10-Q 1 mbcn20170331_10q.htm FORM 10-Q mbcn20170331_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One) 

 

X

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

    For the quarterly period ended March 31, 2017

or 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

    For the transition period from                              to                            

 

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

 

I.R.S. Employer Identification No.

Incorporation or Organization

   

 

15985 East High Street, Middlefield, Ohio

 

44062-0035

Address of Principal Executive Offices

 

Zip Code

 

 

440-632-1666

 

 

Registrant’s Telephone Number, Including Area Code  

 

     
 

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

 

 

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 X     No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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 X    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐ (Do not check if a smaller reporting company)

Smaller reporting company X

Emerging growth company ☐

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐    No ☐

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   Yes ☐    No X 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class: Common Stock, without par value

Outstanding at May 15, 2017: 3,204,858

 

 
 

 

 

MIDDLEFIELD BANC CORP.

 

INDEX

 

 

Part I – Financial Information

 
   

Item 1.    Financial Statements (unaudited)

 
   

Consolidated Balance Sheet as of March 31, 2017 and December 31, 2016

3

   

Consolidated Statement of Income for the Three Months ended March 31, 2017 and 2016

4

   

Consolidated Statement of Comprehensive Income for the Three Months ended March 31, 2017 and 2016

5

   

Consolidated Statement of Changes in Stockholders' Equity for the Three Months ended March 31, 2017

6

   

Consolidated Statement of Cash Flows for the Three Months ended March 31, 2017 and 2016

7

   

Notes to Unaudited Consolidated Financial Statements

9

   

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

36

   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

44

   

Item 4. Controls and Procedures

45

   

Part II – Other Information

 
   

Item 1. Legal Proceedings

45

   

Item 1A. Risk Factors

45

   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

45

   

Item 3. Defaults by the Company on its Senior Securities

45

   

Item 4. Mine Safety Disclosures

45

   

Item 5. Other Information

45

   

Item 6. Exhibits and Reports on Form 8 – K

46

   

Signatures

49

   

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,

2017

   

December 31,

2016

 
                 

ASSETS

               

Cash and due from banks

  $ 61,364     $ 31,395  

Federal funds sold

    1,000       1,100  

Cash and cash equivalents

    62,364       32,495  

Investment securities available for sale, at fair value

    110,452       114,376  

Loans held for sale

    9,462       634  

Loans

    837,158       609,140  

Less allowance for loan and lease losses

    6,720       6,598  

Net loans

    830,438       602,542  

Premises and equipment, net

    11,481       11,203  

Goodwill

    15,646       4,559  

Core deposit intangibles

    3,051       36  

Bank-owned life insurance

    15,334       13,540  

Other real estate owned

    1,634       934  

Accrued interest and other assets

    9,605       7,502  
                 

TOTAL ASSETS

  $ 1,069,467       787,821  
                 

LIABILITIES

               

Deposits:

               

Noninterest-bearing demand

  $ 162,614     $ 133,630  

Interest-bearing demand

    94,605       59,560  

Money market

    162,843       74,940  

Savings

    183,845       172,370  

Time

    243,944       189,434  

Total deposits

    847,851       629,934  

Short-term borrowings

    76,213       68,359  

Other borrowings

    39,388       9,437  

Accrued interest and other liabilities

    6,700       3,131  

TOTAL LIABILITIES

    970,152       710,861  
                 

STOCKHOLDERS' EQUITY

               

Common stock, no par value; 10,000,000 shares authorized, 3,189,722 and 2,640,418 shares issued; 2,803,557 2,254,253 shares outstanding

    69,123       47,943  

Retained earnings

    42,678       41,334  

Accumulated other comprehensive income

    1,032       1,201  

Treasury stock, at cost; 386,165 shares

    (13,518 )     (13,518 )

TOTAL STOCKHOLDERS' EQUITY

    99,315       76,960  
                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 1,069,467     $ 787,821  

 

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,

 
   

2017

   

2016

 

INTEREST AND DIVIDEND INCOME

               

