10-Q 1 v325984_10q.htm 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended September 30, 2012

 

or

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

 

For the transition period from __________ to __________

 

Commission file number: 000-31673

 

OHIO LEGACY CORP

(Exact name of registrant as specified in its charter)

 

Ohio   34-1903890
(State or other jurisdiction of incorporation or organization)  

I.R.S. Employer Identification Number

 

600 South Main St., North Canton, Ohio  44720
(Address of principal executive offices)
 
(330) 499-1900

Registrant's telephone number

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

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

 

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

 

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

 

As of November 14, 2012, the latest practicable date, there were 1,971,431 shares of the issuer’s Common Stock, without par value, issued and outstanding.

 

 
 

 

OHIO LEGACY CORP

FORM 10-Q

 

AS OF AND FOR THE THREE AND NINE MONTHS ENDED September 30, 2012

 

THIRD QUARTER REPORT

 

  Page
   
PART I - FINANCIAL INFORMATION  
   
Item 1. Financial Statements 3
   
Item 2. Management’s Discussion and Analysis 28
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk 38
   
Item 4T. Controls and Procedures 38
   
PART II - OTHER INFORMATION  
   
Item 1. Legal Proceedings 38
   
Item 1A.  Risk Factors 38
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
   
Item 3. Defaults Upon Senior Securities 38
   
Item 4. Removed and Reserved 39
   
Item 5. Other Information 39
   
Item 6. Exhibits 39
   
SIGNATURES 39

 

2
 

 

Item 8. Financial Statements and Supplementary Data.

 

OHIO LEGACY CORP

CONSOLIDATED BALANCE SHEETS

(Unaudited)

As of September 30, 2012 and December 31, 2011

 

   September 30,   December 31, 
   2012   2011 
ASSETS          
Cash and due from banks  $959,574   $778,689 
Federal funds sold and interest-bearing deposits in financial institutions   5,664,378    19,267,467 
Cash and cash equivalents   6,623,952    20,046,156 
Certificate of deposit in financial institution   100,000    100,000 
Securities available for sale   12,296,255    10,677,644 
Loans held for sale   10,362,069    895,610 
Loans, net of allowance of $2,514,913 and $2,484,478 at September 30, 2012 and December 31, 2011   134,959,552    108,277,319 
Federal bank stock   1,577,750    1,597,850 
Premises and equipment, net   2,489,948    2,452,627 
Assets acquired in settlement of loans   2,138,299    2,012,752 
Accrued interest receivable and other assets   1,015,004    541,409 
Total assets  $171,562,829   $146,601,367 
           
LIABILITIES          
Deposits:          
Noninterest-bearing demand   25,252,512    21,017,215 
Interest-bearing demand   6,807,945    6,190,520 
Savings   37,776,563    38,537,916 
Certificates of deposit, net   47,390,258    38,216,813 
Total deposits   117,227,278    103,962,464 
Repurchase agreements   3,967,517    4,213,612 
Short-term Federal Home Loan Bank advances   25,000,000    13,000,000 
Long-term Federal Home Loan Bank advances   6,000,000    6,000,000 
Accrued interest payable and other liabilities   723,541    837,203 
Total liabilities   152,918,336    128,013,279 
           
Commitments and contingent liabilities   0    0 
           
SHAREHOLDERS' EQUITY          
Preferred stock, no par value, 500,000 shares authorized, none outstanding   0    0 
Common stock, no par value;          
September 30, 2012 and December 31, 2011: 22,500,000 shares authorized, 1,971,431 shares issued and outstanding at September 30, 2012 and 1,971,456 issued and outstanding at December 31, 2011   35,954,627    35,806,662 
Accumulated deficit   (17,513,604)   (17,468,889)
Accumulated other comprehensive income   203,470    250,315 
Total shareholders' equity   18,644,493    18,588,088 
Total liabilities and shareholders' equity  $171,562,829   $146,601,367 

 

See notes to the consolidated financial statements.

 

3
 

 

OHIO LEGACY CORP

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   For the Three Months Ended 
   September 30, 
   2012   2011 
Interest and dividend income:          
Loans, including fees  $1,591,120   $1,409,382 
Securities, taxable   41,560    62,873 
Securities, tax-exempt   26,919    27,177 
Interest-bearing deposits, federal funds sold and other   3,085    25,032 
Dividends on federal bank stock   19,140    17,637 
Total interest and dividend income   1,681,824    1,542,101 
Interest expense:          
Deposits   152,753    270,438 
Short-term Federal Home Loan Bank advances   7,807    0 
Long-term Federal Home Loan Bank advances   8,597    0 
Fed Funds Purchased   5    0 
Repurchase agreements   2,990    3,144 
Capital leases   0    15,426 
Total interest expense   172,152    289,008 
Net interest income   1,509,672    1,253,093 
Provision for loan losses   117,375    (108,874)
Net interest income after provision for loan losses   1,392,297    1,361,967 
Noninterest income:          
Service charges and other fees   71,237    157,955 
Trust and brokerage fee income   236,261    196,278 
Gain on sales of securities available for sale, net   55,016    325,032 
Gain on sale of loans   39,148    23,185 
Loss on disposition of assets acquired in settlement of loans   (57,186)   (86,934)
Gain (loss) on disposition of fixed assets   2,100    (3,412)
Other income   1,879    10,069 
Total noninterest income   348,455    622,173 
Noninterest expense:          
Salaries and benefits   898,025    976,541 
Occupancy and equipment   194,378    233,673 
Professional fees   133,956    166,814 
Franchise tax   58,144    51,875 
Data processing   66,855    182,818 
Marketing and advertising   16,696    11,760 
Stationery and supplies   8,788    15,138 
Deposit expense and insurance   69,262    91,753 
Branch disposal expenses   0    166,687 
Other expenses   136,990    217,766 
Total noninterest expense   1,583,094    2,114,825 
Net income (loss) before income taxes   157,658    (130,685)
Income tax expense   20,438    149,384 
Net income (loss)  $137,220   $(280,069)
Basic income (loss) per share  $0.07   $(0.14)
Diluted income (loss) per share  $0.07   $(0.14)

 

See notes to the consolidated financial statements.

 

4
 

 

OHIO LEGACY CORP

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   For the Nine Months Ended 
   September 30, 
   2012   2011 
Interest and dividend income:          
Loans, including fees  $4,332,027   $4,154,898 
Securities, taxable   133,413    323,491 
Securities, tax-exempt   80,827    81,612 
Interest-bearing deposits, federal funds sold and other   22,691    65,174 
Dividends on federal bank stock   58,547    56,045 
Total interest and dividend income   4,627,505    4,681,220 
Interest expense:          
Deposits   443,033    876,716 
Short-term Federal Home Loan Bank advances   17,957    13,754 
Long-term Federal Home Loan Bank advances   25,603    0 
Fed Funds Purchased   5    0 
Repurchase agreements   8,751    8,268 
Capital leases   0    47,698 
Total interest expense   495,349    946,436 
Net interest income   4,132,156    3,734,784 
Provision for loan losses   109,818    (135,069)
Net interest income after provision for loan losses   4,022,338    3,869,853 
Noninterest income:          
Service charges and other fees   213,240    463,739 
Trust and brokerage fee income   679,597    541,328 
Gain on sales of securities available for sale, net   55,016    358,030 
Gain on sale of loans   100,632    71,425 
Loss on disposition of assets acquired in settlement of loans   (83,600)   (122,233)
Loss on disposition of fixed assets   (442)   (3,749)
Other income   18,134    38,447 
Total noninterest income   982,577    1,346,987 
Noninterest expense:          
Salaries and benefits   2,746,642    3,057,451 
Occupancy and equipment   583,573    729,338 
Professional fees   380,990    465,722 
Franchise tax   179,694    158,175 
Data processing   355,007    544,692 
Marketing and advertising   64,401    51,118 
Stationery and supplies   38,062    49,871 
Deposit expense and insurance   221,152    299,501 
Branch disposal expenses   0    166,687 
Other expenses   464,732    681,865 
Total noninterest expense   5,034,253    6,204,420 
Net loss before income taxes   (29,338)   (987,580)
Income tax expense   15,377    0 
Net loss  $(44,715)  $(987,580)
Basic loss per share  $(0.02)  $(0.50)
Diluted income loss per share  $(0.02)  $(0.50)

 

See notes to the consolidated financial statements.

 

5
 

 

OHIO LEGACY CORP

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
Net income (loss)  $137,220   $(280,069)  $(44,715)  $(987,580)
                     
Other comprehensive income (loss):                    
Unrealized gains/losses on securities:                    
Unrealized holding gain (loss) arising during the period   (51,941)   9,721    8,171    482,084 
Reclassification adjustment for losses (gains) included in net income   (55,016)   (325,032)   (55,016)   (358,030)
Tax effect   20,438    149,383    0    0 
Total other comprehensive income (loss)   (86,519)   (165,928)   (46,845)   124,054 
Comprehensive income (loss)  $50,701   $(445,997)  $(91,560)  $(863,526)

 

See notes to the consolidated financial statements.

 

6
 

 

OHIO LEGACY CORP

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited)

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
Balance, beginning of period  $18,543,958   $16,155,730   $18,588,088   $16,470,516 
Stock based compensation expense   49,859    50,217    147,990    152,960 
Comprehensive income (loss)   50,701    (445,997)   (91,560)   (863,526)
Cash paid in lieu of fractional shares for one-for-ten reverse stock split   (25)   0    (25)   0 
Balance, end of period  $18,644,493   $15,759,950   $18,644,493   $15,759,950 

 

See notes to the consolidated financial statements.

