10-Q 1 mbcn20130630_10q.htm FORM 10-Q mbcn20130630_10q.htm

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20552

FORM 10 - Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

OF 1934


For the quarterly period ended June 30, 2013


Commission File Number 000-32561



 Middlefield Banc Corp.

 (Exact name of registrant as specified in its charter)

 

Ohio 

 

34 - 1585111 

(State or other jurisdiction of incorporation 

 

(IRS Employer Identification No.) 

or organization) 

 

 

     

15985 East High Street, Middlefield, Ohio 44062-9263

(Address of principal executive offices)

 

(440) 632-1666

(Registrant'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 [√] NO [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [√] NO [ ]

 

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

 

Large accelerated filer [  ] 

Accelerated filer [  ] 

Non-accelerated filer [  ] 

Small reporting company [√]  

           

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES [ ]   NO [√]

 

State the number of shares outstanding of each of the issuer's classes of common equity as of the latest practicable date:

 

Class: Common Stock, without par value

Outstanding at August 7, 2013: 2,021,912

 
1

 

 

MIDDLEFIELD BANC CORP.

INDEX

 

   

Page

Number 

PART I -  

FINANCIAL INFORMATION   
     
Item 1.  

Financial Statements (unaudited) 

 
     
 

Consolidated Balance Sheet as of June 30, 2013 and December 31, 2012 

3 

 

                       

 
 

Consolidated Statement of Income for the Three and Six Months ended June 30, 2013 and 2012 

4 

 

                       

 
 

Consolidated Statement of Comprehensive Income for the Three and Six Months ended June 30, 2013

5 

     
 

Consolidated Statement of Changes in Stockholders' Equity for the Six Months ended June 30, 2013

6 

     
 

Consolidated Statement of Cash Flows for the Six Months ended June 30, 2013 and 2012

7 

     
 

Notes to Unaudited Consolidated Financial Statements 

8 

     
Item 2.  

Management's Discussion and Analysis of Financial Condition and Results of Operations

30 

     
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk 

41 

     
Item 4.  

Controls and Procedures 

42 

     

PART II -  

OTHER INFORMATION   
     
Item 1.  

Legal Proceedings 

43 

     
Item 1A. 

Risk Factors 

43 

     
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds 

43 

     
Item 3. 

Defaults by the Company on its Senior Securities 

43 

     
Item 4.  

Mine Safety Disclosures 

43 

     
Item 5.  

Other Information 

43 

     
Item 6. 

Exhibits and Reports on Form 8 - K 

43 

     

SIGNATURES 

 

49 

     

Exhibit 31.1 

 

 

Exhibit 31.2 

 

 

Exhibit 32 

 

 

 

 

 
2

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET

(Dollar amounts in thousands)

(Unaudited)

   

June 30,

2013

   

December 31,

2012

 
                 

ASSETS

               

Cash and due from banks

  $ 22,052     $ 33,568  

Federal funds sold

    18,377       11,778  

Cash and cash equivalents

    40,429       45,346  

Investment securities available for sale

    179,757       194,472  

Loans

    412,399       408,433  

Less allowance for loan losses

    7,749       7,779  

Net loans

    404,650       400,654  

Premises and equipment, net

    8,583       8,670  

Goodwill

    4,559       4,559  

Core deposit intangible

    173       195  

Bank-owned life insurance

    8,675       8,536  

Accrued interest and other assets

    10,966       7,856  
                 

TOTAL ASSETS

  $ 657,792     $ 670,288  
                 

LIABILITIES

               

Deposits:

               

Noninterest-bearing demand

  $ 83,095     $ 75,912  

Interest-bearing demand

    58,238       63,915  

Money market

    77,563       81,349  

Savings

    180,875       175,406  

Time

    185,648       196,753  

Total deposits

    585,419       593,335  

Short-term borrowings

    5,407       6,538  

Other borrowings

    12,635       12,970  

Accrued interest and other liabilities

    1,781       2,008  

TOTAL LIABILITIES

    605,242       614,851  
                 

STOCKHOLDERS' EQUITY

               