Interest and fees on loans

  $ 9,180     $ 6,173  

Interest-bearing deposits in other institutions

    49       12  

Federal funds sold

    3       4  

Investment securities:

               

Taxable interest

    218       340  

Tax-exempt interest

    637       790  

Dividends on stock

    112       29  

Total interest and dividend income

    10,199       7,348  
                 

INTEREST EXPENSE

               

Deposits

    1,125       855  

Short-term borrowings

    177       120  

Other borrowings

    83       17  

Trust preferred securities

    57       33  

Total interest expense

    1,442       1,025  
                 

NET INTEREST INCOME

    8,757       6,323  
                 

Provision for loan losses

    165       105  
                 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

    8,592       6,218  
                 

NONINTEREST INCOME

               

Service charges on deposit accounts

    469       447  

Investment securities gains, net

    488       51  

Earnings on bank-owned life insurance

    109       99  

Gain on sale of loans

    234       87  

Other income

    211       225  

Total noninterest income

    1,511       909  
                 

NONINTEREST EXPENSE

               

Salaries and employee benefits

    3,696       2,780  

Occupancy expense

    488       335  

Equipment expense

    281       269  

Data processing costs

    484       272  

Ohio state franchise tax

    186       100  

Federal deposit insurance expense

    68       132  

Professional fees

    596       292  

(Gain) loss on other real estate owned

    (78 )     12  

Advertising expense

    248       195  

Other real estate expense

    133       46  

Directors fees

    112       107  

Core deposit intangible amortization

    72       10  

Appraiser fees

    102       101  

ATM fees

    76       96  

Other expense

    803       591  

Total noninterest expense

    7,267       5,338  
                 

Income before income taxes

    2,836       1,789  

Income taxes

    736       302  
                 

NET INCOME

  $ 2,100     $ 1,487  
                 

EARNINGS PER SHARE

               

Basic

  $ 0.78     $ 0.79  

Diluted

    0.78       0.79  
                 

DIVIDENDS DECLARED PER SHARE

  $ 0.27     $ 0.27  

 

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,

 
   

2017

   

2016

 
                 

Net income

  $ 2,100     $ 1,487  
                 

Other comprehensive income:

               

Net unrealized holding gain on available-for-sale securities

    231       547  

Tax effect

    (78 )     (187 )
                 

Reclassification adjustment for investment securities gains included in net income

    (488 )     (51 )

Tax effect

    166       17  
                 

Total other comprehensive income (loss)

    (169 )     326  
                 

Comprehensive income

  $ 1,931     $ 1,813  

 

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, 2016

  $ 47,943     $ 41,334     $ 1,201     $ (13,518 )   $ 76,960  
                                         

Net income

            2,100                       2,100  

Other comprehensive income

                    (169 )             (169 )

Common stock issuance (546,107 shares)

    21,048                               21,048  

Dividend reinvestment and purchase plan (3,197 shares)

    132                               132  

Cash dividends ($0.27 per share)

            (756 )                     (756 )
                                         

Balance, March 31, 2017

  $ 69,123     $ 42,678     $ 1,032     $ (13,518 )   $ 99,315  

 

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,

 
   

2017

   

2016

 

OPERATING ACTIVITIES

               

Net income

  $ 2,100     $ 1,487  

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

               

Provision for loan losses

    165       105  

Investment securities gain, net

    (488 )     (51 )

Depreciation and amortization

    308       231  

Amortization of premium and discount on investment securities

    124       107  

Accretion of deferred loan fees, net

    (185 )     (71 )

Origination of loans held for sale

    (4,562 )     (3,356 )

Proceeds from sale of loans

    1,921       4,374  

Gain on sale of loans

    (234 )     (87 )

Earnings on bank-owned life insurance

    (109 )     (99 )

Deferred income tax

    (1,116 )     (218 )

(Gain) loss on other real estate owned

    (78 )     12  

Other real estate owned writedowns

    22       24  

Increase in accrued interest receivable

    (199 )     (263 )

