1,407   

Weighted average receive rate

     5.33

Weighted average pay rate

     3.58

Weighted average maturity (years)

     1.8   

Fair value of interest-rate swaps

   $ 45   

Summary information about the interest-rate swaps between the Company and outside parties as of March 31, 2012 is as follows:

 

Notional amount

   $ 1,407   

Weighted average pay rate

     5.33

Weighted average receive rate

     3.58

Weighted average maturity (years)

     1.8   

Fair value of interest-rate swaps

   $ (45

The fair value of the interest-rate swaps at March 31, 2012 is reflected in other assets and other liabilities with a corresponding offset to noninterest income.

Note 5 – Stock-Based Compensation

(dollars in thousands, except per share information)

The Company’s 2008 Equity Incentive Plan (“the Plan”), which is shareholder-approved, permits the grant of stock options or restricted stock awards, to its officers, employees, consultants and non-employee directors for up to 223,448 shares of common stock.

Option awards are granted with an exercise price equal to the fair value of the Company’s common stock at the date of grant; those option awards have vesting periods determined by the Company’s compensation committee and have terms that shall not exceed 10 years.

On May 20, 2008, the Company granted options to purchase 58,000 shares of stock to directors and certain key officers, of which 43,000 remain outstanding at March 31, 2012. The exercise price of the options is $18.03 per share. The options vest in five equal installments over a five-year period and have a term of 10 years. None of these options have been exercised as of March 31, 2012.

On October 19, 2010, the Company granted options to purchase 43,000 shares of stock to directors and certain key officers, of which 41,500 remained outstanding at March 31, 2012. The exercise price of the options is $13.22 per share. The options vest in five equal installments over a five-year period and have a term of 10 years. None of these options have been exercised as of March 31, 2012.

 

16


Table of Contents

On January 17, 2012, the Company granted options to purchase 58,000 shares of stock to directors and certain key officers, all of which remained outstanding at March 31, 2012. The exercise price of the options is $14.10 per share. The options vest in five equal installments over a five-year period and have a term of 10 years. None of these options have been exercised as of March 31, 2012.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. (Employee and management options are tracked separately.) The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferrable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

The fair value of options granted in 2012 was $1.77 per option was determined using the following weighted-average assumptions as of grant date.

 

Risk-free interest rate

     1.39

Expected term (years)

     7.0   

Expected stock price volatility

     16.40

Dividend yield

     2.27

A summary of the activity in the stock option plan for 2012 follows:

 

     Shares      Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value

(in  thousands)
 

Outstanding - January 1, 2012

     84,500       $ 15.70         

Granted

     58,000         14.10         

Exercised

     —           —           

Forfeited or expired

     —           —           
  

 

 

    

 

 

       

Outstanding – March 31, 2012

     142,500       $ 15.03         8.3       $ 73   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fully vested and exercisable at March 31, 2012

     34,100       $ 16.86         6.8       $ 15   

Expected to vest in future periods

     108,400         14.45         8.2         58   

Fully vested and expected to vest at March 31, 2012

     142,500       $ 15.03         8.3       $ 73   
  

 

 

    

 

 

    

 

 

    

 

 

 

The total compensation cost that has been charged against income for the plan was $21 and $10 for the quarters ended March 31, 2012 and 2011. The total income tax benefit was $7 and $3 for the quarters ended March 31, 2012 and 2011. As of March 31, 2012, there was $143 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 4.2 years.

Restricted Stock Awards

On January 3, 2011, the Company granted restricted stock awards for 3,744 shares of the Company’s common stock to certain directors in lieu of cash payment of fees earned in 2010. The awards vested immediately and the compensation expense related to the awards of $50 was recorded in 2010. The fair value of the stock was determined using closing market price of the Company’s common stock on the date of the grant.

On July 1, 2011, the Company granted restricted stock awards for 3,552 shares of the Company’s common stock to certain directors in lieu of cash payment of fees. The awards vested immediately and the compensation expense related to the awards of $48 was recorded in 2011. The fair value of the stock was determined using closing market price of the Company’s common stock on the date of the grant.

On January 3, 2012, the Company granted restricted stock awards for 3,330 shares of the Company’s common stock to certain directors in lieu of cash payment of fees earned in 2011. The awards vested immediately and the compensation expense related to the awards of $48 was recorded in 2011. The fair value of the stock was determined using closing market price of the Company’s common stock on the date of the grant.

