10-Q 1 mbcn20180630_10q.htm FORM 10-Q mbcn20180630_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 June 30, 2018

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, a 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  X

 

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

Smaller reporting company ☐

 

 

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 Exchange Act).  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 August 7, 2018: 3,233,924

 

 

 

 

 

MIDDLEFIELD BANC CORP.

 

INDEX

 

Part I – Financial Information  
       
  Item 1. Financial Statements (unaudited)  
       
    Consolidated Balance Sheet as of June 30, 2018 and December 31, 2017 3
       
    Consolidated Statement of Income for the Three and Six Months ended June 30, 2018 and 2017 4
       
    Consolidated Statement of Comprehensive Income for the Three and Six Months ended June 30, 2018 and 2017 5
       
    Consolidated Statement of Changes in Stockholders' Equity for the Six Months ended June 30, 2018 6
       
    Consolidated Statement of Cash Flows for the Six Months ended June 30, 2018 and 2017 7
       
    Notes to Unaudited Consolidated Financial Statements 9
       
  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 32
       
  Item 3. Quantitative and Qualitative Disclosures about Market Risk 41
       
  Item 4. Controls and Procedures 42
       
Part II – Other Information  
       
  Item 1. Legal Proceedings 43
       
  Item 1a. Risk Factors 43
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 43
       
  Item 3. Defaults by the Company on its Senior Securities 43
       
  Item 4. Mine Safety Disclosures 43
       
  Item 5. Other Information 43
       
  Item 6. Exhibits and Reports on Form 8-K 43
       
Signatures 48
   
Exhibit 31.1  
   
Exhibit 31.2  
   
Exhibit 32  

     

2

 
 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET

(Dollar amounts in thousands, except share data)

(Unaudited)

 

   

June 30,

   

December 31,

 
   

2018

   

2017

 
                 

ASSETS

               

Cash and due from banks

  $ 42,451     $ 39,886  

Federal funds sold

    28,795       -  

Cash and cash equivalents

    71,246       39,886  

Equity securities, at fair value

    656       -  

Investment securities available for sale, at fair value

    100,028       95,283  

Loans held for sale

    1,132       463  

Loans

    943,674       923,213  

Less allowance for loan and lease losses

    7,502       7,190  

Net loans

    936,172       916,023  

Premises and equipment, net

    12,978       11,853  

Goodwill

    15,071       15,071  

Core deposit intangibles

    2,571       2,749  

Bank-owned life insurance

    15,862       15,652  

Other real estate owned

    181       212  

Accrued interest receivable and other assets

    10,182       9,144  
                 

TOTAL ASSETS

  $ 1,166,079     $ 1,106,336  
                 

LIABILITIES

               

Deposits:

               

Noninterest-bearing demand

  $ 207,791     $ 192,438  

Interest-bearing demand

    92,116       83,990  

Money market

    137,572       150,277  

Savings

    204,408       208,502  

Time

    290,359       242,987  

Total deposits

    932,246       878,194  

Short-term borrowings

    87,833       74,707  

Other borrowings

    18,996       29,065  

Accrued interest payable and other liabilities

    4,288       4,507  

TOTAL LIABILITIES

    1,043,363       986,473  
                 

STOCKHOLDERS' EQUITY

               

Common stock, no par value; 10,000,000 shares authorized, 3,619,843 and 3,603,881 shares issued; 3,233,678 and 3,217,716 shares outstanding

    85,544       84,859  

Retained earnings

    51,121       47,431  

Accumulated other comprehensive (loss) income

    (431 )     1,091  

Treasury stock, at cost; 386,165 shares

    (13,518 )     (13,518 )

TOTAL STOCKHOLDERS' EQUITY

    122,716       119,863  
                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 1,166,079     $ 1,106,336  

 

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

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 

INTEREST AND DIVIDEND INCOME

                               

Interest and fees on loans

  $ 11,234     $ 9,916     $ 22,288     $ 19,096  

Interest-bearing deposits in other institutions

    115       92       234       141  

Federal funds sold

    7       1       21       4  

Investment securities:

                               

