10-Q 1 mbcn20160331_10q.htm FORM 10-Q mbcn20160331_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 March 31, 2016

 

Commission File Number 001-36613

Middlefield Banc Corp.

(Exact name of registrant as specified in its charter)

 

 

Ohio

 

34 - 1585111

 

 

(State or other jurisdiction of incorporation

or organization)

 

(IRS Employer Identification No.)

 

 

 

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 May 11, 2016: 2,033,694

 

 
1

 

 

MIDDLEFIELD BANC CORP.

 

INDEX

 

 

Part I – Financial Information

 
   
  Item 1.

Financial Statements (unaudited)

 

       
   

Consolidated Balance Sheet as of March 31, 2016 and December 31, 2015

3

       
   

Consolidated Statement of Income for the Three Months ended March 31, 2016 and 2015

4

       
   

Consolidated Statement of Comprehensive Income for the Three Months ended March 31, 2016 and 2015

5

       
   

Consolidated Statement of Changes in Stockholders' Equity for the Three Months ended March 31, 2016

6

       
   

Consolidated Statement of Cash Flows for the Three Months ended March 31, 2016 and 2015

7

       
   

Notes to Unaudited Consolidated Financial Statements

8

       
  Item 2.

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

32

       
  Item 3.

Quantitative and Qualitative Disclosures about Market Risk

38

       
  Item 4.

Controls and Procedures

39

       

Part II – Other Information

 
   
  Item 1.

Legal Proceedings

40

       
  Item 1A.

 Risk Factors

40

       
  Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

       
  Item 3.

Defaults by the Company on its Senior Securities

40

       
  Item 4.

 Mine Safety Disclosures

40

       
  Item 5.

 Other Information

40

       
  Item 6.

Exhibits and Reports on Form 8 – K

40

       

Signatures

45

   

Exhibit 31.1

 

   

Exhibit 31.2

 

   

Exhibit 32

 

 

 
2

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET

(Dollar amounts in thousands, except share data)

(Unaudited)

 

 

   

March 31,

   

December 31,

 
   

2016

   

2015

 
                 

ASSETS

               

Cash and due from banks

  $ 25,251     $ 22,421  

Federal funds sold

    4,969       1,329  

Cash and cash equivalents

    30,220       23,750  

Investment securities available for sale, at fair value

    142,560       146,520  

Loans held for sale

    176       1,107  

Loans

    530,356       533,710  

Less allowance for loan and lease losses

    6,357       6,385  

Net loans

    523,999       527,325  

Premises and equipment, net

    9,607       9,772  

Goodwill

    4,559       4,559  

Core deposit intangibles

    66       76  

Bank-owned life insurance

    13,240       13,141  

Other real estate owned

    1,447       1,412  

Accrued interest and other assets

    7,008       7,477  
                 

TOTAL ASSETS

  $ 732,882       735,139  
                 

LIABILITIES

               

Deposits:

               

Noninterest-bearing demand

  $ 115,453     $ 116,498  

Interest-bearing demand

    67,082       57,219  

Money market

    82,143       78,856  

Savings

    178,292       180,653  

Time

    188,436       191,221  

Total deposits

    631,406       624,447  

Short-term borrowings

    26,124       35,825  

Other borrowings

    9,875       9,939  

Accrued interest and other liabilities

    1,713       2,624  

TOTAL LIABILITIES

    669,118       672,835  
                 

STOCKHOLDERS' EQUITY

               

Common stock, no par value; 10,000,000 shares authorized, 2,268,191 and 2,263,403 shares issued; 1,882,026 and 1,877,238 shares outstanding

    36,345       36,191  

Retained earnings

    38,216       37,236  

Accumulated other comprehensive income

    2,721       2,395  

Treasury stock, at cost; 386,165 shares

    (13,518 )     (13,518 )

TOTAL STOCKHOLDERS' EQUITY

    63,764       62,304  
                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 732,882     $ 735,139  

 

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

 
   

March 31,

 
   

2016

   

2015

 

INTEREST INCOME

               