 

7
 

 

OHIO LEGACY CORP

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For the Nine Months Ended 
   September 30, 
   2012   2011 
         
Cash flows from operating activities:          
Net loss  $(44,715)  $(987,580)
Adjustments to reconcile net loss to net cash from operating activities:          
Provision for loan losses   109,818    (135,069)
Depreciation and amortization   208,035    277,164 
Loss on disposition of fixed assets   442    3,749 
Securities amortization and accretion, net   91,539    183,490 
Origination of loans held for sale   (12,446,000)   (5,427,370)
Proceeds from sales of loans held for sale   11,511,177    6,137,328 
Participation interests in held for sale loans sold   42,995,076    0 
Participation interests in held for sale loans purchased   (51,443,707)   0 
Loss on disposition or direct write-down of assets acquired in settlement of loans   83,600    122,233 
Gain on sale of securities available for sale   (55,016)   (358,030)
Gain on sale of loans held for sale   (100,632)   (71,425)
Stock based compensation expense   147,990    152,960 
Net change in:          
Accrued interest receivable and other assets   (473,595)   (1,400,192)
Accrued interest payable and other liabilities   (113,662)   (508,975)
Deferred loan fees (costs)   (48,206)   53,922 
Net cash from operating activities   (9,577,856)   (1,957,795)
Cash flows from investing activities:          
Purchases of securities available for sale   (6,209,677)   (6,539,002)
Redemptions of federal bank stock   20,100    39,700 
Maturities, calls and paydowns of securities available for sale   3,701,527    12,967,243 
Sales of securities available for sale   806,170    10,770,482 
Proceeds from sale of assets acquired in settlement of loans   264,613    453,679 
Participation loans sold   7,469,273    1,435,046 
Participation loans purchased   (4,974,886)   (725,000)
Net change in loans   (29,694,364)   (13,311,810)
Proceeds from sale of premises and equipment   6,150    14,250 
Acquisition of premises and equipment   (251,948)   (74,138)
Net cash from investing activities   (28,863,042)   5,030,450 
Cash flows from financing activities          
Net change in deposits   13,264,814    19,231,988 
Net change in repurchase agreements   (246,095)   1,996,427 
Repayment of capital lease obligations   0    (34,514)
Proceeds from short term FHLB advances, net of repayments   12,000,000    0 
Repayments of long term FHLB advances   0    (5,000,000)
Cash paid in lieu of fractional shares for reverse stock split   (25)   0 
Net cash from financing activities   25,018,694    16,193,901 
Net change in cash and cash equivalents   (13,422,204)   19,266,556 
Cash and cash equivalents at beginning of period   20,046,156    32,682,218 
Cash and cash equivalents at end of period  $6,623,952   $51,948,774 

 

See notes to the consolidated financial statements.

 

8
 

 

   For the nine months ended 
   September 30, 
   2012   2011 
Supplemental disclosures of cash flow information:        
         
Cash paid during the period for:          
Interest   489,418    998,782 
Federal income taxes   40,000    0 
Non-cash transactions:          
Transfer of loans to assets acquired in settlement of loans   473,760    604,459 
Reclassification of securities to available-for-sale from held-to-maturity   0    2,816,058 
Reclassification of asset balances to assets to be disposed of through branch sale:          
Loans, net   0    9,077,972 
Premises and equipment, net   0    1,018,681 
Reclassification of liability balances to liabilities to be disposed of through branch sale:          
Deposits   0    74,303,746 
Repurchase agreements   0    726,284 
Capital lease obligation   0    373,079 

 

See notes to the consolidated financial statements.

 

9
 

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations and Principles of Consolidation: The consolidated financial statements include Ohio Legacy Corp (“the Company”) and its wholly-owned subsidiary, Premier Bank & Trust, National Association (“Bank”) (formerly known as Ohio Legacy Bank, National Association). Ohio Legacy Corp is approximately 76% owned by Excel Bancorp, LLC, a registered bank holding company. Intercompany transactions and balances are eliminated in consolidation. References to the Company include Ohio Legacy, consolidated with its subsidiary, the Bank.

 

Ohio Legacy is a bank holding company incorporated on July 1, 1999 under the laws of the State of Ohio. The Bank began operations on October 3, 2000. The Bank provides financial services through its full-service offices in North Canton and St. Clairsville, Ohio. Its primary deposit products are checking, savings and certificate of deposit accounts, and its primary lending products are residential mortgage, commercial and installment loans. Substantially all loans are secured by specific items of collateral including business and consumer assets and real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Real estate loans are secured by residential and commercial real estate. Other financial instruments that potentially represent concentrations of credit risk include deposit accounts in other financial institutions and federal funds sold. On March 23, 2010, the Bank received approval from the Comptroller of the Currency of its application to commence fiduciary powers pursuant to 12 USC 92a. Subsequently, the Bank opted to include “Trust” in its name and announced a name change to Premier Bank & Trust, N.A. effective April 2010. The Bank also began to offer investment brokerage services in April 2010.

 

These consolidated financial statements are prepared without audit and reflect all adjustments that, in the opinion of management, are necessary to present fairly the financial position of the Company at September 30, 2012, and its results of operations and cash flows for the periods presented. All such adjustments are normal and recurring in nature. The accounting principles used to prepare the consolidated financial statements are in compliance with U.S. GAAP. However, the financial statements were prepared in accordance with the instructions of Form 10-Q and, therefore, do not purport to contain all necessary financial and note disclosures required by U.S. GAAP.

 

The financial information presented in this report should be read in conjunction with the Company’s Form 10-K for the year ended December 31, 2011, which includes information and disclosures not presented in this report. Reference is made to the accounting policies of the Company described in Note 1 of the Notes to Consolidated Financial Statements. The Company has consistently followed those policies in preparing this Form 10-Q.

 

Use of Estimates: To prepare financial statements in conformity with U.S. GAAP, 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, judgments about the other than temporary impairment of securities, fair value of financial instruments, valuation of deferred tax assets and the fair value of assets acquired in settlement of loans are particularly subject to change.

 

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. The reclassifications had no impact on reported net income or shareholders’ equity.

 

Adoption of New Accounting Pronouncements:

 

No. 2011-04 | Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirement in U.S. GAAP and IFRSs: In May 2011, FASB issued Accounting Standards Update 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirement in U.S. GAAP and IFRSs (ASU 2011-04). The new guidance in this ASU results in common fair value measurement and disclosure requirements in U.S. and international accounting principles. Certain amendments clarify the FASB‘s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. These amendments also enhance disclosure requirements surrounding fair value measurement. Most significantly, an entity will be required to disclose additional information regarding Level 3 fair value measurements including quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements. The new guidance is effective for interim and annual periods beginning on or after December 15, 2011. The effect of adopting this standard did not have a material effect on the Company’s operating results or financial condition, but the additional disclosures are included in Note 6.

 

No. 2011-05 |Comprehensive Income (Topic 220): In June 2011, FASB issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income. The ASU eliminates the option to report other comprehensive income and its components in the statement of changes in equity. An entity can elect to present the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The ASU does not change the items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income, or how earnings per share is calculated or presented. The amendments in this guidance are effective as of the beginning of the fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. The adoption of this amendment changed the presentation of the statement of comprehensive income for the Company to two consecutive statements instead of presented as part of the consolidated statement of shareholders’ equity.

 

10
 

 

No. 2011-12 | Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05: In December 2011, the FASB issued ASU No. 2011-12 that deferred the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income. The adoption of the new guidance will impact the presentation of the consolidated financial statements.

 

NOTE 2 – EARNINGS (LOSS) PER SHARE

 

Basic earnings (loss) per share is equal to net income (loss) divided by the weighted average number of shares outstanding during the period. Diluted earnings (loss) per share include the dilutive effect of additional potential common shares that may be issued upon the exercise of stock options and stock warrants. The following table details the calculation of basic and diluted earnings (loss) per share:

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
BASIC:                    
Net income (loss)  $137,220   $(280,069)  $(44,715)  $(987,580)
Weighted average common shares outstanding   1,971,453    1,971,456    1,971,455    1,971,456 
Basic income (loss) per share  $0.07   $(0.14)  $(0.02)  $(0.50)
                     
DILUTED:                    
Net income (loss)  $137,220   $(280,069)  $(44,715)  $(987,580)
Weighted average common shares outstanding   1,971,453    1,971,456    1,971,455    1,971,456 
Dilutive effect of stock options   -    -    -    - 
Total common shares and dilutive potential common shares   1,971,453    1,971,456    1,971,455    1,971,456 
Diluted income (loss) per common share  $0.07   $(0.14)  $(0.02)  $(0.50)

 

The dilutive potential common shares that were excluded from the computation of diluted earnings per share because the effect of their exercise was anti-dilutive totaled 128,105 at September 30, 2012 and 2011.

 

At the annual meeting held on May 15, 2012, the Company’s shareholders approved an amendment to its articles of incorporation to effect a 1 for 10 reverse stock split. On August 21, 2012, the Board of Directors authorized filing with the Ohio Secretary of State’s office an amendment to the Company’s articles of incorporation to effect the 1 for 10 reverse stock split effective September 18, 2012. All share and related option information has been retroactively adjusted to reflect the reduced number of shares and options resulting from this action. The reverse split reduces the number of common shares outstanding from 19,714,564 to 1,971,431. Cash was paid for 25.4 fractional shares. The reverse split also affected the common stock underlying stock options that were outstanding immediately prior to the effective date of the reverse stock split as well as the strike price of those options which was adjusted to a price equal to ten times the original strike price. The number of authorized shares of the Company’s common stock was not affected by the reverse stock split. Earnings per share, outstanding common shares and weighted average common shares outstanding have been retroactively restated to reflect this change.

 

NOTE 3 – INVESTMENT SECURITIES

 

The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
September 30, 2012                    
U.S. Government-sponsored enterprises  $1,018,380   $0   $(188)  $1,018,192 
Mortgage-backed securities issued by U.S. Government-sponsored enterprises   7,874,990    181,333    0    8,056,323 
Other mortgage-backed securities-residential   199,537    0    (11,625)   187,912 
Municipal securities   2,757,477    186,601    0    2,944,078 
Equity securities   39,900    49,850    0    89,750 
Total  $11,890,284   $417,784   $(11,813)  $12,296,255 

 

11
 

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
December 31, 2011                    
U.S. Government-sponsored enterprises  $2,514,982   $952   $(28)  $2,515,906 
Mortgage-backed securities issued by U.S. Government-sponsored enterprises   4,663,733    201,434    0    4,865,167 
Other mortgage-backed securities-residential   250,748    0    (60,877)   189,871 
Municipal Securities   2,755,465    205,885         2,961,350 
Equity securities   39,900    105,450    0    145,350 
Total  $10,224,828   $513,721   $(60,905)  $10,677,644 

 

All mortgage-backed securities at both period ends are residential mortgage-backed securities.

 

Proceeds from the sale of securities available-for-sale totaled $806,170 for the nine months ended September 30, 2012 and included gross gains of $55,016 and gross losses of $0. Proceeds from the sale of securities available-for-sale totaled $10,770,482 for the nine months ended September 30, 2011 and included gross gains of $358,030 and gross losses of $0. Proceeds from the sale of securities available-for-sale totaled $806,170 for the three months ended September 30, 2012 and included gross gains of $55,016 and gross losses of $0. Proceeds from the sale of securities available-for-sale totaled $5,818,639 for the three months ended September 30, 2011 and included gross gains of $325,032 and gross losses of $0.

 

The fair value of debt securities and the carrying amount, if different, at September 30, 2012 by expected maturity are depicted in the following table. Expected maturities may differ from contractual maturities because the loans underlying the mortgage-backed securities generally can be prepaid without penalty.

