0000894671-15-000036.txt : 20150810 0000894671-15-000036.hdr.sgml : 20150810 20150810162101 ACCESSION NUMBER: 0000894671-15-000036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20150630 FILED AS OF DATE: 20150810 DATE AS OF CHANGE: 20150810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHIO VALLEY BANC CORP CENTRAL INDEX KEY: 0000894671 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 311359191 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20914 FILM NUMBER: 151041013 BUSINESS ADDRESS: STREET 1: 420 THIRD AVE CITY: GALLIPOLIS STATE: OH ZIP: 45631 BUSINESS PHONE: 7404462631 MAIL ADDRESS: STREET 1: 420 THIRD AVENUE STREET 2: PO BOX 240 CITY: GALLIPOLIS STATE: OH ZIP: 45631 10-Q 1 sec10q063015.htm FORM 10-Q AT 06/30/15 sec10q063015.htm

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

Form 10-Q

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

For the quarterly period ended June 30, 2015

OR

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

For the transition period from ____________ to ____________

Commission file number 0-20914

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

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

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

(740) 446-2631
(Issuer’s telephone number, including area code)
_____________________

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

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

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

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

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

The number of common shares of the registrant outstanding as of August 10, 2015 was 4,117,675.

 
 

 

OHIO VALLEY BANC CORP.
Index

   
Page Number
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements (Unaudited)
 
 
Consolidated Balance Sheets
3
 
Condensed Consolidated Statements of Income
4
 
Consolidated Statements of Comprehensive Income
5
 
Condensed Consolidated Statements of Changes in Shareholders’ Equity
6
 
Condensed Consolidated Statements of Cash Flows
7
 
Notes to the Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
38
Item 4.
Controls and Procedures
39
     
PART II.
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
39
Item 1A.
Risk Factors
39
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
39
Item 3.
Defaults Upon Senior Securities
39
Item 4.
Mine Safety Disclosures
39
Item 5.
Other Information
40
Item 6.
Exhibits
40
     
Signatures
 
41
     
Exhibit Index
 
42

 
 
2

 

PART I - FINANCIAL INFORMATION

ITEM 1.                 FINANCIAL STATEMENTS

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

   
June 30,
2015
   
December 31,
2014
 
   
UNAUDITED
       
ASSETS
           
Cash and noninterest-bearing deposits with banks
  $ 10,587     $ 9,315  
Interest-bearing deposits with banks
    41,493       21,662  
Total cash and cash equivalents
    52,080       30,977  
                 
Certificates of deposit in financial institutions
    980       980  
Securities available for sale
    84,963       85,236  
Securities held to maturity
(estimated fair value: 2015 - $22,538; 2014 - $23,570)
    21,914       22,820  
Federal Home Loan Bank and Federal Reserve Bank stock
    6,576       6,576  
                 
Total loans
    592,899       594,768  
    Less: Allowance for loan losses
    (7,444 )     (8,334 )
Net loans
    585,455       586,434  
                 
Premises and equipment, net
    9,991       9,195  
Other real estate owned
    1,590       1,525  
Accrued interest receivable
    1,799       1,806  
Goodwill
    1,267       1,267  
Bank owned life insurance and annuity assets
    25,926       25,612  
Other assets
    7,832       6,240  
Total assets
  $ 800,373     $ 778,668  
                 
LIABILITIES
               
Noninterest-bearing deposits
  $ 172,419     $ 161,794  
Interest-bearing deposits
    493,869       485,036  
Total deposits
    666,288       646,830  
                 
Other borrowed funds
    24,322       24,972  
Subordinated debentures
    8,500       8,500  
Accrued liabilities
    12,378       12,150  
Total liabilities
    711,488       692,452  
                 
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 5)
    ----       ----  
                 
SHAREHOLDERS’ EQUITY
               
Common stock ($1.00 stated value per share, 10,000,000 shares
  authorized; 4,777,414 shares issued)
    4,777       4,777  
Additional paid-in capital
    35,318       35,318  
Retained earnings
    63,971       60,873  
Accumulated other comprehensive income
    531       960  
Treasury stock, at cost (659,739 shares)
    (15,712 )     (15,712 )
Total shareholders’ equity
    88,885       86,216  
Total liabilities and shareholders’ equity
  $ 800,373     $ 778,668  
 

