Exhibit 99.2

NATIONAL BANCSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS (Unaudited)

(dollars in thousands)

 

		March 31, 2015				December 31, 2014
ASSETS
Cash and due from banks		$	29,498			$	28,901
Securities available for sale			83,781				77,865
Restricted equity securities			3,227				3,224
Loans held for sale			950				479
Loans, net of allowance for loan losses:
March 31, 2015 - $4,023; December 31, 2014 - $4,063			407,897				398,582
Premises and equipment, net			8,694				8,837
Goodwill			4,723				4,723
Accrued interest receivable			1,694				1,618
Bank owned life insurance			2,872				2,856
Other real estate owned			743				743
Other assets			1,893				1,771
Total assets		$	545,972			$	529,599
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing		$	102,907			$	111,718
Interest bearing			314,514				306,614
Total deposits			417,421				418,332
Repurchase agreements			12,534				16,505
Federal Home Loan Bank advances			57,000				38,000
Accrued interest payable			185				176
Accrued expenses and other liabilities			4,830				4,056
Total liabilities			491,970				477,069
SHAREHOLDERS’ EQUITY
Common stock, no par value; 6,000,000 shares authorized; 2,289,528 shares issued			11,447				11,447
Additional paid-in capital			5,017				5,005
Retained earnings			36,023				34,767
Treasury stock, at cost (57,434 and 60,955 shares)			(1,126	)			(1,195	)
Accumulated other comprehensive income			2,641				2,506
Total shareholders’ equity			54,002				52,530
Total liabilities and shareholders’ equity		$	545,972			$	529,599

See accompanying notes to consolidated financial statements.

 

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NATIONAL BANCSHARES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(dollars in thousands, except per share data)

 

		Three months ended
		March 31, 2015				March 31, 2014
Interest and dividend income
Loans, including fees		$	4,311			$	3,671
Securities:
Taxable			204				273
Nontaxable			387				401
Federal funds sold and other			15				20
Total interest and dividend income			4,917				4,365
Interest expense
Deposits			318				324
Short-term borrowings			6				6
Federal Home Loan Bank advances			39				43
Total interest expense			363				373
Net interest income			4,554				3,992
Provision for loan losses			0				148
Net interest income after provision for loan losses			4,554				3,844
Noninterest income
Checking account fees			217				223
Visa check card interchange fees			152				144
Deposit and miscellaneous service fees			92				87
Mortgage banking activities			203				106
Securities gains, net			0				128
Other			55				38
Total noninterest income			719				726
Noninterest expense
Salaries and employee benefits			1,579				1,589
Data processing			254				163
Net occupancy			257				277
Merger related expenses			239				0
FDIC assessment			72				60
Professional and consulting fees			103				92
Franchise tax			105				90
Maintenance and repairs			65				83
Telephone			50				51
Marketing			56				61
Director fees			41				43
Director pension expense			36				1
Software license and maintenance fees			37				43
Postage and supplies			65				74
Other			238				255
Total noninterest expense			3,197				2,882
Income before income tax expense			2,076				1,688
Income tax expense			574				448
Net income		$	1,502			$	1,240
Weighted average basic common shares outstanding			2,230,579				2,224,559
Weighted average diluted common shares outstanding			2,281,223				2,246,657
Earnings per common share:
Basic		$	0.67			$	0.56
Diluted		$	0.66			$	0.55

See accompanying notes to consolidated financial statements.

 

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NATIONAL BANCSHARES CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(dollars in thousands, except per share data)

 

		Three months ended
		March 31, 2015				March 31, 2014
Net income		$	1,502			$	1,240
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during the period			205				614
Reclassification adjustment for gains included in net income			0				(128	)
Tax effect			(70	)			(165	)
Total other comprehensive income			135				321
Comprehensive income		$	1,637			$	1,561

See accompanying notes to consolidated financial statements.

 

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NATIONAL BANCSHARES CORPORATION

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

(dollars in thousands, except per share data)

 

		Three months ended,
		March 31, 2015				March 31, 2014
Balance at beginning of period		$	52,530			$	46,582
Net income			1,502				1,240
Other comprehensive income			135				321
Exercise of stock options issued from Treasury Shares (3,521 and 400 shares)			46				6
Compensation expense under stock-based compensation plans			12				20
Cash dividends declared ($0.10 per share in 2015 and 2014)			(223	)			(223	)
Balance at end of period		$	54,002			$	47,946

See accompanying notes to consolidated financial statements.