 

17


Table of Contents

Note 6 – Fair Value

(dollars in thousands)

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 has the ability to 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 reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Corporation used the following methods and significant assumptions to estimate fair value:

Investment Securities: The fair values for investment 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). The fair values of level 3 investment securities are determined by the Accounting department, which reports to the Chief Financial Officer (CFO). The CFO reviews the fair values and these are reported to the ALCO committee and the Board of Directors. Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. At least annually, a third party is engaged to validate the discounted cash flows and resulting fair value. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

Interest Rate Swaps: The fair values of interest rate swaps are based on valuation models using observable market data as of the measurement date (Level 2).

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally 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 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: Certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use 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.

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 the Credit Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value. A discount is applied when deemed necessary, and is at the discretion of management based on the most recent appraisal analysis and guidelines set by management.

Loans Held for Sale: Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

 

18


Table of Contents

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

 

     Fair Value Measurements
at Mar. 31, 2012 Using
 
     Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets:

        

Available for sale securities:

        

U.S. Government and federal agency

   $ —         $ 2,298       $ —     

State and municipal

     —           55,395         1,593   

Mortgage-backed securities - residential

     —           86,609         16   

Equity securities

     19         —           —     

Interest rate swaps

     —           45         —     

Liabilities:

        

Interest rate swaps

   $ —         $ 45       $ —     

 

     Fair Value Measurements
at Dec. 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:

        

Available for sale securities:

        

U.S. Government and federal agency

   $ —         $ 2,446       $ —     

State and municipal

     —           53,890         3,533   

Mortgage-backed securities - residential

     —           90,270         16   

Equity securities

     20         —           —     

Interest rate swaps

     —           46         —     

Liabilities:

        

Interest rate swaps

   $ —         $ 46       $ —     

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of March 31, 2012:

 

     2012  

Beginning Balance

   $ 3,549   

State and Municipal:

  

Total gains or losses for the period included in other comprehensive income

     (4

Maturities

     (572

Transfers from Level 3 to Level 2

     (1,364
  

 

 

 

Ending balance

   $ 1,609   
  

 

 

 

Five state and municipal securities with a fair value of $1,364 as of March 31, 2012 were transferred from Level 3 to Level 2 because observable market data became available for securities with similar characteristics. The Company’s policy is to recognize transfers into or out of a level as of the end of the reporting period.

The Company’s state and municipal security valuations were supported by analysis prepared by an independent third party. The third party uses Interactive Data Corporation (IDC) as the primary source for security valuations. IDC’s evaluations are based on market data. IDC utilizes evaluated pricing models that vary based by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs. IDC evaluators follow multiple review processes to assess the available market, credit, and deal level information to support the evaluation process. If they determine sufficient objectively verifiable information is not available to support a valuation, they will discontinue evaluating that security. Given this approach, the state and municipal security with the pricing source of IDC is considered level 2.

 

19


Table of Contents

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

 

     Fair Value Measurements
at Mar. 31, 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

   $ —         $ —         $ 371   

Commercial and land development

     —           —           975   

One-to-four family

     —           —           90   

Other real estate owned

     —           —           324   

 

     Fair Value Measurements
at Dec. 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:

        

Impaired loans

        

Commercial

   $ —         $ —         $ 417   

Commercial and land development

     —           —           974   

One-to-four family

     —           —           92   

Other real estate owned

     —           —           18   

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal amount of $1,965, with a valuation allowance of $529, resulting in an additional provision for loan loss of $13 in the three months ended March 31, 2012. Impaired loans had a principal amount of $1,999, with a valuation allowance of $516, resulting in an additional provision of $247 for loan loss in the year ended December 31, 2011.

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $324, which is made up of the outstanding balance of $324 at March 31, 2012. There was no valuation allowance related to this property at March 31, 2012. There were no write-downs of other real estate for the quarter ended March 31, 2012. Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $18, which is made up of the outstanding balance of $131, net of a valuation allowance of $113 at December 31, 2011. The property was written-down $38 in 2011.