 

   Available for Sale 
   Fair Value 
Due in one year or less  $0 
Due from one to five years   922,475 
Due from five to ten years   2,017,837 
Due after ten years   1,021,958 
Mortgage-backed securities-residential   8,244,235 
Total  $12,206,505 

 

Securities with unrealized losses for less than one year and one year or more were as follows:

 

   Less than 12 months   12 Months or More   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
September 30, 2012:  Value   Loss   Value   Loss   Value   Loss 
Available for sale:                              
U.S. Government-sponsored enterprises  $1,018,192   $(188)  $0   $0   $1,018,192   $(188)
Other mortgage-backed securities-residential   0    0    187,912    (11,625)   187,912    (11,625)
Total  $1,018,192   $(188)  $187,912   $(11,625)  $1,206,104   $(11,813)

 

   Less than 12 months   12 Months or More   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
December 31, 2011:  Value   Loss   Value   Loss   Value   Loss 
Available for sale:                              
U.S. Government-sponsored enterprises  $1,003,318   $(28)  $0   $0   $1,003,318   $(28)
Other mortgage-backed securities-residential   0    0    189,871    (60,877)   189,871    (60,877)
Total  $1,003,318   $(28)  $189,871   $(60,877)  $1,193,189   $(60,905)

 

Other-Than-Temporary-Impairment

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

 

As of September 30, 2012, the Company’s security portfolio consisted of 27 securities, one of which was in an unrealized loss position for 12 months or longer.

 

12
 

 

Mortgage-backed securities-residential

 

The Company’s mortgage-backed securities portfolio includes one non-agency security with a fair value of $187,912 which represents an unrealized loss of approximately $11,625 at September 30, 2012; the estimated fair value has been less than its amortized cost for twelve months or more. This non-agency mortgage-backed security was rated Caa1 by Moody’s on April 21, 2011 and BBB- on July 12, 2011 by Standard & Poor’s rating services. This security is senior to several subordinate classes of securities that together are collateralized by a pool of residential mortgages. No losses incurred on the mortgages in the pool have been assigned to the senior classes. Although the borrowers are not required to make principal payments during the initial 10 year period, 80% of the original principal has been repaid as of September 30, 2012. There are no negative amortization loans in the pool and none of the loans are subprime, Alt A or similar type of high-default product. Based on these factors, as of September 30, 2012, the Company believes there is no OTTI and does not have the intent to sell this security and it is likely that it will not be required to sell the security before its anticipated recovery.

 

NOTE 4 – LOANS

Loans, by collateral type, were as follows at September 30, 2012 and December 31, 2011:

 

   September 30, 2012   December 31, 2011 
   Balance   Percent   Balance   Percent 
Residential real estate  $32,756,685    23.9%  $27,985,517    25.3%
Multifamily real estate   11,163,410    8.1%   9,140,672    8.2%
Commercial real estate   52,895,736    38.5%   42,622,961    38.5%
Construction   5,946,871    4.3%   4,219,420    3.8%
Commercial   15,361,786    11.2%   10,031,094    9.1%
Secured by trust assets   6,103,720    4.4%   6,798,929    6.1%
Consumer and home equity   13,166,494    9.6%   9,931,647    9.0%
Total Loans   137,394,702    100.0%   110,730,240    100.0%
Less: Allowance for loan losses   (2,514,913)        (2,484,478)     
Net deferred loan costs (fees)   79,763         31,557      
Loans, net  $134,959,552        $108,277,319      

 

Residential real estate loans pledged as collateral for advances and to support available borrowing capacity at the Federal Home Loan Bank totaled approximately $29,838,000 at September 30, 2012 and $24,475,000 at December 31, 2011. Commercial and multi-family real estate pledged to the FHLB as of September 30, 2012 and December 31, 2011 totaled $30,701,000 and $23,827,000, respectively. Commercial and home equity loans pledged as collateral at the Federal Reserve Bank of Cleveland for available discount window borrowing at September 30, 2012 and December 31, 2011 totaled $27,024,000 and $16,553,000, respectively.

 

Activity in the allowance for loan losses by loan class for the three months and nine months ended September 30 are presented in the following tables:

 

       For the Three Months Ended September 30, 2012    
   Balance,
June 30,
2012
   Provision for Loan
Losses
   Loans Charged-
Off
   Recoveries   Balance,
September 30,
2012
 
1-4 family residential mortgage  $203,688   $12,050   $0   $1,157   $216,895 
1-4 family rental property   244,685    (6,115)   0    873    239,443 
Multi-family real estate   426,039    (25,835)   0    0    400,204 
Home equity loans   179,833    117,051    (935)   5,968    301,917 
Consumer   36,571    688    (1,145)   618    36,732 
Commercial   173,919    (247,479)   (1,100)   111,790    37,130 
Secured by trust assets   13,877    (1,670)   0    0    12,207 
Commercial real estate:                         
Non-owner occupied   215,353    56,765    0    0    272,118 
Owner occupied   701,302    196,447    (2,405)   2,405    897,749 
Construction and development   75,841    15,473    0    9,204    100,518 
Total  $2,271,108   $117,375   $(5,585)  $132,015   $2,514,913 

 

13
 

 

       For the Three Months Ended September 30, 2011     
   Balance, June 30,
2011
   Provision for
Loan Losses
   Loans
Charged-
Off
   Recoveries   Reclassification for loans
to be disposed of
through branch sale
   Balance,
September 30,
2011
 
1-4 family residential mortgage  $174,411   $4,387   $0   $0   $(5,745)  $173,053 
1-4 family rental property   199,799    13,721    0    0    (11,918)   201,602 
Multi-family real estate   410,604    156,305    0    0    (132,966)   433,943 
Home equity loans   88,155    7,608    0    0    (1,836)   93,927 
Consumer   10,383    (4,260)   (426)   528    (914)   5,311 
Commercial   280,171    43,907    0    10,118    (90,260)   243,936 
Secured by trust assets   11,794    1,421    0    0    0    13,215 
Commercial real estate:                              
Non-owner occupied   427,587    (63,510)   0    0    (5,966)   358,111 
Owner occupied   995,368    (30,860)   (7,554)   59,708    (350,395)   666,267 
Construction and development   163,230    (237,593)   (1,205)   250,846    0    175,278 
Total  $2,761,502   $(108,874)  $(9,185)  $321,200   $(600,000)  $2,364,643 

 

       For the Nine Months Ended September 30, 2012     
   Balance,
December 31,
2011
   Provision for Loan Losses   Loans Charged- Off   Recoveries   Balance,
September 30,
2012
 
1-4 family residential mortgage  $202,699   $101,615   $(90,366)  $2,947   $216,895 
1-4 family rental property   235,523    33,184    (30,137)   873    239,443 
Multi-family real estate   423,031    (22,827)   0    0    400,204 
Home equity loans   139,419    177,948    (21,418)   5,968    301,917 
Consumer   9,687    27,981    (2,262)   1,326    36,732 
Commercial   284,961    (362,126)   (1,100)   115,395    37,130 
Secured by trust assets   13,600    (1,393)   0    0    12,207 
Commercial real estate:                         
Non-owner occupied   278,699    24,831    (31,412)   0    272,118 
Owner occupied   662,269    235,480    (2,405)   2,405    897,749 
Construction and development   234,590    (104,875)   (50,000)   20,803    100,518 
Total  $2,484,478   $109,818   $(229,100)  $149,717   $2,514,913 

 

       For the Nine Months Ended September 30, 2011     
   Balance,
December 31,
2010
   Provision for
Loan Losses
   Loans
Charged-Off
   Recoveries   Reclassification
for loans to be
disposed of
through branch
sale
   Balance,
September 30,
2011
 
1-4 family residential mortgage  $183,507   $43,368   $(48,077)  $0   $(5,745)  $173,053 
1-4 family rental property   331,184    (117,664)   0    0    (11,918)   201,602 
Multi-family real estate   454,670    112,239    0    0    (132,966)   433,943 
Home equity loans   93,187    2,576    0    0    (1,836)   93,927 
Consumer   10,818    (5,052)   (942)   1,401    (914)   5,311 
Commercial   275,473    128,440    (81,263)   11,546    (90,260)   243,936 
Secured by trust assets   12,095    1,120    0    0    0    13,215 
Commercial real estate:                              
Non-owner occupied   509,739    (116,573)   (29,089)   0    (5,966)   358,111 
Owner occupied   1,043,458    44,475    (166,658)   95,387    (350,395)   666,267 
Construction and development   141,635    (227,998)   (1,205)   262,846    0    175,278 
Total  $3,055,766   $(135,069)  $(327,234)  $371,180   $(600,000)  $2,364,643 

 

The unpaid principal balance of loans reflects the borrowers’ principal balance and is not reduced by partial charge-offs previously recorded by the Company. For nonaccrual loans, the recorded investment in loans is reduced by the full amount of payments received from the borrower, whereas the unpaid principal balance will continue to reflect an allocation of the borrower’s payment between principal and interest. Generally accepted accounting principles define the recorded investment in loans as the sum of unpaid principal balance, accrued interest receivable, and deferred fees and costs minus partial charge-offs. Because accrued interest receivable, deferred fees and deferred costs are not material, the recorded investment in loans presented in the accompanying tables does not include these balances.

 

The following tables present the balance in the allowance for loan losses and the recorded investment of loans by portfolio class and based on impairment method.