Taxable interest

    170       223       339       441  

Tax-exempt interest

    550       630       1,075       1,267  

Dividends on stock

    53       40       112       152  

Total interest and dividend income

    12,129       10,902       24,069       21,101  
                                 

INTEREST EXPENSE

                               

Deposits

    1,973       1,227       3,613       2,352  

Short-term borrowings

    192       273       468       450  

Other borrowings

    118       125       240       265  

Total interest expense

    2,283       1,625       4,321       3,067  
                                 

NET INTEREST INCOME

    9,846       9,277       19,748       18,034  
                                 

Provision for loan losses

    210       170       420       335  
                                 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

    9,636       9,107       19,328       17,699  
                                 

NONINTEREST INCOME

                               

Service charges on deposit accounts

    472       449       925       918  

Investment securities gains on sale, net

    -       -       -       488  

Gain on equity securities

    13       -       31       -  

Earnings on bank-owned life insurance

    98       98       210       207  

Gain on sale of loans

    117       231       121       465  

Other income

    305       211       504       422  

Total noninterest income

    1,005       989       1,791       2,500  
                                 

NONINTEREST EXPENSE

                               

Salaries and employee benefits

    3,866       3,203       7,845       6,899  

Occupancy expense

    472       433       1,008       921  

Equipment expense

    201       266       434       547  

Data processing costs

    402       588       879       908  

Ohio state franchise tax

    244       186       359       372  

Federal deposit insurance expense

    150       135       300       203  

Professional fees

    327       423       772       796  

Advertising expense

    230       164       458       412  

Software amortization expense

    155       80       305       162  

Core deposit intangible amortization

    87       103       178       175  

Merger expense

    -       307       -       694  

Other expense

    929       816       1,870       1,882  

Total noninterest expense

    7,063       6,704       14,408       13,971  
                                 

Income before income taxes

    3,578       3,392       6,711       6,228  

Income taxes

    481       885       1,009       1,621  
                                 

NET INCOME

  $ 3,097     $ 2,507     $ 5,702     $ 4,607  
                                 

EARNINGS PER SHARE

                               

Basic

  $ 0.96     $ 0.84     $ 1.77     $ 1.62  

Diluted

    0.96       0.83       1.76       1.61  
                                 

DIVIDENDS DECLARED PER SHARE

  $ 0.28     $ 0.27     $ 0.61     $ 0.54  

 

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

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Net income

  $ 3,097     $ 2,507     $ 5,702     $ 4,607  
                                 

Other comprehensive (loss) gain:

                               

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

    (73 )     1,186       (1,985 )     1,417  

Tax effect

    15       (403 )     417       (481 )
                                 

Reclassification adjustment for investment securities gains included in net income

    -       -       -       (488 )

Tax effect

    -       -       -       166  
                                 

Total other comprehensive (loss) gain

    (58 )     783       (1,568 )     614  
                                 

Comprehensive income

  $ 3,039     $ 3,290     $ 4,134     $ 5,221  

 

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 and per share data)

(Unaudited)

 

 

                   

Accumulated

                 
                   

Other

           

Total

 
   

Common

   

Retained

   

Comprehensive

   

Treasury

   

Stockholders'

 
   

Stock

   

Earnings

   

Income (Loss)

   

Stock

   

Equity

 
                                         

Balance, December 31, 2017

  $ 84,859     $ 47,431     $ 1,091     $ (13,518 )   $ 119,863  
                                         

Change in accounting principle for adoption of ASU 2016-01

            141       (141 )             -  

Change in accounting principle for adoption of ASU 2018-02

            (187 )     187               -  

Net income

            5,702                       5,702  

Other comprehensive loss

                    (1,568 )             (1,568 )

Dividend reinvestment and purchase plan (5,902 shares)

    301                               301  

Stock options exercised (4,500 shares)

    104                               104  

Stock-based compensation expense (5,560 shares)

    280                               280  

Cash dividends ($0.61 per share)

            (1,966 )                     (1,966 )
                                         

Balance, June 30, 2018

  $ 85,544     $ 51,121     $ (431 )   $ (13,518 )   $ 122,716  

 

See accompanying notes to unaudited consolidated financial statements.