Common stock, no par value; 10,000,000 shares authorized, 2,210,822 and 2,181,763 shares issued

    34,694       34,295  

Retained earnings

    24,780       22,485  

Accumulated other comprehensive income (loss)

    (190 )     5,391  

Treasury stock, at cost; 189,530 shares

    (6,734 )     (6,734 )

TOTAL STOCKHOLDERS' EQUITY

    52,550       55,437  
                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 657,792     $ 670,288  

 

See accompanying notes to unaudited consolidated financial statements.

 

 
3

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF INCOME

(Dollar amounts in thousands, except per share data)

(Unaudited)

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2013

   

2012

   

2013

   

2012

 

INTEREST INCOME

                               

Interest and fees on loans

  $ 5,550     $ 5,641     $ 11,122     $ 11,178  

Interest-bearing deposits in other institutions

    9       8       17       12  

Federal funds sold

    4       4       8       7  

Investment securities:

                               

Taxable interest

    625       791       1,299       1,706  

Tax-exempt interest

    744       753       1,477       1,500  

Dividends on stock

    15       26       38       52  

Total interest income

    6,947       7,223       13,961       14,455  
                                 

INTEREST EXPENSE

                               

Deposits

    1,219       1,434       2,516       2,931  

Short-term borrowings

    47       99       99       158  

Other borrowings

    44       82       90       166  

Trust preferred securities

    47       31       81       77  

Total interest expense

    1,357       1,646       2,786       3,332  
                                 

NET INTEREST INCOME

    5,590       5,577       11,175       11,123  

Provision for loan losses

    300       450       613       1,050  
                                 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

    5,290       5,127       10,562       10,073  
                                 

NONINTEREST INCOME

                               

Service charges on deposit accounts

    511       471       958       902  

Investment securities gains (losses), net

    (10 )     296       175       296  

Earnings on bank-owned life insurance

    75       69       143       137  

Gain on sale of loans

    -       -       -       85  

Other income

    243       181       411       391  

Total noninterest income

    819       1,017       1,687       1,811  
                                 

NONINTEREST EXPENSE

                               

Salaries and employee benefits

    1,906       1,800       3,777       3,550  

Occupancy expense

    248       222       522       470  

Equipment expense

    186       201       375       371  

Data processing costs

    187       191       400       390  

Ohio state franchise tax

    149       128       303       257  

Federal deposit insurance expense

    64       258       218       501  

Professional fees

    291       186       567       400  

(Gain) loss on sale of other real estate owned

    (13 )     32       (5 )     50  

Advertising expense

    111       112       223       232  

Other real estate expense

    90       213       196       273  

Directors Fees

    133       106       238       182  

Other expense

    596       592       1,135       1,147  

Total noninterest expense

    3,948       4,041       7,949       7,823  
                                 

Income before income taxes

    2,161       2,103       4,300       4,061  

Income taxes

    476       463       958       898  
                                 

NET INCOME

  $ 1,685     $ 1,640     $ 3,342     $ 3,163  
                                 

EARNINGS PER SHARE

                               

Basic

  $ 0.84     $ 0.85     $ 1.66     $ 1.72  

Diluted

    0.83       0.85       1.66       1.72  
                                 

DIVIDENDS DECLARED PER SHARE

  $ 0.26     $ 0.26     $ 0.52     $ 0.52  

 

See accompanying notes to unaudited consolidated financial statements.