 

20


Table of Contents

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 March 31, 2012:

 

     Fair value     

Valuation

Technique(s)

  

Unobservable Input(s)

  

Range (Weighted
Average)

Impaired loans – Commercial

   $ 371       Sales comparison approach    Adjustment for differences related to market conditions    31%

Impaired loans – Commercial and land development

   $ 975       Sales comparison approach    Adjustment for differences related to market conditions    31%-35% (35%)

Impaired loans - One-to-four family

   $ 90       Sales comparison approach    Adjustment for differences related to market conditions    20%

Other real estate owned – residential

   $ 324       Sales comparison approach    Adjustment for differences related to market conditions    20%

 

21


Table of Contents

Carrying amount and estimated fair values of financial instruments at March 31, 2012 and December 31, 2011 were as follows:

 

     Fair Value Measurements at  
     Carrying
Amount
            Mar. 31, 2012                
        Level 1      Level 2      Level 3      Total  

Financial assets

              

Cash and cash equivalents

   $ 23,125       $ 23,125       $ —         $ —         $ 23,125   

Securities available for sale

     145,930         19         144,302         1,609         145,930   

Restricted equity securities

     3,220         na         na         na         na   

Loans, net

     222,346         —           —           223,679         223,679   

Accrued interest receivable

     1,535         —           921         614         1,535   

Interest rate swaps

     45         —           45         —           45   

Financial liabilities

              

Deposits

   $ 352,408       $ 291,794         61,318       $ —         $ 353,112   

Short-term borrowings

     9,816         —           9,816         —           9,816   

Federal Home Loan Bank advances

     8,000         —           8,282         —           8,282   

Accrued interest payable

     207         26         181         —           207   

Interest rate swaps

     45         —           45         —           45   

 

Dec. 31, 2011

   Carrying
Amount
     Fair
Value
 

Financial assets

     

Cash and cash equivalents

   $ 15,213       $ 15,213   

Time deposits with other financial institutions

     246         246   

Securities available for sale

     150,175         150,175   

Restricted equity securities

     3,220         na   

Loans, net

     213,952         215,490   

Accrued interest receivable

     1,404         1,404   

Interest rate swaps

     46         46   

Financial liabilities

     

Deposits

   $ 340,664       $ 341,356   

Short-term borrowings

     10,168         10,168   

Federal Home Loan Bank advances

     8,000         8,299   

Accrued interest payable

     219         219   

Interest rate swaps

     46         46   

The methods and assumptions used to estimate fair value on the preceding tables are described as follows:

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

(b) Restricted Equity Securities: It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

(c) Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: 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. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality 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.

(d) Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) 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. 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.

 

22


Table of Contents

(e) Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

(f) Federal Home Loan Bank advances: 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.

(g) Accrued interest receivable/payable: The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2 or Level 3 classification that is consistent with the associated asset or liability.

(h) 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.

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

FORWARD-LOOKING INFORMATION

This Form 10-Q contains forward-looking statements as referenced in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to many risks and uncertainties. When used herein, the terms “anticipates,” “plans,” “expects,” “believes,” and similar expressions as they relate to the Company or its management are intended to identify such forward looking statements. Actual results could differ materially from those indicated by the forward-looking statements. Risks and uncertainties that could cause or contribute to differences include, changes in the regulatory environment, changes in business conditions and inflation, risks associated with credit quality and other factors discussed in the Company’s filings with the U.S. Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2011. The Company assumes no obligation to update any forward-looking statement.

GENERAL

The Company’s results of operations are dependent primarily on net interest income, provision for loan losses, noninterest income and its ability to control costs. Net interest income is the difference (“spread”) between the interest income earned on loans and securities and the cost of funds, consisting of interest paid on deposits, Federal Home Loan Bank advances and short-term funds. The interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. The provision for loan losses is significantly affected by the relative strength or weakness of the local economy. The Company’s net income is also affected by, among other things, loan fee income, service charges, gains on securities and loans, operating expenses, FDIC assessment expense and franchise and income taxes. The Company’s operating expenses principally consist of employee compensation and benefits, occupancy and other general and administrative expenses. The Company’s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities. Additionally, future changes in applicable laws, regulations or government policies may also materially impact the Company.

OVERVIEW

Total assets increased to $417.7 million as of March 31, 2012, from $406.1 million at December 31, 2011.

Net income for the first three months of 2012 was $700 thousand compared to $487 thousand for the same period of 2011 or $0.32 and $0.22 basic and diluted per share, respectively. Net income was impacted by the $300 thousand increase in net interest income and a $100 thousand decrease in noninterest expense.

Net interest income for the three month period ended March 31, 2012 increased $300 thousand, or 9.7%, compared to the same period in 2011, despite a declining interest rate environment. The provision for loan losses increased to $149 thousand for the three months ended March 31, 2012 compared to $147 thousand for the same period in 2011. Noninterest income for the first three months of 2012 decreased $96 thousand compared to the same period in 2011, primarily related to $128 thousand of gains recorded in 2011 on the sale of the guaranteed portion of five Small Business Administration (SBA) loans.