 

6

 
 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

 

   

Six Months Ended

 
   

June 30,

 
   

2018

   

2017

 

OPERATING ACTIVITIES

               

Net income

  $ 5,702     $ 4,607  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Provision for loan losses

    420       335  

Investment securities gains on sale, net

    -       (488 )

Gain on equity securities

    (31 )     -  

Depreciation and amortization of premises and equipment, net

    457       535  

Software amortization expense

    305       162  

Amortization of premium and discount on investment securities, net

    208       220  

Accretion of deferred loan fees, net

    (564 )     (295 )

Amortization of core deposit intangibles

    178       175  

Stock-based compensation expense

    280       -  

Origination of loans held for sale

    (6,694 )     (10,035 )

Proceeds from sale of loans

    6,146       3,866  

Gain on sale of loans

    (121 )     (148 )

Origination of student loans held for sale

    -       (222,526 )

Proceeds from sale of student loans

    -       225,956  

Gain on sale of student loans

    -       (317 )

Earnings on bank-owned life insurance

    (210 )     (207 )

Deferred income tax

    132       (245 )

Net (gain) loss on other real estate owned

    5       (158 )

(Increase) decrease in accrued interest receivable

    (7 )     102  

Increase in accrued interest payable

    83       56  

Other, net

    (1,268 )     (4,208 )

Net cash provided by (used in) operating activities

    5,021       (2,613 )
                 

INVESTING ACTIVITIES

               

Investment securities available for sale:

               

Proceeds from repayments and maturities

    2,304       7,364  

Proceeds from sale of securities

    -       2,678  

Purchases

    (9,862 )     -  

Increase in loans, net

    (20,005 )     (64,390 )

Proceeds from the sale of other real estate owned

    26       1,463  

Purchase of bank-owned life insurance

    -       (4 )

Purchase of premises and equipment

    (1,582 )     (518 )

Purchase of restricted stock

    (90 )     (899 )

Redemption of restricted stock

    -       795  

Acquisition, net of cash paid

    -       5,431  

Net cash used in investing activities

    (29,209 )     (48,080 )
                 

FINANCING ACTIVITIES

               

Net increase in deposits

    54,052       18,805  

Increase (decrease) in short-term borrowings, net

    13,126       (4,971 )

Repayment of other borrowings

    (10,069 )     (91 )

Proceeds from other borrowings

    -       30,000  

Proceeds from common stock issued

    -       15,377  

Stock options exercised

    104       -  

Proceeds from dividend reinvestment and purchase plan

    301       272  

Cash dividends

    (1,966 )     (1,623 )

Net cash provided by financing activities

    55,548       57,769  
                 

Increase in cash and cash equivalents

    31,360       7,076  
                 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

    39,886       32,495  
                 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $ 71,246     $ 39,571  

 

See accompanying notes to unaudited consolidated financial statements.

 

7

 

 

   

Six Months Ended

 
   

June 30,

 
   

2018

   

2017

 

SUPPLEMENTAL INFORMATION

               

Cash paid during the year for:

               

Interest on deposits and borrowings

  $ 4,238     $ 3,011  

Income taxes

    1,075       3,555  
                 

Noncash investing transactions:

               

Transfers from loans to other real estate owned

  $ -     $ 1,021  

Common stock issued in business acquisition

    -       20,995  

Transfer of equity securities from investment securities available for sale, at fair value

    (625 )     -  
                 
                 

Acquisition of Liberty Bank, N.A.

               

Noncash assets acquired

               

Loans

  $ -     $ 195,388  

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  

Other assets

    -       997  

Goodwill

    -       10,740  

Total noncash assets acquired

    -       218,611  

Liabilities assumed

               

Time deposits

    -       (30,744 )

Deposits other than time deposits

    -       (167,300 )

Accrued interest payable

    -       (47 )

Deferred taxes

    -       (1,134 )

Other liabilities

    -       (2,754 )

Total liabilities assumed

    -       (201,979 )
                 

Liberty stock acquired in business combination

    -       (1,068 )
                 

Net noncash assets acquired

  $ -     $ 15,564  
                 

Cash and cash equivalents acquired, net

  $ -     $ 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” or “Middlefield Bank”), 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, 2017, 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, 2017. The results of the Company’s operations for any interim period are not necessarily indicative for the results of the Company’s operations for any other interim period or for a full fiscal year.