Interest and fees on loans

  $ 6,173     $ 5,843  

Interest-bearing deposits in other institutions

    12       8  

Federal funds sold

    4       3  

Investment securities:

               

Taxable interest

    340       395  

Tax-exempt interest

    790       759  

Dividends on stock

    29       27  

Total interest income

    7,348       7,035  
                 

INTEREST EXPENSE

               

Deposits

    855       831  

Short-term borrowings

    120       37  

Other borrowings

    17       23  

Trust preferred securities

    33       (8 )

Total interest expense

    1,025       883  
                 

NET INTEREST INCOME

    6,323       6,152  
                 

Provision for loan losses

    105       105  
                 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

    6,218       6,047  
                 

NONINTEREST INCOME

               

Service charges on deposit accounts

    447       441  

Investment securities gains, net

    51       24  

Earnings on bank-owned life insurance

    99       69  

Gain on sale of loans

    87       53  

Other income

    225       209  

Total noninterest income

    909       796  
                 

NONINTEREST EXPENSE

               

Salaries and employee benefits

    2,780       2,360  

Occupancy expense

    335       349  

Equipment expense

    269       216  

Data processing costs

    272       250  

Ohio state franchise tax

    100       75  

Federal deposit insurance expense

    132       112  

Professional fees

    292       319  

Loss on other real estate owned

    12       88  

Advertising expense

    195       196  

Other real estate expense

    46       65  

Directors fees

    107       118  

Core deposit intangible amortization

    10       10  

Appraiser fees

    101       56  

ATM fees

    96       84  

Other expense

    591       513  

Total noninterest expense

    5,338       4,811  
                 

Income before income taxes

    1,789       2,032  

Income taxes

    302       404  
                 

NET INCOME

  $ 1,487     $ 1,628  
                 

EARNINGS PER SHARE

               

Basic

  $ 0.79     $ 0.79  

Diluted

    0.79       0.79  
                 

DIVIDENDS DECLARED PER SHARE

  $ 0.27     $ 0.26  

 

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

 
   

March 31,

 
   

2016

   

2015

 
                 

Net income

  $ 1,487     $ 1,628  
                 

Other comprehensive income:

               

Net unrealized holding gain on available-for-sale securities

    547       851  

Tax effect

    (187 )     (289 )
                 

Reclassification adjustment for investment securities gains included in net income

    (51 )     (24 )

Tax effect

    17       8  
                 

Total other comprehensive income

    326       546  
                 

Comprehensive income

  $ 1,813     $ 2,174  

 

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)

 

 

                   

Accumulated

                 
                   

Other

           

Total

 
   

Common

   

Retained

   

Comprehensive

   

Treasury

   

Stockholders'

 
   

Stock

   

Earnings

   

Income

   

Stock

   

Equity

 
                                         

Balance, December 31, 2015

  $ 36,191     $ 37,236     $ 2,395     $ (13,518 )   $ 62,304  
                                         

Net income

            1,487                       1,487  

Other comprehensive income

                    326               326  

Common stock issuance (900 shares)

    29                               29  

Dividend reinvestment and purchase plan (3,888 shares)

    125                               125  

Cash dividends ($0.27 per share)

            (507 )                     (507 )
                                         

Balance, March 31, 2016

  $ 36,345     $ 38,216     $ 2,721     $ (13,518 )   $ 63,764  

  

See accompanying notes to unaudited consolidated financial statements.

 

 
6

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

 

 

   

Three Months Ended

 
   

March 31,

 
   

2016

   

2015

 

OPERATING ACTIVITIES

               

Net income

  $ 1,487     $ 1,628  

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

               

Provision for loan losses

    105       105  

Investment securities gain, net

    (51 )     (24 )

Depreciation and amortization

    271       180  

Amortization of premium and discount on investment securities

    107       189  

Accretion of deferred loan fees, net

    (71 )     (241 )

Origination of loans held for sale

    (3,356 )     (2,664 )

Proceeds from sale of loans

    4,374       2,465  

Gain on sale of loans

    (87 )     (53 )

Earnings on bank-owned life insurance

    (99 )     (69 )

Deferred income tax

    (218 )     (305 )

(Gain) loss on other real estate owned

    (12 )     182  

Other real estate owned writedowns

    24       (94 )

Increase in accrued interest receivable

    (263 )     (454 )

Decrease in accrued interest payable

    (6 )     (11 )

Other, net

    (203 )     (407 )

Net cash provided by operating activities

    2,002       427  
                 

INVESTING ACTIVITIES

               

Investment securities available for sale:

               

Proceeds from repayments and maturities

    4,822       2,224  

Proceeds from sale of securities

    1,322       1,590  

Purchases

    (1,744 )     -  

Decrease (increase) in loans, net

    3,215       (5,497 )

Proceeds from the sale of other real estate owned

    30       299  

Purchase of premises and equipment

    (18 )     (108 )

Net cash provided by (used for) investing activities

    7,627       (1,492 )
                 

FINANCING ACTIVITIES

               

Net increase in deposits

    6,959       31,031  

Decrease in short-term borrowings, net

    (9,701 )     (9,895 )

Repayment of other borrowings

    (64 )     (91 )

Common stock issued

    29       -  

Stock options exercised

    -       2  

Proceeds from dividend reinvestment and purchase plan

    125       175  

Cash dividends

    (507 )     (534 )

Net cash (used for) provided by financing activities

    (3,159 )     20,688  
                 

Increase in cash and cash equivalents

    6,470       19,623  
                 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

    23,750       25,639  
                 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $ 30,220     $ 45,262  
                 

SUPPLEMENTAL INFORMATION

               

Cash paid during the year for:

               

Interest on deposits and borrowings

  $ 1,031     $ 894  

Income taxes

    375       -  
                 

Noncash investing transactions:

               

Transfers from loans to other real estate owned

  $ 77     $ -  

 

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 bank subsidiary, The Middlefield Banking Company (“MB”), and a nonbank asset resolution subsidiary EMORECO, Inc. All significant inter-company items have been eliminated.

 

The accompanying unaudited 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, 2015, 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, 2015. 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 May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is evaluating the effect of adopting this new accounting Update.

 

In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements -Going Concern (Subtopic 205-40). The amendments in this Update provide guidance in accounting principles generally accepted in the United States of America about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force). This ASU clarifies how current U.S. GAAP should be interpreted in subjectively evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Public business entities are required to implement the new requirements in fiscal years and interim periods within those fiscal years beginning after December 15, 2015. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In January 2015, the FASB issued ASU 2015-01, Income Statement –Extraordinary and Unusual Items, as part of its initiative to reduce complexity in accounting standards. This Update eliminates from GAAP the concept of extraordinary items. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.

 

 
8

 

 

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810). The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30), as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In April 2015, the FASB issued ASU 2015-04, Compensation-Retirement Benefits (Topic 715), as part of its initiative to reduce complexity in accounting standards. For an entity with a fiscal year end that does not coincide with a month end, the amendments in this Update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month end that is closest to the entity's fiscal year end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. The amendments in this Update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In April 2015, the FASB issued ASU 2015-05, Intangible – Goodwill and Other Internal Use Software (Topic 350-40), as part of its initiative to reduce complexity in accounting standards. This guidance will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. For public business entities, the Board decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the amendments will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In April 2015, the FASB issued ASU 2015-06, Earnings Per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions. Topic 260, Earnings Per Share, contains guidance that addresses master limited partnerships that originated from Emerging Issues Task Force (“EITF”) Issue No. 07-4, Application of the Two-Class Method Under FASB Statement No. 128 to Master Limited Partnerships. Under Topic 260, master limited partnerships apply the two-class method of calculating earnings per unit because the general partner, limited partners, and incentive distribution rights holders each participate differently in the distribution of available cash in accordance with the contractual rights contained in the partnership agreement. The amendments in this Update specify that for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner. In that circumstance, the previously reported earnings per unit of the limited partners (which is typically the earnings per unit measure presented in the financial statements) would not change as a result of the dropdown transaction. Qualitative disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method are also required. The amendments in this Update are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

 

 
9

 

 