See accompanying notes to consolidated financial statements

 
3

 


OHIO VALLEY BANC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except per share data)

   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
                         
Interest and dividend income:
                       
Loans, including fees
  $ 8,150     $ 8,223     $ 17,049     $ 17,037  
Securities
                               
Taxable
    453       445       902       851  
Tax exempt
    134       139       273       275  
Dividends
    72       80       146       166  
Other Interest
    57       38       123       104  
      8,866       8,925       18,493       18,433  
Interest expense:
                               
Deposits
    555       578       1,090       1,151  
Other borrowed funds
    120       119       241       231  
Subordinated debentures
    42       41       83       82  
      717       738       1,414       1,464  
Net interest income
    8,149       8,187       17,079       16,969  
Provision for loan losses
    799       1,386       721       1,880  
Net interest income after provision for loan losses
    7,350       6,801       16,358       15,089  
                                 
Noninterest income:
                               
Service charges on deposit accounts
    393       395       746       786  
Trust fees
    57       59       115       114  
Income from bank owned life insurance and annuity assets
    138       171       314       330  
Mortgage banking income
    55       57       114       115  
Electronic refund check / deposit fees
    255       414       2,350       3,062  
Debit / credit card interchange income
    627       548       1,165       1,052  
Gain (loss) on other real estate owned
    45       4       60       (8
Gain on sale of securities
    135       ----       135       ----  
Gain on sale of ProAlliance Corporation
    ----       ----       ----       135  
Other
    212       264       407       444  
      1,917       1,912       5,406       6,030  
Noninterest expense:
                               
Salaries and employee benefits
    4,426       4,235       8,826       8,612  
Occupancy
    388       391       790       789  
Furniture and equipment
    194       152       372       332  
FDIC insurance
    132       113       298       240  
Data processing
    362       293       730       614  
Foreclosed assets
    62       41       97       102  
Other
    1,990       1,772       3,868       3,603  
      7,554       6,997       14,981       14,292  
                                 
Income before income taxes
    1,713       1,716       6,783       6,827  
Provision for income taxes
    303       372       1,749       1,919  
                                 
NET INCOME
  $ 1,410     $ 1,344     $ 5,034     $ 4,908  
                                 
Earnings per share
  $ .34     $ .33     $ 1.22     $ 1.20  

 
See accompanying notes to consolidated financial statements
 
 
4

 
 
 
OHIO VALLEY BANC CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands)
 
   
   
Three months ended
June 30,
   
Six months ended
 June 30,
 
   
2015
   
2014
   
2015
   
2014
 
                         
Net Income
  $ 1,410     $ 1,344     $ 5,034     $ 4,908  
                                 
Other comprehensive income:
                               
  Change in unrealized gain on available for sale securities
    (971     716       (516     1,162  
  Reclassification adjustment for realized (gains)
    (135     ----       (135     ----  
      (1,106     716       (651     1,162  
  Related tax (expense) benefit
    376       (243 )     222       (394 )
Total other comprehensive income, net of tax
    (730 )     473       (429 )     768  
                                 
Total comprehensive income
  $ 680     $ 1,817     $ 4,605     $ 5,676  

 
 

See accompanying notes to consolidated financial statements
 
 
5

 

 
OHIO VALLEY BANC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(dollars in thousands, except share and per share data)
 
   
   
Three months ended
 June 30,
   
Six months ended 
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
                         
Balance at beginning of period
  $ 89,276     $ 83,417     $ 86,216     $ 80,419  
                                 
Net income
    1,410       1,344       5,034       4,908  
                                 
Other comprehensive income, net of tax
    (730 )     473       (429 )     768  
                                 
Cash dividends
    (1,071 )     (861 )     (1,936 )     (1,722 )
                                 