Decrease in accrued interest payable

    (14 )     (6 )

Amorization of core deposit intangibles

    72       40  

Other, net

    547       (203 )

Net cash (used in) provided by operating activities

    (1,726 )     2,026  
                 

INVESTING ACTIVITIES

               

Investment securities available for sale:

               

Proceeds from repayments and maturities

    3,544       4,822  

Proceeds from sale of securities

    -       1,322  

Purchases

    -       (1,744 )

(Increase) decrease in loans, net

    (34,533 )     3,215  

Proceeds from the sale of other real estate owned

    333       6  

Purchase of bank-owned life insurance

    (4 )     -  

Purchase of premises and equipment

    (179 )     (18 )

Purchase of restricted stock

    (899 )     -  

Redemption of restricted stock

    795       -  

Acquisition, net of cash paid

    5,431       -  

Net cash (used in) provided by investing activities

    (25,512 )     7,603  
                 

FINANCING ACTIVITIES

               

Net increase in deposits

    19,873       6,959  

Increase (decrease) in short-term borrowings, net

    7,854       (9,701 )

Repayment of other borrowings

    (49 )     (64 )

Proceeds from other borrowings

    30,000       -  

Common stock issued

    53       29  

Proceeds from dividend reinvestment and purchase plan

    132       125  

Cash dividends

    (756 )     (507 )

Net cash provided by (used in) financing activities

    57,107       (3,159 )
                 

Increase in cash and cash equivalents

    29,869       6,470  
                 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

    32,495       23,750  
                 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $ 62,364     $ 30,220  
                 

SUPPLEMENTAL INFORMATION

               

Cash paid during the year for:

               

Interest on deposits and borrowings

  $ 1,456     $ 1,031  

Income taxes

    -       375  
                 

Noncash investing transactions:

               

Transfers from loans to other real estate owned

  $ 977     $ 77  

Common stock issued in business acquisition

    20,995       -  

 

See accompanying notes to unaudited consolidated financial statements.

 

 
7

 

 

SUPPLEMENTAL INFORMATION (continued)

       

Acquisition of Liberty Bank

       

Non-cash assets acquired

       

Loans

  $ 194,320  

Loans held for sale

    5,953  

Premises and equipment, net

    325  

Accrued interest receivable

    440  

Bank-owned life insurance

    1,681  

Core deposit intangible

    3,087  

Deferred tax asset

    (1,104 )

Other assets

    997  

Goodwill

    11,087  
      216,786  

Liabilities assumed

       

Time deposits

    (30,744 )

Deposits other than time deposits

    (167,300 )

Accrued interest payable

    (47 )

Other liabilities

    (3,131 )
      (201,222 )
         

Net non-cash assets acquired

  $ 15,564  
         

Cash and cash equivalents acquired

  $ 5,431  

 

See accompanying notes to unaudited consolidated financial statements.

 

 
8

 

 

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 (“MBC”), and a nonbank asset resolution subsidiary, EMORECO, Inc. All significant inter-company items have been eliminated.

 

On January 12, 2017, the Company completed its acquisition of Liberty Bank, N.A. ("Liberty"), pursuant to a previously announced definitive merger agreement. Under the terms of the merger agreement, Liberty shareholders received $37.96 in cash or 1.1934 shares of Middlefield’s common stock in exchange for each share of Liberty common stock they owned immediately prior to the merger. Middlefield issued 544,610 shares of its common stock in the merger and the aggregate merger consideration was approximately $42.2 million. Upon closing, Liberty was merged into MBC, and its three full-service bank offices, in Twinsburg, in northern Summit County, and in Beachwood and Solon in eastern Cuyahoga County, became offices of MBC. The systems integration of Liberty into MBC was completed in February.

 

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, 2016, 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, 2016. 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. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, we do not expect the new standard, or any of the amendments, to result in a material change from our current accounting for revenue because the majority of the Company's financial instruments are not within the scope of Topic 606.  However, we do expect that the standard will result in new disclosure requirements, which are currently being evaluated.