 

Recent Accounting Pronouncements –

 

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. In February 2018, the FASB issued ASU No. 2018-03 which includes technical corrections and improvements to clarify the guidance in ASU No. 2016-01. On January 1, 2018, the Company adopted ASU 2016-01 which resulted in a reclassification of $141,000 between accumulated other comprehensive income and retained earnings on the Consolidated Balance Sheet and Consolidated Statement of Changes in Stockholders’ Equity.

 

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 disclosures to be provided at adoption.

 

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In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“CECL”), 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 is 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. Management is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements. Management will oversee the implementation of CECL and is currently in the process of implementing a software solution to assist in the adoption of this ASU. Management plans to run the current incurred loss model and the CECL model concurrently for 12 months prior to the adoption of this guidance on January 1, 2020.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220), to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. On January 1, 2018, the Company adopted this standard which resulted in a reclassification of $187,000 between accumulated other comprehensive income and retained earnings on the Consolidated Balance Sheet and Consolidated Statement of Changes in Stockholders’ Equity.

 

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities, to clarify certain aspects of the guidance issued in ASU 2016-01. (1) An entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer. Once an entity makes this election, the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820. (2) Adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place. (3) Remeasuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities. (4) When the fair value option is elected for a financial liability, the guidance in paragraph 825-10- 45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15, Derivatives and Hedging—Embedded Derivatives, or 825-10, Financial Instruments—Overall. (5) Financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the liability should be remeasured into the functional currency of the reporting entity using end-of-period spot rates. (6) The prospective transition approach for equity securities without a readily determinable fair value in the amendments in Update 2016-01 is meant only for instances in which the measurement alternative is applied. An insurance entity subject to the guidance in Topic 944, Financial Services— Insurance, should apply a prospective transition method when applying the amendments related to equity securities without readily determinable fair values. An insurance entity should apply the selected prospective transition method consistently to the entity’s entire population of equity securities for which the measurement alternative is elected. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in Update 2016-01. For all other entities, the effective date is the same as the effective date in Update 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update 2016-01. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

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ASU 2018-04, Investments – Debt Securities (Topic 320) and Regulated Operations (Topic 980) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273, ASU 2018-04 supersedes various SEC paragraphs and adds an SEC paragraph pursuant to the issuance of Staff Accounting Bulletin No. 117. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718), which simplified the accounting for nonemployee share-based payment transactions. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments in this Update improve the following areas of nonemployee share-based payment accounting; (a) the overall measurement objective, (b) the measurement date, (c) awards with performance conditions, (d) classification reassessment of certain equity-classified awards, (e) calculated value (nonpublic entities only), and (f) intrinsic value (nonpublic entities only). The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. 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. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

ASU 2018-10, Codification Improvements to Topic 842, Leases, represents changes to clarify, correct errors in, or make minor improvements to the Codification. The amendments in this ASU affect the amendments in ASU 2016-02, which are not yet effective, but for which early adoption upon issuance is permitted. For entities that early adopted Topic 842, the amendments are effective upon issuance of this ASU, and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842. 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 REVENUE RECOGNITION

 

Effective January 1, 2017, the Company adopted ASU 2014-09 Revenue from Contracts with Customers-Topic 606 and all subsequent ASUs that modified ASC 606. The implementation of the new standard had no material impact to the measurement or recognition of revenue of prior periods and did not require any cumulative effect adjustment for adoption.

 

Management determined that the primary sources of revenue, which emanate from interest income on loans and investments, along with noninterest revenue resulting from investment security gains, gains on the sale of loans, and BOLI income, are not within the scope of ASC 606. As a result, no changes were made during the period related to these sources of revenue, which cumulatively comprise 93.1% of the total revenue of the Company.

 

The main types of noninterest income within the scope of the standard are as follows:

 

Service charges on deposit accounts – The Company has contracts with its deposit customers where fees are charged if the account balance falls below predetermined levels defined as compensating balances. These agreements can be cancelled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. The Company also has transaction fees related to specific transactions or activities resulting from a customer request or activity that include overdraft fees, online banking fees, and other transaction fees. All of these fees are attributable to specific performance obligations of the Company where the revenue is recognized at a defined point in time, which is completion of the requested service/transaction.