Balance at end of period
  $ 88,885     $ 84,373     $ 88,885     $ 84,373  
                                 
Cash dividends per share
  $ .26     $ .21     $ .47     $ .42  


 
 

See accompanying notes to consolidated financial statements

 
6

 


OHIO VALLEY BANC CORP.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (UNAUDITED)
(dollars in thousands)
 
             
   
Six months ended
June 30,
 
   
2015
   
2014
 
             
Net cash provided by operating activities:
  $ 4,760     $ 6,606  
                 
Investing activities:
               
Proceeds from maturities of securities available for sale
    7,783       7,326  
Purchases of securities available for sale
    (17,035 )     (8,041 )
Proceeds from maturities of securities held to maturity
    1,501       475  
Purchases of securities held to maturity
    (625 )     (610 )
Proceeds from sale of available for sale securities
    8,792       ----  
Redemptions of Federal Home Loan Bank stock
    ----       1,200  
Net change in loans
    (234 )     (22,191 )
Proceeds from sale of other real estate owned
    487       107  
Purchases of premises and equipment
    (1,198 )     (783 )
Net cash provided by (used in) investing activities
    (529 )     (22,517 )
                 
Financing activities:
               
Change in deposits
    19,458       8,780  
Cash dividends
    (1,936 )     (1,722 )
Proceeds from Federal Home Loan Bank borrowings
    ----       3,633  
Repayment of Federal Home Loan Bank borrowings
    (650 )     (530 )
Change in other short-term borrowings
    ----       50  
Net cash provided by financing activities
    16,872       10,211  
                 
Change in cash and cash equivalents
    21,103       (5,700 )
Cash and cash equivalents at beginning of period
    30,977       28,344  
Cash and cash equivalents at end of period
  $ 52,080     $ 22,644  
                 
Supplemental disclosure:
               
                 
Cash paid for interest
  $ 1,352     $ 1,439  
Cash paid for income taxes
    2,450       2,731  
Transfers from loans to other real estate owned
    492       484  
Other real estate owned sales financed by the Bank
    135       65  

See accompanying notes to consolidated financial statements
 
 
7

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

NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION:  The accompanying consolidated financial statements include the accounts of Ohio Valley Banc Corp. (“Ohio Valley”) and its wholly-owned subsidiaries, The Ohio Valley Bank Company (the “Bank”), Loan Central, Inc. (“Loan Central”), a consumer finance company, Ohio Valley Financial Services Agency, LLC (“Ohio Valley Financial Services”), an insurance agency, and OVBC Captive, Inc. (“the Captive”), a limited purpose property and casualty insurance company.  Ohio Valley and its subsidiaries are collectively referred to as the “Company”.  All material intercompany accounts and transactions have been eliminated in consolidation.
 
These interim financial statements are prepared by the Company without audit and reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company at June 30, 2015, and its results of operations and cash flows for the periods presented.  The results of operations for the six months ended June 30, 2015 are not necessarily indicative of the operating results to be anticipated for the full fiscal year ending December 31, 2015.  The accompanying consolidated financial statements do not purport to contain all the necessary financial disclosures required by accounting principles generally accepted in the United States of America that might otherwise be necessary in the circumstances.  The Annual Report of the Company for the year ended December 31, 2014 contains consolidated financial statements and related notes which should be read in conjunction with the accompanying consolidated financial statements.

As previously reported, the Internal Revenue Service proposed that Loan Central, as a tax return preparer, be assessed a penalty for allegedly negotiating or endorsing checks issued by the U.S. Treasury to taxpayers. The penalty would amount to approximately $1.2 million. Loan Central appealed this matter within the Internal Revenue Service. Loan Central was notified that the Appeals Office would not concede the penalty, and the penalty had been assessed. The Company will have to resolve the matter through the judicial system. Based on consultation with legal counsel, management remains confident that it is highly unlikely that the penalty recommendation will be sustained. Therefore, the Company did not recognize any interest and/or penalties related to this matter for the periods presented.

The consolidated financial statements for 2014 have been reclassified to conform to the presentation for 2015.  These reclassifications had no effect on the net results of operations or shareholders’ equity.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:  To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, 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.

