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OLCB > SEC Filings for OLCB > Form 10-Q on 14-Nov-2011All Recent SEC Filings

Show all filings for OHIO LEGACY CORP



Quarterly Report

Item 2. Management's Discussion and Analysis.

In the following section, management presents an analysis of Ohio Legacy Corp's financial condition as of September 30, 2011, and results of operations as of and for the three and nine months ended September 30, 2011 and 2010. This discussion is provided to give shareholders a more comprehensive review of the issues facing management than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the consolidated financial statements and the accompanying notes included in this Form 10-Q and the Company's annual report on Form 10-K for the year ended December 31, 2010.


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

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

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

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

competition in the industry and markets in which we operate;

rapid changes in technology affecting the financial services industry;

changes in government regulation;

general economic and business conditions;

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

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

our ability to retain existing customers and attract new customers;

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

the adequacy of our allowance for loan losses; and

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


In October 2011, Premier Bank & Trust completed the sale of two branch offices located in Wooster, Ohio, to The Commercial and Savings Bank of Millersburg, Ohio ("CSB"), a wholly owned subsidiary of CSB Bancorp, Inc., under an agreement (the "Agreement") entered into during June 2011. The assets and liabilities identified for sale are included in the categories of "Assets and Liabilities to be Disposed of through Branch Sale" on the Consolidated Balance Sheets.

Under the terms of the Agreement, CSB purchased approximately $9 million in loans, net of an allocation of the Allowance for Loan and Lease Losses totaling $600,000, real estate, fixtures and equipment associated with the branch locations, and deposits and other liabilities of $75 million. CSB paid a premium of $3.5 million, or 5% of the average amount of assumed deposits during the ten day period prior to and the day of closing less a fixed stated amount of $166,000. In addition to the loans, real estate, and fixed assets sold to CSB, the transaction was funded with approximately $42 million in cash and $19 million in borrowings from the Federal Home Loan Bank. This transaction positions the Company to focus on our core market of Stark County, Ohio, and provides future expansion potential.

In September 2011, the Bank was advised by its primary regulator, the Office of the Comptroller of the Currency (the" OCC"), that it had terminated the Consent Order entered into during February 2009 since the Bank demonstrated full compliance with all terms of the Consent Order, and the continued existence of the Consent Order was no longer required. As a result, the Bank is considered well-capitalized bank under the risk-based capital regulations governing the banking industry and is no longer classified by the OCC as a "troubled" institution.

The following key factors summarize the Company's financial condition at September 30, 2011 compared to December 31, 2010:

Total assets increased $15.0 million to $185.6 million from $170.6 million.

Assets and liabilities associated with the branch sale to CSB were segregated on the Consolidated Balance Sheets as of September 30, 2011, reflecting the intention of the Company to dispose of these assets and liabilities through the branch sale. These assets and liabilities are collectively referred to as the "Disposal Group".

Liquidity remained high during the third quarter with cash and cash equivalents increasing $19.3 million to $51.9 million. Liquidity will decrease following the sale of deposits associated with the Wooster branch offices in October 2011.

Net loans increased $2.6 million to $103.7 million. Excluding the reclassification of $9.1 million in loans identified for the branch sale, total loans increased $11.6 million to $112.8 million.

Total deposits decreased $55.1 million to $88.1 million due to the reclassification of $74.3 million in deposits identified for the branch sale. Excluding this reclassification, total deposits increased $19.2 million from $143.2 million to $162.4 million.

The Bank raised time deposits from other financial institutions totaling $11.2 million with an average account balance of $223,000 through a national certificate of deposit rate listing service offered through a subscription to participating financial institutions to provide funds for the branch sale and provide additional liquidity following the closing of the sale. Retail depositors continued the trend toward investing in money market fund and savings deposit balances and reducing time deposit balances.

Debt with the Federal Home Loan Bank totaling $5 million was repaid.

Total shareholders' equity decreased $711,000 from $16.5 million to $15.8 million principally due to the operating loss recorded by the Company for the nine months ending September 30, 2011.

The following key factors summarize our results of operations for the nine months ending September 30, 2011:

The Company incurred a net loss of $987,580 in 2011 compared to a loss of $3,065,489 for the same period in 2010.

Net interest income improved $209,352 in 2011 compared to the same period in 2010.