 

14
 

 

   Loans Collectively Evaluated for
Impairment
   Loans Individually
Evaluated for Impairment
   Total 
September 30, 2012  Allowance
for Loan
Loss
   Recorded
Investment
   Allowance
for Loan
Loss
   Recorded
Investment
   Allowance
for Loan
Loss
   Recorded
Investment
 
1-4 family residential mortgage  $216,895   $27,924,779   $0   $592,980   $216,895   $28,517,759 
1-4 family rental property   232,754    4,187,254    6,689    51,672    239,443    4,238,926 
Multi-family real estate   400,204    10,868,730    0    294,680    400,204    11,163,410 
Home equity   258,168    11,279,952    43,749    224,164    301,917    11,504,116 
Consumer   36,732    1,662,378    0    0    36,732    1,662,378 
Commercial   35,831    15,252,073    1,299    109,713    37,130    15,361,786 
Secured by trust assets   12,207    6,103,720    0    0    12,207    6,103,720 
Commercial real estate:                              
Non-owner occupied   245,790    22,070,954    26,328    2,451,292    272,118    24,522,246 
Owner occupied   892,384    27,698,986    5,365    674,504    897,749    28,373,490 
Construction and development   100,518    5,946,871    0    0    100,518    5,946,871 
Total  $2,431,483   $132,995,697   $83,430   $4,399,005   $2,514,913   $137,394,702 

 

   Loans Collectively Evaluated for
Impairment
   Loans Individually Evaluated for
Impairment
   Total 
December 31, 2011  Allowance
for Loan Loss
   Recorded
Investment
   Allowance for
Loan Loss
   Recorded
Investment
   Allowance for
Loan Loss
   Recorded
Investment
 
1-4 family residential mortgage  $202,699   $23,645,009   $0   $108,877   $202,699   $23,753,886 
1-4 family rental property   235,523    4,068,998    0    162,633    235,523    4,231,631 
Multi-family real estate   423,031    9,132,775    0    7,897    423,031    9,140,672 
Home equity   98,944    8,711,640    40,475    189,603    139,419    8,901,243 
Consumer   9,687    1,030,404    0    0    9,687    1,030,404 
Commercial   284,347    9,838,175    614    192,919    284,961    10,031,094 
Commercial secured by trust assets   13,600    6,798,929    0    0    13,600    6,798,929 
Commercial real estate:                              
Non-owner occupied   212,153    20,279,967    66,546    2,522,791    278,699    22,802,758 
Owner occupied   650,824    19,208,688    11,445    611,515    662,269    19,820,203 
Construction and development   234,590    3,931,523    0    287,897    234,590    4,219,420 
Total  $2,365,398   $106,646,108   $119,080   $4,084,132   $2,484,478   $110,730,240 

 

The following tables present loans individually evaluated for impairment by loan class as of September 30, 2012 and December 31, 2011 and for the three and nine months ended September 30, 2012 and September 30, 2011:

 

   As of September 30, 2012   As of December 31, 2011 
   Unpaid
Principal
Balance
   Recorded
Investment
   Allowance for
Loan Losses
Allocated
   Unpaid
Principal
Balance
   Recorded
Investment
   Allowance for
Loan Losses
Allocated
 
With no related allowance recorded:                              
1-4 family residential mortgage  $627,121   $592,980   $0   $197,637   $108,877   $0 
1-4 family rental property   63,597    14,709    0    288,674    162,633    0 
Multi-family real estate   325,355    294,680    0    36,952    7,897    0 
Home equity   58,833    58,038    0    32,336    32,337    0 
Commercial   108,415    108,414    0    371,177    192,305    0 
Commercial real estate:                              
Non-owner occupied   2,411,344    2,411,344    0    1,836,578    1,754,214    0 
Owner occupied   710,524    669,139    0    613,495    533,746    0 
Construction and development   0    0    0    716,657    287,897    0 
Subtotal   4,305,189    4,149,304    0    4,093,506    3,079,906    0 
                               
With an allowance recorded:                              
1-4 family residential mortgage   0    0    0    0    0    0 
1-4 family rental property   60,949    36,963    6,689    0    0    0 
Multi-family real estate   0    0    0    0    0    0 
Home equity   166,126    166,126    43,749    157,266    157,266    40,475 
Commercial   1,349    1,299    1,299    2,849    614    614 
Commercial real estate:                              
Non-owner occupied   118,959    39,948    26,328    773,028    768,577    66,546 
Owner occupied   11,037    5,365    5,365    82,517    77,769    11,445 
Subtotal   358,420    249,701    83,430    1,015,660    1,004,226    119,080 
                               
Total  $4,663,609   $4,399,005   $83,430   $5,109,166   $4,084,132   $119,080 

 

15
 

 

   For the Three Months Ended September 30,
2012
   For the Three Months Ended September 30,
2011
 
   Average
Recorded
Investment
   Interest
Income
Recognized
   Cash Basis
Interest
Recognized
   Average
Recorded
Investment
   Interest
Income
Recognized
   Cash Basis
Interest
Recognized
 
                         
With no related allowance recorded:                              
1-4 family residential mortgage  $552,930   $0   $0   $175,495   $0   $0 
1-4 family rental property   18,943    1,344    1,344    32,410    0    0 
Multi-family real estate   98,227    4,453    1,881    0    0    0 
Home equity   58,311    0    0    0    0    0 
Commercial   117,977    1,444    1,499    145,130    0    0 
Commercial real estate:                              
Non-owner occupied   2,418,961    34,531    36,834    40,121    0    0 
Owner occupied   638,082    0    0    631,845    1,712    1,712 
Construction and development   0    0    0    765,633    0    0 
Subtotal   3,903,431    41,772    41,558    1,790,634    1,712    1,712 
                               
With an allowance recorded:                              
1-4 family residential mortgage   0    0    0    92,885    0    0 
1-4 family rental property   34,059    0    0    152,234    0    0 
Multi-family real estate   1,966    0    0    0    0    0 
Home equity   118,396    1,873    1,876    0    0    0 
Consumer   0    0    0    0    0    0 
Commercial   0    0    0    0    0    0 
Commercial real estate:                              
Non-owner occupied   13,620    0    0    0    0    0 
Owner occupied   0    0    0    54,499    0    0 
Subtotal   168,041    1,873    1,876    299,618    0    0 
                               
Total  $4,071,472   $43,645   $43,434   $2,090,252   $1,712   $1,712 

 

   For the Nine Months Ended September 30,
2012
   For the Nine Months Ended September 30,
2011
 
   Average
Recorded
Investment
   Interest
Income
Recognized
   Cash Basis
Interest
Recognized
   Average
Recorded
Investment
   Interest
Income
Recognized
   Cash Basis
Interest
Recognized
 
                         
With no related allowance recorded:                              
1-4 family residential mortgage  $398,096   $0   $0   $243,244   $590   $590 
1-4 family rental property   80,595    1,344    1,344    132,624    10,861    10,861 
Multi-family real estate   36,615    12,914    8,945    15,283    0    0 
Home equity   60,966    0    0    3,980    0    0 
Commercial   151,202    7,127    6,609    171,291    0    0 
Commercial real estate:                              
Non-owner occupied   2,462,059    108,274    104,313    101,698    0    0 
Owner occupied   588,159    0    0    971,027    1,712    1,712 
Construction and development   159,943    0    0    937,493    0    0 
Subtotal   3,937,635    129,659    121,211    2,576,640    13,163    13,163 
                               
With an allowance recorded:                              
1-4 family residential mortgage   0    0    0    48,211    0    0 
1-4 family rental property   36,592    0    0    67,716    0    0 
Multi-family real estate   1,081    0    0    0    0    0 
Home equity   117,242    5,836    5,307    0    0    0 
Consumer   0    0    0    0    0    0 
Commercial   0    0    0    29,543    0    0 
Commercial real estate:                              
Non-owner occupied   7,709    0    0    15,207    0    0 
Owner occupied   6,998    0    0    42,449    0    0 
Subtotal   169,622    5,836    5,307    203,126    0    0 
                               
Total  $4,107,257   $135,495   $126,518   $2,779,766   $13,163   $13,163 

 

16
 

 

The following tables present the aging of the recorded investment in loans by loan class:

 

       Days Past Due         
September 30, 2012  Loans Not Past Due   30-59
Days
   60-89
Days
   90 Days or
Greater
   Total Past
Due
   Total 
1-4 family residential mortgage   27,575,017.00   $383,198   $0   $559,544   $942,742   $28,517,759 
1-4 family rental property   4,187,254    29,128    0    22,544    51,672    4,238,926 
Multi-family real estate   10,868,730    290,285    0    4,395    294,680    11,163,410 
Home equity loans   11,395,326    32,979    0    75,811    108,790    11,504,116 
Consumer   1,660,649    1,729    0    0    1,729    1,662,378 
Commercial   15,343,298    1,299    0    17,189    18,488    15,361,786 
Secured by trust assets   6,103,720    0    0    0    0    6,103,720 
Commercial real estate:                              
Non-owner occupied   24,482,298    0    0    39,948    39,948    24,522,246 
Owner occupied   25,626,195    196,026    2,298,246    253,023    2,747,295    28,373,490 
Construction and development   5,946,871    0    0    0    0    5,946,871 
Total  $133,189,358   $934,644   $2,298,246   $972,454   $4,205,344   $137,394,702 

 

The 60-89 Days past due balance consists of one loan in which the Bank owns a 2.45% participation interest. Sixty-six participants share in the credit. The loan has matured and the participating banks have not agreed on renewal terms for the borrower. The participation agreement requires approval of 100% of the participating banks to renew the loan.

 

       Days Past Due         
December 31, 2011  Loans Not Past
Due
   30-59
Days
   60-89
Days
   90 Days or
Greater
   Total Past
Due
   Total 
1-4 family residential mortgage  $23,161,060   $454,167   $138,659   $0   $592,826   $23,753,886 
1-4 family rental property   3,924,394    144,603    31,975    130,659    307,237    4,231,631 
Multi-family real estate   9,132,775    0    0    7,897    7,897    9,140,672 
Home equity loans   8,809,248    25,161    34,497    32,337    91,995    8,901,243 
Consumer   1,017,062    0    11,670    1,672    13,342    1,030,404 
Commercial   10,005,369    3,848    6,692    15,185    25,725    10,031,094 
Secured by trust assets   6,798,929    0    0    0    0    6,798,929 
Commercial real estate:                              
Non-owner occupied   22,762,810    0    0    39,948    39,948    22,802,758 
Owner occupied   19,581,686    0    0    238,517    238,517    19,820,203 
Construction and development   3,881,837    49,686    0    287,897    337,583    4,219,420 
Total  $109,075,170   $677,465   $223,493   $754,112   $1,655,070   $110,730,240 

 

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by loan class:

 

September  30, 2012  Nonaccrual Loans   90 Days or
Greater & Still
Accruing
   Total 
1-4 family residential mortgage  $592,980   $0   $592,980 
1-4 family rental property   51,672    0    51,672 
Multi-family real estate   4,395    0    4,395 
Home equity loans   75,811    0    75,811 
Consumer   5,412    0    5,412 
Commercial   18,488    0    18,488 
Secured by trust assets   0    0    0 
Commercial real estate:               
Non-owner occupied   39,948    0    39,948 
Owner occupied   674,504    0    674,504 
Construction and development   0    0    0 
Total  $1,463,210   $0   $1,463,210 

 

December 31, 2011  Nonaccrual loans   90 Days or
Greater & Still
Accruing
   Total 
1-4 family residential mortgage  $108,877   $0   $108,877 
1-4 family rental property   162,633    0    162,633 
Multi-family real estate   7,897    0    7,897 
Home equity loans   38,612    0    38,612 
Consumer   6,309    1,672    7,981 
Commercial   77,919    0    77,919 

 

17
 

 

December 31, 2011  Nonaccrual loans   90 Days or
Greater & Still
Accruing
   Total 
Commercial real estate:               
Non-owner occupied   39,948    0    39,948 
Owner occupied   611,515    0    611,515 
Construction and development   287,897    0    287,897 
Total  $1,341,607   $1,672   $1,343,279 

 

Troubled Debt Restructurings:

 

Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and classified as impaired. TDRs are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

 

The following tables report the balance of TDRs outstanding and related information as of September 30, 2012 and December 31, 2011:

 

       Outstanding Recorded Investment 
September 30, 2012:  Number of Loans   Pre-Modification   Post-Modification 
Home equity   1   $150,991   $150,991 
Commercial   1    64,532    115,000 
Commercial real estate:               
Non-owner occupied   5    2,476,202    2,781,147 
Owner occupied   1    238,517    229,519 
Total   8   $2,930,242   $3,276,657 
                
TDR allocated specific reserves            $31,562 
TDR loan commitments outstanding             6,000 

 

       Outstanding Recorded Investment 
December 31, 2011:  Number of Loans   Pre-Modification   Post-Modification 
Home equity   1   $150,991   $150,991 
Commercial   3    145,294    195,761 
Commercial real estate:               
Non-owner occupied   4    2,222,984    2,490,647 
Owner occupied   2    120,403    120,403 
Total   10   $2,639,672   $2,957,802 
                
TDR allocated specific reserves            $100,746 
TDR loan commitments outstanding            $6,000 

 

The Home Equity modification related to a change in payment through the re-amortization of the remaining balance and an increase in the interest rate.  