 

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 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 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 (g) 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.

 

 
9

 

 

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. The Company is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact on the financial statements. Based on the Company’s preliminary analysis of its current portfolio, the impact to the Company’s balance sheet is estimated to result in less than a 1 percent increase in assets and liabilities. The Company also anticipates additional disclosure to be provided at adoption.

 

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. 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 2016-06, 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. 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 2016-07, 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. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

 
10

 

 

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 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. 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 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.

 

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606), which among other things clarifies the objective of the collectability criterion in Topic 606, as well as certain narrow aspects of Topic 606. 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 for 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. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that are deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

 

 
11

 

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing diversity in practice. Among these include recognizing cash payments for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.

 

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810), which amends the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. Under the amendments, a single decision maker is not required to consider indirect interests held through related parties that are under common control with the single decision maker to be the equivalent of direct interests in their entirety. Instead, a single decision maker is required to include those interests on a proportionate basis consistent with indirect interests held through other related parties. 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 October 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.

 

In December 2016, the FASB issued ASU 2016-19, Technical Corrections and Improvements, which represents changes to clarify, correct errors, or make minor improvements to the Accounting Standards Codification. The amendments make the Accounting Standards Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. Most of the amendments in this Update do not require transition guidance and are effective upon issuance of this Update. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. This Update, among others things, clarifies that guarantee fees within the scope of Topic 460, Guarantees, (other than product or service warranties) are not within the scope of Topic 606. The effective date and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements for the new revenue recognition guidance. For public entities with a calendar year-end, the new guidance is effective in the quarter and year beginning January 1, 2018. For all other entities with a calendar year-end, the new guidance is effective in the year ending December 31, 2019, and interim periods in 2020. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

 
12

 

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which provides a more robust framework to use in determining when a set of assets and activities (collectively referred to as a “set”) is a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update should be applied prospectively on or after the effective date. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In January 2017, the FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323), Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. This Update adds an SEC paragraph to the Codification following an SEC Staff Announcement about applying Staff Accounting Bulletin (SAB) Topic 11.M. Specifically, this announcement applies to ASU 2014-09, Revenue from Contracts with Customers (Topic 606); ASU 2016-02, Leases (Topic 842); and ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. A registrant should evaluate Updates that have not yet been adopted to determine the appropriate financial statement disclosures about the potential material effects of those Updates on the financial statements when adopted. If a registrant does not know or cannot reasonably estimate the impact that adoption of the Updates referenced in this announcement are expected to have on the financial statements, then in addition to making a statement to that effect, that registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. In this regard, the SEC staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies that the registrant expects to apply, if determined, and a comparison to the registrant’s current accounting policies. Also, a registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. The amendments in this Update are effective immediately.

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (“SEC”) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In February 2017, the FASB issued ASU 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965). This Update relates primarily to the reporting by an employee benefit plan for its interest in a master trust, which is a trust for which a regulated financial institution serves as a trustee or custodian and in which assets of more than one plan sponsored by a single employer or by a group of employers under common control are held. For each master trust in which a plan holds an interest, the amendments in this Update require a plan's interest in that master trust and any change in that interest to be presented in separate line items in the statement of net assets available for benefits and in the statement of changes in net assets available for benefits, respectively. The amendments in this Update remove the requirement to disclose the percentage interest in the master trust for plans with divided interests and require that all plans disclose the dollar amount of their interest in each of those general types of investments, which supplements the existing requirement to disclose the master trusts balances in each general type of investments. There are also increased disclosure requirements for investments in master trust. The amendments in this Update are effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. 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 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. This Update is not expected to have a significant impact on the Company’s financial statements.

 

 
13

 

 

NOTE 2 - STOCK-BASED COMPENSATION

 

The Company had no unvested stock options outstanding or unrecognized stock-based compensation costs outstanding as of March 31, 2017 and 2016.