 

Gains (losses) on sale of other real estate owned – Gains and losses are recognized at the completion of the property sale when the buyer obtains control of the real estate and all of the performance obligations of the Company have been satisfied. Evidence of the buyer obtaining control of the asset include transfer of the property title, physical possession of the asset, and the buyer obtaining control of the risks and rewards related to the asset. In situations where the Company agrees to provide financing to facilitate the sale, additional analysis is performed to ensure that the contract for sale identifies the buyer and seller, the asset to be transferred, payment terms, and that the contract has a true commercial substance and that collection of amounts due from the buyer is reasonable. In situations where financing terms are not reflective of current market terms, the transaction price is discounted impacting the gain/loss and the carrying value of the asset.

 

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The following table depicts the disaggregation of revenue derived from contracts with customers to depict the nature, amount, timing, and uncertainty of revenue and cash flows:

 

   

For the Three Months

Ended June 30,

   

For the Six Months

Ended June 30,

 

Noninterest Income

 

2018

   

2017

   

2018

   

2017

 

(Dollar amounts in thousands)

                               
                                 

Service charges on deposit accounts:

                               

Overdraft fees

  $ 197     $ 182     $ 390     $ 374  

ATM banking fees

    214       205       415       319  

Service charges and other fees

    61       62       120       225  

Investment securities gains on sale, net (a)

    -       -       -       488  

Equity securities, unrealized gains (a)

    13       -       31       -  

Earnings on bank-owned life insurance (a)

    98       98       210       207  

Gain on sale of loans (a)

    117       231       121       465  

Other income

    305       211       504       422  

Total noninterest income

  $ 1,005     $ 989     $ 1,791     $ 2,500  

 

(a) Not within scope of ASC 606

 

 

NOTE 3 - STOCK-BASED COMPENSATION

 

The Company had no unvested stock options outstanding as of June 30, 2018 and 2017.

 

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

 

           

Weighted-

 
           

average

 
   

Shares

   

Exercise Price

 
   

2018

   

Per Share

 
                 

Outstanding, January 1

    19,750     $ 20.94  

Exercised

    (6,000 )     23.00  
                 

Outstanding, June 30

    13,750     $ 20.05  
                 

Exercisable, June 30

    13,750     $ 20.05  

 

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The following table presents the activity during the six months ended June 30, 2018 related to awards of restricted stock:

 

           

Weighted-

 
           

average

 
           

Grant Date Fair

 
   

Shares

   

Value Per Share

 
                 

Nonvested at January 1, 2018

    14,601     $ 35.14  

Granted

    9,952       48.20  

Forfeited

    (223 )     35.31  

Vested

    (3,905 )     33.61  

Nonvested at June 30, 2018

    20,425     $ 41.80  
                 

Expected to vest at June 30, 2018

    10,473     $ 35.71  

 

The Company recognizes restricted stock forfeitures in the period they occur.

 

Share-based compensation expense of $91,000 and $45,000 was recognized for the three-month periods ended June 30, 2018 and 2017, respectively. Share-based compensation expense of $136,000 and $90,000 was recognized for the six-month periods ended June 30, 2018 and 2017, respectively.

 

The expected remaining compensation expense that will be recognized on restricted stock totals $141,000, of which $70,000 will be recognized in 2018 and $71,000 will be recognized in 2019.

 

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NOTE 4 - 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 and restricted stock 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

   

For the Six

 
   

Months Ended

   

Months Ended

 
   

June 30,

   

June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Weighted-average common shares outstanding

    3,611,891       3,386,616       3,609,174       3,227,184  
                                 

Average treasury stock shares

    (386,165 )     (386,165 )     (386,165 )     (386,165 )
                                 

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

    3,225,726       3,000,451       3,223,009       2,841,019  
                                 

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

    14,603       13,689       15,227       13,139  
                                 

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

    3,240,329       3,014,140       3,238,236       2,854,158  

 

Options to purchase 13,750 shares of common stock, at prices ranging from $17.55 to $23.00, were outstanding during the three and six months ended June 30, 2018. Also outstanding were 20,425 shares of restricted stock. None of the outstanding options or restricted stock were anti-dilutive.