 

The modifications of the Commercial class generally relate to maturity date extensions as well as rate and payment modifications.  The payment modifications adjusted the remaining amortization of the outstanding loan balance.  Generally, interest rates are either maintained at the same rate or increased for modifications in the Commercial class.  The advance of funds “post-modification” related to equipment purchases.

 

The modifications of the Non-Owner Occupied Commercial Real Estate class related to a restructuring of payment, interest rate, term and amortization.  For each loan, the interest rate was either increased or was unchanged.  The loan term was left unchanged or shortened.  The amortization period was lengthened up to 7 years with the loan-to-value of each loan remaining within Bank credit policy limits. The increase in balances “post-modification” related to the advance of new funds to pay delinquent real estate taxes.

 

The Owner-Occupied Commercial Real Estate modifications were the result of matching the expiration date of the real estate holding company debt with the debt of the operating entity.

 

18
 

 

A loan is typically considered to be in payment default once it is eleven days contractually past due under the modified terms. During the three and nine months ending September 30, 2012, there was one non-owner occupied commercial real estate loan identified as a TDR totaling $290,285 for which a payment default occurred during the prior twelve months following the modification. The payment default did not result in a charge off or a change in the allowance for loan and lease losses.

 

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 company’s internal underwriting policy.

 

The following table includes TDR related activity for the three and nine months ended September 30:

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2012   2011   2012   2011 
   Number   Amount   Number   Amount   Number   Amount   Number   Amount 
TDRs completed:                                        
Owner occupied commercial real estate   0   $0    0   $0    1   $220,090    2   $113,648 
Commercial   0    0    0    0    0    0    5    107,778 
Non-owner occupied commercial real estate   1    290,285    0    0    1    290,285    0    0 
                                         
TDR related increase (decrease) in the allowance for loan loss       $0        $0        $0        $0 
TDR charge offs        0         0         0         0 

 

No loans were modified during the three or nine months ending September 30, 2012 that had a significant payment delay and did not meet the definition of a troubled debt restructuring.

 

Credit Quality Indicators:

 

The Company classifies all non-homogeneous loans such as commercial and commercial real estate 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, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk into four non-classified categories (i.e. passing grade loans) and three categories of classified loans. This analysis is performed on a quarterly basis. The Company 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.

 

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the 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. Loans listed as not rated are included in groups of homogeneous loans. Loans not analyzed as part of homogeneous groups include commercial, commercial real estate, multi-family real estate, and construction and development loans. Homogeneous groups of loans are not typically risk rated unless the loan is placed on nonaccrual status. A loan may also be separated from the homogeneous pool and individually risk rated due to recurrent delinquency problems, typically 60 to 89 days past due. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

September 30, 2012  Not Rated   Pass   Special Mention   Substandard   Doubtful   Total 
1-4 family residential mortgage  $27,615,597   $190,768   $118,414   $592,980   $0   $28,517,759 
1-4 family rental property   816,981    3,285,463    0    136,482    0    4,238,926 
Multi-family real estate   285,578    7,493,765    2,037,477    1,346,590    0    11,163,410 
Home equity loans   11,217,858    62,094    0    191,827    32,337    11,504,116 
Consumer   1,662,378    0    0    0    0    1,662,378 

 

19
 

 

September 30, 2012  Not Rated   Pass   Special Mention   Substandard   Doubtful   Total 
Commercial   0    15,253,371    0    108,415    0    15,361,786 
Secured by trust assets   0    6,103,720    0    0    0    6,103,720 
Commercial real estate:                              
Non-owner occupied   0    20,750,236    829,485    2,942,525    0    24,522,246 
Owner occupied   0    24,997,476    2,477,364    898,650    0    28,373,490 
Construction and development   2,805,585    3,141,286    0    0    0    5,946,871 
Total  $44,403,977   $81,278,179   $5,462,740   $6,217,469   $32,337   $137,394,702 
                               

 

December 31, 2011  Not Rated   Pass   Special Mention   Substandard   Doubtful   Total 
1-4 family residential mortgage  $23,441,682   $0   $203,327   $1,680   $107,197   $23,753,886 
1-4 family rental property   494,363    2,872,069    513,544    351,655    0    4,231,631 
Multi-family real estate   303,587    7,240,618    254,823    1,341,644    0    9,140,672 
Home equity loans   8,637,268    72,895    1,477    150,991    38,612    8,901,243 
Consumer   1,030,404    0    0    0    0    1,030,404 
Commercial   0    9,823,849    14,326    130,799    62,120    10,031,094 
Secured by trust assets   675,626    6,123,303    0    0    0    6,798,929 
Commercial real estate:                            0 
Non-owner occupied   5,000    19,005,683    759,562    3,032,513    0    22,802,758 
Owner occupied   1,795    17,493,719    1,506,489    707,573    110,627    19,820,203 
Construction and development   1,867,195    2,037,504    26,824    287,897    0    4,219,420 
Total  $36,456,920   $64,669,640   $3,280,372   $6,004,752   $318,556   $110,730,240 

 

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 current principal balance of residential and consumer loans based on payment activity:

 

   Residential         
September 30, 2012  1-4 family   Home Equity   Consumer   Total 
Performing  $27,924,779   $11,428,305   $1,656,966   $41,010,050 
Nonperforming   592,980    75,811    5,412    674,203 
Total  $28,517,759   $11,504,116   $1,662,378   $41,684,253 

 

   Residential         
December 31, 2011  1-4 Family   Home Equity   Consumer   Total 
Performing  $23,645,009   $8,711,640   $1,024,095   $33,380,744 
Nonperforming   108,877    189,603    6,309    304,789 
Total  $23,753,886   $8,901,243   $1,030,404   $33,685,533 

 

NOTE 5 – ASSETS ACQUIRED IN SETTLEMENT OF LOANS

 

Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed. Expenditures that improve the fair value of the property are capitalized. The Company makes periodic reassessments of the value of assets held in this category and records valuation adjustments or write-downs as the reassessments dictate.

 

Assets acquired in settlement of loans were as follows:

 

   September 30,   December 31, 
   2012   2011 
Interest in limited liability company  $1,255,437   $1,255,437 
Residential real estate   79,155    201,154 
Commercial real estate   263,000    292,251 
Construction and development   540,707    263,910 
Total  $2,138,299   $2,012,752 

 

The interest in the limited liability company was obtained through a U.S. Bankruptcy Code 363 sale. The limited liability company was formed by the lead bank for the banks participating in the project financing to acquire title to the real estate, conduct the operation of the facility, and market the real estate and the operations of the business for sale. The carrying value of its interest is based upon the estimated fair value of the real estate less costs to sell.

 

20
 

 

Direct write-downs of assets acquired in settlement of loans totaled $87,636 and $70,148 for the nine months ended September 30, 2012 and 2011, respectively. Direct write-downs of assets acquired in settlement of loans totaled $57,186 and $70,148 for the three months ended September 30, 2012 and 2011, respectively.

 

NOTE 6 – FAIR VALUE

 

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 company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial asset:

 

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

 

Certificate of Deposit in Financial Institution: The fair value of certificates of deposit maintained with financial institutions is based upon discounted cash analyses, using interest rates currently offered for similar time deposits resulting in a Level 2 classification.

 

Securities: The fair values for securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using matrix pricing, which is a mathematical technique used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).

 

Loans Held For Sale: The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan resulting in Level 2 classification.

 

Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: Fair values for loans are estimated using discounted cash flow analyses, using interest rates currently offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

 

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 typically significant and result in a Level 3 classification of the inputs for determining fair value.

 

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

 

Assets Acquired in Settlement of Loans: Assets acquired in settlement of loans are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value less estimated costs to sell. The fair value of assets acquired in settlement of loans is generally based on real estate appraisals. 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 typically significant and result in a Level 3 classification of the inputs for determining fair value.

 

21
 

 

Annual 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. For commercial impaired loans and other real estate owned, if the carrying value is less than $250,000, the Company may obtain a property evaluation by an independent company instead of an appraisal. The Company uses an independent third party appraisal management company for the management of appraisal ordering and review. The appraisal management company 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 and provides a written review report to the Company. Appraised values or evaluation values are always discounted by at least ten percent for selling costs to arrive at fair value. In some cases, and when justified through appropriate documentation, additional discounting is reflected to allow for changing market conditions, property condition or increasing vacancy.

 

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. The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in a Level 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.

 

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.

 

Other Borrowings: 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.

 

Accrued Interest Receivable/Payable: The carrying amounts of accrued interest approximate fair value and its classification is correlated to the underlying financial instrument.

 

Off-balance Sheet Instruments: Fair values for off-balance sheet commitments are nominal and are not material.