Noninterest expense for the first three months of 2012 decreased $100 thousand compared to the same period in 2011 due primarily to a decrease in professional and consulting expense and the FDIC assessment expense. Income tax expense was $138 thousand for the three months ended March 31, 2012 compared to $49 thousand for the same period in 2011.

 

23


Table of Contents

Office of the Controller of the Currency (“OCC”) regulations requires banks to maintain certain minimum levels of regulatory capital. Additionally, the regulations establish a framework for the classification of banks into five categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Generally, an institution is considered well-capitalized if it has a core (Tier 1) capital ratio of at least 5.0% (based on adjusted total assets); a core (Tier 1) risk-based capital ratio of a least 6.0%; and a total risk-based capital ratio of at least 10.0%. The Bank had capital ratios above the minimum to be well-capitalized at March 31, 2012 and December 31, 2011.

The Company is not aware of any market or institutional trends, events or uncertainties that are expected to have a material effect on liquidity, capital resources or operations or any current recommendations by its regulators which would have a material effect if implemented. The Company has not engaged in sub-prime lending activities and does not plan to engage in those activities in the future.

FINANCIAL CONDITION – MARCH 31, 2012, COMPARED TO DECEMBER 31, 2011

Balance Sheet

Cash and due from banks increased $7.5 million to $23.1 million at March 31, 2012, primarily related to an increase in local governmental deposit accounts.

Securities available for sale decreased $4.2 million due primarily to maturities and repayments of $8.5 million, offset by the purchase of $5.0 million securities. The net unrealized gains on securities decreased to $5.2 million as of March 31, 2012 compared to $5.5 million net unrealized gains on securities as of December 31, 2011.

Loans increased $8.4 million during the first three months of 2012. Loan growth has improved as a result of efforts made in the last three years to add experienced lenders and loan products that borrowers want and need. The commercial lending products now offered, along with knowledgeable lenders, have given the Bank the ability to offer a full range of lending products to our existing and potential customers. The Bank is also concentrating on the expansion of our agricultural business and lending services.

Loans at March 31, 2012 and December 31, 2011 were as follows:

(dollars in thousands)

 

     Mar. 31,
2012
    Dec. 31,
2011
 

Real estate:

    

Commercial and land development

   $ 69,720      $ 66,886   

One-to-four family

     57,854        56,917   

Home equity

     30,168        30,086   

Multifamily

     19,961        17,041   

Real estate construction:

    

Commercial and land development

     5,395        4,822   

One-to-four family

     643        683   

Commercial

     34,901        33,473   

Consumer:

    

Auto:

    

Direct

     1,958        2,065   

Indirect

     4,194        4,541   

Other

     1,049        980   
  

 

 

   

 

 

 
     225,843        217,494   
  

 

 

   

 

 

 

Unearned and deferred income

     (313     (379

Allowance for loan losses

     (3,184     (3,163
  

 

 

   

 

 

 

Total

   $ 222,346      $ 213,952   
  

 

 

   

 

 

 

 

24


Table of Contents

Allowance for loan losses is a valuation allowance for probable incurred credit losses. This account is increased by the provision for loan losses and decreased by charge-offs less recoveries. The allowance balance required is established using the following methodology:

 

   

All problem loans, impaired loans, past due loans and non-performing loans are closely monitored and analyzed by management on an ongoing basis. A classification rating is assigned to problem loans based on information about specific borrower situations and estimated collateral values. These loans are classified as either special mention, substandard, doubtful or loss.

 

   

Specific problem loans, past due loans or non-performing loans are identified and analyzed individually in an effort to determine the expected probable incurred loss on these specifically identified loans.

 

   

For problem loans that are not analyzed individually, a provision is established based on a historical migration analysis. The historical migration analysis identifies the percentage of problem loans that have been ultimately charged-off historically and over what time periods such loans have been charged off. Historical migration percentages are reviewed and adjusted by management to reflect various factors such as the growth and change in mix of the loan portfolio and by Comptroller of the Currency regulatory guidance. Non-individually analyzed loans are pooled and evaluated by loan type. The probable incurred loss on these pooled past due loans is estimated using historical loan loss experience.

 

   

National and local economic conditions and other factors are also considered in determining the adequacy of the allowance for loan losses.

 

   

A percentage of the allowance is allocated to specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

 

   

The allowance for loan losses is reviewed on a regular basis to determine the adequacy of the allowance.

The allowance for loan losses increased from $3.163 million as of December 31, 2011 to $3.184 million or from 1.46% of total loans at year-end 2011 to 1.41% at March 31, 2012. The provision for loan losses for the quarter was $149 thousand compared to $147 thousand for the same period in 2011. Net charge-offs were $128 thousand for the three months ended March 31, 2012, compared to net charge-offs of $12 thousand for the same period in 2011.