 

 
4

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Dollar amounts in thousands)

(Unaudited)

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Net income

  $ 1,685     $ 1,640     $ 3,342     $ 3,163  
                                 

Other comprehensive income (loss):

                               

Net unrealized holding gain (loss) on available for sale securities

    (6,760 )     1,884       (8,281 )     1,824  

Tax effect

    2,298       (640 )     2,815       (620 )
                                 

Reclassification adjustment for (gains) losses included in net income

    10       (296 )     (175 )     (296 )

Tax effect

    (3 )     100       60       100  
                                 

Total other comprehensive income (loss)

    (4,455 )     1,048       (5,581 )     1,008  
                                 

Comprehensive income (loss)

  $ (2,770 )   $ 2,688     $ (2,239 )   $ 4,171  

 

See accompanying notes to unaudited consolidated financial statements.  

 

 
5

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(Dollar amounts in thousands, except dividend per share amount)

(Unaudited)

   

Common

Stock

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

Income (Loss)

   

Treasury

Stock

   

Total

Stockholders'

Equity

 
                                         

Balance, December 31, 2012

  $ 34,295     $ 22,485     $ 5,391     $ (6,734 )   $ 55,437  
                                         

Net income

            3,342                       3,342  

Comprehensive loss

                    (5,581 )             (5,581 )

Common stock issuance (13,320 shares), net of issuance cost ($139)

    74                               74  

Dividend reinvestment and purchase plan (15,739 shares)

    440                               440  

Stock options exercised

    (115 )                             (115 )

Cash dividends ($0.52 per share)

            (1,047 )                     (1,047 )
                                         

Balance, June 30, 2013

  $ 34,694     $ 24,780     $ (190 )   $ (6,734 )   $ 52,550  

 

See accompanying notes to unaudited consolidated financial statements.

 

 
6

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

   

Six Months Ended

June 30,

 
   

2013

   

2012

 

OPERATING ACTIVITIES

               

Net income

  $ 3,342     $ 3,163  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Provision for loan losses

    613       1,050  

Investment securities (gains) losses, net

    (175 )     (296 )

Depreciation and amortization

    449       442  

Amortization of premium and discount on investment securities

    457       477  

Accretion of deferred loan fees, net

    (119 )     (93 )

Origination of loans held for sale

    -       (1,084 )

Proceeds from sale of loans held for sale

    -       1,169  

Gain on sale of loans

    -       (85 )

Earnings on bank-owned life insurance

    (143 )     (137 )

Deferred income taxes

    103       (58 )

(Gain) loss on sale of other real estate owned

    (5 )     50  

(Increase) decrease in accrued interest receivable

    (88 )     111  

Decrease in accrued interest payable

    (32 )     (97 )

(Increase) decrease in prepaid federal deposit insurance

    (73 )     422  

Other, net

    57       (558 )

Net cash provided by operating activities

    4,386       4,476  
                 

INVESTING ACTIVITIES

               

Investment securities available for sale:

               

Proceeds from repayments and maturities

    12,992       34,731  

Proceeds from sale of securities

    8,135       21,804  

Purchases

    (15,150 )     (34,657 )

Increase in loans, net

    (5,465 )     (9,328 )

Proceeds from the sale of other real estate owned

    465       476  

Purchase of premises and equipment

    (250 )     (631 )

Net cash provided by investing activities

    727       12,395  
                 

FINANCING ACTIVITIES

               

Net decrease in deposits

    (7,916 )     (9,233 )

Decrease in short-term borrowings, net

    (1,131 )     (433 )

Repayment of other borrowings

    (335 )     (468 )

Common stock issuance

    74       2,329  

Stock options exercised

    (115 )     32  

Proceeds from dividend reinvestment & purchase plan

    440       343  

Cash dividends

    (1,047 )     (970 )

Net cash used for financing activities

    (10,030 )     (8,400 )
                 

Increase (decrease) in cash and cash equivalents

    (4,917 )     8,471  
                 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

    45,346       34,390  
                 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $ 40,429     $ 42,861  
                 

SUPPLEMENTAL INFORMATION

               

Cash paid during the year for:

               

Interest on deposits and borrowings

  $ 2,818     $ 3,429  

Income taxes

    900       950  
                 

Non-cash investing transactions:

               

Transfers from loans to other real estate owned

  $ 975     $ 316  

 

See accompanying notes to unaudited consolidated financial statements.