 

Options to purchase 21,375 shares of common stock, at prices ranging from $17.55 to $37.48, were outstanding during the three and six months ended June 30, 2017. Also outstanding were 9,975 shares of restricted stock. None of the outstanding options or restricted stock were anti-dilutive.

 

 

NOTE 5 - 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 establishes 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.

 

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Level III:

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

 

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

 

           

June 30, 2018

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a recurring basis:

                               

U.S. government agency securities

  $ -     $ 7,988     $ -     $ 7,988  

Obligations of states and political subdivisions

    -       75,397       -       75,397  

Mortgage-backed securities in government-sponsored entities

    -       16,643       -       16,643  

Total debt securities

    -       100,028       -       100,028  

Equity securities in financial institutions

    406       250       -       656  

Total

  $ 406     $ 100,278     $ -     $ 100,684  

 

           

December 31, 2017

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a recurring basis:

                               

U.S. government agency securities

  $ -     $ 8,719     $ -     $ 8,719  

Obligations of states and political subdivisions

    -       67,429       -       67,429  

Mortgage-backed securities in government-sponsored entities

    -       18,510       -       18,510  

Total debt securities

    -       94,658       -       94,658  

Equity securities in financial institutions

    375       250       -       625  

Total

  $ 375     $ 94,908     $ -     $ 95,283  

 

Investment Securities Available for Sale - The Company obtains fair values from an independent pricing service which represent quoted prices for similar assets, 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).

 

Equity Securities - Equity securities that are traded on a national securities exchange are valued at their last reported sales price as of the measurement date. Equity securities traded in the over-the-counter (“OTC”) markets and listed securities for which no sale was reported on that date are generally valued at their last reported “bid” price if held long, and last reported “ask” price if sold short. To the extent equity securities are actively traded and valuation adjustments are not applied, they are categorized in Level I of the fair value hierarchy. Equity securities traded on inactive markets or valued by reference to similar instruments are generally categorized in Level II of the fair value hierarchy. Equity securities are carried at fair value through net income at June 30, 2018.

 

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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. Collateral-dependent impaired loans are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. A new cost basis is established at the time a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken to the property’s value subsequent to the initial measurement. No such devaluation occurred in the six months ended June 30, 2018.

 

           

June 30, 2018

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a non-recurring basis:

                               

Impaired loans

  $ -     $ -     $ 1,134     $ 1,134  

 

           

December 31, 2017

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a non-recurring basis:

                               

Impaired loans

  $ -     $ -     $ 3,072     $ 3,072  

Other real estate owned

    -       -       32       32  

 

Impaired Loans – The Company has measured impairment on collateral-dependent 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 above table 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 above table as it is not currently being carried at its fair value. The fair values in the above table exclude estimated selling costs of $419,000 at June 30, 2018.

 

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 above table. 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 above table 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 above table as a 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.

 

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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)  

June 30, 2018

                         

Impaired loans

  $ 1,134  

Appraisal of collateral (1)

 

Appraisal adjustments (2)

  0% to 100% (47.49%)  

 

   

Quantitative Information about Level III Fair Value Measurements

 

(Dollar amounts in thousands)

 

 

 

 

 

 

 
   

Fair Value Estimate

  Valuation Techniques   Unobservable Input   Range (Weighted Average)  

December 31, 2017

                         

Impaired loans

  $ 3,072  

Appraisal of collateral (1)

 

Appraisal adjustments (2)

  0% to 86.1% (13.8%)  
                           

Other real estate owned

  $ 32  

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 III 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.

 

The estimated fair value of the Company’s financial instruments not recorded at fair value on a recurring basis is as follows:

 

   

June 30, 2018

 
   

Carrying

                           

Total

 
   

Value

   

Level I

   

Level II

   

Level III

   

Fair Value

 
   

(Dollar amounts in thousands)

 

Financial assets:

                                       

Cash and cash equivalents (1)

  $ 71,246     $ 71,246     $ -     $ -     $ 71,246  

Loans held for sale

    1,132       -       1,132       -       1,132  

Net loans

    936,172       -       -       925,076       925,076  

Bank-owned life insurance (1)

    15,862       15,862       -       -       15,862  

Federal Home Loan Bank stock (1)

    3,679       3,679       -       -       3,679  

Accrued interest receivable (1)

    3,295       3,295       -       -       3,295  
                                         

Financial liabilities:

                                       

Deposits

  $ 932,246     $ 641,887     $ -     $ 287,358     $ 929,245  

Short-term borrowings (1)

    87,833       87,833       -       -       87,833  

Other borrowings

    18,996       -       -       18,990       18,990  

Accrued interest payable (1)

    661       661       -       -       661  

 

(1) This financial instrument is carried at cost at June 30, 2018, which approximates the fair value of the instrument.

 

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December 31, 2017

 
   

Carrying

                           

Total

 
   

Value

   

Level I

   

Level II

   

Level III

   

Fair Value

 
   

(Dollar amounts in thousands)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 39,886     $ 39,886     $ -     $ -     $ 39,886  

Loans held for sale

    463       -       463       -       463  

Net loans

    916,023       -       -       913,323       913,323  

Bank-owned life insurance

    15,652       15,652       -       -       15,652  

Federal Home Loan Bank stock

    3,589       3,589       -       -       3,589  

Accrued interest receivable

    3,288       3,288       -       -       3,288  
                                         

Financial liabilities:

                                       

Deposits

  $ 878,194     $ 635,207     $ -     $ 242,020     $ 877,227  

Short-term borrowings

    74,707       74,707       -       -       74,707  

Other borrowings

    29,065       -       -       29,069       29,069  

Accrued interest payable

    578       578       -       -       578  

 

 

 

NOTE 6 – ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The following tables present the changes in accumulated other comprehensive income (“AOCI”) by component net of tax for the three and six months ended June 30, 2018 and 2017, respectively:

 

(Dollars in thousands)  

Unrealized gains on

available-for-sale securities

(a)

 

Balance as of March 31, 2018

  $ (373 )

Other comprehensive loss before reclassification

    (58 )

Balance at June 30, 2018

  $ (431 )
         
         

Balance as of December 31, 2017

  $ 1,091  

Other comprehensive loss before reclassification

    (1,568 )

Change in accounting principle, ASC 2016-01 (b)

    (141 )

Change in accounting principle, ASC 2018-02 (b)

    187  

Period change

    (1,522 )

Balance at June 30, 2018

  $ (431 )

 

18

 

 

(Dollars in thousands)  

Unrealized gains on

available-for-sale securities

(a)

 

Balance as of March 31, 2017

  $ 1,032  

Other comprehensive income before reclassification

    783  

Amount reclassified from accumulated other comprehensive income

    -  

Period change

    783  

Balance at June 30, 2017

  $ 1,815  
         
         

Balance as of December 31, 2016

  $ 1,201  

Other comprehensive income before reclassification

    936  

Amount reclassified from accumulated other comprehensive income

    (322 )

Period change

    614  

Balance at June 30, 2017

  $ 1,815  

 

 

(a)

All amounts are net of tax. Amounts in parentheses indicate debits to AOCI.

 

(b)

Reclassifications are the result of the adoption of ASUs 2016-01 and 2018-02 effective for the Company beginning January 1, 2018. The reclassifications are presented within the Consolidated Statement of Changes in Stockholders’ Equity for the affected transitional periods.

 

The following tables present significant amounts reclassified from or to each component of AOCI:

 

   

Amount Reclassified from Accumulated Other Comprehensive Income

   

Affected Line Item in

the Statement Where

(Dollars in thousands)   For the Six Months Ended     Net Income is

Details about other comprehensive income

 

June 30, 2018

   

June 30, 2017

   

Presented

Unrealized gains on available-for-sale securities (a)   $ -     $ 488    

Investment securities gains on sale, net Income taxes

      -       (166 )  

 

    $ -     $ 322      

 

 

(a)

For unrealized gains on available-for-sale securities, amounts in parentheses indicate expenses and other amounts indicate income.

 

There were no amounts reclassified to or from AOCI for the three months ended June 30, 2018 and June 30, 2017.