Total nonperforming loans decreased from $4.0 million as of December 31, 2011 to $3.5 million at March 31, 2012. Non-performing loans consist of loans placed on non-accrual status and loans past due 90 or more days and still accruing interest. Loans past due 30 through 89 days and still accruing, increased from $641 thousand to $705 thousand as of March 31, 2012.

Adversely classified assets at March 31, 2012 and December 31, 2011 were as follows:

(dollars in thousands)

 

     Mar. 31, 2012     Dec. 31, 2011  
     Amount      Percent of
total loans
    Amount      Percent of
total loans
 

Classified loans:

          

Special mention

   $ 3,424         1.5   $ 4,887         2.3

Substandard

     7,478         3.3     7,242         3.3

Doubtful

     —           0.0     —           0.0

Loss

     —           0.0     —           0.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total classified loans

     10,902         4.8     12,129         5.6

Other real estate owned

     324         0.1     18         0.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total classified assets

   $ 11,226         4.9   $ 12,147         5.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total classified loans decreased from $12.1 million at December 31, 2011 to $10.9 million at March 31, 2012. The Bank’s classification ratio was 22.2% and 21.1% as of March 31, 2012 and December 31, 2011. The classification ratio is calculated using total adversely classified assets (excluding special mention loans) divided by Tier 1 capital plus allowance for loan losses. Management believes the allowance for loan losses is adequate as of March 31, 2012.

Total deposits increased $11.7 million as of March 31, 2012 compared to December 31, 2011. The increase is primarily attributed to growth in noninterest-bearing demand accounts and interest-bearing demand accounts. Historically noninterest-bearing demand accounts have fluctuated based upon the liquidity needs of our customers. The increase in interest-bearing demand accounts can be attributed to the Company’s success in marketing our “Platinum Checking” and “Bonus Checking” accounts.

 

25


Table of Contents

Deposits at March 31, 2012 and December 31, 2011 were as follows:

(dollars in thousands)

 

     Mar. 31,
2012
     Dec. 31,
2011
 

Demand, noninterest-bearing

   $ 78,817       $ 70,810   

Demand, interest-bearing

     156,462         154,410   

Savings

     56,515         55,781   

Time, $100,000 and over

     16,004         15,305   

Time, other

     44,610         44,358   
  

 

 

    

 

 

 
   $ 352,408       $ 340,664   
  

 

 

    

 

 

 

Shareholders’ Equity

Total shareholders’ equity increased $411 thousand to $43.2 million as of March 31, 2012 from $42.7 million as of December 31, 2011. Net income for the three months ended March 31, 2012 was $700 thousand, while dividends declared were $178 thousand. Accumulated other comprehensive income decreased from $3.6 million on December 31, 2011 to $3.5 million as of March 31, 2012.

The Bank is subject to regulatory capital requirements. The following is a summary of the actual and required regulatory capital amounts and ratios. Management believes the capital position of the Bank remains strong.

(dollars in thousands)

 

Mar. 31, 2012

   Actual     For Capital
Adequacy Purposes
    To Be Well Capitalized
Under Prompt Corrective
Action Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

Total capital to risk-weighted assets

   $ 35,170         13.77   $ 20,440         8.00   $ 25,550         10.00

Tier 1 capital to risk-weighted assets

     31,986         12.52     10,220         4.00     15,330         6.00

Tier 1 capital to average assets

     31,986         7.79     16,415         4.00     20,519         5.00

 

Dec. 31, 2011

   Actual     For Capital
Adequacy Purposes
    To Be Well Capitalized
Under Prompt Corrective
Action Provisions
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

Total capital to risk-weighted assets

   $ 34,367         13.85   $ 19,847         8.00   $ 24,809         10.00

Tier 1 capital to risk-weighted assets

     31,256         12.60     9,923         4.00     14,885         6.00

Tier 1 capital to average assets

     31,256         7.78     16,069         4.00     20,086         5.00

Statements of Cash Flows

Net cash from operating activities for the first three months of 2012 was $1.7 million compared to $344 thousand for the same period of 2011. Net cash from investing activities for the first three months of 2012 was $(5.0) million, compared to $4.2 million for the first three months of 2011. Net cash from financing activities was $11.2 million for the first three months of 2012 compared to $3.9 million for the first three months of 2011. The increase in cash and cash equivalents was $7.9 million during the first three months of 2012 primarily related to an increase in local governmental deposit accounts. Total cash and cash equivalents was $23.1 million as of March 31, 2012 compared to $15.2 million at December 31, 2011.