The Company reduced its allowance for loan loss through a negative loan loss provision of $135,069 in 2011 compared to provision expense of $140,743 for the same period in 2010.

Noninterest income increased $989,956 primarily driven by an increase in trust and brokerage services fee income of $457,090, an increase in gains on securities sales of $326,801 and a reduction in the loss realized on disposition of other real estate owned of $179,827. Trust and brokerage services are new services offered by the Company beginning with the second quarter of 2010.

Noninterest expense decreased by $602,789 principally due to the absence of investor expenses of $517,222 recorded in the first quarter of 2010 in connection with the assignment of promissory notes from Excel Financial to the Company in connection with the assignment of the Stock Purchase Agreement to Excel Bancorp by Excel Financial.

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

Assets are expected to decrease and capital will increase during the fourth quarter of 2011 due to the sale of deposits associated with two branch offices in Wayne County, Ohio;

Liquidity will decrease following the sale of the Wayne County branch offices in October 2011 which should improve our margins;

Credit quality will remain a primary focus of the Company, and costs associated with credit administration and collection efforts will remain high;

Commercial lending, with an emphasis on commercial and industrial lending, and new services in trust, brokerage and wealth management are expected to expand;

Operating expenses associated with the change in management during 2010 and new services are expected to be higher than the historical compensation costs at the Company;

The Bank's costs associated with its regulatory risk profile including FDIC insurance and regulatory examination costs will remain high until asset quality and earnings improve.


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

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

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

Valuation allowance for deferred tax assets. Another critical accounting policy relates to valuation of the deferred tax asset for net operating losses. Net operating loss carryforwards of approximately $8,987,000 will expire as follows:
$1,419,000 on December 31, 2027, $132,000 on December 31, 2028, $1,694,000 on December 31, 2029, and $5,742,000 on December 31, 2030. A valuation allowance has been recorded for the related deferred tax asset for these carryforwards and other net deferred tax assets recorded by the Company to reduce the carrying amount of these assets to zero. Additional information is included in Note 10 to our consolidated financial statements.

FINANCIAL CONDITION - September 30, 2011 compared to December 31, 2010

Assets. At September 30, 2011, total assets increased to $185.6 million, up $15.0 million from $170.6 million at December 31, 2010. The asset increase was principally due to an increase in deposits of $19.2 million (including deposits in the Disposal Group) which was partially offset by the repayment from operating liquidity of Federal Home Loan Bank advances totaling $5 million during the first quarter of 2011.

Cash and Cash Equivalents. Cash and cash equivalents increased to $51.9 million at September 30, 2011, up $19.3 million from year-end 2010. The increase in cash was due to proceeds received from sales and calls of securities available for sale that were not reinvested and proceeds from an increase in deposits. The sale of deposits associated with two branch offices in Wayne County, Ohio required a substantial use of cash when the transaction closed in October 2011.

Securities. Total securities available for sale had an estimated fair value of $11.1 million at September 30, 2011, compared to $25.2 million at year-end 2010. Sales of securities available for sale totaled $10.8 million and maturities, calls and principal repayments totaled $13.0 million. Securities sales consisted principally of GNMA mortgage-backed securities issued in 2009 with an original term of 30 years and a coupon rate of 4.5% to 5.0%. These securities were sold in part as a defensive move to reduce the market price sensitivity of the portfolio to rising interest rates and to raise cash for the Wayne County branch office sale. The net unrealized gain on the securities portfolio was $482,279 at September 30, 2011 compared to a net unrealized gain of $427,807 at December 31, 2010. At June 30, 2011, the Company reclassified its municipal securities portfolio from the held-to-maturity classification to the available-for-sale sale classification, since it no longer intends to hold these securities to maturity.

Loans and Asset Quality. Total loans, net of the allowance for loan loss and deferred loan fees, increased $2.6 million to $103.7 million. Loans reclassified as assets to be disposed of through the branch sale totaled $9.1 million. Excluding this reclassification, total loans, net of the allowance for loan loss and deferred loan fees, increased $11.6 million at September 30, 2011.