 

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NATIONAL BANCSHARES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(dollars in thousands, except per share data)

 

		Three months ended
		March 31, 2015				March 31, 2014
Net cash from operating activities		$	1,820			$	1,802
Cash flows from investing activities
Securities available for sale
Proceeds from maturities and repayments			2,388				3,246
Proceeds from sales			0				3,466
Purchases			(8,309	)			(7,857	)
Purchases of property and equipment			0				(1	)
Proceeds from the sale of other real estate owned			0				46
Net change in loans			(9,243	)			(14,232	)
Net cash from investing activities			(15,164	)			(15,332	)
Cash flows from financing activities
Net change in deposits			(911	)			18,032
Net change in repurchase agreements			(3,971	)			(4,004	)
Proceeds from the exercise of stock options			46				6
Proceeds from Federal Home Loan Bank advances			25,000				9,000
Repayments of Federal Home Loan Bank advances			(6,000	)			(2,000	)
Dividends paid			(223	)			(223	)
Net cash from financing activities			13,941				20,811
Net change in cash and cash equivalents			597				7,281
Beginning cash and cash equivalents			28,901				34,312
Ending cash and cash equivalents		$	29,498			$	41,593
Supplemental Disclosures
Cash paid for interest		$	354			$	388
Cash paid for income taxes		$	0			$	145
Supplemental noncash disclosures:
Transfer from loans to other real estate owned		$	0			$	0

See accompanying notes to consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1 – Basis of Presentation

(dollars in thousands)

Company Organization and Financial Presentation

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

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

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

The consolidated financial statements do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements and footnotes in the Company’s annual report for the year ended December 31, 2014. The Company believes the disclosures are adequate to make the information presented not misleading; however, the results of operations and other data presented for the periods presented are not necessarily indicative of results to be expected for the entire fiscal year.

Use of Estimates

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

Cash Flows

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

Earnings Per Common Share

Earnings per common share is net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock options. No stock options were antidilutive as of March 31, 2015. 50,000 stock options were not considered in computing diluted earnings per common share for the quarter ended March 31, 2014 because they were antidilutive.

Note 2 – Securities

(dollars in thousands)

Securities consist of the following at March 31, 2015 and December 31, 2014:

 

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
March 31, 2015		Cost				Gains				Losses				Value
U.S. Government and federal agency		$	8,000			$	0			$	0			$	8,000
State and municipal			45,289				3,127				(17	)			48,399
Mortgage-backed: residential			26,467				836				0				27,303
Equity securities			23				56				0				79
Total		$	79,779			$	4,019			$	(17	)		$	83,781

 

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						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
December 31, 2014		Cost				Gains				Losses				Value
State and municipal		$	45,081			$	2,947			$	(23	)		$	48,005
Mortgage-backed: residential			28,964				838				0				29,802
Equity securities			23				35				0				58
Total		$	74,068			$	3,820			$	(23	)		$	77,865

 

		For the three months ended
		Mar. 31,				Mar. 31,
		2015				2014
Sales of available for sale securities were as follows:
Proceeds		$	0			$	3,466
Gross gains			0				128

The tax provision related to net realized gains and losses for the three months ended March 31, 2015 and 2014 was $0 and $44.

The fair value of securities at March 31, 2015 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

 

		Amortized Cost				Fair Value
Due in one year or less		$	8,680			$	8,683
Due from one to five years			7,781				8,245
Due from five to ten years			16,828				18,067
Due after ten years			20,000				21,404
Mortgage-backed: residential			26,467				27,303
Equity securities			23				79
Total		$	79,779			$	83,781

Securities pledged at March 31, 2015 and December 31, 2014 had a fair value of $62,378 and $56,957 and were pledged to secure public deposits and repurchase agreements.

At March 31, 2015 and December 31, 2014, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

Securities with unrealized losses at March 31, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

 

		Less than 12 months								12 months or more								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
March 31, 2015		Value				Loss				Value				Loss				Value				Loss
State and municipal		$	657			$	(10	)		$	761			$	(7	)		$	1,418			$	(17	)
Total temporarily impaired		$	657			$	(10	)		$	761			$	(7	)		$	1,418			$	(17	)
		Less than 12 months								12 months or more								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
December 31, 2014		Value				Loss				Value				Loss				Value				Loss
State and municipal		$	0			$	0			$	1,856			$	(23	)		$	1,856			$	(23	)
Total temporarily impaired		$	0			$	0			$	1,856			$	(23	)		$	1,856			$	(23	)

 

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Note 3 – Loans and Allowance for Loan Losses