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

EARNINGS PER SHARE:  Earnings per share are computed based on net income divided by the weighted average number of common shares outstanding during the period.  The weighted average common shares outstanding were 4,117,675 for the three and six months ended June 30, 2015 and 4,098,753 for the three and six months ended June 30, 2014.  Ohio Valley had no dilutive effect and no potential common shares issuable under stock options or other agreements for any period presented.

NEW ACCOUNTING PRONOUNCEMENTS:  In January 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40)” (ASU 2014-04).  The amendments in ASU 2014-04 clarify the circumstances under which an in substance repossession or foreclosure occurs and when a creditor is considered to have received physical possession of a residential real estate property collateralizing a residential real estate loan.  The amendments in ASU 2014-04 also require interim and annual disclosure of the amount of foreclosed residential real estate property held by the creditor and the recorded investment in loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction.  ASU 2014-04 is effective for reporting periods beginning after December 15, 2014.  The effect of adopting ASU 2014-04 did not have a material effect on the Company’s financial statements.
 
 
8

 
 
In June 2014, the FASB issued ASU 2014-11 “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures”.  The amendments in ASU 2014-11 change the accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements. The amendments also require two new disclosures. The first disclosure requires an entity to disclose information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements. The second disclosure provides increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings.  2014-11 is effective for reporting periods beginning after December 15, 2014. The effect of adopting ASU 2014-11 did not have a material effect on the Company’s financial statements.

In June 2014, the FASB issued ASU 2014-12 “Compensation – Stock Compensation (Topic 718)”.  ASU 2014-12 clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date without taking into account the effect of the performance target) related to an award for which transfer to the employee is contingent on the entity’s satisfaction of a performance target until it becomes probable that the performance target will be met. No new disclosures are required under ASU 2014-12.  The guidance is effective for reporting periods beginning after December 15, 2015. The effect of adopting ASU 2014-12 is not expected to have a material effect on the Company’s financial statements.

NOTE 2 – FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair values:
 
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity 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 following is a description of the Company’s valuation methodologies used to measure and disclose the fair values of its financial assets and liabilities on a recurring or nonrecurring basis:
 
Securities:  The fair values for securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
 
 
9

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

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

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

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

   
Fair Value Measurements at June 30, 2015 Using
 
 
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable
 Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                 
U.S. Government sponsored entity securities
    ----     $ 8,986       ----  
Agency mortgage-backed securities, residential
    ----       75,977       ----  
 
   
Fair Value Measurements at December 31, 2014, Using
 
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable
 Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                 
U.S. Government sponsored entity securities
    ----     $ 8,917       ----  
Agency mortgage-backed securities, residential
    ----       76,319       ----  

There were no transfers between Level 1 and Level 2 during 2015 or 2014.
 
 
10

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

   
Fair Value Measurements at June 30, 2015, Using
 
 
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable
Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                 
Impaired loans:
                 
  Commercial real estate:
                 
     Owner-occupied
    ----       ----     $ 936  
     Nonowner-occupied
    ----       ----       2,672  
                         
Other real estate owned:
                       
  Commercial real estate:
                       
     Construction
    ----       ----       1,147  

   
Fair Value Measurements at December 31, 2014, Using
 
 
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable
Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Assets:
                 
Impaired loans:
                 
  Commercial real estate:
                 
     Owner-occupied
    ----       ----     $ 1,679  
     Nonowner-occupied
    ----       ----       5,270  
  Commercial and industrial
    ----       ----       2,532  
                         
Other real estate owned:
                       
  Commercial real estate:
                       
     Construction
    ----       ----       1,147  

At June 30, 2015, the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled $4,045, with a corresponding valuation allowance of $437.  This resulted in a decrease of $19 in provision expense during the three months ended June 30, 2015, and a decrease of $13 in provision expense during the six months ended June 30, 2015, with $1,304 in additional charge-offs recognized.  This is compared to an increase of $46 in provision expense during the three months ended June 30, 2014, and a decrease of $127 in provision expense during the six months ended June 30, 2014, with $157 in additional charge-offs recognized.  At December 31, 2014, the recorded investment of impaired loans measured for impairment using the fair value of collateral for collateral-dependent loans totaled $12,773, with a corresponding valuation allowance of $3,292.
 