 

26


Table of Contents

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED

March 31, 2012 and 2011

Net income for the first three months of 2012 was $700 thousand or $0.32 per basic and diluted earnings per share compared to $487 thousand or $0.22 per basic and diluted earnings per share for the same period in 2011. Net income was positively impacted by the $300 thousand increase in net interest income and a $100 thousand decrease in noninterest expense.

Annualized return on average equity (“ROAE”) and average assets (“ROAA”) for the first three months of 2012 were 6.55% and 0.67%, respectively, compared with 5.02% and 0.52% for the first three months of 2011.

 

    

Three months ended March 31,

 
     2012     2011  

(dollars in thousands)

   Daily Average
Balance
     Interest      Average
yield/cost (1)
    Daily Average
Balance
     Interest      Average
yield/cost (1)
 

Assets

                

Interest earning assets:

                

Securities:

                

Taxable

   $ 94,252       $ 612         2.66   $ 92,658       $ 739         3.28

Nontaxable (tax equivalent basis) (2)

     57,637         689         5.13     46,033         591         5.19

Interest bearing deposits

     22,648         11         0.19     22,773         28         0.49

Net loans (including nonaccrual loans)

     217,880         2,772         5.09     191,319         2,518         5.26
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     392,417         4,084         4.16     352,783         3,876         4.39
     

 

 

    

 

 

      

 

 

    

 

 

 

All other assets

     25,021              26,231         
  

 

 

         

 

 

       

Total assets

   $ 417,438            $ 379,014         
  

 

 

         

 

 

       

Liabilities and Shareholders’ Equity

                

Interest-bearing liabilities:

                

Interest-bearing checking

   $ 160,133         181         0.45   $ 133,645         206         0.62

Savings

     56,808         20         0.14     50,826         20         0.16

Time, $100,000 and over

     15,642         43         1.10     17,645         59         1.34

Time, other

     44,292         148         1.34     50,792         200         1.58

Federal Home Loan Bank advances

     8,000         51         2.55     12,400         82         2.65

Short-term borrowings

     9,942         10         0.40     8,369         11         0.53
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     294,817         453         0.61     273,677         578         0.84
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Demand deposits

     75,177              63,592         

Other liabilities

     4,493              2,395         

Shareholders’ equity

     42,951              39,350         
  

 

 

         

 

 

       

Total liabilities and shareholders’ equity

   $ 417,438            $ 379,014         
  

 

 

         

 

 

       

Net interest income (tax equivalent basis) (2)

      $ 3,631            $ 3,298      
     

 

 

         

 

 

    

Interest rate spread (3)

           3.55           3.55

Net yield on interest-earning assets (4)

           3.70           3.74

Ratio of average interest-earning assets to average interest-bearing liabilities

           133.10           128.90

 

(1) Average yields are computed using annualized interest income and expense for the periods.
(2) Tax equivalence based on highest statutory rate of 34%.
(3) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(4) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.

Interest and dividend income totaled $3.9 million, an increase of $175 thousand for the three months ended March 31, 2012 compared to the same period in 2011. Adjusted on a fully tax-equivalent (“FTE”) basis the yield on earning assets in the first three months of 2012 was 4.16% compared to 4.39% in the first three months of 2011. The decrease in the average yield on earning assets is primarily related to the overall decline in interest rates.

 

27


Table of Contents

Interest expense totaled $453 thousand, a decrease of $125 thousand or 21.6% for the three months ended March 31, 2012 as compared to the same period in 2011. The average cost for interest bearing liabilities was 0.61% for the first three months of 2012 compared to 0.84% for the same period in 2011.

The decrease of 23 basis points from the first three months of 2012 is the result of change in the average volume in the mix of interest bearing liabilities and declining interest rates. The increase in interest-bearing liabilities is due primarily to growth in interest-bearing demand accounts and savings accounts. The cost of interest-bearing demand deposits and savings accounts is relatively low compared to other interest-bearing liabilities.

Net interest income increased $300 thousand, or 9.7% for the three month period ended March 31, 2012 as compared to March 31, 2011. During the first three months of 2012, the interest rate spread on a FTE basis remained constant at 3.55% when compared to the first three months of 2011.

Provision for loan losses totaled $149 thousand for the first three months of 2012 compared to $147 thousand for the same period in 2011.