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). The Update applies to reporting entities that elect to measure the fair value of an investment using the net asset value per share (or its equivalent) practical expedient. Under the amendments in this Update, investments for which fair value is measured at net asset value per share (or its equivalent) using the practical expedient should not be categorized in the fair value hierarchy. Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at net asset value per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. Investments that calculate net asset value per share (or its equivalent), but for which the practical expedient is not applied will continue to be included in the fair value hierarchy. A reporting entity should continue to disclose information on investments for which fair value is measured at net asset value (or its equivalent) as a practical expedient to help users understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity's financial statements. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In May 2015, the FASB issued ASU 2015-09, Financial Services – Insurance (Topic 944): Disclosure About Short-Duration Contracts. The amendments apply to all insurance entities that issue short-duration contracts as defined in Topic 944, Financial Services – Insurance. The amendments require insurance entities to disclose for annual reporting periods certain information about the liability for unpaid claims and claim adjustment expenses. The amendments also require insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements. Additionally, the amendments require insurance entities to disclose for annual and interim reporting periods a rollforward of the liability for unpaid claims and claim adjustment expenses, described in Topic 944. For health insurance claims, the amendments require the disclosure of the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. For all other entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. The amendments in this Update represent changes to clarify the FASB Accounting Standards Codification (“Codification”), correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Transition guidance varies based on the amendments in this Update. The amendments in this Update that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance of this Update. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606). The amendments in this Update defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after

December 15, 2019. The Company is evaluating the effect of adopting this new accounting Update.

 

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805). The amendments in this Update require that an acquirer recognizes adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this Update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. This Update is not expected to have a significant impact on the Company’s financial statements.

 

 
10

 

 

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this Update apply to all entities that present a classified statement of financial position. For public business entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments in this Update are effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The amendments in this Update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (g) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (h) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

 
11

 

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet.  A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term.  A short-term lease is defined as one in which: (a) the lease term is 12 months or less, and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In March 2016, the FASB issued ASU 2016-04, Liabilities Extinguishments of Liabilities (Subtopic 405-20). The standard provides that liabilities related to the sale of prepaid stored-value products within the scope of this Update are financial liabilities. The amendments in the Update provide a narrow scope exception to the guidance in Subtopic 405-20 to require that breakage for those liabilities be accounted for consistent with the breakage guidance in Topic 606. The amendments in this Update are effective for public business entities, certain not-for-profit entities, and certain employee benefit plans for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Earlier application is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815). The amendments in this Update apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a heading instrument under Topic 815. The standards in this Update clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. An entity has an option to apply the amendments in this Update on either a prospective basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Company’s financial statements.

 

 
12

 

 

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815). The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt host. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For entities other than public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In March 2016, the FASB issued ASU 2016-07, Investments Equity Method and Joint Ventures (Topic 323). The Update affects all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments in this Update eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments in this Update require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

 

 
13

 

 

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services (that are an output of the entity’s ordinary activities) in exchange for consideration. The amendments in this update do not change the core principle of the guidance in Topic 606; they simply clarify the implementation guidance on principal versus agent considerations. The amendments in this Update are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements of Update 2014-09. ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). The amendments in this Update affect all entities that issue share-based payment awards to their employees. The standards in this Update provide simplification for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as with equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition to those simplifications, the amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. This should not result in a change in practice because the guidance that is being superseded was never effective. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606). The amendments in this Update affect entities with transactions included within the scope of Topic 606, which includes entities that enter into contracts with customers to transfer goods or services in exchange for consideration. The amendments in this Update do not change the core principle for revenue recognition in Topic 606. Instead, the amendments provide (1) more detailed guidance in a few areas and (2) additional implementation guidance and examples based on feedback the FASB received from its stakeholders. The amendments are expected to reduce the degree of judgment necessary to comply with Topic 606, which the FASB expects will reduce the potential for diversity arising in practice and reduce the cost and complexity of applying the guidance. The amendments in this Update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

 

NOTE 2 - STOCK-BASED COMPENSATION

 

The Company had no unvested stock options outstanding or unrecognized stock-based compensation costs outstanding as of March 31, 2016 and 2015.