Other real estate owned that was measured at fair value less costs to sell at June 30, 2015 and December 31, 2014 had a net carrying amount of $1,147, which is made up of the outstanding balance of $2,217, net of a valuation allowance of $1,070 at December 31, 2014. There were no corresponding write downs during the three and six months ended June 30, 2015 and 2014.  There was $88 in net appreciation during 2014.
 
 
11

 
 
The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2015 and December 31, 2014:

 
June 30, 2015
 
 
Fair Value
 
 
Valuation Technique(s)
 
Unobservable Input(s)
 
 
Range
 
(Weighted Average)
 
Impaired loans:
                 
  Commercial real estate:
                 
      Owner-occupied
  $ 936  
Sales approach
Adjustment to comparables
9.0% to 62%
    28%  
      Nonowner-occupied
    2,672  
Sales approach
Adjustment to comparables
0% to 12.5%
    5.7%  
                       
Other real estate owned:
                     
  Commercial real estate:
                     
      Construction
    1,147  
Sales approach
Adjustment to comparables
5% to 35%
    18%  

 
December 31, 2014
 
 
Fair Value
 
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range
   
(Weighted Average)
 
Impaired loans:
                   
  Commercial real estate:
                   
      Owner-occupied
  $ 1,679  
Sales approach
Adjustment to comparables
0.3% to 62%
      18%  
         
Income approach
Capitalization Rate
  10%       10%  
      Nonowner-occupied
    2,597  
Income approach
Capitalization Rate
  6.5%       6.5%  
      Nonowner-occupied
    2,673  
Sales approach
Adjustment to comparables
0% to 12.5%
      5.7%  
  Commercial and industrial
    2,532  
Sales approach
Adjustment to comparables
10% to 30%
      21.42%  
                           
Other real estate owned:
                         
  Commercial real estate:
                         
      Construction
    1,147  
Sales approach
Adjustment to comparables
5% to 35%
      18%  

The carrying amounts and estimated fair values of financial instruments at June 30, 2015 and December 31, 2014 are as follows:

         
Fair Value Measurements at June 30, 2015 Using:
 
   
Carrying
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial Assets:
                             
Cash and cash equivalents
  $ 52,080     $ 52,080     $ ----     $ ----     $ 52,080  
Certificates of deposit
                                       
  in financial institutions
    980       ----       980       ----       980  
Securities available for sale
    84,963       ----       84,963       ----       84,963  
Securities held to maturity
    21,914       ----       11,372       11,166       22,538  
Federal Home Loan Bank and
                                       
  Federal Reserve Bank stock
    6,576       N/A       N/A       N/A       N/A  
Loans, net
    585,455       ----       ----       590,457       590,457  
Accrued interest receivable
    1,799       ----       215       1,584       1,799  
                                         
Financial liabilities:
                                       
Deposits
    666,288       171,656       493,906       ----       665,562  
Other borrowed funds
    24,322       ----       23,810       ----       23,810  
Subordinated debentures
    8,500       ----       5,068       ----       5,068  
Accrued interest payable
    456       3       453       ----       456  
 
 
12

 
 
         
Fair Value Measurements at December 31, 2014 Using:
 
   
Carrying
Value
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Financial Assets:
                             
Cash and cash equivalents
  $ 30,977     $ 30,977     $ ----     $ ----     $ 30,977  
Certificates of deposit
                                       
  in financial institutions
    980       ----       980       ----       980  
Securities available for sale
    85,236       ----       85,236       ----       85,236  
Securities held to maturity
    22,820       ----       12,144       11,426       23,570  
Federal Home Loan Bank and
                                       
  Federal Reserve Bank stock
    6,576       N/A       N/A       N/A       N/A  
Loans, net
    586,434       ----       ----       591,594       591,594  
Accrued interest receivable
    1,806       ----       230       1,576       1,806  
                                         
Financial liabilities:
                                       
Deposits
    646,830       161,784       485,503       ----       647,287  
Other borrowed funds
    24,972       ----       24,555       ----       24,555  
Subordinated debentures
    8,500       ----       4,979       ----       4,979  
Accrued interest payable
    394       4       390       ----       394  

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

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

Certificates of Deposit in Financial Institutions: The carrying amounts of certificates of deposit in financial institutions approximate fair values and are classified as Level 2.