 

 
7

 

 

MIDDLEFIELD BANC CORP.

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

NOTE 1 - BASIS OF PRESENTATION

 

The consolidated financial statements of Middlefield Banc Corp. ("Company") include its two bank subsidiaries The Middlefield Banking Company (“MB”) and Emerald Bank (“EB”) and a non-bank asset resolution subsidiary EMORECO, Inc. All significant inter-company items have been eliminated.

 

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles and the instructions for Form 10-Q and Article 10 of Regulation S-X. In management’s opinion, the financial statements include all adjustments, consisting of normal recurring adjustments, that the Company considers necessary to fairly state the Company’s financial position and the results of operations and cash flows. The consolidated balance sheet at December 31, 2012, has been derived from the audited financial statements at that date but does not include all of the necessary informational disclosures and footnotes as required by U. S. generally accepted accounting principles. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included with the Company’s Form 10-K for the year ended December 31, 2012 (File No. 000-32561). The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year.

 

 

Recent Accounting Pronouncements

 

In April 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-07, Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting. The amendments in this Update are being issued to clarify when an entity should apply the liquidation basis of accounting. In addition, the guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. The amendments require an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is imminent when the likelihood is remote that the entity will return from liquidation and either (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties or (b) a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy). If a plan for liquidation was specified in the entity’s governing documents from the entity’s inception (for example, limited-life entities), the entity should apply the liquidation basis of accounting only if the approved plan for liquidation differs from the plan for liquidation that was specified at the entity’s inception. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. Entities should apply the requirements prospectively from the day that liquidation becomes imminent. Early adoption is permitted. Entities that use the liquidation basis of accounting as of the effective date in accordance with other Topics (for example, terminating employee benefit plans) are not required to apply the amendments. Instead, those entities should continue to apply the guidance in those other Topics until they have completed liquidation.

 

In June 2013, the FASB issued ASU 2013-08, Financial Services – Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The amendments in this Update affect the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. The amendments do all of the following: 1. Change the approach to the investment company assessment in Topic 946, clarify the characteristics of an investment company, and provide comprehensive guidance for assessing whether an entity is an investment Company. 2. Require an investment company to measure noncontrolling ownership interests in other investment companies at fair value rather than using the equity method of accounting. 3. Require the following additional disclosures: (a) the fact that the entity is an investment company and is applying the guidance in Topic 946, (b) information about changes, if any, in an entity’s status as an investment company, and (c) information about financial support provided or contractually required to be provided by an investment company to any of its investees. The amendments in this Update are effective for an entity’s interim and annual reporting periods in fiscal years that begin after December 15, 2013. Earlier application is prohibited.

 

 
8

 

 

 

In July 2013, the FASB ASU 2013-09, Fair Value Measurement (Topic 820): Deferral of the Effective Date of Certain Disclosures for Nonpublic Employee Benefit Plans in Update No. 2011-04. The amendments in this Update apply to certain quantitative disclosure requirements for an employee benefit plan, other than those plans that are subject to the Securities and Exchange Commission’s filing requirements (hereafter “nonpublic employee benefit plan”), that holds investments in its plan sponsor’s own nonpublic entity equity securities, including equity securities of its plan sponsor’s nonpublic affiliated entities and that are within the scope of the disclosure requirements contained in FASB Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update defer indefinitely the effective date of certain required disclosures in Update 2011-04 (Topic 820) of quantitative information about the significant unobservable inputs used in Level 3 fair value measurements for investments held by a nonpublic employee benefit plan in its plan sponsor’s own nonpublic entity equity securities, including equity securities of its plan sponsor’s nonpublic affiliated entities. The amendments in this Update do not defer the effective date for those certain quantitative disclosures for other nonpublic entity equity securities held in the nonpublic employee benefit plan or any qualitative disclosures. The deferral in this amendment is effective upon issuance for financial statements that have not been issued.