 

19

 

 

 

NOTE 7 INVESTMENT AND EQUITY SECURITIES

 

The amortized cost and fair values of investment securities are as follows:

 

   

June 30, 2018

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

(Dollar amounts in thousands)

 

Cost

   

Gains

   

Losses

   

Value

 
                                 

U.S. government agency securities

  $ 8,052     $ 43     $ (107 )   $ 7,988  

Obligations of states and political subdivisions:

                               

Taxable

    503       11       -       514  

Tax-exempt

    74,767       786       (670 )     74,883  

Mortgage-backed securities in government-sponsored entities

    17,249       44       (650 )     16,643  

Total

  $ 100,571     $ 884     $ (1,427 )   $ 100,028  

 

   

December 31, 2017

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

(Dollar amounts in thousands)

 

Cost

   

Gains

   

Losses

   

Value

 
                                 

U.S. government agency securities

  $ 8,664     $ 126     $ (71 )   $ 8,719  

Obligations of states and political subdivisions:

                               

Taxable

    504       8       -       512  

Tax-exempt

    65,408       1,547       (38 )     66,917  

Mortgage-backed securities in government-sponsored entities

    18,640       157       (287 )     18,510  

Total debt securities

    93,216       1,838       (396 )     94,658  

Equity securities in financial institutions

    415       210       -       625  

Total

  $ 93,631     $ 2,048     $ (396 )   $ 95,283  

 

The Company held one equity investment without a readily determinable fair value at June 30, 2018. For both year-to-date and life-to-date, the equity had an amortized cost of $250,000, with no impairment or observable price changes.

 

The Company recognized net gains on equity investments of $13,000 and $31,000, respectively, for the three and six months ended June 30, 2018. No net gains on sold equity securities were realized during those periods.

 

20

 

 

The amortized cost and fair value of debt securities at June 30, 2018, 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.

 

   

Amortized

   

Fair

 

(Dollar amounts in thousands)

 

Cost

   

Value

 
                 

Due in one year or less

  $ 5,676     $ 5,729  

Due after one year through five years

    6,202       6,267  

Due after five years through ten years

    12,267       12,156  

Due after ten years

    76,426       75,876  

Total

  $ 100,571     $ 100,028  

 

Proceeds from the sales of investment securities and the gross realized gains and losses are as follows:

 

(Dollar amounts in thousands)  

For the Three Months

Ended June 30,

   

For the Six Months

Ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Proceeds from sales

  $ -     $ 2,678     $ -     $ 2,678  

Gross realized gains

    -       -       -       488 (1)

Gross realized losses

    -       -       -       -  

 

(1) Prior to the acquisition of Liberty Bank, N.A., the Company held an equity interest in Liberty which was re-measured at fair value on the acquisition date and resulted in a gain of $488,000. This gain was recorded in Equity Securities, Unrealized Gains on the consolidated Income Statement for the six months ended June 30, 2017.

 

Investment securities with an approximate carrying value of $67.9 million and $57.9 million at June 30, 2018 and December 31, 2017, respectively, were pledged to secure deposits and for 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.

 

   

June 30, 2018

 
   

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

  $ 495     $ (13 )   $ 3,816     $ (94 )   $ 4,311     $ (107 )

Obligations of states and political subdivisions:

                                               

Tax-exempt

    27,247       (571 )     2,713       (99 )     29,960       (670 )

Mortgage-backed securities in government-sponsored entities

    4,905       (209 )     8,520       (441 )     13,425       (650 )

Total

  $ 32,647     $ (793 )   $ 15,049     $ (634 )   $ 47,696     $ (1,427 )

 

21

 

 

   

December 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

  $ 557     $ (4 )   $ 4,036     $ (67 )   $ 4,593     $ (71 )

Obligations of states and political subdivisions:

                                               

Tax-exempt

    1,009       (6 )     2,784       (32 )     3,793       (38 )

Mortgage-backed securities in government-sponsored entities

    5,698       (71 )     8,734       (216 )     14,432       (287 )

Total

  $ 7,264     $ (81 )   $ 15,554     $ (315 )   $ 22,818     $ (396 )

 

There were 87 securities considered temporarily impaired at June 30, 2018.

 

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 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.