 

Stock option activity during the three months ended March 31 is as follows:

 

           

Weighted-

           

Weighted-

 
           

average

           

average

 
           

Exercise

           

Exercise

 
   

2016

   

Price

   

2015

   

Price

 
                                 

Outstanding, January 1

    31,949     $ 25.03       46,451     $ 27.90  

Exercised

    -       -       (375 )     17.55  
                                 

Outstanding, March 31

    31,949     $ 25.03       46,076     $ 27.99  
                                 

Exercisable, March 31

    31,949     $ 25.03       46,076     $ 27.99  

 

 
14

 

 

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 stock options 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

 
   

March 31,

 
   

2016

   

2015

 

Weighted-average common shares outstanding

    2,264,342       2,243,190  
                 

Average treasury stock shares

    (386,165 )     (189,530 )
                 

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

    1,878,177       2,053,660  
                 

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

    8,766       9,207  
                 

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

    1,886,943       2,062,867  

 

Options to purchase 31,949 shares of common stock, at prices ranging from $17.55 to $40.24, were outstanding during the three months ended March 31, 2016. Of those options, 24,700 were considered dilutive for the three month period based on the market price exceeding the strike price.

 

Options to purchase 46,076 shares of common stock, at prices ranging from $17.55 to $40.24, were outstanding as of the three months ended March 31, 2015. For the three months ended March 31, 2015, 27,250 were considered dilutive based on the market price exceeding the strike price.

 

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 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.

 

 
15

 

 

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.

 

           

March 31, 2016

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a recurring basis:

                               

U.S. government agency securities

  $ -     $ 18,853     $ -     $ 18,853  

Obligations of states and political subdivisions

    -       97,001       -       97,001  

Mortgage-backed securities in government- sponsored entities

            23,813               23,813  

Private-label mortgage-backed securities

    -       2,079       -       2,079  

Total debt securities

    -       141,746       -       141,746  

Equity securities in financial institutions

    5       809       -       814  

Total

  $ 5     $ 142,555     $ -     $ 142,560  

 

 

           

December 31, 2015

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a recurring basis:

                               

U.S. government agency securities

  $ -     $ 21,629     $ -     $ 21,629  

Obligations of states and political subdivisions

    -       97,290       -       97,290  

Mortgage-backed securities in government- sponsored entities

    -       24,524       -       24,524  

Private-label mortgage-backed securities

    -       2,263       -       2,263  

Total debt securities

    -       145,706       -       145,706  

Equity securities in financial institutions

    5       809       -       814  

Total

  $ 5     $ 146,515     $ -     $ 146,520  

 

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 March 31, 2016 or December 31, 2015.

 

The Company uses prices compiled by third party vendors due to 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 and 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 III inputs, other real estate owned has been classified as Level III.

 

 
16

 

 

           

March 31, 2016

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a nonrecurring basis:

                               

Impaired loans

  $ -     $ -     $ 14,836     $ 14,836  

Other real estate owned

    -       -       1,447       1,447  

 

           

December 31, 2015

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a nonrecurring basis:

                               

Impaired loans

  $ -     $ -     $ 12,848     $ 12,848  

Other real estate owned

    -       -       1,412       1,412  

  

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company uses Level III inputs to determine fair value:

 

   

Quantitative Information about Level III Fair Value Measurements

 

(Dollar amounts in thousands)

       

 

 

 

 

 
   

Fair Value Estimate

  Valuation Techniques Unobservable Input Range (Weighted Average)

March 31, 2016

                   

Impaired loans

  $ 10,350  

Discounted cash flow

Discount rate

3.1% to 7.9% (4.9%)
      4,486  

Appraisal of collateral (1)

Appraisal adjustments (2)

0.0% to 66.4% (38.2%)

Other real estate owned

  $ 1,447  

Appraisal of collateral (1)

Appraisal adjustments (2)

0.0% to  10.0% (7.2%)

 

 

   

Quantitative Information about Level III Fair Value Measurements

 

(Dollar amounts in thousands)

       

 

 

 

 

 
   

Fair Value Estimate

  Valuation Techniques Unobservable Input Range (Weighted Average)

December 31, 2015

                   

Impaired loans

  $ 6,867  

Discounted cash flow

Discount rate

3.1% to 7.9% (5.0%)
      5,981  

Appraisal of collateral (1)

Appraisal adjustments (2)

0.0% to 87.1% (23.3%)

Other real estate owned

  $ 1,412  

Appraisal of collateral (1)

Appraisal adjustments (2)

0% to 10.0% (7.3%)

 

(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.