Total non-performing loans decreased from $4.0 million as of December 31, 2011 to $3.5 million at March 31, 2012. Non-performing loans consist of loans placed on non-accrual status and loans past due 90 or more days and still accruing interest. Adversely classified loans, including special mention, substandard and doubtful, decreased from $12.1 million at December 31, 2011 to $10.9 million at March 31, 2012. Loans past due 30 through 89 days and still accruing, increased from $641 thousand to $705 thousand as of March 31, 2012.

Each quarter, management reviews the adequacy of the allowance for loan losses by reviewing the overall quality and risk profile of the Company’s loan portfolio, by reviewing specific problem credits and assessing the potential for losses based on expected cash flows or collateral values, by reviewing trends in problem loan levels, by updating loss history for the Company’s loans, by analyzing the growth and change in mix of the portfolio, and by analyzing economic trends that are believed to impact the Company’s borrowers. Management reviewed all of these factors and determined the allowance for loan losses was adequate as of March 31, 2012.

Noninterest income for the three months ended March 31, 2012 decreased to $636 thousand or 13.1%, from $732 thousand for the same period in 2011. The change is primarily related to $128,000 of gains recorded in 2011 on the sale of the guaranteed portion of five Small Business Administration (SBA) loans.

Noninterest expense for the three months ended March 31, 2012 was $3.0 million, a decrease of 3.2% from $3.1 million for the same period in 2011 due primarily to a decrease in professional and consulting expense and the FDIC assessment expense.

Income tax expense was $138 thousand for the three months ended March 31, 2012 which represents an increase of $89 thousand compared to the same period in 2011. Higher pre-tax income, partially offset by an increase in interest income from tax-exempt securities are the primary factors causing the increase in income tax expense.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Economic Value of Equity

The economic value of equity, (EVE), is the difference between the net present value of the assets and the net present value of liabilities. EVE can be thought of as the liquidation value of the Bank on the date the calculation is made. Calculating EVE involves using a discount rate to calculate the net present value of assets and liabilities after making assumptions about the duration of assets and liabilities. As interest rates change, the discount rate changes and the change in interest rates effects the duration of assets and liabilities. If interest rates fall, for example, the duration of loans shortens since borrowers tend to prepay. Conversely the duration of loans increases if interest rates rise since borrowers are inclined to hold on to the favorable rate they were able to obtain in the lower interest rate environment.

The Board of Directors has established revised limits on a decline in the economic value of equity (EVE) and earnings at risk (EAR) given changes in interest rates. These limits are that EVE shall not decline by more than 10%, 20%, 30% and 35% given a 1%, 2%, 3% and 4% increase or decrease in interest rates respectively and that EAR shall not be greater than 5%, 10%, 15% or 20% given a 1%, 2%, 3% or 4% increase or decrease in interest rates respectively. The following illustrates our equity at risk in the economic value of equity model.

 

28


Table of Contents

Mar. 31, 2012

 

Basis Point Change in Rates

    +400 bp        +300 bp        +200 bp        +100 bp        -100 bp        -200 bp        -300 bp        -400 bp   

Increase (decrease) in EVE

    (15.7 )%      (11.0 )%      (4.9 )%      (0.35 )%      (5.8 )%      nm        nm        nm   

Dec. 31, 2011

 

Basis Point Change in Rates

    +400 bp        +300 bp        +200 bp        +100 bp        -100 bp        -200 bp        -300 bp        -400 bp   

Increase (decrease) in EVE

    (18.7 )%      (13.3 )%      (6.3 )%      (1.1 )%      (8.2 )%      nm        nm        nm   

nm – not meaningful

The Bank is in compliance with the interest rate risk policy limits related to EVE as of March 31, 2012 and December 31, 2011.

Earnings at Risk

Earnings at risk, is the amount by which net interest income will be affected given a change in interest rates. The interest income and interest expense for each category of earning assets and interest bearing liabilities is recalculated after making up and down assumptions about the change in interest rates. Changes in prepayment speeds and repricing speeds are also taken into account when computing earnings at risk given a change in interest rates.

The following illustrates the effect on earnings or EAR given rate increases of 100 to 400 basis points and decreases in interest rates of 100 to 400 basis points.

Mar. 31, 2012

 

Basis Point Change in Rates

    + 400 bp        +300 bp        +200 bp        +100 bp        -100 bp        -200 bp        -300 bp        -400 bp   

Increase (decrease) in Earnings

    0.1     (0.15 )%      0.0     0.1     (0.4 )%      nm        nm        nm   

Dec. 31, 2011

 

Basis Point Change in Rates

    +400 bp        +300 bp        +200 bp        +100 bp        -100 bp        -200 bp        -300 bp        -400 bp   

Increase (decrease) in Earnings

    (1.1 )%      (1.0 )%      (0.4 )%      (0.1 )%      (0.4 )%      nm        nm        nm   

nm – not meaningful

The Bank is in compliance with the interest rate risk policy limits related to EAR as of March 31, 2012 and December 31, 2011.

Item 4T. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2012, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were, to the best of their knowledge, effective as of March 31, 2012, in timely alerting them to material information relating to the Company (including its consolidated subsidiary) required to be included in the Company’s periodic SEC filings.

There were no changes in the Company’s internal controls over financial reporting during the three months ended March 31, 2012 that materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

 

29


Table of Contents

PART II. OTHER INFORMATION

 

Item 1.    Legal Proceedings - None
Item 1A.    Risk Factors - There have been no significant changes in the Company’s risk factors as outlined in the Company’s Form 10-K for the period ending December 31, 2011.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds - None
Item 3.    Defaults Upon Senior Securities - None
Item 4.    Mine Safety Disclosures - None
Item 5.    Other Information - None
Item 6.    Exhibits

 

Exhibit No.

Under Reg.

S-K, Item 601

  

Description of Exhibits

  

If incorporated by Reference,

Documents with Which Exhibit

Was Previously Filed with SEC

(3.1)

   Amended Articles of Incorporation   

Annual Report 10-K filed 3/26/04

File No. 000-14773

(3.2)

   Code of Regulations   

Annual Report 10-K filed 3/26/04

File No. 000-14773

(10.1)

   Directors Defined Benefit Plan Agreement   

Annual Report 10-K filed 3/29/01

File No. 000-14773

(10.2)

  

Employment Agreement entered into by

David C. Vernon and National Bancshares and First National Bank

   Special Report 8-K filed 12/7/06

(10.3)

  

Special Separation Agreement of

James R. VanSickle

  

Quarterly Report 10-Q filed 8/14/07

File No. 000-14473

(10.4)

  

Special Separation Agreement of

Thomas R. Poe

  

Quarterly Report 10-Q filed 11/16/09

File No. 000-14473

(10.5)

  

Special Separation Agreement of

Myron Filarski

  

Quarterly Report 10-Q filed 11/2/10

File No. 000-14473

(10.6)

   Amendment to Employment Agreement entered into by David C. Vernon and National Bancshares Corporation and First National Bank   

Annual Report 10-K filed 03/27/12

File No. 000-14773

(10.7)

   Deferred Compensation Plan   

Quarterly Report 10-Q filed 11/10/11

File No. 000-14473

(11)

   Computation of Earnings per Share    See Consolidated Statements of Income and Comprehensive Income Page 4

(31.1)

   Certification   

(31.2)

   Certification   

(32)

   Certification   

Exhibit 101

   Instance Document   

Exhibit 101

   Schema Document   

Exhibit 101

   Calculation Linkbase Document   

Exhibit 101

   Labels Linkbase Document   

Exhibit 101

   Presentation Linkbase Document   

No other exhibits are required to be filed herewith pursuant to Item 601 of Regulation S-K.

 

30


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

National Bancshares Corporation

 

Date: May 14, 2012      

/s/ Mark R. Witmer

      Mark R. Witmer, President and
      Chief Executive Officer
Date: May 14, 2012      

/s/ James R. VanSickle

      James R. VanSickle, Chief Financial Officer

 

 

31

PINX:NBOH National Bancshares Corp Quarterly Report 10-Q Filling

National Bancshares Corp PINX:NBOH Stock - Get Quarterly Report SEC Filing of National Bancshares Corp PINX:NBOH stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

Content Partners
PINX:NBOH National Bancshares Corp Quarterly Report 10-Q Filing - 3/31/2012
Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol |  Title Star Rating |  Category |  Total Assets |  Top Holdings |  Top Sectors |  Symbol |  Name Title |  Date |  Author |  Collection |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol / Ticker |  Title Star Rating |  Category |  Total Assets |  Symbol / Ticker |  Name Title |  Date |  Author |  Collection |  Popularity |  Interest Title |  Date |  Company |  Symbol |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Popularity |  Our Choices Title |  Date |  Company |  Symbol |  Interest |  Popularity

Previous: PINX:NBOH National Bancshares Corp Insider Activity 4 Filing - 9/7/2012  |  Next: PINX:NBOH National Bancshares Corp Quarterly Report 10-Q Filing - 6/30/2012