 

In July 2013, the FASB issued ASU 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this Update permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.

 

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This Update applies to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption is permitted. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted.

 

 

 
9

 

  

NOTE 2 - STOCK-BASED COMPENSATION

 

The Company had no unvested stock options outstanding or unrecognized stock-based compensation costs outstanding as of June 30, 2013 and 2012.

 

Stock option activity during the six months ended June 30 is as follows:

 

   

2013

   

Weighted-

average

Exercise

Price

   

2012

   

Weighted-

average

Exercise

Price

 
                                 

Outstanding, January 1

    79,693     $ 26.81       88,774     $ 26.81  

Exercised

    (19,761 )     24.09       -       -  

Forfeited

          -       (9,081 )     22.94  
                                 

Outstanding, June 30

    59,932       28.29       79,693       27.25  
                                 

Exercisable June 30

    59,932       28.29       79,693       27.25  

 

 
10

 

 

NOTE 3 - EARNINGS PER SHARE

 

 

The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the average shares outstanding. Diluted earnings per share adds the dilutive effects of options, warrants, and convertible securities to average shares outstanding.

 

The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.

 

   

For the Three

Months Ended

June 30,

   

For the Six

Months Ended

June 30,

 
   

2013

   

2012

   

2013

   

2012

 

Weighted average common shares outstanding

    2,206,794       2,108,863       2,198,033       2,031,187  
                                 

Average treasury stock shares

    (189,530 )     (189,530 )     (189,530 )     (189,530 )
                                 

Weighted average common shares and common stock equivalents used to calculate basic earnings per share

    2,017,264       1,919,333       2,008,503       1,841,657  
                                 

Additional common stock equivalents (stock options) used to calculate diluted earnings per share

    6,697       1,872       8,557       1,208  
                                 

Weighted average common shares and common stock equivalents used to calculate diluted earnings per share

    2,023,961       1,921,205       2,017,060       1,842,865  

 

Options to purchase 61,132 shares of common stock, at prices ranging from $17.55 to $40.24, were outstanding during the three months ended June 30, 2013. Of those options, 31,833 were considered dilutive based on the market price exceeding the strike price. The remaining 29,299 options had no dilutive effect on earnings per share. For the six months ended June 30, 2013, 49,394 options were considered dilutive. The remaining 11,738 options had no dilutive effect on earnings per share.

 

Options to purchase 88,354 shares of common stock, at prices ranging from $17.55 to $40.24, were outstanding during the three and six months ended June 30, 2012. Of those options, 9,000 were considered dilutive based on the market price exceeding the strike price. The remaining 79,354 options had no dilutive effect on the earnings per share.

  

 
11

 

 

NOTE 4 - FAIR VALUE MEASUREMENTS

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. GAAP established a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

 

 

 

Level I:

Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

 

Level II:

Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.

 

Level III:

Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

 

 

 

The following tables present the assets measured on a recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

           

June 30, 2013

         
                                 

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 
                                 

Assets Measured on a Recurring Basis:

                               

U.S. government agency securities

  $ -     $ 26,588     $ -     $ 26,588  

Obligations of states and political subdivisions

    -       89,718       -       89,718  

Mortgage-backed securities in government- sponsored entities

            58,413               58,413  

Private-label mortgage-backed securities

    -       4,288       -       4,288  

Total debt securities

    -       179,007       -       179,007  

Equity securities in financial institutions

    5       745       -       750  

Total

  $ 5     $ 179,752     $ -     $ 179,757  

  

 
12

 

 

           

December 31, 2012

         
                                 
   

Level I

   

Level II

   

Level III

   

Total

 
                                 

Assets Measured on a Recurring Basis:

                               

U.S. government agency securities

  $ -     $ 24,960     $ -     $ 24,960  

Obligations of states and political subdivisions

    -       92,596       -       92,596  

Mortgage-backed securities in government- sponsored entities

            71,102       -       71,102  

Private-label mortgage-backed securities

    -       5,064       -       5,064  

Total debt securities

    -       193,722       -       193,722  

Equity securities in financial institutions

    5       745       -       750  

Total

  $ 5     $ 194,467     $ -     $ 194,472  

 

 

The Company obtains fair values from an independent pricing service which represent either quoted market prices for the identical securities (Level I inputs) or fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level II).