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

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

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

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

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

Subordinated Debentures: The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements, resulting in a Level 2 classification.
 
 
13

 
 
Accrued Interest Receivable and Payable: The carrying amount of accrued interest approximates fair value, resulting in a classification that is consistent with the earning assets and interest-bearing liabilities with which it is associated.

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

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

NOTE 3 – SECURITIES

The following table summarizes the amortized cost and estimated fair value of the available for sale and held to maturity securities portfolios at June 30, 2015 and December 31, 2014 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income for available for sale securities and gross unrecognized gains and losses for held to maturity securities:
 
 
Securities Available for Sale
 
Amortized Cost
   
Gross Unrealized
Gains
   
Gross Unrealized
Losses
   
Estimated
Fair Value
 
June 30, 2015
                       
  U.S. Government sponsored entity securities
  $ 9,015     $ 3     $ (32 )   $ 8,986  
  Agency mortgage-backed securities, residential
    75,144       1,342       (509 )     75,977  
      Total securities
  $ 84,159     $ 1,345     $ (541 )   $ 84,963  
                                 
December 31, 2014
                               
  U.S. Government sponsored entity securities
  $ 9,019     $ 2     $ (104 )   $ 8,917  
  Agency mortgage-backed securities, residential
    74,762       1,693       (136 )     76,319  
      Total securities
  $ 83,781     $ 1,695     $ (240 )   $ 85,236  

 
Securities Held to Maturity
 
Amortized Cost
   
Gross Unrecognized
Gains
   
Gross Unrecognized Losses
   
Estimated
Fair Value
 
June 30, 2015
                       
  Obligations of states and political subdivisions
  $ 21,906     $ 798     $ (174 )   $ 22,530  
  Agency mortgage-backed securities, residential
    8       ----       ----       8  
      Total securities
  $ 21,914     $ 798     $ (174 )   $ 22,538  
                                 
December 31, 2014
                               
  Obligations of states and political subdivisions
  $ 22,811     $ 939     $ (189 )   $ 23,561  
  Agency mortgage-backed securities, residential
    9       ----       ----       9  
      Total securities
  $ 22,820     $ 939     $ (189 )   $ 23,570  

 
 
14

 
 
The amortized cost and estimated fair value of the securities portfolio at June 30, 2015, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because certain issuers may have the right to call or prepay the debt obligations prior to their contractual maturities.  Securities not due at a single maturity are shown separately.

   
Available for Sale
   
Held to Maturity
 
 
Debt Securities:
 
Amortized Cost
   
Estimated
Fair Value
   
Amortized Cost
   
Estimated
Fair Value
 
                         
  Due in one year or less
  $ 1,002     $ 1,005     $ 410     $ 422  
  Due in over one to five years
    8,013       7,981       6,417       6,754  
  Due in over five to ten years
    ----       ----       11,724       12,108  
  Due after ten years
    ----       ----       3,355       3,246  
  Agency mortgage-backed securities, residential
    75,144       75,977       8       8  
      Total debt securities
  $ 84,159     $ 84,963     $ 21,914     $ 22,538  

The following table summarizes the investment securities with unrealized losses at June 30, 2015 and December 31, 2014 by aggregated major security type and length of time in a continuous unrealized loss position:
 