 

 
17

 

 

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

 

   

March 31, 2016

 
   

Carrying

                           

Total

 
   

Value

   

Level I

   

Level II

   

Level III

   

Fair Value

 
   

(Dollar amounts in thousands)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 30,220     $ 30,220     $ -     $ -     $ 30,220  

Investment securities

                                       

Available for sale

    142,560       5       142,555       -       142,560  

Loans held for sale

    176       -       176       -       176  

Net loans

    523,999       -       -       531,917       531,917  

Bank-owned life insurance

    13,240       13,240       -       -       13,240  

Federal Home Loan Bank stock

    1,887       1,887       -       -       1,887  

Accrued interest receivable

    2,650       2,650       -       -       2,650  
                                         
                                         

Financial liabilities:

                                       

Deposits

  $ 631,406     $ 442,970     $ -     $ 180,127     $ 623,097  

Short-term borrowings

    26,124       26,124       -       -       26,124  

Other borrowings

    9,875       -       -       12,606       12,606  

Accrued interest payable

    389       389       -       -       389  

 

 

   

December 31, 2015

 
   

Carrying

                           

Total

 
   

Value

   

Level I

   

Level II

   

Level III

   

Fair Value

 
   

(Dollar amounts in thousands)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 23,750     $ 23,750     $ -     $ -     $ 23,750  

Investment securities

                                       

Available for sale

    146,520       5       146,515       -       146,520  

Loans held for sale

    1,107       -       1,107       -       1,107  

Net loans

    527,325       -       -       534,021       534,021  

Bank-owned life insurance

    13,141       13,141       -       -       13,141  

Federal Home Loan Bank stock

    1,887       1,887       -       -       1,887  

Accrued interest receivable

    2,387       2,387       -       -       2,387  
                                         

Financial liabilities:

                                       

Deposits

  $ 624,447     $ 433,226     $ -     $ 191,747     $ 624,973  

Short-term borrowings

    35,825       35,825       -       -       35,825  

Other borrowings

    9,939       -               10,063       10,063  

Accrued interest payable

    395       395       -       -       395  

 

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.

 

 
18

 

 

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.

 

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 Held for Sale

Loans held for sale are carried at lower of cost or fair value. The fair value of loans held for sale is based on secondary market pricing on portfolios with similar characteristics. The changes in fair value of the assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage loan held for sale.

 

Net 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 Borrowings

The fair values of certificates of deposit and other borrowings 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.

 

 
19

 

 

NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The following tables present the changes in accumulated other comprehensive income by component net of tax for the three months ended March 31, 2016 and 2015, respectively:

 

   

Unrealized gains on

 
   

available-for-sale

 

(Dollars in thousands)

 

securities

 

Balance as of December 31, 2015

  $ 2,395  

Other comprehensive income before reclassification

    360  

Amount reclassified from accumulated other comprehensive income

    (34 )

Period change

    326  

Balance at March 31, 2016

  $ 2,721  

 

 

   

Unrealized gains on

 
   

available-for-sale

 

(Dollars in thousands)

 

securities

 

Balance as of December 31, 2014

  $ 2,548  

Other comprehensive income before reclassification

    562  

Amount reclassified from accumulated other comprehensive income

    (16 )

Period change

    546  

Balance at March 31, 2015

    3,094  

 

The following tables present significant amounts reclassified out of each component of accumulated other comprehensive income for the three months ended March 31, 2016 and 2015, respectively:

  

   

 

   
    Amount Reclassified from  

Affected Line Item in

    Accumulated Other Comprehensive Income (a)   

the Statement Where

(Dollars in thousands)

  For the Three Months Ended  

Net Income is

Details about other comprehensive income

  March 31, 2016    

March 31, 2015

 

Presented

Unrealized gains on available-for-sale securities

                 
    $ 51     $ 24  

Investment securities gains, net

      (17 )     (8 )

Income taxes

    $ 34     $ 16  

Net of tax

 

 

(a) Amounts in parentheses indicate debits to net income

 

 
20

 

 

NOTE 6 - INVESTMENT SECURITIES AVAILABLE FOR SALE

 

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

  

   

March 31, 2016

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

(Dollar amounts in thousands)

 

Cost

   

Gains

   

Losses

   

Value

 
                                 

U.S. government agency securities

  $ 18,616     $ 313     $ (76 )   $ 18,853  

Obligations of states and political subdivisions:

                               

Taxable

    1,989       187       (1 )     2,175  

Tax-exempt

    91,605       3,394       (173 )     94,826  

Mortgage-backed securities in government-sponsored entities

    23,550       380       (117 )     23,813  

Private-label mortgage-backed securities

    1,927       153       (1 )     2,079  

Total debt securities

    137,687       4,427       (368 )     141,746  

Equity securities in financial institutions

    750       64       -       814  

Total

  $ 138,437     $ 4,491     $ (368 )   $ 142,560  

 

 

   

December 31, 2015

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 
                                 

U.S. government agency securities

  $ 21,655     $ 245     $ (271 )   $ 21,629  

Obligations of states and political subdivisions:

                               

Taxable

    1,989       134       -       2,123  

Tax-exempt

    91,940       3,402       (175 )     95,167  

Mortgage-backed securities in government-sponsored entities

    24,480       316       (272 )     24,524  

Private-label mortgage-backed securities

    2,079       184       -       2,263  

Total debt securities

    142,143       4,281       (718 )     145,706  

Equity securities in financial institutions

    750       64       -       814  

Total

  $ 142,893     $ 4,345     $ (718 )   $ 146,520  

 

The amortized cost and fair value of debt securities at March 31, 2016, 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.

 

 
21

 

 

   

Amortized

   

Fair

 

(Dollar amounts in thousands)

 

Cost

   

Value

 
                 

Due in one year or less

  $ 1,224     $ 1,237  

Due after one year through five years

    11,171       11,380  

Due after five years through ten years

    18,523       19,327  

Due after ten years

    106,769       109,802  
                 

Total

  $ 137,687     $ 141,746  

 

Proceeds from the sales of securities available for sale and the gross realized gains and losses for the three months ended March 31 are as follows:

 

(Dollar amounts in thousands)  

For the Three Months

Ended March 31,

 
   

2016

   

2015

 

Proceeds from sales

  $ 1,322     $ 1,590  

Gross realized gains

    51       48  

Gross realized losses

    -       (24 )

 

Investment securities with an approximate carrying value of $63.0 million and $68.8 million at March 31, 2016 and December 31, 2015, 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.

  

   

March 31, 2016

 
   

Less than Twelve Months

   

Twelve Months or Greater

   

Total

 
           

Gross

           

Gross

           

Gross

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

(Dollar amounts in thousands)

 

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 
                                                 

U.S. government agency securities

  $ 4,565     $ (9 )   $ 7,612     $ (67 )   $ 12,177     $ (76 )

Obligations of states and political subdivisions

    8,999       (122 )     1,426       (52 )     10,425       (174 )

Mortgage-backed securities in government-sponsored entities

    4,000       (7 )     6,675       (110 )     10,675       (117 )

Private-label mortgage-backed securities

    109       (1 )     -       -       109       (1 )

Total

  $ 17,673     $ (139 )   $ 15,713     $ (229 )   $ 33,386     $ (368 )

 

 
22

 

  

   

December 31, 2015

 
   

Less than Twelve Months

   

Twelve Months or Greater

   

Total

 
           

Gross

           

Gross

           

Gross

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 
                                                 

U.S. government agency securities

  $ 3,818     $ (57 )   $ 10,872     $ (214 )   $ 14,690     $ (271 )

Obligations of states and political subdivisions

                                               

Tax-exempt

    1,268       (9 )     9,394       (166 )     10,662       (175 )

Mortgage-backed securities in government-sponsored entities

    8,725       (86 )     6,685       (186 )     15,410       (272 )

Total

  $ 13,811     $ (152 )   $ 26,951     $ (566 )   $ 40,762     $ (718 )

 

There were 38 securities considered temporarily impaired at March 31, 2016.