 

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

 

           

Weighted-

           

Weighted-

 
           

average

           

average

 
           

Exercise

           

Exercise

 
   

2017

   

Price

   

2016

   

Price

 
                                 

Outstanding, January 1

    29,324     $ 19.50       31,949     $ 25.03  

Exercised

    (1,562 )     34.34       -       -  
                                 

Outstanding, March 31

    27,762     $ 23.07       31,949     $ 25.03  
                                 

Exercisable, March 31

    27,762     $ 23.07       31,949     $ 25.03  

 

 
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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,

 
   

2017

   

2016

 

Weighted-average common shares outstanding

    3,065,981       2,264,342  
                 

Average treasury stock shares

    (386,165 )     (386,165 )
                 

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

    2,679,816       1,878,177  
                 

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

    12,199       8,766  
                 

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

    2,692,015       1,886,943  

 

Options to purchase 27,762 shares of common stock, at prices ranging from $17.55 to $37.48, were outstanding during the three months ended March 31, 2017. Of those options, 27,762 were considered dilutive for the three-month period based on the market price exceeding the strike price and no options were anti-dilutive.

 

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, 7,249 were not included in the calculation of diluted earnings per share because they were anti-dilutive.

 

 

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, 2017

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a recurring basis:

                               

U.S. government agency securities

  $ -     $ 9,827     $ -     $ 9,827  

Obligations of states and political subdivisions

    -       79,697       -       79,697  

Mortgage-backed securities in government-sponsored entities

    -       19,036       -       19,036  

Private-label mortgage-backed securities

    -       1,602       -       1,602  

Total debt securities

    -       110,162       -       110,162  

Equity securities in financial institutions

    -       290       -       290  

Total

  $ -     $ 110,452     $ -     $ 110,452  

 

           

December 31, 2016

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a recurring basis:

                               

U.S. government agency securities

  $ -     $ 10,236     $ -     $ 10,236  

Obligations of states and political subdivisions

    -       81,223       -       81,223  

Mortgage-backed securities in government-sponsored entities

    -       20,069       -       20,069  

Private-label mortgage-backed securities

    -       1,709       -       1,709  

Total debt securities

    -       113,237       -       113,237  

Equity securities in financial institutions

    -       1,139       -       1,139  

Total

  $ -     $ 114,376     $ -     $ 114,376  

 

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).

 

The Company uses prices compiled by third party vendors.

 

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 - The Company has measured impairment on impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the table below as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the table below as it is not currently being carried at its fair value. The fair values below excluded estimated selling costs of $280,600 at March 31, 2017.

 

Other Real Estate Owned (OREO) – OREO is carried at the lower of cost or fair value, which is measured at the date of foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan is not considered to be carried at fair value, and is therefore not included in the table below. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. The fair value of OREO is based on the appraised value of the property, which is generally unadjusted by management and is based on comparable sales for similar properties in the same geographic region as the subject property, and is included in the table below as a Level II measurement. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the loans are categorized in the table below as Level III measurement since these adjustments are considered to be unobservable inputs. Income and expenses from operations and further declines in the fair value of the collateral subsequent to foreclosure are included in net expenses from OREO.

 

 
16

 

 

           

March 31, 2017

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a nonrecurring basis:

                               

Impaired loans

  $ -     $ -     $ 585     $ 585  

Other real estate owned

    -       -       27       27  
                                 

 

           

December 31, 2016

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a nonrecurring basis:

                               

Impaired loans

  $ -     $ -     $ 6,498     $ 6,498  

Other real estate owned

    -       -       511       511  

 

 

 

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, 2017

                       

Impaired loans

  $ 585  

Appraisal of collateral (1)

 

Appraisal adjustments (2)

  3.5% to 8.3% (5.6%)  

Other real estate owned

  $ 27  

Appraisal of collateral (1)

 

Appraisal adjustments (2)

  0.0% to 10.0%  

 

 

   

Quantitative Information about Level III Fair Value Measurements

 

(Dollar amounts in thousands)

  Fair Value Estimate  

Valuation Techniques

 

Unobservable Input

 

Range (Weighted

Average)

 

December 31, 2016

                       

Impaired loans

  $ 4,928  

Discounted cash flow

 

Discount rate

  3.1% to 7.0% (5.1%)  
      1,570  

Appraisal of collateral (1)

 

Appraisal adjustments (2)

  0.0% to 59.7% (28.2%)  

Other real estate owned

  $ 511  

Appraisal of collateral (1)

 

Appraisal adjustments (2)

  0% to 10.0  

 

 

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level 3 inputs which are not identifiable, less any associated allowance.