Loans classified by management as special mention, substandard, doubtful and not deemed impaired represented 7.4% of total loans at September 30, 2011, compared to 12.5% at December 31, 2010. Impaired loans represented 1.6% of total loans at September 30, 2011, and totaled $1,684,209, down $1,725,033 from year-end 2010. Loan balances classified as special mention or substandard that are included in the Disposal Group total approximately $2.3 million. Improving asset quality continues to be a prime objective for management. Aside from this pending sale, outstanding loan balances are expected to increase over the remainder of the year through business development efforts. However expected loan growth may be constrained by continued economic weakness in the markets served by the Company.

Allowance for loan losses. The balance of the allowance for loan loss at September 30, 2011, was $2,364,643 excluding $600,000 for the portion of the allowance allocated to loans in the Disposal Group compared to $3,055,766 at year-end 2010. For the nine months ending September 30, 2011, the allowance for loan loss was reduced by a negative loan loss provision of $135,069. Recoveries on loans previously charged-off totaled $371,180. The amount of the allowance for loan loss is based on a combination of actual experiential factors such as historical losses for each category of loans, information about specific borrowers, and other factors, including delinquencies, general economic conditions and the outlook for specific industries, which are more subjective in nature.

The reduction to the allowance is directionally consistent with the trends in the criticized loan portfolio. Criticized loans decreased as a result of loan risk upgrades on specific loans and principal reductions from payments. Another contributing factor was a decrease in the historical loss percentages. These loss rates are regularly updated to reflect the most recent three years of loss experience. The loss rate for special mention and substandard loans for the first three quarters in 2011 (added to the loss experience calculation during the quarter) were lower than the loss experience for the first three quarters of 2008 that were eliminated from the calculation.

The general allowance allocated to loans not classified by management totaled 1.63% of non-classified loans at September 30, 2011, compared to 1.90% at year-end 2010. As a percentage of total loans, the allowance decreased to 2.23% at September 30, 2011, compared to 2.93% at year-end 2010. The allowance for loan loss as a percentage of loans not individually identified as impaired and that excludes the amount of the allowance specifically allocated to impaired loans totaled 2.14% at September 30, 2011, compared to 3.02% at year-end 2010. Specific allocations of the allowance for impaired loans increased to $125,585 at September 30, 2011 compared to $6,435 at year-end 2010.

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

Other real estate owned consisted of eight properties and totaled $1.1 million at September 30, 2011 compared to $1.0 million at year-end 2010. Six properties were sold for a net loss of $52,085, and six properties with an estimated value of $604,000 were transferred to OREO during 2011.

Deposits. Total deposits decreased by $55.1 million to $88.1 million after the reclassification of $74.3 million in deposits to the Disposal Group at September 30, 2011, compared to year-end 2010. Including those deposits reclassified to the Disposal Group, total deposits increased $19.2 million at September 30, 2011 compared to December 31, 2010. Time deposits totaling $11.2 million were acquired from financial institutions subscribing to a national time deposit rate listing service. These deposits had a weighted average rate of 0.54% with an average maturity of 376 days. This funding source is less expensive than rates paid in the retail deposit market, but there is no opportunity to cross-sell other products and services to these depositors. It has also allowed the Bank to extend the maturity term of its deposits since retail depositors have migrated into money market funds as customers anticipate higher interest rates in the near term reflecting an unwillingness to lengthen deposit maturities.

Federal Home Loan Bank Advances. Debt remaining from the Federal Home Loan Bank was repaid during the first quarter of 2011. The weighted average interest rate on $5.0 million in matured advances was 2.43%. The advances were repaid from excess operating liquidity.

Shareholders' Equity. Shareholders' Equity decreased $711,000 to $15.8 million at September 30, 2011. The decrease was due to the operating loss of $988,000 incurred for the nine months of 2011. Stock-based compensation expense of $153,000 increased equity as well as $124,000 in other comprehensive income related to the appreciation in market value of securities available for sale including the impact of the reclassification of securities to the available-for-sale classification from the held-to-maturity classification.


The net loss for the three months ending September 30, 2011, totaled $280,069 or a loss of $0.01 per diluted share compared to a net loss of $1,155,131, or $0.06 per diluted share during the third quarter of 2010. Average diluted shares outstanding were unchanged at 19,714,564 shares for the third quarter of 2011 compared to the same quarter of 2010.