 

Assets measured at fair value on a recurring basis are summarized in the following tables:

 

   Fair Value Measurements Using 
       Significant         
   Quoted Prices in   Other   Significant     
   Active Markets for   Observable   Unobservable     
   Identical Assets   Inputs   Inputs     
   (Level 1)   (Level 2)   (Level 3)   Total 
September 30, 2012:                    
Equity securities  $89,750   $0   $0   $89,750 
U.S. government sponsored enterprises   0    1,018,192    0    1,018,192 
Mortgage-backed securities issued by U.S. Government-sponsored enterprises   0    8,056,323    0    8,056,323 
Other mortgage backed securities-residential   0    187,912    0    187,912 
Municipal securities   0    2,380,172    563,906    2,944,078 
Total securities available for sale  $89,750   $11,642,599   $563,906   $12,296,255 

 

   Fair Value Measurements Using  
       Significant         
   Quoted Prices in   Other   Significant     
   Active Markets for   Observable   Unobservable     
   Identical Assets   Inputs   Inputs     
   (Level 1)   (Level 2)   (Level 3)   Total 
December 31, 2011:                    
Equity securities  $145,350   $0   $0   $145,350 
U.S. government sponsored enterprises   0    2,515,906    0    2,515,906 
Mortgage-backed securities issued by U.S. Government-sponsored enterprises   0    4,865,167    0    4,865,167 
Other mortgage backed securities-residential   0    189,871    0    189,871 

 

22
 

 

   Fair Value Measurements Using 
       Significant         
   Quoted Prices in   Other   Significant     
   Active Markets for   Observable   Unobservable     
   Identical Assets   Inputs   Inputs     
   (Level 1)   (Level 2)   (Level 3)   Total 
Municipal securities   0    2,379,836    581,514    2,961,350 
Total securities available for sale  $145,350   $9,950,780   $581,514   $10,677,644 

  

Level 3 securities are priced by a third party vendor and consist of non-rated municipal bonds of a single issuer. The vendor uses internal quality ratings that are a proprietary, internal data management tool to group municipal securities into sectors by perceived credit quality and correlation to the overall municipal market. Data gathered can be categorized as indicative data (terms and conditions data) and market data which are inputs used in price generation. Market data is comprised of various inputs needed to generate or adjust the variables required by the vendors pricing system. Examples of these market inputs are trades, bid price or spread, two-sided markets, quotes, benchmark curves including but not limited to Treasury benchmarks and LIBOR and swap curves, market data feeds such as MSRB, new issues, financial statements, discount rate, capital rates, and trustee reports. They rely on the expertise and judgment of its pricing analysts to gather and identify relevant information to use in formulating pricing opinions.

 

The Company’s policy is to recognize transfers into or out of a level as of the end of the reporting period. There were no transfers between Level 1 and Level 2 securities during the three or nine months ended September 30, 2012.

 

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2012. There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2011.

 

   Three Months   Nine Months 
   Ended   Ended 
   September 30, 2012   September 30, 2012 
Balance of recurring Level 3 assets, beginning of period  $560,124   $581,514 
Total gains or losses (realized/unrealized):          
Included in earnings – realized          
Included in earnings – unrealized          
Included in other comprehensive income   3,782    (17,608)
Purchases          
Sales          
Issuances          
Settlements          
Transfers in and/or out of Level 3          
Balance of recurring Level 3 assets, end of period  $563,906   $563,906 

 

The following table summarizes changes in unrealized gains and losses recorded in earnings for the three months and nine months ended September 30 for Level 3 assets and liabilities that are still held at September 30.

 

   Changes in Unrealized Gains/Losses   Changes in Unrealized Gains/Losses 
   Relating to Assets Still Held at   Relating to Assets Still Held at 
   Reporting Date for the Three Months   Reporting Date for the Nine Months 
   Ending September 30,   Ending September 30, 
   Municipal Securities   Municipal Securities 
   2012   2011   2012   2011 
Interest income on securities  $27   $0   $105   $0 
Other changes in fair value   3,755    0    (17,713)   0 
Total  $3,782   $0   ($17,608)  $0 

 

23
 

 

Assets measured at fair value on a non-recurring basis are summarized in the following table:

 

   Fair Value Measurements Using 
       Significant         
   Quoted Prices in   Other   Significant     
   Active Markets for   Observable   Unobservable     
   Identical Assets   Inputs   Inputs     
   (Level 1)   (Level 2)   (Level 3)   Total 
September 30, 2012:                    
Impaired loans:                    
1-4 family residential mortgage  $0   $0   $152,000   $152,001 
1-4 family rental property   0    0    45,619    45,619 
Home equity   0    0    122,377    122,377 
Multi-family real estate   0    0    4,774    4,774 
Commercial   0    0    0    0 
Commercial real estate:                    
Non-owner occupied   0    0    13,620    13,620 
Owner occupied   0    0    0    0 
Construction and development   0    0    0    0 
                     
Assets acquired in settlement of loans:                    
Residential   0    0    79,155    79,155 
Commercial real estate   0    0    150,000    150,000 
Construction and development   0    0    179,947    179,947 
Interest in limited liability company   0    0    1,255,437    1,255,437 
                     
December 31, 2011:                    
Impaired loans:                    
1-4 family residential mortgage  $0   $0   $107,197   $107,197 
1-4 family rental property   0    0    130,659    130,659 
Home equity   0    0    116,791    116,791 
Multi-family real estate   0    0    7,897    7,897 
Commercial   0    0    62,120    62,120 
Commercial real estate:                    
Non-owner occupied   0    0    741,979    741,979 
Owner occupied   0    0    66,324    66,324 
Construction and development   0    0    287,897    287,897 
                     
Assets acquired in settlement of loans:                    
Residential   0    0    55,989    55,989 
Commercial real estate   0    0    292,251    292,251 
Construction and development   0    0    263,910    263,910 
Interest in limited liability company   0    0    1,255,437    1,255,437 

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $421,820 with a specific allocation of the allowance for loan losses of $83,430 at September 30, 2012. Provisions for loan losses as a result of charge-offs or write-downs to the fair value of collateral were $149,973 for the nine months ended September 30, 2012 of which $9,540 was provided for during the three months ended September 30, 2012.

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal balance of $1,639,944, with a specific allocation of the allowance for loan losses of $119,080 at December 31, 2011. Provisions for loan losses as a result of charge-offs or write-downs to the fair value of collateral were $628,530 in 2011, of which $94,643 was provided for during the three months ended September 30, 2011 and $445,442 was provided for during the nine months ended September 30, 2011.

 

Assets acquired in settlement of loans, measured at fair value less costs to sell, had a carrying value of $1,664,539 at September 30, 2012. Gross write-downs totaling $87,636 were recorded on assets acquired in settlement of loans during the nine months ended September 30, 2012 of which $57,186 was recorded during the three months ended September 30, 2012. Gross write-downs totaling $70,148 were recorded on assets acquired in settlement of loans during the nine months ended September 30, 2011—all was recorded during the three months ended September 30, 2011.

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2012:

 

24
 

 

   Fair value   Valuation
Technique
  Unobservable
Inputs
  Range
to
  Weighted
Average
 
                  
Impaired loans                          
1-4 family residential  $152,000   Sales comparison approach  Adjustment for differences between the comparable sales   -4.00%   0.00%   -4.00%
1-4 family rental property   45,619   Sales comparison approach  Adjustment for differences between the comparable sales   -32.00%   1.00%   -9.03%
Home equity   122,377   Sales comparison approach  Adjustment for differences between the comparable sales   -1.00%   4.00%   -0.50%
Multi-family real estate   4,774   Sales comparison approach  Adjustment for differences between the comparable sales   0.00%   2.10%   2.10%
Commercial real estate:                          
Non-owner occupied   13,620   Income approach  Capitalization rate   12.00%   12.00%   12.00%
                           
Assets Acquired in Settlement of Loans                          
Residential  $79,155   Sales comparison approach  Adjustment for differences between the comparable sales   -15.00%   0.00%   -4.39%
Commercial real estate   150,000   Sales comparison approach  Adjustment for differences between the comparable sales   -7.00%   -7.00%   -7.00%
Construction and development   179,947   Sales comparison approach  Adjustment for differences between the comparable sales   0%   0.00%   0.00%
Interest in limited liability company   1,255,437   Income approach  Capitalization rate   10.25%   10.25%   10.25%

 

The carrying values and estimated fair values of financial assets and liabilities were as follows:

 

       Fair Value Measurements Using: 
September 30, 2012  Carrying Value   Level 1   Level 2   Level 3   Total 
Financial assets                         
Cash and cash equivalents  $6,624,000   $6,624,000   $0   $0   $6,624,000 
Certificate of deposit in financial institution   100,000    0    100,000    0    100,000 
Securities available for sale   12,296,000    90,000    11,642,000    564,000    12,296,000 
Loans held for sale   10,362,000    0    10,617,000    0    10,617,000 
Loans, net   134,960,000    0    0    136,602,000    136,602,000 
Federal bank stock   1,578,000    NA    NA    NA    NA 
Accrued interest receivable   445,000    0    77,000    368,000    445,000 
Financial liabilities                         
Deposits   (117,227,000)   (69,837,000)   (47,564,000)   0    (117,401,000)
Repurchase agreements   (3,968,000)   0    (3,968,000)   0    (3,968,000)
Federal Home Loan Bank advances   (31,000,000)   0    (31,007,000)   0    (31,007,000)
Accrued interest payable   (30,000)   (2,000)   (28,000)   0    (30,000)

  

December 31, 2011  Carrying Value   Estimated Fair Value 
Financial assets          
Cash and cash equivalents  $20,046,000   $20,046,000 
Certificate of deposit in financial institution   100,000    100,000 
Securities available for sale   10,678,000    10,678,000 
Loans held for sale   896,000    928,000 
Loans, net   108,277,000    110,428,000 
Federal bank stock   1,598,000    NA 
Accrued interest receivable   340,000    340,000 

 

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December 31, 2011  Carrying Value   Estimated Fair Value 
Financial liabilities          
Deposits   (103,962,000)   (104,100,000)
Repurchase agreements   (4,214,000)   (4,214,000)
Federal Home Loan Bank advances   (19,000,000)   (19,055,000)
Accrued interest payable   (24,000)   (24,000)

 

 

NOTE 7 – STOCK BASED COMPENSATION

 

As discussed in Note 2, the Company completed a 1 for 10 reverse stock split effective September 18, 2012. The reverse stock split also affected the common stock underlying stock options including the maximum number of shares available for share-based awards, the number of underlying options outstanding, and the strike price of options previously granted and outstanding. All share-based award information has been retroactively adjusted to reflect the reduced number of options and the resulting higher exercise price.

 

Shareholders adopted the Ohio Legacy Corp 2010 Cash and Equity Incentive Plan in May 2010. The Plan permits the grant of share-based awards for a maximum of 200,000 shares of common stock. The Plan provides for awards of options, restricted stock, stock appreciation rights, and other stock-based awards to employees, directors and consultants. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant. Options awards have vesting periods as determined by the Compensation Committee of the Board of Directors. All options currently outstanding have an original vesting period of five years. The Company has a policy of using authorized but unissued common shares to satisfy option exercises.