 

(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, 2017

 
   

Carrying

                           

Total

 
   

Value

   

Level I

   

Level II

   

Level III

   

Fair Value

 
   

(Dollar amounts in thousands)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 62,364     $ 62,364     $ -     $ -     $ 62,364  

Investment securities Available for sale

    110,452       -       110,452       -       110,452  

Loans held for sale

    9,462       8,328       1,134       -       9,462  

Net loans

    830,438       -       -       834,096       834,096  

Bank-owned life insurance

    15,334       15,334       -       -       15,334  

Federal Home Loan Bank stock

    3,589       3,589       -       -       3,589  

Accrued interest receivable

    3,068       3,068       -       -       3,068  
                                         

Financial liabilities:

                                       

Deposits

  $ 847,851     $ 603,907     $ -     $ 205,035     $ 808,942  

Short-term borrowings

    76,213       76,213       -       -       76,213  

Other borrowings

    39,388       -       -       16,565       16,565  

Accrued interest payable

    427       427       -       -       427  

 

 

   

December 31, 2016

 
   

Carrying

                           

Total

 
   

Value

   

Level I

   

Level II

   

Level III

   

Fair Value

 
   

(Dollar amounts in thousands)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 32,495     $ 32,495     $ -     $ -     $ 32,495  

Investment securities Available for sale

    114,376       -       114,376       -       114,376  

Loans held for sale

    634       -       634       -       634  

Net loans

    602,542       -       -       604,447       604,447  

Bank-owned life insurance

    13,540       13,540       -       -       13,540  

Restricted stock

    2,204       2,204       -       -       2,204  

Accrued interest receivable

    2,426       2,426       -       -       2,426  
                                         

Financial liabilities:

                                       

Deposits

  $ 629,934     $ 440,500     $ -     $ 189,871     $ 630,371  

Short-term borrowings

    68,359       68,359       -       -       68,359  

Other borrowings

    9,437       -               9,512       9,512  

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.

 

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.

 

 
18

 

 

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.

 

 

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, 2017 and 2016, respectively:

 

 

   

Unrealized gains on

 
   

available-for-sale

 

(Dollars in thousands)

 

securities (a)

 

Balance as of December 31, 2016

  $ 1,201  

Other comprehensive income before reclassification

    153  

Amount reclassified from accumulated other comprehensive income

    (322 )

Period change

    (169 )

Balance at March 31, 2017

  $ 1,032  

 

   

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  

 

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

 

 
19

 

 

The following tables present significant amounts reclassified out of each component of accumulated other comprehensive income for the three months ended March 31, 2017 and 2016, respectively:

 

 

     

Amount Reclassified from Accumulated Other Comprehensive

Income (a)

   

Affected Line Item in

the Statement Where

(Dollars in thousands)

    For the Three Months Ended    

Net Income is

Details about other comprehensive income

  March 31, 2017    

March 31, 2016

   

Presented

Unrealized gains on available-for-sale securities

                   
    $ 488     $ 51    

Investment securities gains, net

      (166 )     (17 )  

Income taxes

    $ 322     $ 34    

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, 2017

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

(Dollar amounts in thousands)

 

Cost

   

Gains

   

Losses

   

Value

 
                                 

U.S. government agency securities

  $ 9,732     $ 167     $ (72 )   $ 9,827  

Obligations of states and political subdivisions:

                               