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

                                                      Three Months Ended September 30,
                                               2011                                       2010
                                             Interest                                   Interest
                               Average       Earned/        Yield/        Average       Earned/        Yield/
(Dollars in Thousands)         Balance         Paid          Rate         Balance         Paid          Rate
Interest-earning assets:
Interest-bearing deposits
in other financial
institutions and federal
funds sold                    $  44,476     $       25          0.22 %   $  36,979     $       25          0.27 %
Securities available for
sale                             13,480             90          2.67 %      29,005            218          2.98 %
Securities held to maturity           -              -             - %       2,995             28          3.78 %
Federal agency stock              1,518             18          4.65 %       1,558             20          4.98 %
Loans (1)                       109,007          1,409          5.13 %      92,745          1,382          5.91 %
 Total interest-earning
assets                          168,481          1,542          3.63 %     163,282          1,673          4.06 %
Noninterest-earning assets        7,849                                      9,719
Total assets                  $ 176,330                                  $ 173,001

Liabilities and
Shareholders' Equity
Interest-bearing demand
deposits                      $   9,712     $        6          0.26 %   $   9,036     $       12          0.53 %
Savings accounts                 13,359             12          0.35 %      15,833             29          0.72 %
Money market accounts            51,082             71          0.56 %      45,141            100          0.88 %
Certificates of deposit          55,989            181          1.28 %      54,307            305          2.23 %
Total interest-bearing
deposits                        130,142            270          0.82 %     124,317            446          1.42 %
Other Borrowings                  4,967             19          1.48 %      13,129             85          2.56 %
   Total Interest-bearing
liabilities                     135,109            289          0.85 %     137,446            531          1.53 %
Noninterest-bearing demand
deposits                         24,529                                     17,061
liabilities                         700                                        883
Total liabilities               160,338                                    155,390
Shareholders' equity             15,992                                     17,611
  Total liabilities and
   shareholders' equity       $ 176,330                                  $ 173,001

Net interest income;
interest rate spread (2)                    $    1,253          2.78 %                 $    1,142          2.53 %
Net earning assets            $  33,372                                  $  25,836
Net interest margin (3)                                         2.95 %                                     2.77 %

Average interest-earning
assets to interest-bearing
liabilities                         1.2              X                         1.2              X

(1) Net of net deferred loan fees and costs and loans in process. Non-accrual loans are reported in non-interest earning assets in this table.

(2) Interest rate spread represents the difference between the yield on interest earning assets and the cost of interest bearing liabilities.

(3) Net interest margin represents net interest income, annualized, divided by average interest-earning assets.

Net interest income. For the three months ending September 30, 2010, net interest income was $1,253,093, up $111,379 from same period in 2010 while total interest earning assets were up $5.2 million. The yield on earning assets declined 0.43% to 3.63% for the third quarter of 2011 from 4.06% for the comparable period of 2010. The yield on interest-bearing liabilities declined 0.68% to 0.85% for the third quarter of 2011 from 1.53% for the same period in 2010. The net interest margin increased to 2.78% from 2.53%.

Interest Income. Total interest income for the third quarter of 2011 was $1.5 million, down from $1.7 million for the third quarter of 2010. A low interest rate environment combined with a larger allocation of funds to liquid assets or securities with a shorter duration contributed to lower interest income levels. Average balances in funds invested in interest-bearing deposits and federal funds sold increased to $44.5 million earning only 0.22% during the third quarter of 2011 compared to $37.0 million at a yield of 0.27% during the third quarter of 2010. Management increased liquidity during the third quarter of 2011 anticipating the closing of the branch sale transaction on October 14, 2011. Although the yield on loans decreased from 5.91% to 5.13%, an increase in average loan balances of $16.3 million more than offset the impact of lower rates on the loan portfolio for the comparative quarter as interest income on loans increased by $28,000.

Interest expense. Interest on deposits declined $176,000 to $270,000 for the third quarter of 2011 compared to the same period in 2010. The average rate paid on interest-bearing deposits dropped 0.60% to 0.82%. Interest expense related to other borrowings including Federal Home Loan Bank advances declined by $66,000. Management expects that it will be difficult to achieve further reductions to the cost its core deposits since the current cost is already priced at historically low rates.

Provision for Loan Loss. A negative loan loss provision totaling $108,874 was . . .

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