 

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 represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. 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 following table depicts the activity under this Plan:

 

   2012 
   Options   Weighted Average
Exercise Price
 
Outstanding, January 1   128,185   $23.00 
Granted   -    - 
Forfeited   (80)   23.00 
Exercised   -    - 
Outstanding, September 30   128,105   $23.00 

 

The weighted average remaining contractual life of the options outstanding at September 30, 2012 was 7.78 years. The intrinsic value of options outstanding was $0. At September 30, 2012, there were 26,525 options that were exercisable. All nonvested outstanding options are expected to vest.

 

The compensation cost yet to be recognized for stock options that have been awarded but not vested is as follows:

 

For the remainder of 2012  $49,859 
  2013   197,811 
  2014   197,811 
  2015   98,436 
   $543,917 

 

NOTE 8 – REGULATORY MATTERS

 

Banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Prompt corrective action regulations provide five classifications: (i) well capitalized; (ii) adequately capitalized; (iii) undercapitalized; (iv) significantly undercapitalized; and (v) critically undercapitalized, although these terms are not used to represent overall financial condition. Failure to meet capital requirements can initiate regulatory action.

 

26
 

 

Actual and required capital amounts (in thousands) and ratios are presented below at September 30, 2012 and December 31, 2011:

 

                   To Be Well- 
                   Capitalized Under 
           For Capital   Prompt Corrective 
   Actual   Adequacy Purposes   Action Provisions 
(Dollars in thousands)  Amount   Ratio   Amount   Ratio   Amount   Ratio 
September 30, 2012                              
Total capital to risk-weighted assets                              
Premier Bank & Trust  $20,035    13.9%  $11,538    8.0%  $14,423    10.0%
Tier 1 capital to risk-weighted assets                              
Premier Bank & Trust   18,223    12.6%   5,769    4.0%   8,654    6.0%
Tier 1 capital to average assets                              
Premier Bank & Trust   18,223    11.4%   6,390    4.0%   7,987    5.0%
December 31, 2011:                              
Total capital to risk-weighted assets                              
Premier Bank & Trust  $19,501    17.6%  $8,841    8.0%  $11,051    10.0%
Tier 1 capital to risk-weighted assets                              
Premier Bank & Trust   18,106    16.4%   4,420    4.0%   6,631    6.0%
Tier 1 capital to average assets                              
Premier Bank & Trust   18,106    12.1%   5,965    4.0%   7,457    5.0%

 

NOTE 9 – INCOME TAXES

 

At September 30, 2012, a valuation allowance of $4,416,779 was recorded to reduce the carrying amount of the Company’s net deferred tax assets to zero due primarily to losses sustained in prior years. As a result, income tax benefits related to net operating losses are not typically recorded. A portion of the change in the valuation allowance in each period is attributable to other comprehensive income.

 

Internal Revenue Code section 382 places a limitation on the amount of taxable income that can be offset by net operating loss carryforwards after a change in control (generally greater than 50% change in ownership) of a loss corporation. Accordingly, utilization of net operating loss carryforwards may be subject to an annual limitation regarding their utilization against future taxable income upon change in control.

 

At February 19, 2010, a Stock Purchase Agreement between Ohio Legacy Corp and Excel Bancorp resulted in a section 382 limitation against pre-transaction Ohio Legacy Corp net operating loss carryforwards. The Company reduced the deferred tax asset related to net operating loss carryforwards and the valuation allowance by $1,039,000 at December 31, 2010. At December 31, 2011, the Company further reduced the deferred tax asset related to net operating loss carryforwards and the valuation allowance by an additional $377,000 as a result of changes in the realizable amount of such net operating loss.

 

At December 31, 2011, after consideration of the reduction to pre-transaction net operating losses due to the section 382 limitation, the Company had net operating loss carryforwards of approximately $7,246,000 that will expire as follows: $1,257,000 on December 31, 2027, $132,000 on December 31, 2028, $3,801,000 on December 31, 2029, and $2,056,000 on December 31, 2030. In addition, the Company had approximately $76,000 of alternative minimum tax credits that may be carried forward indefinitely.

 

At December 31, 2011 and 2010, the Company had no unrecognized tax benefits recorded. The Company does not expect the amount of unrecognized tax benefits to change significantly within the next twelve months.

 

27
 

 

Item 2. Management’s Discussion and Analysis.

 

In the following section, management presents an analysis of Ohio Legacy Corp's financial condition as of September 30, 2012, and results of operations as of and for the three months and nine months ended September 30, 2012 and 2011. This discussion is provided to give shareholders a more comprehensive review of the issues facing management than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and the accompanying notes included in this Form 10-Q and the Company’s annual report on Form 10-K for the year ended December 31, 2011.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Form 10-Q, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act which can be identified by the use of forward-looking terminology, such as “may”, “might”, “could”, “would”, “believe”, “expect”, “intend”, “plan”, “seek”, “anticipate”, “estimate”, “project” or “continue” or the negative version of such terms or comparable terminology. All statements other than statements of historical fact included in this Form 10-Q, including statements regarding our outlook, financial position, results of operation, liquidity, capital resources and interest rate sensitivity are forward-looking statements.

 

The Private Securities Litigation Reform Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the forward-looking statements. We desire to take advantage of the “safe harbor” provisions of that Act.

 

Forward-looking statements speak only as of the date on which they are made and, except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date on which the statement is made.

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results to be materially different from any future results expressed or implied by such forward-looking statements. Although we believe the assumptions, judgments and expectations reflected in such forward-looking statements are reasonable, we can give no assurance such assumptions, judgments and expectations will prove to have been correct. Important factors that could cause actual results to differ materially from those in the forward-looking statements included in this Form 10-Q include, but are not limited to:

 

·competition in the industry and markets in which we operate;

 

·rapid changes in technology affecting the financial services industry;

 

·changes in government regulation;

 

·general economic and business conditions;

 

·changes in industry conditions created by state and federal legislation and regulations;

 

·changes in general interest rates and the impact of future interest rate changes on our profitability, capital adequacy and the fair value of our financial assets and liabilities;

 

·our ability to retain existing customers and attract new customers;

 

·our development of new products and services and their success in the marketplace;

 

·our ability to seek additional capital in the future;

 

·the adequacy of our allowance for loan losses; and

 

·our anticipated loan and deposit account growth, expense levels, liquidity and capital resources and projections of earnings.

 

28
 

 

OVERVIEW OF STRATEGIC DEVELOPMENTS

 

The Company’s management has focused on a number of initiatives including the following:

 

·Evaluate the markets where the Company’s branch network operates to determine whether the operating costs and demographics fit with the Bank’s business plan. As a result, the following events occurred:
oA full service branch office was opened in February 2012 in St. Clairsville, Ohio expanding services offered to current and prospective clients at this Belmont County location. The branch office is located in the same plaza as the Bank’s Wealth office.
oDeposits totaling $74.3 million and net loans totaling $9.1 million, including criticized loans of $2.3 million, for two branch offices located in Wayne County, Ohio, were sold in October 2011.
·Develop fee-based revenue through the wealth management business started by the Bank in April 2010.
oAssets under management by the trust department totaled $118 million at September 30, 2012 and $105 million at year-end 2011.
·Evaluate the core processing system to reduce costs while expanding product offerings to remain competitive through advances in technology.
oThe Bank completed a core processing system conversion in April 2012. The second phase of product implementation is underway including imaging, customer relationship management software and other back-office initiatives.
·Deliver efficient and premier service and products for current and prospective clients and develop a sales culture throughout the Company.

 

In October 2011, Premier Bank & Trust completed the sale of two branch offices located in Wooster, Ohio, to The Commercial and Savings Bank of Millersburg, Ohio (“CSB”), a wholly owned subsidiary of CSB Bancorp, Inc., under an agreement (the “Agreement”) entered into during June 2011. Under the terms of the Agreement, CSB purchased approximately $9 million in loans, net of an allocation of the Allowance for Loan and Lease Losses totaling $600,000, real estate, fixtures and equipment associated with the branch locations, and deposits and other liabilities of $75 million. CSB paid a premium of $3.5 million, or 5% of the average amount of assumed deposits during the ten day period prior to and the day of closing less a fixed stated amount of $166,000. In addition to the loans, real estate, and fixed assets sold to CSB, the transaction was funded with approximately $42 million in cash and $19 million in borrowings from the Federal Home Loan Bank. This transaction positions the Company to focus on our core market of Stark and Belmont Counties in Ohio, and provides future expansion potential. The impact of the branch sale is evident when comparing the results for the reported periods of 2012 with to the same period of 2011 particularly for deposit related noninterest income and overhead expenses.

 

The following key factors summarize the Company’s financial condition at September 30, 2012 compared to December 31, 2011:

 

·Total assets increased $25.0 million to $171.6 million from $146.6 million.
·Net loans increased $26.7 million to $135.0 million, and loans held for sale increased $9.5 million to $10.4 million.
·Total deposits increased $13.3 million to $117.2 million.
·Excess liquidity, higher deposit balances, and short-term borrowings from the Federal Home Loan Bank funded loan growth resulting in a $13.4 million reduction to cash and cash equivalents to $6.6 million compared to $20.0 million at year-end.
·Total shareholders’ equity increased $56,000 to $18.6 million. The increase in capital was the result of stock-based compensation expense of $148,000 which was partially offset by an operating loss of $45,000 for the nine months ended September 30, 2012 and other comprehensive loss of $47,000.

 

The following key factors summarize our results of operations for the three months ended September 30, 2012:

 

·The Company recorded net income of $137,220 for the third quarter of 2012 compared to a loss of $280,069 for the same period in 2011.
·Net interest income improved $256,579 for the third quarter of 2012 compared to the same period in 2011.
·The loan loss provision for the third quarter of 2012 was $117,375 compared to a negative loan loss provision of $108,874 for the year-ago quarter. The Company has benefited from improvements to the historical loss rates used in its estimate of the allowance for loan loss during both periods. Net recoveries of approximately $312,000 for the third quarter of 2011 enabled the Company to record a negative loan loss provision during that period.
·Noninterest income decreased $273,718 as gains on sales of securities declined by $270,016 and service charges and other deposit related fee income declined by $86,718 resulting from the sale deposits for two branch offices in October 2011.
29
 

 

·Noninterest expense decreased by $531,731 principally due to the elimination of overhead associated with the sold branches and the absence of branch disposal expenses totaling $166,687 incurred during the year-ago quarter.