Taxable

    1,614       129       (3 )     1,740  

Tax-exempt

    76,804       1,658       (505 )     77,957  

Mortgage-backed securities in government-sponsored entities

    19,091       172       (227 )     19,036  

Private-label mortgage-backed securities

    1,479       123       -       1,602  

Total debt securities

    108,720       2,249       (807 )     110,162  

Equity securities in financial institutions

    170       120       -       290  

Total

  $ 108,890     $ 2,369     $ (807 )   $ 110,452  

 

   

December 31, 2016

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 
                                 

U.S. government agency securities

  $ 10,158     $ 174     $ (96 )   $ 10,236  

Obligations of states and political subdivisions:

                               

Taxable

    1,615       129       (4 )     1,740  

Tax-exempt

    78,327       1,678       (522 )     79,483  

Mortgage-backed securities in

                            -  

government-sponsored entities

    20,128       202       (261 )     20,069  

Private-label mortgage-backed securities

    1,579       130       -       1,709  

Total debt securities

    111,807       2,313       (883 )     113,237  

Equity securities in financial institutions

    750       389       -       1,139  

Total

  $ 112,557     $ 2,702     $ (883 )   $ 114,376  

 

 

 

The amortized cost and fair value of debt securities at March 31, 2017, 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

  $ 3,922     $ 3,975  

Due after one year through five years

    9,224       9,527  

Due after five years through ten years

    11,400       11,793  

Due after ten years

    84,174       84,867  
                 

Total

  $ 108,720     $ 110,162  

 

 
21

 

 

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:

 

   

For the Three Months

 

(Dollar amounts in thousands)

  Ended March 31,  
   

2017

   

2016

 

Proceeds from sales

  $ -     $ 1,322  

Gross realized gains

    488       51  

Gross realized losses

    -       -  

 

Investment securities with an approximate carrying value of $58.4 million and $60.3 million at March 31, 2017 and December 31, 2016, respectively, were pledged to secure deposits and other purposes as required by law. Pledged cash with a carrying value of $4.5 million at March 31, 2017 was also pledged to secure deposits and other purposes as required by law.

 

Prior to the acquisition of Liberty Bank, N.A., the Company had a previously held equity interest in Liberty which was re-measured at fair value on the acquisition date and resulted in a gain of $488,000, which was recorded in Investment Securities Gains on the consolidated Income Statement for the three months ended March 31, 2017.

 

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, 2017

 
   

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

  $ 3,723     $ (35 )   $ 1,364     $ (37 )   $ 5,087     $ (72 )

Obligations of states and political subdivisions

                                               

Taxable

    506       (3 )     -       -       506       (3 )

Tax-exempt

    22,979       (505 )     -       -       22,979       (505 )

Mortgage-backed securities in government-sponsored entities

    9,432       (114 )     4,401       (113 )     13,833       (227 )

Total

  $ 36,640     $ (657 )   $ 5,765     $ (150 )   $ 42,405     $ (807 )

 

   

December 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

  $ 3,803     $ (47 )   $ 1,316     $ (49 )   $ 5,119     $ (96 )

Obligations of states and politcal subdivisions

                                               

Taxable

    502       (4 )     -       -       502       (4 )

Tax-exempt

    23,554       (522 )     -       -       23,554       (522 )

Mortgage-backed securities in government-sponsored entities

    9,066       (126 )     4,438       (135 )     13,504       (261 )

Total

  $ 36,925     $ (699 )   $ 5,754     $ (184 )   $ 42,679     $ (883 )

 

 

There were 67 securities considered temporarily impaired at March 31, 2017.

 

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.

 

 
22

 

 

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 98.3% of the total available-for-sale portfolio as of March 31, 2017 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, 2017 and 2016, 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, 2017 or December 31, 2016 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,

 
   

2017

   

2016

 
                 

Commercial and industrial

  $ 91,777     $ 60,630  

Real estate - construction

    29,238       23,709  

Real estate - mortgage:

               

Residential

    300,508       270,830  

Commercial

    395,102       249,490  

Consumer installment

    20,533       4,481  
      837,158       609,140  

Less: Allowance for loan and lease losses

    6,720       6,598  
                 

Net loans