(dollars in thousands)

Loans at March 31, 2015 and December 31, 2014 were as follows:

 

		March 31, 2015				December 31, 2014
Commercial real estate:
Commercial real estate		$	66,623			$	66,633
Secured by farmland			52,555				47,918
Construction and land development			15,793				19,390
Commercial:
Commercial and industrial			42,075				40,144
Agricultural production			23,092				22,528
Residential real estate:
One-to-four family			114,730				110,801
Multifamily			15,819				16,029
Construction and land development			8,617				8,443
Home equity			41,736				40,087
Consumer:
Auto:
Direct			16,432				16,875
Indirect			37				58
Other			13,869				13,269
			411,378				402,175
Unearned and deferred income			542				470
Allowance for loan losses			(4,023	)			(4,063	)
		$	407,897			$	398,582

 

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The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2015:

 

						Commercial				Residential				Home
March 31, 2015		Commercial				Real Estate				Real Estate				Equity				Consumer				Total
Beginning balance		$	1,002			$	1,748			$	858			$	215			$	240			$	4,063
Provision for loan losses			198				(186	)			(38	)			(8	)			34				0
Loans charged-off			(15	)			0				0				0				(97	)			(112	)
Recoveries			20				0				0				1				51				72
Ending balance		$	1,205			$	1,562			$	820			$	208			$	228			$	4,023

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2014:

 

						Commercial				Residential				Home
March 31, 2014		Commercial				Real Estate				Real Estate				Equity				Consumer				Total
Beginning balance		$	1,050			$	1,621			$	839			$	226			$	136			$	3,872
Provision for loan losses			38				10				31				33				36				148
Loans charged-off			0				0				0				(17	)			(1	)			(18	)
Recoveries			0				0				0				0				1				1
Ending balance		$	1,088			$	1,631			$	870			$	242			$	172			$	4,003

The recorded investment in loans includes the principal balance outstanding, net of unearned and deferred income and including accrued interest receivable. The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2015 and December 31, 2014:

 

						Commercial				Residential				Home
March 31, 2015		Commercial				Real Estate				Real Estate				Equity				Consumer				Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	66			$	0			$	0			$	0			$	0			$	66
Collectively evaluated for impairment			1,139				1,562				820				208				228				3,957
Total ending allowance balance		$	1,205			$	1,562			$	820			$	208			$	228			$	4,023
Recorded investment in loans
Loans individually evaluated for impairment		$	721			$	1,847			$	367			$	127			$	89			$	3,151
Loans collectively evaluated for impairment			64,682				133,467				138,604				42,146				30,950				409,849
Total ending loans balance		$	65,403			$	135,314			$	138,971			$	42,273			$	31,039			$	413,000

 

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						Commercial				Residential				Home
December 31, 2014		Commercial				Real Estate				Real Estate				Equity				Consumer				Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	0			$	0			$	0			$	0			$	0			$	0
Collectively evaluated for impairment			1,002				1,748				858				215				240				4,063
Total ending allowance balance		$	1,002			$	1,748			$	858			$	215			$	240			$	4,063
Recorded investment in loans:
Loans individually evaluated for impairment		$	312			$	1,919			$	393			$	129			$	58			$	2,811
Loans collectively evaluated for impairment			62,782				132,274				134,711				40,468				30,714				400,949
Total ending loans balance		$	63,094			$	134,193			$	135,104			$	40,597			$	30,772			$	403,760

 

 

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The impact on interest income of impaired loans was immaterial to the consolidated statements of income for the three month periods ending March 31, 2015 and 2014.

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2015 and December 31, 2014:

 

March 31, 2015		Unpaid Principal Balance				Recorded Investment				Allowance for Loan Losses Allocated				Three-month Average Recorded Investment
With no related allowance recorded:
Real estate:
Commercial and land development		$	501			$	499			$	0			$	510
One-to-four family			367				366				0				371
Real estate construction
Commercial and land development			1,346				1,349				0				1,373
Commercial			305				306				0				308
Home equity			127				127				0				128
Consumer			89				89				0				91
With an allowance recorded:
Real estate:
Commercial and land development			0				0				0				0
One-to-four family			0				0				0				0
Real estate construction:
Commercial and land development
Commercial			416				415				66				430
		$	3,151			$	3,151			$	66			$	3,211
December 31, 2014		Unpaid Principal Balance				Recorded Investment				Allowance for Loan Losses Allocated				Average Recorded Investment
With no related allowance recorded:
Commercial real estate:
Commercial real estate		$	514			$	519			$	0			$	526
Construction and land development			1,398				1,400				0				1,470
Residential real estate:
One-to-four family			395				393				0				423
Home equity			128				129				0				131
Consumer			58				58				0				61
Commercial			311				312				0				337
		$	2,804			$	2,811			$	0			$	2,948

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

 

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The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2015 and December 31, 2014:

 

		March 31, 2015								December 31, 2014
						Loans Past Due								Loans Past Due
						90 or More Days								90 or More Days
		Nonaccrual				Still Accruing				Nonaccrual				Still Accruing
Commercial real estate:
Commercial real estate		$	253			$	0			$	253			$	0
Construction and land development			161				0				179				0
Commercial:
Commercial and industrial			416				27				0				33
Residential real estate:
One-to-four family			224				174				231				143
Home equity			89				7				89				16
Consumer			56				64				58				53
		$	1,199			$	272			$	810			$	245

The following table presents the aging of the recorded investment in past due loans as of March 31, 2015 by class of loans:

 

		30 - 59 Days Past Due(1)				60 - 89 Days Past Due				90 or More Days Past Due (2)				Total Past Due				Loans Not Past Due (3)				Total
Commercial real estate:
Commercial real estate		$	0			$	0			$	251			$	251			$	66,538			$	66,789
Secured by farmland			92				0				0				92				52,591				52,683
Construction and land development			0				0				0				0				15,842				15,842
Commercial:
Commercial			45				0				0				45				42,117				42,162
Agriculture production			0				0				27				27				23,214				23,241
Residential real estate:
One-to-four family			562				0				174				736				113,736				114,472
Multifamily			0				0				0				0				15,865				15,865
Construction and land development			0				0				0				0				8,634				8,634
Home equity			72				0				7				79				42,194				42,273
Consumer:
Auto:
Direct			39				27				65				131				16,912				17,043
Indirect			0				0				0				0				37				37
Other			176				91				0				267				13,692				13,959
		$	986			$	118			$	524			$	1,628			$	411,372			$	413,000

 

(1)	Includes $43 of loans on nonaccrual status.

(2)	Includes $252 of loans on nonaccrual status.

(3)	Includes $904 of loans on nonaccrual status.

 

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The following table presents the aging of the recorded investment in past due loans as of December 31, 2014 by class of loans:

 

		30 - 59				60 - 89				90 or More
		Days				Days				Days				Total				Loans Not
		Past Due				Past Due				Past Due (1)				Past Due				Past Due (2)				Total
Commercial real estate:
Commercial real estate		$	0			$	0			$	256			$	256			$	66,456			$	66,712
Secured by farmland			93				0				0				93				47,990				48,083
Construction and land development			0				0				0				0				19,399				19,399
Commercial:
Commercial and industrial			86				0				33				119				40,227				40,346
Agricultural production			28				3				0				31				22,717				22,748
Residential real estate:
One-to-four family			563				80				188				831				109,805				110,636
Multifamily			0				0				0				0				16,049				16,049
Construction and land development			0				0				0				0				8,419				8,419
Home equity			118				0				16				134				40,462				40,596
Consumer:
Auto:
Direct			168				18				34				220				17,207				17,427
Indirect			0				0				0				0				58				58
Other			49				0				19				68				13,219				13,287
		$	1,105			$	101			$	546			$	1,752			$	402,008			$	403,760

 

(1)	Includes $298 of loans on nonaccrual status.

(2)	Includes $512 of loans on nonaccrual status

Troubled Debt Restructuring

Loans where at least one borrower has been discharged of their obligation in Chapter 7 bankruptcy, are classified as troubled debt restructurings. At March 15, 2015 and December 31, 2014, $568 and $565 thousand of loans in Chapter 7 bankruptcy status were included in total troubled debt restructurings.

The Corporation has loans with a balance of $2,467 that were individually evaluated for impairment whose loan terms have been modified in troubled debt restructurings as of March 31, 2015. No specific reserves have been allocated for these loans as of March 31, 2015. The Corporation has not committed to lend any additional amounts as of March 31, 2015 to customers with outstanding loans that are classified as troubled debt restructurings. The Corporation had loans with balances of $2,535 that were individually evaluated for impairment whose loan terms have been modified in troubled debt restructurings as of December 31, 2014. No specific reserve was allocated for these loans.

There were no loans modified as troubled debt restructurings that experienced payment default following the modification within the last twelve months. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

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

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

 

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of March 31, 2015 and December 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

						Special
March 31, 2015		Pass				Mention				Substandard				Doubtful				Total
Commercial real estate:
Commercial real estate		$	63,343			$	1,436			$	2,010			$	0			$	66,789
Secured by farmland			52,683				0				0				0				52,683
Construction and land development			15,155				526				161				0				15,842
Commercial:
Commercial and industrial			41,446				481				235				0				42,162
Agricultural production			23,241				0				0				0				23,241
Residential real estate:
One-to-four family			0				0				15				0				15
		$	195,868			$	2,443			$	2,421			$	0			$	200,732

 

						Special
December 31, 2014		Pass				Mention				Substandard				Doubtful				Total
Commercial real estate:
Commercial real estate		$	62,401			$	904			$	3,407			$	0			$	66,712
Secured by farmland			48,083				0				0				0				48,083
Construction and land development			18,667				552				180				0				19,399
Commercial:
Commercial and industrial			39,440				556				350				0				40,346
Agricultural production			22,748				0				0				0				22,748
Residential real estate:
One-to-four family			0				0				16				0				16
		$	191,339			$	2,012			$	3,953			$	0			$	197,304

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of March 31, 2015 and December 31, 2014:

 

		Consumer												Residential Real Estate
																						One-to-four				Home
March 31, 2015		Direct				Indirect				Other				Construction				Multifamily				Family				Equity				Total
Performing		$	16,922			$	37			$	13,959			$	8,634			$	15,865			$	114,102			$	42,177			$	211,696
Nonperforming			121				0				0				0				0				355				96				572
		$	17,043			$	37			$	13,959			$	8,634			$	15,865			$	114,457			$	42,273			$	212,268

 

 

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		Consumer												Residential Real Estate
																						One-to-four				Home
December 31, 2014		Direct				Indirect				Other				Construction				Multifamily				Family				Equity				Total
Performing		$	17,335			$	58			$	13,268			$	8,419			$	16,049			$	110,262			$	40,491			$	205,882
Nonperforming			92				0				19				0				0				358				105				574
		$	17,427			$	58			$	13,287			$	8,419			$	16,049			$	110,620			$	40,596			$	206,456

Note 4 – Stock-Based Compensation

(dollars in thousands, except per share information)

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

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

All options vest in five equal installments over a five year period and have a term of 10 years. Details related to the granting of the option awards, remaining outstanding and exercised options were as follows:

 

		Number of				Exercise				Remaining				Number
Grant Date		Options				Price				Outstanding				Exercised
May 2008			58,000			$	18.03				29,000				0
October 2010			43,000				13.22				21,758				10,542
January 2012			58,000				14.10				42,913				3,087
December 2013			45,000				19.00				45,000				0
February 2014			5,000				21.00				5,000				0

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

The fair value of options granted in 2014 and the assumptions used for grants were as follows:

 

Fair value of options granter		$	3.37
Risk-free interest rate			2.17	%
Expected term (years)			7.0
Expected stock price volatility			15.16	%
Dividend yield			1.52	%

A summary of the activity in the stock option plan for 2015 follows:

 

										Weighted
						Weighted				Average				Aggregate
						Average				Remaining				Intrinsic
						Exercise				Contractual				Value
		Shares				Price				Term				(in thousands)
Outstanding - January 1, 2015			147,592			$	16.45
Granted			0				0
Exercised			(3,521	)			13.22
Forfeited			(400	)			13.22
Outstanding - March 31, 2015			143,671			$	16.53				6.6			$	2,208
Fully vested and expected to vest at March 31, 2015			143,671			$	16.53				6.6			$	2,208
Exercisable at March 31, 2015			81,271			$	15.94				5.5			$	1,297

 

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Information related to the exercise of stock options during the three months ended March 31, 2015 and 2014 follows:

 

		March 31, 2015				March 31, 2014
Intrinsic value of options exercised		$	48			$	2
Cash received from option exercises			46				6

The total compensation cost that has been charged against income for the plan was $12 and $20 for the quarters ended March 31, 2015 and 2014. The total income tax benefit was $4 and $7 for the quarters ended March 31, 2015 and 2014. As of March 31, 2015 and 2014, there was $86 and $150 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost as of March 31, 2015 is expected to be recognized over a weighted-average period of 3.4 years.

Note 6 – Fair Value

(dollars in thousands)

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

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

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

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

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

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

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

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 which are updated no less frequently than annually. 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. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals for both collateral-dependent impaired loans and 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 Corporation. Once received, a member of the Credit Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics.

 

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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 March 31, 2015 Using

Quoted Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

(Level 1)

(Level 2)

(Level 3)

Assets:

Available for sale securities:

U.S. Government and federal agency

$

0

$

8,000

$

0

State and municipal

0

48,399

0

Mortgage-backed securities - residential

0

27,303

0

Equity securities

79

0

0

Fair Value Measurements

at December 31, 2014 Using

Quoted Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

(Level 1)

(Level 2)

(Level 3)

Assets:

Available for sale securities:

State and municipal

$

0

$

48,005

$

0

Mortgage-backed securities - residential

0

29,802

0

Equity securities

58

0

0

There were no investments measured using unobservable inputs (Level 3) during 2015 and 2014, respectively.

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

For level 3 investments, the Company uses significant unobservable inputs that reflect a reporting entity’s own assumptions that market participants would use in pricing an asset or liability. The Company uses different valuation processes such as market approach, income approach, or the cost approach.

 

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Assets and Liabilities Measured on a Non-Recurring Basis

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

 

Fair Value Measurements

at March 31, 2015 Using

Quoted Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

(Level 1)

(Level 2)

(Level 3)

Assets:

Impaired loans:

Commercial real estate

$

0

$

0

$

248

Commercial

0

0

350

Residential real estate:

One-to-four family

0

0

166

Other real estate owned:

Commercial

0

0

254

Fair Value Measurements

at December 31, 2014 Using

Quoted Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Assets

Inputs

Inputs

(Level 1)

(Level 2)

(Level 3)

Assets:

Impaired loans:

Commercial real estate

$

0

$

0

$

232

Residential real estate:

One-to-four family

0

0

170

Other real estate owned:

Commercial

0

0

254

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal amount of $830, with a valuation allowance of $66 at March 31, 2015. Impaired loans had an additional provision for loan loss of $66 for the three months ended March 31, 2015.

Other real estate owned had a carrying value of $254 at March 31, 2015. There were no write-downs of other real estate owned carried at fair value in 2015.

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a principal amount of $431, with a valuation allowance of $29 at December 31, 2014. Loans measured at fair value during the three months ended March 31, 2014 resulted in no additional provision for loan losses.

Other real estate owned had a carrying value of $254 at December 31, 2014. There were no write-downs of other real estate owned carried at fair value in 2014.

 

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The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2015:

 

										Range
						Valuation		Unobservable		(Weighted
		Fair value				Technique(s)		Input(s)		Average)
Commercial		$	350			Sales comparison Approach		Adjustment for differences between comparable sales			36	%
Impaired loans:
Commercial and land development		$	248			Sales comparison approach		Adjustment for differences between comparable sales			16	%
Residential real estate:
One-to-four family		$	166			Sales comparison approach		Adjustment for differences between comparable sales			6	%
Other real estate owned:
Commercial		$	254			Sales comparison approach		Adjustment for differences between comparable sales			14	%

Carrying amount and estimated fair values of financial instruments at March 31, 2015 and December 31, 2014 were as follows:

 

March 31, 2015		Carrying Amount				Fair Value
Financial assets
Cash and cash equivalents		$	29,498			$	29,498
Securities available for sale			83,781				83,781
Restricted equity securities			3,227				n/a
Loans, net			407,897				408,411
Loans held for sale			950				950
Accrued interest receivable			1,694				1,694
Financial liabilities
Deposits		$	417,421			$	417,725
Repurchase agreements			12,534				12,534
Federal Home Loan Bank advances			57,000				57,031
Accrued interest payable			185				185
December 31, 2014		Carrying Amount				Fair Value
Financial assets
Cash and cash equivalents		$	28,901			$	28,901
Securities available for sale			77,865				77,865
Restricted equity securities			3,224				n/a
Loans, net			398,582				398,186
Loans held for sale			479				496
Accrued interest receivable			1,618				1,618
Financial liabilities
Deposits		$	418,332			$	418,423
Repurchase agreements			16,505				16,505
Federal Home Loan Bank advances			38,000				38,028
Accrued interest payable			176				176

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

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

(b) Restricted Equity Securities: It is not practical to determine the fair value of these securities due to restrictions placed on their transferability.

(c) Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans

 

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are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. 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.

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors.

(d) Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount). 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.

(e) Repurchase agreements: The carrying amounts of borrowings under repurchase agreements, generally maturing within ninety days, approximate their fair values.

(f) Federal Home Loan Bank advances: The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements.

 

(g)	Accrued interest receivable/payable: The carrying amounts of accrued interest approximate fair value.

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

 

20