 

On a quarterly basis, the Company performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment (“OTTI”). A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The Company assesses whether the unrealized loss is other than temporary.

 

OTTI losses are recognized in earnings when the Company has the intent to sell the debt security or it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even if the Company does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss has occurred.

 

An unrealized loss is generally deemed to be other than temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. As a result the credit loss component of an OTTI is recorded as a component of investment securities gains (losses) in the accompanying Consolidated Statement of Income, while the remaining portion of the impairment loss is recognized in other comprehensive income, provided the Company does not intend to sell the underlying debt security and it is “more likely than not” that the Company will not have to sell the debt security prior to recovery.

 

Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises, and state and political subdivisions accounted for more than 98% of the total available-for-sale portfolio as of March 31, 2016 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government and the lack of prolonged unrealized loss positions within the obligations of state and political subdivisions security portfolio. The Company considers the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

 

 

 

The length of time and the extent to which the fair value has been less than the amortized cost basis.

 

     

 

 

Changes in the near term prospects of the underlying collateral of a security such as changes in default rates, loss severity given default and significant changes in prepayment assumptions;

 

     

 

 

The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and

       

 

 

Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation and government actions affecting the issuer’s industry and actions taken by the issuer to deal with the present economic climate.

 

For the three months ended March 31, 2016 and 2015, there were no available-for-sale debt securities with an unrealized loss that suffered OTTI. Management does not believe any individual unrealized loss as of March 31, 2016 or December 31, 2015 represented an other-than-temporary impairment. The unrealized losses on debt securities are primarily the result of interest rate changes. These conditions will not prohibit the Company from receiving its contractual principal and interest payments on these debt securities. The fair value of these debt securities is expected to recover as payments are received on these securities and they approach maturity. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

 

 
23

 

 

NOTE 7 - LOANS AND RELATED ALLOWANCE FOR LOAN AND LEASE LOSSES

 

Major classifications of loans are summarized as follows (in thousands):

 

   

March 31,

   

December 31,

 
   

2016

   

2015

 
                 

Commercial and industrial

  $ 47,436     $ 42,536  

Real estate - construction

    21,005       22,137  

Real estate - mortgage:

               

Residential

    238,489       232,478  

Commercial

    218,363       231,701  

Consumer installment

    5,063       4,858  
      530,356       533,710  

Less: Allowance for loan and lease losses

    6,357       6,385  
                 

Net loans

  $ 523,999     $ 527,325  

 

The Company’s primary business activity is with customers located within its local Northeastern Ohio trade area, eastern Geauga County, and contiguous counties to the north, east, and south. The Company also serves the central Ohio market with offices in Dublin and Westerville, Ohio. Commercial, residential, consumer, and agricultural loans are granted. Although the Company has a diversified loan portfolio, loans outstanding to individuals and businesses are dependent upon the local economic conditions in the Company’s immediate trade area.

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances net of the allowance for loan and lease losses.  Interest income is recognized as income when earned on the accrual method.  The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of interest is doubtful.  Interest received on nonaccrual loans is recorded as income or applied against principal according to management’s judgment as to the collectability of such principal.

 

Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan’s yield.  Management is amortizing these amounts over the contractual life of the related loans.

 

The following tables summarize the primary segments of the loan portfolio and allowance for loan and lease losses (in thousands):

 

                   

Real Estate- Mortgage

                 

March 31, 2016

 

Commercial and

industrial

   

Real estate-

construction

   

Residential

   

Commercial

   

Consumer

installment

   

Total

 

Loans:

                                               

Individually evaluated for impairment

  $ 865     $ 1,453     $ 4,085     $ 9,239     $ 5     $ 15,647  

Collectively evaluated for impairment

    46,571