   
Less Than 12 Months
 
12 Months or More
   
Total
 
 
June 30, 2015
 
Fair
Value
   
Unrealized Loss
   
Fair
Value
   
Unrealized Loss
   
Fair
Value
   
Unrealized Loss
 
Securities Available for Sale
                                   
U.S. Government sponsored
                                   
  entity securities
  $ 3,991     $ (13 )   $ 3,989     $ (19 )   $ 7,980     $ (32 )
Agency mortgage-backed
                                               
  securities, residential
    27,837       (406 )     3,869       (103 )     31,706       (509 )
    Total available for sale
  $ 31,828     $ (419 )   $ 7,858     $ (122 )   $ 39,686     $ (541 )
 
 
   
Less Than 12 Months
 
12 Months or More
   
Total
 

   
Fair
Value
   
Unrecognized Loss
   
Fair
Value
   
Unrecognized Loss
   
Fair
Value
   
Unrecognized Loss
 
Securities Held to Maturity
                                   
Obligations of states and
                                   
  political subdivisions
  $ 2,488     $ (29 )   $ 1,510     $ (145 )   $ 3,998     $ (174 )
    Total held to maturity
  $ 2,488     $ (29 )   $ 1,510     $ (145 )   $ 3,998     $ (174 )
 

   
Less Than 12 Months
 
12 Months or More
   
Total
 
 
December 31, 2014
 
Fair
Value
   
Unrealized Loss
   
Fair
Value
   
Unrealized Loss
   
Fair
Value
   
Unrealized Loss
 
Securities Available for Sale
                                   
U.S. Government sponsored
                                   
  entity securities
  $ ----     $ ----     $ 7,911     $ (104 )   $ 7,911     $ (104 )
Agency mortgage-backed
                                               
  securities, residential
    11,232       (20 )     8,397       (116 )     19,629       (136 )
    Total available for sale
  $ 11,232     $ (20 )   $ 16,308     $ (220 )   $ 27,540     $ (240 )


 
Less Than 12 Months
 
12 Months or More
 
Total
 

   
Fair
Value
   
Unrecognized Loss
   
Fair
Value
   
Unrecognized Loss
   
Fair
Value
   
Unrecognized Loss
 
Securities Held to Maturity
                                   
Obligations of states and
                                   
  political subdivisions
  $ 1,171     $ (9 )   $ 2,916     $ (180 )   $ 4,087     $ (189 )
    Total held to maturity
  $ 1,171     $ (9 )   $ 2,919     $ (180 )   $ 4,087     $ (189 )

During the three and six months ended June 30, 2015 the Company had proceeds of $8,792 pertaining to securities sales on available for sale securities with gross gains recognized of $135 for both periods.  There were no sales during the three and six months ended June 30, 2014.  Unrealized losses on the Company's debt securities have not been recognized into income because the issuers' securities are of high credit quality at June 30, 2015, and management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery.  Management does not believe any individual unrealized loss at June 30, 2015 and December 31, 2014 represents an other-than-temporary impairment.
 
 
15

 
 
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are comprised of the following:
 
June 30,
   
December 31,
 
   
2015
   
2014
 
Residential real estate
  $ 224,923     $ 223,628  
Commercial real estate:
               
    Owner-occupied
    76,081       78,848  
    Nonowner-occupied
    73,296       71,229  
    Construction
    24,645       27,535  
Commercial and industrial
    85,573       83,998  
Consumer:
               
    Automobile
    43,757       42,849  
    Home equity
    20,138       18,291  
    Other
    44,486       48,390  
      592,899       594,768  
Less:  Allowance for loan losses
    7,444       8,334  
                 
Loans, net
  $ 585,455     $ 586,434  

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2015 and 2014:

June 30, 2015
 
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
and Industrial
   
Consumer
   
Total
 
Allowance for loan losses:
                             
    Beginning balance
  $ 1,465     $ 4,210     $ 1,738     $ 907     $ 8,320  
    Provision for loan losses
    (121 )     (64 )     478       506       799  
    Loans charged off
    (126 )     (1,366 )     (22 )     (446 )     (1,960 )
    Recoveries
    12       15       93       165       285  
    Total ending allowance balance
  $ 1,230     $ 2,795     $ 2,287     $ 1,132     $ 7,444  
 
 
June 30, 2014
 
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
and Industrial
   
Consumer
   
Total
 
Allowance for loan losses:
                             