 

Financial instruments are considered Level III when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. In addition to these unobservable inputs, the valuation models for Level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Level III financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. The Company has no securities considered to be Level III as of June 30, 2013 or December 31, 2012.

 

The Company uses prices compiled by third party vendors due to the recent stabilization in the markets along with improvements in third party pricing methodology that have narrowed the variances between third party vendor prices and actual market prices.

 

The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loan include: quoted market prices for identical assets classified as Level I inputs; observable inputs, employed by certified appraisers, for similar assets classified as Level II inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs.

 

The Company values other real estate owned at the estimated fair value of the underlying collateral less expected selling costs. Such values are estimated primarily using appraisals and reflect a market value approach. Due to the significance of the Level 3 inputs, other real estate owned has been classified as Level III.

 

 
13

 

 

           

June 30, 2013

         
                                 

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 
                                 

Assets Measured on a non-recurring Basis:

                               

Impaired loans

  $ -     $ -     $ 15,287     $ 15,287  

Other real estate owned

    -       -       2,361       2,361  

 

           

December 31, 2012

         
                                 
   

Level I

   

Level II

   

Level III

   

Total

 
                                 

Assets Measured on a non-recurring Basis:

                               

Impaired loans

  $ -     $ -     $ 17,600     $ 17,600  

Other real estate owned

    -       -       1,846       1,846  

 

 

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis and for which the Company uses Level III inputs to determine fair value:

 

   

Quantitative Information about Level III Fair Value Measurements

 

(unaudited, in thousands)

 

Estimate

   

Valuation

Techniquest 

 

Unobservable Input 

   

Range (Weighted Average)

   

June 30, 2013

   

December 31, 2012

                       

Impaired loans 

  $  15,287          17,600    

Appraisal of collateral (1) 

 

Appraisal adjustments (2) 

    0% to  -68.0% (-31.4 %)
                          Liquidation expenses (2)     0%  to  -45.8% (-2.2 %)

Other real estate owned 

  $  2,361          1,846    

Appraisal of collateral (1), (3) 

 

Appraisal adjustments (2) 

    0%  to  -10.0% (-7.5 %)

 

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

(3) Includes qualitative adjustments by management and estimated liquidation expenses.

 

 
14

 

 

The estimated fair value of the Company’s financial instruments is as follows:

 

   

June 30, 2013

 
   

Carrying

Value

   

Level I

   

Level II

   

Level III

   

Total

Fair Value

 
   

(in thousands)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 40,429     $ 40,429     $ -     $ -     $ 40,429  

Investment securities

                                       

Available for sale

    179,757       5       179,752       -       179,757  

Net loans

    404,650       -       -       408,322       408,322  

Bank-owned life insurance

    8,675       8,675               -       8,675  

Federal Home Loan Bank stock

    1,887       1,887               -       1,887  

Accrued interest receivable

    2,251       2,251       -       -       2,251  
                                         
                                         

Financial liabilities:

                                       

Deposits

  $ 585,419     $ 399,771     $ -     $ 187,825     $ 587,596  

Short-term borrowings

    5,407       5,407       -       -       5,407  

Other borrowings

    12,635       -       -       12,860       12,860  

Accrued interest payable

    460       460       -       -       460  

 

 

   

December 31, 2012

 
   

Carrying

Value

   

Level I

   

Level II

   

Level III

   

Total

Fair Value

 
   

(in thousands)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 45,346     $ 45,346     $ -     $ -     $ 45,346  

Investment securities

                                       

Available for sale

    194,472       5       194,467       -       194,472  

Net loans

    400,654       -       -       390,206       390,206  

Bank-owned life insurance

    8,536       8,536       -       -       8,536  

Federal Home Loan Bank stock

    1,887       1,887       -       -       1,887  

Accrued interest receivable

    2,163       2,163       -       -       2,163  
                                         

Financial liabilities:

                                       

Deposits

  $ 593,335     $ 396582     $ -     $ 196,122     $ 592,704  

Short-term borrowings

    6,538       6,538       -       -       6,538  

Other borrowings

    12,970       -       -       13,337       13,337  

Accrued interest payable

    492       492       -       -       492  

 

 

Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.

 

Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.

 

If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling. Since many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.

 

 
15

 

 

 

As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.

 

The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions:

 

Cash and Cash Equivalents, Federal Home Loan Bank Stock, Accrued Interest Receivable, Accrued Interest Payable, and Short-Term Borrowings

The fair value is equal to the current carrying value.

 

Bank-Owned Life Insurance

The fair value is equal to the cash surrender value of the life insurance policies.

 

Investment Securities Available for Sale

The fair value of investment securities is equal to the available quoted market price.  If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. 

 

Loans

The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were used as estimates for fair value.

 

Deposits and Other Borrowed Funds

The fair values of certificates of deposit and other borrowed funds are based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities. Demand, savings, and money market deposits are valued at the amount payable on demand as of period end.

 

Commitments to Extend Credit

These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure.

 

 

 

 

 
16

 

 

NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The following table presents the changes in accumulated other comprehensive income by component net of tax for the three and six months ended June 30, 2013 and 2012:

   

Unrealized gains on

available for sale

securities (a)

 

Balance as of December 31, 2012

  $ 5,391  

Other comprehensive loss before reclassification

    (1,004 )

Amount reclassified from accumulated other comprehensive income

    (122 )

Period change

    (1,126 )

Balance at March 31, 2013

    4,265  
         

Other comprehensive loss before reclassification

    (4,462 )

Amount reclassified from accumulated other comprehensive income

    7  

Period change

    (4,455 )

Balance at June 30, 2013

  $ (190 )
         

Balance as of December 31, 2011

  $ 4,541  

Other comprehensive loss before reclassification

    (40 )

Amount reclassified from accumulated other comprehensive income

    -  

Period change

    (40 )

Balance at March 31, 2012

    4,501  
         

Other comprehensive loss before reclassification

    1,244  

Amount reclassified from accumulated other comprehensive income

    (196 )

Period change

    1,048  

Balance at June 30, 2012

  $ 5,549  

 

(a) All amounts are net of tax. Amounts in parentheses indicate debits.

  

 
17

 

 

The following tables present significant amounts reclassified out of each component of accumulated other comprehensive inocme:

 

   

Amount Reclassified from

   
   

Accumulated Other Comprehensive Income

 

Affected Line Item in

   

For the Three Months Ended

 

the Statement Where

   

June 30,

 

Net Income is

Details about other comprehensive income

 

2013

   

2012

 

Presented

Unealized gains on available for sale securities

                 
    $ 10     $ 296  

Investment securities gains, net

      (3 )     (100 )

Income taxes

    $ 7     $ 196  

Net of tax

 

(a) Amounts in parentheses indicate debits to net income

 

   

Accumulated Other Comprehensive Income

For the Six Months Ended

June 30,

 

Affected Line Item in

the Statement Where

Net Income is

Details about other comprehensive income

 

2013

   

2012

 

Presented

Unealized gains on available for sale securities

                 
    $ (175 )   $ (296 )

Investment securities gains, net

      60       100  

Income taxes

    $ (115 )   $ (196 )

Net of tax

 

(a) Amounts in parentheses indicate debits to net income

 

 

NOTE 6 - INVESTMENT SECURITIES AVAILABLE FOR SALE

 

The amortized cost and fair values of securities available for sale are as follows:

 

 

   

June 30, 2013

 

(Dollar amounts in thousands)

 

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 
                                 

U.S. government agency securities

  $ 27,020     $ 343     $ (775 )   $ 26,588  

Obligations of states and political subdivisions:

                               

Taxable

    5,367       344       (6 )     5,705  

Tax-exempt

    84,455       2,273       (2,715 )     84,013  

Mortgage-backed securities in government-sponsored entities

    58,557       809       (953 )     58,413  

Private-label mortgage-backed securities

    3,895       393       -       4,288  

Total debt securities

    179,294       4,162       (4,449 )     179,007  

Equity securities in financial institutions

    750       -       -       750  

Total

  $ 180,044     $ 4,162     $ (4,449 )   $ 179,757  

 

 

 
18

 

 

 

   

December 31, 2012

 
   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 
                                 

U.S. government agency securities

  $ 24,485     $ 566     $ (91 )   $ 24,960  

Obligations of states and political subdivisions:

                               

Taxable

    6,888       738       -       7,626  

Tax-exempt

    80,391       4,683       (104 )     84,970  

Mortgage-backed securities in government-sponsored entities

    69,238       1,929       (65 )     71,102  

Private-label mortgage-backed securities

    4,553       511       -       5,064  

Total debt securities

    185,555       8,427       (260 )     193,722  

Equity securities in financial institutions

    750       -       -       750  

Total

  $ 186,305     $ 8,427     $ (260 )   $ 194,472  

 

The amortized cost and fair value of debt securities at June 30, 2013, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Dollar amounts in thousands)

 

Amortized

Cost

   

Fair

Value

 
                 

Due in one year or less

  $ 2,781     $ 2,835  

Due after one year through five years

    4,125       4,331  

Due after five years through ten years

    22,550       22,894  

Due after ten years

    149,838       148,947  
                 

Total

  $ 179,294     $ 179,007  

 

Proceeds from the sales of securities available-for-sale and the gross realized gains and losses for the three and six months ended June 30 are as follows:

 

   

For the Three Months Ended June 30,

   

For the Six Months Ended June 30,

 
   

2013

   

2012

   

2013

   

2012

 

Proceeds from sales

  $ 533     $ 21,804     $ 8,135     $ 21,804  

Gross realized gains

    -       308       204       308  

Gross realized losses

    (10 )     (12 )     (29 )     (12 )

 

Investment securities with an approximate carrying value of $70.4 million and $62.5 million at June 30, 2013 and December 31, 2012, respectively, were pledged to secure deposits and other purposes as required by law.

 

The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.

 

 
19

 

 

   

June 30, 2013

 
   

Less than Twelve Months

   

Twelve Months or Greater

   

Total

 

(Dollar amounts in thousands)

 

Fair

Value

   

Gross

Unrealized

Losses

   

Fair

Value

   

Gross

Unrealized

Losses

   

Fair

Value

   

Gross

Unrealized

Losses

 
                                                 

U.S. government agency securities

  $ 17,131     $ (775 )   $ -     $ -     $ 17,131     $ (775 )

Obligations of states and political subdivisions

  $ 21,713     $ (2,721 )   $ -     $ -     $ 21,713     $ (2,721 )

Mortgage-backed securities in government-sponsored entities

    34,542       (953 )     -       -       34,542       (953 )

Total

  $ 73,386     $ (4,449 )   $ -     $ -     $ 73,386     $ (4,449 )

 

   

December 31, 2012

 
   

Less than Twelve Months

   

Twelve Months or Greater

   

Total

 
   

Fair

Value

   

Gross

Unrealized

Losses

   

Fair

Value

   

Gross

Unrealized

Losses

   

Fair

Value

   

Gross

Unrealized