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EX-32 - EXHIBIT 32 - MIDDLEFIELD BANC CORPex32.htm
EX-31.2 - EXHIBIT 31.2 - MIDDLEFIELD BANC CORPex31-2.htm
EX-31.1 - EXHIBIT 31.1 - MIDDLEFIELD BANC CORPex31-1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20552

 

FORM 10 - Q

 

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

 

For the quarterly period ended March 31, 2016

 

Commission File Number 001-36613

Middlefield Banc Corp.

(Exact name of registrant as specified in its charter)

 

 

Ohio

 

34 - 1585111

 

 

(State or other jurisdiction of incorporation

or organization)

 

(IRS Employer Identification No.)

 

 

 

15985 East High Street, Middlefield, Ohio 44062-9263

(Address of principal executive offices)

 

(440) 632-1666

(Registrant's telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

                                                                                                         

YES [√] NO [ ]

 

 

 

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

 

 

 

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

 

Large accelerated filer [ ] 

Accelerated filer [ ]

Non-accelerated filer [ ]

Small reporting company [√]

 

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

YES [ ]   NO [√]

 

 

 

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

   

 

Class: Common Stock, without par value

Outstanding at May 11, 2016: 2,033,694

 

 
1

 

 

MIDDLEFIELD BANC CORP.

 

INDEX

 

 

Part I – Financial Information

 
   
  Item 1.

Financial Statements (unaudited)

 

       
   

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

3

       
   

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

4

       
   

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

5

       
   

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

6

       
   

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

7

       
   

Notes to Unaudited Consolidated Financial Statements

8

       
  Item 2.

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

32

       
  Item 3.

Quantitative and Qualitative Disclosures about Market Risk

38

       
  Item 4.

Controls and Procedures

39

       

Part II – Other Information

 
   
  Item 1.

Legal Proceedings

40

       
  Item 1A.

 Risk Factors

40

       
  Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

       
  Item 3.

Defaults by the Company on its Senior Securities

40

       
  Item 4.

 Mine Safety Disclosures

40

       
  Item 5.

 Other Information

40

       
  Item 6.

Exhibits and Reports on Form 8 – K

40

       

Signatures

45

   

Exhibit 31.1

 

   

Exhibit 31.2

 

   

Exhibit 32

 

 

 
2

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET

(Dollar amounts in thousands, except share data)

(Unaudited)

 

 

   

March 31,

   

December 31,

 
   

2016

   

2015

 
                 

ASSETS

               

Cash and due from banks

  $ 25,251     $ 22,421  

Federal funds sold

    4,969       1,329  

Cash and cash equivalents

    30,220       23,750  

Investment securities available for sale, at fair value

    142,560       146,520  

Loans held for sale

    176       1,107  

Loans

    530,356       533,710  

Less allowance for loan and lease losses

    6,357       6,385  

Net loans

    523,999       527,325  

Premises and equipment, net

    9,607       9,772  

Goodwill

    4,559       4,559  

Core deposit intangibles

    66       76  

Bank-owned life insurance

    13,240       13,141  

Other real estate owned

    1,447       1,412  

Accrued interest and other assets

    7,008       7,477  
                 

TOTAL ASSETS

  $ 732,882       735,139  
                 

LIABILITIES

               

Deposits:

               

Noninterest-bearing demand

  $ 115,453     $ 116,498  

Interest-bearing demand

    67,082       57,219  

Money market

    82,143       78,856  

Savings

    178,292       180,653  

Time

    188,436       191,221  

Total deposits

    631,406       624,447  

Short-term borrowings

    26,124       35,825  

Other borrowings

    9,875       9,939  

Accrued interest and other liabilities

    1,713       2,624  

TOTAL LIABILITIES

    669,118       672,835  
                 

STOCKHOLDERS' EQUITY

               

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

    36,345       36,191  

Retained earnings

    38,216       37,236  

Accumulated other comprehensive income

    2,721       2,395  

Treasury stock, at cost; 386,165 shares

    (13,518 )     (13,518 )

TOTAL STOCKHOLDERS' EQUITY

    63,764       62,304  
                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 732,882     $ 735,139  

 

See accompanying notes to unaudited consolidated financial statements.

 

 
3

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF INCOME

(Dollar amounts in thousands, except per share data)

(Unaudited)

 

 

   

Three Months Ended

 
   

March 31,

 
   

2016

   

2015

 

INTEREST INCOME

               

Interest and fees on loans

  $ 6,173     $ 5,843  

Interest-bearing deposits in other institutions

    12       8  

Federal funds sold

    4       3  

Investment securities:

               

Taxable interest

    340       395  

Tax-exempt interest

    790       759  

Dividends on stock

    29       27  

Total interest income

    7,348       7,035  
                 

INTEREST EXPENSE

               

Deposits

    855       831  

Short-term borrowings

    120       37  

Other borrowings

    17       23  

Trust preferred securities

    33       (8 )

Total interest expense

    1,025       883  
                 

NET INTEREST INCOME

    6,323       6,152  
                 

Provision for loan losses

    105       105  
                 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

    6,218       6,047  
                 

NONINTEREST INCOME

               

Service charges on deposit accounts

    447       441  

Investment securities gains, net

    51       24  

Earnings on bank-owned life insurance

    99       69  

Gain on sale of loans

    87       53  

Other income

    225       209  

Total noninterest income

    909       796  
                 

NONINTEREST EXPENSE

               

Salaries and employee benefits

    2,780       2,360  

Occupancy expense

    335       349  

Equipment expense

    269       216  

Data processing costs

    272       250  

Ohio state franchise tax

    100       75  

Federal deposit insurance expense

    132       112  

Professional fees

    292       319  

Loss on other real estate owned

    12       88  

Advertising expense

    195       196  

Other real estate expense

    46       65  

Directors fees

    107       118  

Core deposit intangible amortization

    10       10  

Appraiser fees

    101       56  

ATM fees

    96       84  

Other expense

    591       513  

Total noninterest expense

    5,338       4,811  
                 

Income before income taxes

    1,789       2,032  

Income taxes

    302       404  
                 

NET INCOME

  $ 1,487     $ 1,628  
                 

EARNINGS PER SHARE

               

Basic

  $ 0.79     $ 0.79  

Diluted

    0.79       0.79  
                 

DIVIDENDS DECLARED PER SHARE

  $ 0.27     $ 0.26  

 

See accompanying notes to unaudited consolidated financial statements.

 
4

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Dollar amounts in thousands)

(Unaudited)

 

 

   

Three Months Ended

 
   

March 31,

 
   

2016

   

2015

 
                 

Net income

  $ 1,487     $ 1,628  
                 

Other comprehensive income:

               

Net unrealized holding gain on available-for-sale securities

    547       851  

Tax effect

    (187 )     (289 )
                 

Reclassification adjustment for investment securities gains included in net income

    (51 )     (24 )

Tax effect

    17       8  
                 

Total other comprehensive income

    326       546  
                 

Comprehensive income

  $ 1,813     $ 2,174  

 

See accompanying notes to unaudited consolidated financial statements.

 

 
5

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY

(Dollar amounts in thousands, except share data)

(Unaudited)

 

 

                   

Accumulated

                 
                   

Other

           

Total

 
   

Common

   

Retained

   

Comprehensive

   

Treasury

   

Stockholders'

 
   

Stock

   

Earnings

   

Income

   

Stock

   

Equity

 
                                         

Balance, December 31, 2015

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

Net income

            1,487                       1,487  

Other comprehensive income

                    326               326  

Common stock issuance (900 shares)

    29                               29  

Dividend reinvestment and purchase plan (3,888 shares)

    125                               125  

Cash dividends ($0.27 per share)

            (507 )                     (507 )
                                         

Balance, March 31, 2016

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

  

See accompanying notes to unaudited consolidated financial statements.

 

 
6

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

 

 

   

Three Months Ended

 
   

March 31,

 
   

2016

   

2015

 

OPERATING ACTIVITIES

               

Net income

  $ 1,487     $ 1,628  

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

               

Provision for loan losses

    105       105  

Investment securities gain, net

    (51 )     (24 )

Depreciation and amortization

    271       180  

Amortization of premium and discount on investment securities

    107       189  

Accretion of deferred loan fees, net

    (71 )     (241 )

Origination of loans held for sale

    (3,356 )     (2,664 )

Proceeds from sale of loans

    4,374       2,465  

Gain on sale of loans

    (87 )     (53 )

Earnings on bank-owned life insurance

    (99 )     (69 )

Deferred income tax

    (218 )     (305 )

(Gain) loss on other real estate owned

    (12 )     182  

Other real estate owned writedowns

    24       (94 )

Increase in accrued interest receivable

    (263 )     (454 )

Decrease in accrued interest payable

    (6 )     (11 )

Other, net

    (203 )     (407 )

Net cash provided by operating activities

    2,002       427  
                 

INVESTING ACTIVITIES

               

Investment securities available for sale:

               

Proceeds from repayments and maturities

    4,822       2,224  

Proceeds from sale of securities

    1,322       1,590  

Purchases

    (1,744 )     -  

Decrease (increase) in loans, net

    3,215       (5,497 )

Proceeds from the sale of other real estate owned

    30       299  

Purchase of premises and equipment

    (18 )     (108 )

Net cash provided by (used for) investing activities

    7,627       (1,492 )
                 

FINANCING ACTIVITIES

               

Net increase in deposits

    6,959       31,031  

Decrease in short-term borrowings, net

    (9,701 )     (9,895 )

Repayment of other borrowings

    (64 )     (91 )

Common stock issued

    29       -  

Stock options exercised

    -       2  

Proceeds from dividend reinvestment and purchase plan

    125       175  

Cash dividends

    (507 )     (534 )

Net cash (used for) provided by financing activities

    (3,159 )     20,688  
                 

Increase in cash and cash equivalents

    6,470       19,623  
                 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

    23,750       25,639  
                 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $ 30,220     $ 45,262  
                 

SUPPLEMENTAL INFORMATION

               

Cash paid during the year for:

               

Interest on deposits and borrowings

  $ 1,031     $ 894  

Income taxes

    375       -  
                 

Noncash investing transactions:

               

Transfers from loans to other real estate owned

  $ 77     $ -  

 

See accompanying notes to unaudited consolidated financial statements.

 

 
7

 

 

MIDDLEFIELD BANC CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - BASIS OF PRESENTATION

 

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

 

The accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles and the instructions for Form 10-Q and Article 10 of Regulation S-X. In management’s opinion, the financial statements include all adjustments, consisting of normal recurring adjustments, that the Company considers necessary to fairly state the Company’s financial position and the results of operations and cash flows. The consolidated balance sheet at December 31, 2015, has been derived from the audited financial statements at that date but does not include all of the necessary informational disclosures and footnotes as required by U.S. generally accepted accounting principles. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included with the Company’s Form 10-K for the year ended December 31, 2015. The results of the Company’s operations for any interim period are not necessarily indicative of the results of the Company’s operations for any other interim period or for a full fiscal year.

 

Recent Accounting Pronouncements

 

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

 

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

 

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

 

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

 

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

 

 
8

 

 

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

 

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

 

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

 

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

 

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

 

 
9

 

 

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

 

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

 

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

 

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

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

 

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

 

 
10

 

 

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

 

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

 

 
11

 

 

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

 

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

 

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

 

 
12

 

 

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

 

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

 

 
13

 

 

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

 

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

 

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

 

 

NOTE 2 - STOCK-BASED COMPENSATION

 

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

 

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

 

           

Weighted-

           

Weighted-

 
           

average

           

average

 
           

Exercise

           

Exercise

 
   

2016

   

Price

   

2015

   

Price

 
                                 

Outstanding, January 1

    31,949     $ 25.03       46,451     $ 27.90  

Exercised

    -       -       (375 )     17.55  
                                 

Outstanding, March 31

    31,949     $ 25.03       46,076     $ 27.99  
                                 

Exercisable, March 31

    31,949     $ 25.03       46,076     $ 27.99  

 

 
14

 

 

NOTE 3 - EARNINGS PER SHARE

 

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

 

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

 

   

For the Three

 
   

Months Ended

 
   

March 31,

 
   

2016

   

2015

 

Weighted-average common shares outstanding

    2,264,342       2,243,190  
                 

Average treasury stock shares

    (386,165 )     (189,530 )
                 