    Beginning balance
  $ 1,437     $ 2,845     $ 1,331     $ 849     $ 6,462  
    Provision for loan losses
    444       383       201       358       1,386  
    Loans charged off
    (139 )     ----       (4 )     (197 )     (340 )
    Recoveries
    136       48       97       139       420  
    Total ending allowance balance
  $ 1,878     $ 3,276     $ 1,625     $ 1,149     $ 7,928  

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2015 and 2014:

June 30, 2015
 
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
and Industrial
   
Consumer
   
Total
 
Allowance for loan losses:
                             
    Beginning balance
  $ 1,426     $ 4,195     $ 1,602     $ 1,111     $ 8,334  
    Provision for loan losses
    (90 )     (58 )     492       377       721  
    Loans charged off
    (223 )     (1,374 )     (24 )     (707 )     (2,328 )
    Recoveries
    117       32       217       351       717  
    Total ending allowance balance
  $ 1,230     $ 2,795     $ 2,287     $ 1,132     $ 7,444  

June 30, 2014
 
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
and Industrial
   
Consumer
   
Total
 
Allowance for loan losses:
                             
    Beginning balance
  $ 1,169     $ 2,914     $ 1,279     $ 793     $ 6,155  
    Provision for loan losses
    753       440       182       505       1,880  
    Loans charged off
    (193 )     (157 )     (4 )     (452 )     (806 )
    Recoveries
    149       79       168       303       699  
    Total ending allowance balance
  $ 1,878     $ 3,276     $ 1,625     $ 1,149     $ 7,928  


 
16

 
 
The following table presents the balance in the allowance for loan losses and the recorded investment of loans by portfolio segment and based on impairment method as of June 30, 2015 and December 31, 2014:

June 30, 2015
 
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
and Industrial
   
Consumer
   
Total
 
Allowance for loan losses:
                             
    Ending allowance balance attributable to loans:
                             
        Individually evaluated for impairment
  $ ----     $ 1,168     $ 1,522     $ 4     $ 2,694  
        Collectively evaluated for impairment
    1,230       1,627       765       1,128       4,750  
            Total ending allowance balance
  $ 1,230     $ 2,795     $ 2,287     $ 1,132     $ 7,444  
                                         
Loans:
                                       
        Loans individually evaluated for impairment
  $ 1,902     $ 10,275     $ 7,510     $ 218     $ 19,905  
        Loans collectively evaluated for impairment
    223,021       163,747       78,063       108,163       572,994  
            Total ending loans balance
  $ 224,923     $ 174,022     $ 85,573     $ 108,381     $ 592,899  

December 31, 2014
 
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
and Industrial
   
Consumer
   
Total
 
Allowance for loan losses:
                             
    Ending allowance balance attributable to loans:
                             
        Individually evaluated for impairment
  $ ----     $ 2,506     $ 900     $ 6     $ 3,412  
        Collectively evaluated for impairment
    1,426       1,689       702       1,105       4,922  
            Total ending allowance balance
  $ 1,426     $ 4,195     $ 1,602     $ 1,111     $ 8,334  
                                         
Loans:
                                       
        Loans individually evaluated for impairment
  $ 1,415     $ 11,711     $ 6,824     $ 219     $ 20,169  
        Loans collectively evaluated for impairment
    222,213       165,901       77,174       109,311       574,599  
            Total ending loans balance
  $ 223,628     $ 177,612     $ 83,998     $ 109,530     $ 594,768  

The following tables present information related to loans individually evaluated for impairment by class of loans as of June 30, 2015 and December 31, 2014:

 
June 30, 2015
 
Unpaid Principal Balance
   
 
Recorded
Investment
   
Allowance for Loan Losses Allocated
 
With an allowance recorded:
                 
    Commercial real estate:
                 
        Owner-occupied
  $ 478     $ 478     $ 437  
        Nonowner-occupied
    3,558       3,558       731  
    Commercial and industrial
    3,325       3,325       1,522  
    Consumer:
                       
        Home equity
    218       218       4  
With no related allowance recorded: