10-Q 1 mbcn20130930_10q.htm FORM 10-Q mbcn20130930_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 September 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 November 5, 2013: 2,026,578

 

 
1

 

 

MIDDLEFIELD BANC CORP.

 

INDEX

 

Part I – 

Financial Information

   
 

Item 1.

Financial Statements (unaudited)

 
       
   

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

3

       
   

Consolidated Statement of Income for the Three and Nine Months ended September 30, 2013 and 2012   

  4

       
   

Consolidated Statement of Comprehensive Income for the Three and Nine Months ended September 30, 2013 

5

       
   

Consolidated Statement of Changes in Stockholders' Equity for the Nine Months ended September 30, 2013 

6

       
   

Consolidated Statement of Cash Flows for the Nine Months ended September 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     

29

       
 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk     

40

       
 

Item 4.

Controls and Procedures     

41

       

Part II – 

Other Information

   
 

Item 1.

Legal Proceedings     

42

       
 

Item 1A.

Risk Factors     

42

       
 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds     

42

       
 

Item 3.

Defaults by the Company on its Senior Securities     

42

       
 

Item 4.

Mine Safety Disclosures     

42

       
 

Item 5.

Other Information     

42

       
 

Item 6.

Exhibits and Reports on Form 8 – K     

43

       

Signatures

 47

   

Exhibit 31.1

 

   

Exhibit 31.2

 
   

Exhibit 32

 

 

 
2

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET

(Dollar amounts in thousands)

(Unaudited)

 
   

September 30,

2013

   

December 31,

2012

 
                 

ASSETS

               

Cash and due from banks

  $ 21,124     $ 33,568  

Federal funds sold

    11,069       11,778  

Cash and cash equivalents

    32,193       45,346  

Investment securities available for sale

    180,771       194,473  

Loans

    419,060       408,433  

Less allowance for loan losses

    7,821       7,779  

Net loans

    411,239       400,654  

Premises and equipment, net

    8,555       8,670  

Goodwill

    4,559       4,559  

Core deposit intangible

    161       195  

Bank-owned life insurance

    8,745       8,536  

Accrued interest and other assets

    11,918       7,855  
                 

TOTAL ASSETS

  $ 658,141     $ 670,288  
                 

LIABILITIES

               

Deposits:

               

Noninterest-bearing demand

  $ 81,760     $ 75,912  

Interest-bearing demand

    59,799       63,915  

Money market

    77,118       81,349  

Savings

    179,581       175,406  

Time

    180,964       196,753  

Total deposits

    579,222       593,335  

Short-term borrowings

    10,575       6,538  

Federal funds purchased

    1,639       -  

Other borrowings

    12,261       12,970  

Accrued interest and other liabilities

    1,915       2,008  

TOTAL LIABILITIES

    605,612       614,851  
                 

STOCKHOLDERS' EQUITY

               

Common stock, no par value; 10,000,000 shares authorized, 2,216,099 and 2,181,763 shares issued

    34,833       34,295  

Retained earnings

    26,123       22,485  

Accumulated other comprehensive (loss) income

    (1,693 )     5,391  

Treasury stock, at cost; 189,530 shares

    (6,734 )     (6,734 )

TOTAL STOCKHOLDERS' EQUITY

    52,529       55,437  
                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 658,141     $ 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

September 30,

   

Nine Months Ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 

INTEREST INCOME

                               

Interest and fees on loans

  $ 5,754     $ 5,810     $ 16,876     $ 16,988  

Interest-bearing deposits in other institutions

    6       7       23       19  

Federal funds sold

    4       6       12       13  

Investment securities:

                               

Taxable interest

    610       749       1,909       2,455  

Tax-exempt interest

    782       749       2,259       2,249  

Dividends on stock

    18       21       56       73  

Total interest income

    7,174       7,342       21,135       21,797  
                                 

INTEREST EXPENSE

                               

Deposits

    1,170       1,418       3,686       4,349  

Short-term borrowings

    41       61       140       219  

Federal funds purchased

    1       -       1       -  

Other borrowings

    41       78       131       244  

Trust preferred securities

    75       45       156       122  

Total interest expense

    1,328       1,602       4,114       4,934  
                                 

NET INTEREST INCOME

    5,846       5,740       17,021       16,863  
                                 

Provision for loan losses

    153       143       766       1,193  
                                 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

    5,693       5,597       16,255       15,670  
                                 

NONINTEREST INCOME

                               

Service charges on deposit accounts

    510       481       1,468       1,383  

Investment securities gains, net

    -       152       175       448  

Earnings on bank-owned life insurance

    66       71       209       208  

Gain on sale of loans

    -       -       -       85  

Other income

    232       164       643       555  

Total noninterest income

    808       868       2,495       2,679  
                                 

NONINTEREST EXPENSE

                               

Salaries and employee benefits

    1,872       1,705       5,649       5,255  

Occupancy expense

    273       233       795       703  

Equipment expense

    228       186       603       557  

Data processing costs

    209       184       609       574  

Ohio state franchise tax

    164       160       467       417  

Federal deposit insurance expense

    135       250       353       751  

Professional fees

    316       270       883       670  

(Gain) loss on sale of other real estate owned

    (35 )     188       (40 )     238  

Advertising expense

    113       114       336       346  

Other real estate expense

    128       68       324       341  

Directors fees

    77       97       315       279  

Other expense

    635       667       1,770       1,814  

Total noninterest expense

    4,115       4,122       12,064       11,945  
                                 

Income before income taxes

    2,386       2,343       6,686       6,404  

Income taxes

    521       494       1,479       1,392  
                                 

NET INCOME

  $ 1,865     $ 1,849     $ 5,207     $ 5,012  
                                 

EARNINGS PER SHARE

                               

Basic

  $ 0.92     $ 0.93     $ 2.59     $ 2.66  

Diluted

    0.92       0.93       2.58       2.65  
                                 

DIVIDENDS DECLARED PER SHARE

  $ 0.26     $ 0.26     $ 0.78     $ 0.78  
 

See accompanying notes to unaudited consolidated financial statements.

 

 
4

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Dollar amounts in thousands, except per share data)

(Unaudited)

 
   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Net income

  $ 1,865     $ 1,849     $ 5,207     $ 5,012  
                                 

Other comprehensive income (loss):

                               

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

    (2,277 )     838       (10,558 )     2,662  

Tax effect

    774       (285 )     3,589       (905 )
                                 

Reclassification adjustment for investment securities gains included in net income

    -       (152 )     (175 )     (448 )

Tax effect

    -       52       60       152  
                                 

Total other comprehensive income (loss)

    (1,503 )     453       (7,084 )     1,461  
                                 

Comprehensive income (loss)

  $ 362     $ 2,302     $ (1,877 )   $ 6,473  

 

See accompanying notes to unaudited consolidated financial statements.

 

 
5

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

(Dollar amounts in thousands, except share data)

(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

            5,207                       5,207  

Comprehensive loss

                    (7,084 )             (7,084 )

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

    74                               74  

Dividend reinvestment and purchase plan (21,016 shares)

    590                               590  

Stock options exercised

    (126 )                             (126 )

Cash dividends ($0.78 per share)

            (1,569 )                     (1,569 )
                                         

Balance, September 30, 2013

  $ 34,833     $ 26,123     $ (1,693 )   $ (6,734 )   $ 52,529  
 

See accompanying notes to unaudited consolidated financial statements.

 

 
6

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollar amounts in thousands, except per share data)

(Unaudited) 

 
   

Nine Months Ended

September 30,

 
   

2013

   

2012

 

OPERATING ACTIVITIES

               

Net income

  $ 5,207     $ 5,012  

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

               

Provision for loan losses

    766       1,193  

Investment securities gains, net

    (175 )     (448 )

Depreciation and amortization

    786       663  

Amortization of premium and discount on investment securities

    721       674  

Accretion of deferred loan fees, net

    (203 )     (139 )

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

    (209 )     (208 )

Deferred income taxes

    161       220  

(Gain) loss on sale of other real estate owned

    (40 )     238  

Increase in accrued interest receivable

    (402 )     (364 )

Decrease in accrued interest payable

    (28 )     (88 )

(Increase) decrease in prepaid federal deposit insurance

    (73 )     633  

Other, net

    546       (63 )

Net cash provided by operating activities

    7,057       7,323  
                 

INVESTING ACTIVITIES

               

Investment securities available for sale:

               

Proceeds from repayments and maturities

    20,103       40,227  

Proceeds from sale of securities

    8,136       27,426  

Purchases

    (25,815 )     (50,828 )

Increase in loans, net

    (12,841 )     (8,826 )

Proceeds from the sale of other real estate owned

    860       542  

Purchase of premises and equipment

    (476 )     (883 )

Net cash (used for) provided by investing activities

    (10,033 )     7,658  
                 

FINANCING ACTIVITIES

               

Net (decrease) increase in deposits

    (14,113 )     3,776  

Increase (decrease) in short-term borrowings, net

    4,037       (874 )

Increase in federal funds purchased

    1,639       -  

Repayment of other borrowings

    (709 )     (995 )

Common stock issuance

    74       2,329  

Stock options exercised

    (126 )     -  

Proceeds from dividend reinvestment & purchase plan

    590       481  

Cash dividends

    (1,569 )     (1,482 )

Net cash (used for) provided by financing activities

    (10,177 )     3,235  
                 

Increase (decrease) in cash and cash equivalents

    (13,153 )     18,216  
                 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

    45,346       34,390  
                 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $ 32,193     $ 52,606  
                 

SUPPLEMENTAL INFORMATION

               

Cash paid during the year for:

               

Interest on deposits and borrowings

  $ 4,142     $ 5,022  

Income taxes

    1,100       1,250  
                 

Non-cash investing transactions:

               

Transfers from loans to other real estate owned

  $ 1,693     $ 916  

 

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.

 

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.

 

 

 
8

 

 

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 September 30, 2013 and 2012.

 

Stock option activity during the nine months ended September 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

    (21,112 )     24.11       -       -  

Forfeited

    -       -       (420 )     36.86  
                                 

Outstanding, September 30

    58,581       28.38       88,354       26.76  
                                 

Exercisable, September 30

    58,581       28.38       88,354       26.76  
 

 

 
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

September 30,

   

For the Nine

Months Ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 

Weighted average common shares outstanding

    2,212,020       2,167,711       2,202,747       2,077,027  
                                 

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

    2,022,490       1,978,181       2,013,217       1,887,497  
                                 

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

    6,930       5,682       7,981       4,236  
                                 

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

    2,029,420       1,983,863       2,021,198       1,891,733  

 

 

 

Options to purchase 58,581 shares of common stock, at prices ranging from $17.55 to $40.24, were outstanding during the three months ended September 30, 2013. Of those options, 29,633 were considered dilutive based on the market price exceeding the strike price. The remaining options had no dilutive effect on earnings per share. For the nine months ended September 30, 2013, 49,394 options were considered dilutive. The remaining 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 at September 30, 2012. Of those options, 9,000 were considered dilutive based on the average market price exceeding the strike price for the nine months ended September 30, 2012. The three month period ended with 17,536 shares considered dilutive. In accordance with the subscription agreement entered into by an institutional investor, there was also an additional 11,332 shares, at $16 per share, considered dilutive for the three and nine-months ended September 30, 2012. The remaining 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.

 

 
           

September 30, 2013

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a recurring basis:

                               

U.S. government agency securities

  $ -     $ 26,343     $ -     $ 26,343  

Obligations of states and political subdivisions

    -       94,621       -       94,621  

Mortgage-backed securities in government- sponsored entities

            55,083               55,083  

Private-label mortgage-backed securities

    -       3,974       -       3,974  

Total debt securities

    -       180,021       -       180,021  

Equity securities in financial institutions

    5       745       -       750  

Total

  $ 5     $ 180,766     $ -     $ 180,771  

 

           

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 September 30, 2013 or December 31, 2012.

 

 

 
12

 

 

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.

 

 
           

September 30, 2013

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a non-recurring basis:

                               

Impaired loans

  $ -     $ -     $ 15,467     $ 15,467  

Other real estate owned

    -       -       2,719       2,719  

 

           

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)

 

Fair Value Estimate

 

Valuation Techniques

Unobservable Input

 

Range (Weighted Average)

   

September 30, 2013

   

December 31, 2012

               

Impaired loans

  $ 15,467     $ 17,600  

Appraisal of collateral (1)

Appraisal adjustments (2)

  0% to -68.0% (-30.7%)
                   

Liquidation expenses (2)

  0% to -45.8% (-2.0%)

Other real estate owned

  $ 2,719     $ 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.

 

 

 
13

 

 

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

 

 
   

September 30, 2013

 
   

Carrying

Value

   

Level I

   

Level II

   

Level III

   

Total

Fair Value

 
   

(in thousands)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 32,193     $ 32,193     $ -     $ -     $ 32,193  

Investment securities

                                       

Available for sale

    180,771       5       180,766       -       180,771  

Net loans

    411,239       -       -       413,767       413,767  

Bank-owned life insurance

    8,745       8,745               -       8,745  

Federal Home Loan Bank stock

    1,887       1,887               -       1,887  

Accrued interest receivable

    2,565       2,565       -       -       2,565  
                                         
                                         

Financial liabilities:

                                       

Deposits

  $ 579,222     $ 398,258     $ -     $ 182,824     $ 581,082  

Short-term borrowings

    10,575       10,575       -       -       10,575  

Federal funds purchased

    1,639       1,639       -       -       1,639  

Other borrowings

    12,261       -       -       12,469       12,469  

Accrued interest payable

    464       464       -       -       464  

 

   

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     $ 396,582     $ -     $ 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.

 

 

 
14

 

 

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, Federal Funds Purchased, 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.

 

 
15

 

 

NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The following table presents the changes in accumulated other comprehensive income (loss) by component net of tax for the three and nine months ended September 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

    (5,466 )

Amount reclassified from accumulated other comprehensive income (loss)

    (115 )

Period change

    (5,581 )

Balance at June 30, 2013

  $ (190 )
         

Other comprehensive loss before reclassification

    (1,503 )

Amount reclassified from accumulated other comprehensive income (loss)

    -  

Period change

    (1,503 )

Balance at September 30, 2013

  $ (1,693 )
         

Balance as of December 31, 2011

  $ 4,541  

Other comprehensive income before reclassification

    1,204  

Amount reclassified from accumulated other comprehensive income (loss)

    (196 )

Period change

    1,008  

Balance at June 30, 2012

    5,549  
         

Other comprehensive loss before reclassification

    553  

Amount reclassified from accumulated other comprehensive income (loss)

    (100 )

Period change

    453  

Balance at September 30, 2012

  $ 6,002  
 

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

 

 

 

The following tables present significant amounts reclassified out of each component of accumulated other comprehensive income (loss): 

 

   

Amount Reclassified from

 

 

   

Accumulated Other Comprehensive Income (Loss)

 

Affected Line Item in

   

For the Three Months Ended

 

the Statement Where

   

September 30,

 

Net Income is

Details about other comprehensive income

 

2013

(a)

2012

 

Presented

Unrealized gains on available for sale securities

                 
    $ -     $ 152  

Investment securities gains, net

      -       (52 )

Income taxes

    $ -     $ 100  

Net of tax

 

(a) Amounts in parentheses indicate debits to net income

  

 
16

 

 

 

   

Amount Reclassified from

 
   

Accumulated Other Comprehensive Income (Loss)

 

Affected Line Item in

   

For the Nine Months Ended

 

the Statement Where

   

September 30,

 

Net Income is

Details about other comprehensive income

 

2013

(a)

2012

 

Presented

Unrealized gains on available for sale securities

                 
    $ 175     $ 448  

Investment securities gains, net

      (60 )     (152 )

Income taxes

    $ 115     $ 296  

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:

 

 

   

September 30, 2013

 

(Dollar amounts in thousands)

 

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 
                                 

U.S. government agency securities

  $ 27,550     $ 161     $ (1,368 )   $ 26,343  

Obligations of states and political subdivisions:

                               

Taxable

    5,364       215       (21 )     5,558  

Tax-exempt

    90,441       1,885       (3,263 )     89,063  

Mortgage-backed securities in government-sponsored entities

    55,633       696       (1,246 )     55,083  

Private-label mortgage-backed securities

    3,597       377       -       3,974  

Total debt securities

    182,585       3,334       (5,898 )     180,021  

Equity securities in financial institutions

    750       -       -       750  

Total

  $ 183,335     $ 3,334     $ (5,898 )   $ 180,771  

 

 

   

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       4,684       (104 )     84,971  

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 )     193,723  

Equity securities in financial institutions

    750       -       -       750  

Total

  $ 186,305     $ 8,427     $ (260 )   $ 194,473  
 

 

 
17

 

 

The amortized cost and fair value of debt securities at September 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

  $ 2,736     $ 2,768  

Due after one year through five years

    4,071       4,261  

Due after five years through ten years

    21,891       21,963  

Due after ten years

    153,887       151,029  
                 

Total

  $ 182,585     $ 180,021  

 

 

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

 

 

   

For the Three Months Ended September 30,

   

For the Nine Months Ended September 30,

 
   

2013

   

2012

   

2013

   

2012

 

Proceeds from sales

  $ -     $ 5,622     $ 8,136     $ 27,426  

Gross realized gains

    -       154       204       462  

Gross realized losses

    -       (2 )     (29 )     (14 )
 

 

Investment securities with an approximate carrying value of $73.8 million and $62.5 million at September 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.

 

 

   

September 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

  $ 17,408     $ (1,368 )   $ -     $ -     $ 17,408     $ (1,368 )

Obligations of states and political subdivisions

    30,690       (3,244 )     448       (40 )     31,138       (3,284 )

Mortgage-backed securities in government-sponsored entities

    30,295       (1,061 )     5,719       (185 )     36,014       (1,246 )

Total

  $ 78,393     $ (5,673 )   $ 6,167     $ (225 )   $ 84,560