 

The following key factors summarize our results of operations for the nine months ended September 30, 2012:

 

·The Company recorded a net loss of $44,715 for the first nine months of 2012 compared to a net loss of $987,580 for the same period of 2011.
·Net interest income improved $397,372 for the period in 2012 compared to the same period in 2011.
·The loan loss provision for 2012 was $109,818 compared to a negative loan loss provision of $135,069 for the year-ago quarter.
·Noninterest income decreased $364,410 driven by a reduction in service charges and other deposit related fee income of approximately $270,000 from the sale of two branch offices in October 2011 and by a reduction in securities gains which were lower by $303,014 for the comparative periods. Trust and brokerage fee income increased $138,269.
·Noninterest expense decreased by $1,170,167. The decline was partly driven by the elimination of overhead associated with the sold branches and lower expenses for professional fees, data processing, and loan expenses including other real estate owned costs.

 

The following forward-looking statements describe our near term outlook:

 

·Margins may decline as interest earning assets continue to adjust to lower rates given the Federal Open Market Committee’s expectation to maintain a highly accommodative stance for monetary policy to support a stronger economic recovery. The FOMC has maintained the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015. The FOMC also has the ability to influence longer term interest rates through its open market operations.
·It will be difficult to reduce our cost of funds significantly below current levels.
·Commercial lending, with an emphasis on commercial and industrial lending, and new services in trust, brokerage and wealth management are expected to expand;
·Credit quality will remain a primary focus of the Company, and costs associated with credit administration and collection efforts will remain high;
·The Bank’s costs associated with its regulatory risk profile including FDIC insurance and regulatory examination costs will remain elevated until asset quality and earnings improve.

 

CRITICAL ACCOUNTING POLICIES

 

The preparation of consolidated financial statements and related disclosures in accordance with U.S. generally accepted accounting principles requires us to make judgments, assumptions and estimates at a specific point in time that affect the amounts reported in the accompanying consolidated financial statements and related notes. In preparing these financial statements, we have utilized available information including our past history, industry standards and the current economic environment, among other factors, in forming our estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by management in formulating our estimates inherent in these financial statements may not materialize. Application of the critical accounting policies described below involves the exercise of judgment and the use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operation to similar businesses.

 

Allowance for loan losses. The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and recoveries and decreased by charge-offs. We estimate the allowance balance by considering the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged off. Loan losses are charged against the allowance when we believe the loan balance cannot be collected.

 

We consider various factors, including portfolio risk, economic environment and loan delinquencies, when determining the level of the provision for loan losses. We monitor loan quality monthly and engage an independent third party each quarter to help monitor and confirm our loan grading conclusions.

 

30
 

 

Valuation allowance for deferred tax assets. Another critical accounting policy relates to valuation of the deferred tax asset for net operating losses. Net operating loss carryforwards of approximately $7,246,000 will expire as follows: $1,257,000 on December 31, 2027, $132,000 on December 31, 2028, $3,801,000 on December 31, 2029, and $2,056,000 on December 31, 2030. A valuation allowance has been recorded for the related deferred tax asset for these carryforwards and other net deferred tax assets recorded by the Company to reduce the carrying amount of these assets to zero. Additional information is included in Note 9 to the consolidated financial statements.

 

FINANCIAL CONDITION – September 30, 2012 compared to December 31, 2011

 

Assets. At September 30, 2012, total assets increased to $171.6 million, up $25.0 million from $146.6 million at December 31, 2011. The asset increase was principally due to an increase in funds provided by an increase in deposits of $13.3 million and a $12 million increase in short-term borrowings from the Federal Home Loan Bank.

 

Cash and Cash Equivalents. Cash and cash equivalents decreased to $6.6 million at September 30, 2012, down $13.4 million from year-end 2011. The decrease in cash and cash equivalents was due to an increase in lending activities.

 

Securities. Total securities available for sale had an estimated fair value of $12.3 million at September 30, 2012, compared to $10.7 million at year-end 2011. One security was sold during the nine months ended September 30, 2012 for a gain of $55,016. The net unrealized gain on the securities portfolio was $405,971 at September 30, 2012 compared to a net unrealized gain of $452,816 at December 31, 2011.

 

Loans Held for Sale. Loans held for sale increased to $10.4 million at September 30, 2012 compared to approximately $896,000 at year-end 2011. The increase was driven primarily by a mortgage purchase participation (“MPP”) program whereby the Bank purchases a 50% interest in mortgage loans originated by brokers outside of the Bank’s market from another financial institution. At September 30, 2012, the balance of loans purchased through the MPP program totaled $8.4 million.

 

Loans and Asset Quality. Total loans, net of the allowance for loan loss and deferred loan fees, increased $26.7 million to $135.0 million, an increase of 24.6%. Loans criticized by management as special mention or substandard and not deemed impaired represented 5.3% of total loans at September 30, 2012, compared to 5.0% at December 31, 2011. Impaired loans on nonaccrual status represented 1.1% of total loans and totaled $1,457,796 at September 30, 2012, compared to $1,335,298, or 1.2% of total loans at December 31, 2011. Improving asset quality continues to be a prime objective for management. Outstanding loan balances are expected to increase over the remainder of the year through business development efforts. However expected loan growth may be constrained by continued economic weakness in the markets served by the Company and competitive pressure.

 

At September 30, 2012, owner occupied, commercial real estate classified as special mention included a $2.3 million participation loan originated in 2007 that had matured. Since the loan was past maturity, it was downgraded from a pass grade during the third quarter because the participating banks had not agreed on renewal terms for the borrower. The participation agreement requires approval of 100% of the sixty-six participating banks to renew the loan. This loan is also included in the 60-89 days past due category and is the principal reason that total past due loans increased to $4.2 million at September 30, 2012 from $1.7 million at December 31, 2012.

 

Allowance for loan losses. The balance of the allowance for loan losses at September 30, 2012, was $2,514,913 compared to $2,484,478 at year-end 2011. Loan loss provision expense of $117,375 was recorded for the three months ended September 30, 2012 and loan loss provision expense of $109,818 was recorded for the first nine months of 2012. Recoveries on loans previously charged-off totaled $149,717 and loans charged off totaled $229,100 for the nine months ended September 30, 2012. A negative loan loss provision of $108,874 was recorded for the three months ended September 30, 2011 and a negative loan loss provision of $135,069 was recorded for the first nine months of 2011. Recoveries on loans previously charged-off totaled $371,180 and loans charged off totaled $327,234 for the nine months ended September 30, 2011. The amount of the allowance for loan loss is based on a combination of actual experiential factors such as historical losses for each category of loans, information about specific borrowers, and other factors, including delinquencies, general economic conditions and the outlook for specific industries, which are more subjective in nature.

 

Historical loan loss rates are regularly updated to reflect the most recent three years of loss experience. Loss rates have declined as loan charge offs recorded during the first nine months of 2009 have begun to roll out of the loan loss experience rate calculation for 2012. Reductions to the estimate of incurred losses in the loan portfolio for lower loss rates resulted in a reduction to the allowance for loan losses of approximately $1,047,000 at September 30, 2012 compared to year-end 2011. The specific allowance allocated to impaired loans declined approximately $36,000. These reductions were partially offset by the allowance for loan losses set aside for loan growth in the portfolio totaling approximately $508,000 and an increase in other subjective factors totaling approximately $605,000.

 

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The general allowance allocated to loans not criticized by management totaled 1.85% of non-criticized loans at September 30, 2012, compared to 1.75% at year-end 2011. As a percentage of total loans, the allowance decreased to 1.83% at September 30, 2012, compared to 2.24% at year-end 2011. The allowance for loan loss as a percentage of loans not individually identified as impaired and that excludes the amount of the allowance specifically allocated to impaired loans totaled 1.83% at September 30, 2012, compared to 2.22% at year-end 2011. Specific allocations of the allowance for impaired loans decreased to $83,430 at September 30, 2012 compared to $119,080 at year-end 2011.

 

Assets acquired in settlement of loans. These assets include other real estate owned (“OREO”) and an interest in a limited liability company acquired during 2010 that owns the real estate and operations of an indoor water park and resort obtained through a U.S. Bankruptcy Code 363 sale. The limited liability company was formed by the lead bank for the banks participating in the project financing to acquire title to the real estate, conduct the operation of the facility, and market the real estate and the operations of the business for sale. The carrying value of its interest is approximately $1.3 million and is based upon the estimated fair value of the real estate less costs to sell.

 

Other real estate owned consisted of eight properties and totaled approximately $883,000 at September 30, 2012 compared to nine properties with a carrying value of $757,000 at year-end 2011. Five properties were sold for a gain of $4,036, and two properties were transferred to OREO during the nine months ended September 30, 2012. Direct valuation write-downs were recorded on four properties totaling $87,636 for the nine months ended September 30, 2012.

 

Deposits. Total deposits increased $13.3 million to $117.2 million compared to year-end 2011. Certificates of deposit at September 30, 2012 included $16.9 million in deposits acquired from financial institutions subscribing to a national time deposit rate listing service compared to $15.5 million on deposit through this service at year-end 2011, an increase of $1.4 million. While this funding source is typically a less expensive source of funds than for comparable funds raised through the retail time deposit market, there is no opportunity to cross-sell other products and services to these depositors. It has also allowed the Bank to better manage the average term of its time deposits since retail depositors have migrated into money market funds as customers tend to be unwilling to lengthen time deposit maturities given the current low interest rate environment. It has partially replaced deposits sold through the branch sale during the fourth quarter of 2011.

 

Federal Home Loan Bank Advances. Federal Home Loan Bank advances totaling $19 million were used as a funding source following the sale of two branches during the fourth quarter of 2011. Since year-end, the Company has used short-term advances principally to fund the increase in mortgage loans held for sale.

 

Shareholders’ Equity. Shareholders’ Equity increased $56,000 to $18.6 million at September 30, 2012. This modest increase was the result of stock-based compensation expense of $148,000—a non-cash expense added back to shareholders’ equity so that it is capital neutral. This was partially offset by an operating loss of $45,000 for the nine months ended September 30, 2012 and other comprehensive loss of $47,000.

 

RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30, 2012

 

The Company recorded net income of $137,220, or $0.07 per share, for the three months ended September 30, 2012, compared to a net loss of $280,069, or a loss of $0.14 per share, during the third quarter of 2011. Average shares outstanding totaled 1,971,453 for 2012 and 1,971,456 for 2011. Share and per share amounts are retroactively restated to reflect the effect of a 1 for 10 reverse stock split completed during the third quarter of 2012.

 

The following table sets forth information relating to the average balance sheet and reflects the average yield on interest-earning assets and the average cost of interest-bearing liabilities for the periods indicated. These yields and costs are derived by dividing income or expense, on an annualized basis, by the average balances of interest-earning assets or interest-bearing liabilities for the periods presented.

 

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   Three Months Ended September 30, 
   2012   2011 
       Interest           Interest     
   Average   Earned/   Yield/   Average   Earned/   Yield/ 
(Dollars in Thousands)  Balance   Paid   Rate   Balance