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

    1,878,177       2,053,660  
                 

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

    8,766       9,207  
                 

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

    1,886,943       2,062,867  

 

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

 

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

 

NOTE 4 - FAIR VALUE MEASUREMENTS

 

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

 

 

Level I:

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

 

Level II:

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

 

Level III:

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

 

 
15

 

 

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

 

           

March 31, 2016

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a recurring basis:

                               

U.S. government agency securities

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

Obligations of states and political subdivisions

    -       97,001       -       97,001  

Mortgage-backed securities in government- sponsored entities

            23,813               23,813  

Private-label mortgage-backed securities

    -       2,079       -       2,079  

Total debt securities

    -       141,746       -       141,746  

Equity securities in financial institutions

    5       809       -       814  

Total

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

 

 

           

December 31, 2015

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a recurring basis:

                               

U.S. government agency securities

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

Obligations of states and political subdivisions

    -       97,290       -       97,290  

Mortgage-backed securities in government- sponsored entities

    -       24,524       -       24,524  

Private-label mortgage-backed securities

    -       2,263       -       2,263  

Total debt securities

    -       145,706       -       145,706  

Equity securities in financial institutions

    5       809       -       814  

Total

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

 

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

 

Financial instruments are considered Level III when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. In addition to these unobservable inputs, the valuation models for Level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Level III financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. The Company has no securities considered to be Level III as of March 31, 2016 or December 31, 2015.

 

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

 

The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loan include quoted market prices for identical assets classified as Level I inputs and observable inputs, employed by certified appraisers, for similar assets classified as Level II inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs. The Company values other real estate owned at the estimated fair value of the underlying collateral less expected selling costs. Such values are estimated primarily using appraisals and reflect a market value approach. Due to the significance of the Level III inputs, other real estate owned has been classified as Level III.

 

 
16

 

 

           

March 31, 2016

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a nonrecurring basis:

                               

Impaired loans

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

Other real estate owned

    -       -       1,447       1,447  

 

           

December 31, 2015

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a nonrecurring basis:

                               

Impaired loans

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

Other real estate owned

    -       -       1,412       1,412  

  

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

 

   

Quantitative Information about Level III Fair Value Measurements

 

(Dollar amounts in thousands)

       

 

 

 

 

 
   

Fair Value Estimate

  Valuation Techniques Unobservable Input Range (Weighted Average)

March 31, 2016

                   

Impaired loans

  $ 10,350  

Discounted cash flow

Discount rate

3.1% to 7.9% (4.9%)
      4,486  

Appraisal of collateral (1)

Appraisal adjustments (2)

0.0% to 66.4% (38.2%)

Other real estate owned

  $ 1,447  

Appraisal of collateral (1)

Appraisal adjustments (2)

0.0% to  10.0% (7.2%)

 

 

   

Quantitative Information about Level III Fair Value Measurements

 

(Dollar amounts in thousands)

       

 

 

 

 

 
   

Fair Value Estimate

  Valuation Techniques Unobservable Input Range (Weighted Average)

December 31, 2015

                   

Impaired loans

  $ 6,867  

Discounted cash flow

Discount rate

3.1% to 7.9% (5.0%)
      5,981  

Appraisal of collateral (1)

Appraisal adjustments (2)

0.0% to 87.1% (23.3%)

Other real estate owned

  $ 1,412  

Appraisal of collateral (1)

Appraisal adjustments (2)

0% to 10.0% (7.3%)

 

(1)

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

(2)

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

 

 
17

 

 

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

 

   

March 31, 2016

 
   

Carrying

                           

Total

 
   

Value

   

Level I

   

Level II

   

Level III

   

Fair Value

 
   

(Dollar amounts in thousands)

 

Financial assets:

                                       

Cash and cash equivalents

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

Investment securities

                                       

Available for sale

    142,560       5       142,555       -       142,560  

Loans held for sale

    176       -       176       -       176  

Net loans

    523,999       -       -       531,917       531,917  

Bank-owned life insurance

    13,240       13,240       -       -       13,240  

Federal Home Loan Bank stock

    1,887       1,887       -       -       1,887  

Accrued interest receivable

    2,650       2,650       -       -       2,650  
                                         
                                         

Financial liabilities:

                                       

Deposits

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

Short-term borrowings

    26,124       26,124       -       -       26,124  

Other borrowings

    9,875       -       -       12,606       12,606  

Accrued interest payable

    389       389       -       -       389  

 

 

   

December 31, 2015

 
   

Carrying

                           

Total

 
   

Value

   

Level I

   

Level II

   

Level III

   

Fair Value

 
   

(Dollar amounts in thousands)

 

Financial assets:

                                       

Cash and cash equivalents

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

Investment securities

                                       

Available for sale

    146,520       5       146,515       -       146,520  

Loans held for sale

    1,107       -       1,107       -       1,107  

Net loans

    527,325       -       -       534,021       534,021  

Bank-owned life insurance

    13,141       13,141       -       -       13,141  

Federal Home Loan Bank stock

    1,887       1,887       -       -       1,887  

Accrued interest receivable

    2,387       2,387       -       -       2,387  
                                         

Financial liabilities:

                                       

Deposits

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

Short-term borrowings

    35,825       35,825       -       -       35,825  

Other borrowings

    9,939       -               10,063       10,063  

Accrued interest payable

    395       395       -       -       395  

 

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

 

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

 

 
18

 

 

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

 

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

 

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

 

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

The fair value is equal to the current carrying value.

 

Bank-Owned Life Insurance

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

 

Investment Securities Available for Sale

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

 

Loans Held for Sale

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

 

Net Loans

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

 

Deposits and Other Borrowings

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

 

Commitments to Extend Credit

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

 

 
19

 

 

NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE INCOME

 

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

 

   

Unrealized gains on

 
   

available-for-sale

 

(Dollars in thousands)

 

securities

 

Balance as of December 31, 2015

  $ 2,395  

Other comprehensive income before reclassification

    360  

Amount reclassified from accumulated other comprehensive income

    (34 )

Period change

    326  

Balance at March 31, 2016

  $ 2,721  

 

 

   

Unrealized gains on

 
   

available-for-sale

 

(Dollars in thousands)

 

securities

 

Balance as of December 31, 2014

  $ 2,548  

Other comprehensive income before reclassification

    562  

Amount reclassified from accumulated other comprehensive income

    (16 )

Period change

    546  

Balance at March 31, 2015

    3,094  

 

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

  

   

 

   
    Amount Reclassified from  

Affected Line Item in

    Accumulated Other Comprehensive Income (a)   

the Statement Where

(Dollars in thousands)

  For the Three Months Ended  

Net Income is

Details about other comprehensive income

  March 31, 2016    

March 31, 2015

 

Presented

Unrealized gains on available-for-sale securities

                 
    $ 51     $ 24  

Investment securities gains, net

      (17 )     (8 )

Income taxes

    $ 34     $ 16  

Net of tax

 

 

(a) Amounts in parentheses indicate debits to net income

 

 
20

 

 

NOTE 6 - INVESTMENT SECURITIES AVAILABLE FOR SALE

 

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

  

   

March 31, 2016

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

(Dollar amounts in thousands)

 

Cost

   

Gains

   

Losses

   

Value

 
                                 

U.S. government agency securities

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

Obligations of states and political subdivisions:

                               

Taxable

    1,989       187       (1 )     2,175  

Tax-exempt

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

Mortgage-backed securities in government-sponsored entities

    23,550       380       (117 )     23,813  

Private-label mortgage-backed securities

    1,927       153       (1 )     2,079  

Total debt securities

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

Equity securities in financial institutions

    750       64       -       814  

Total

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

 

 

   

December 31, 2015

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 
                                 

U.S. government agency securities

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

Obligations of states and political subdivisions:

                               

Taxable

    1,989       134       -       2,123  

Tax-exempt

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

Mortgage-backed securities in government-sponsored entities

    24,480       316       (272 )     24,524  

Private-label mortgage-backed securities

    2,079       184       -       2,263  

Total debt securities

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

Equity securities in financial institutions

    750       64       -       814  

Total

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

 

The amortized cost and fair value of debt securities at March 31, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 
21

 

 

   

Amortized

   

Fair

 

(Dollar amounts in thousands)

 

Cost

   

Value

 
                 

Due in one year or less

  $ 1,224     $ 1,237  

Due after one year through five years

    11,171       11,380  

Due after five years through ten years

    18,523       19,327  

Due after ten years

    106,769       109,802  
                 

Total

  $ 137,687     $ 141,746  

 

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

 

(Dollar amounts in thousands)  

For the Three Months

Ended March 31,

 
   

2016

   

2015

 

Proceeds from sales

  $ 1,322     $ 1,590  

Gross realized gains

    51       48  

Gross realized losses

    -       (24 )

 

Investment securities with an approximate carrying value of $63.0 million and $68.8 million at March 31, 2016 and December 31, 2015, respectively, were pledged to secure deposits and other purposes as required by law.

 

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

  

   

March 31, 2016

 
   

Less than Twelve Months

   

Twelve Months or Greater

   

Total

 
           

Gross

           

Gross

           

Gross

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

(Dollar amounts in thousands)

 

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 
                                                 

U.S. government agency securities

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

Obligations of states and political subdivisions

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

Mortgage-backed securities in government-sponsored entities

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

Private-label mortgage-backed securities

    109       (1 )     -       -       109       (1 )

Total

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

 

 
22

 

  

   

December 31, 2015

 
   

Less than Twelve Months

   

Twelve Months or Greater

   

Total

 
           

Gross

           

Gross

           

Gross

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 
                                                 

U.S. government agency securities

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

Obligations of states and political subdivisions

                                               

Tax-exempt

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

Mortgage-backed securities in government-sponsored entities

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

Total

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

 

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

 

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

 

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

 

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

 

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

 

 

 

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

 

     

 

 

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

 

     

 

 

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

       

 

 

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

 

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

 

 
23

 

 

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

 

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

 

   

March 31,

   

December 31,

 
   

2016

   

2015

 
                 

Commercial and industrial

  $ 47,436     $ 42,536  

Real estate - construction

    21,005       22,137  

Real estate - mortgage:

               

Residential

    238,489       232,478  

Commercial

    218,363       231,701  

Consumer installment

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

Less: Allowance for loan and lease losses

    6,357       6,385  
                 

Net loans

  $ 523,999     $ 527,325  

 

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

 

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

 

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

 

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

 

                   

Real Estate- Mortgage

                 

March 31, 2016

 

Commercial and

industrial

   

Real estate-

construction

   

Residential

   

Commercial

   

Consumer

installment

   

Total

 

Loans:

                                               

Individually evaluated for impairment

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

Collectively evaluated for impairment

    46,571       19,552       234,404       209,124       5,058       514,709  

Total loans

  $ 47,436     $ 21,005     $ 238,489     $ 218,363     $ 5,063     $ 530,356  

 

 

                   

Real estate- Mortgage

                 

December 31, 2015

 

Commercial and

industrial

   

Real estate-

construction

   

Residential

   

Commercial

   

Consumer

installment

   

Total

 

Loans:

                                               

Individually evaluated for impairment

  $ 1,808     $ 1,787     $ 3,881     $ 6,199     $ 6     $ 13,681  

Collectively evaluated for impairment

    40,728       20,350       228,597       225,502       4,852       520,029  

Total loans

  $ 42,536     $ 22,137     $ 232,478     $ 231,701     $ 4,858     $ 533,710  

 

 
24

 

 

 

                   

Real Estate- Mortgage

                 

March 31, 2016

 

Commercial and industrial

   

Real estate- construction

   

Residential

   

Commercial

   

Consumer installment

   

Total

 

Allowance for loan and lease losses:

                                               

Ending allowance balance attributable to loans:

                                               

Individually evaluated for impairment

  $ 323     $ 118     $ 269     $ 101     $ -     $ 811  

Collectively evaluated for impairment

    260       129       2,447       2,682       28       5,546  

Total ending allowance balance

  $ 583     $ 247     $ 2,716     $ 2,783     $ 28     $ 6,357  

 

 

                   

Real Estate- Mortgage

                 

December 31, 2015

 

Commercial and industrial

   

Real estate- construction

   

Residential

   

Commercial

   

Consumer installment

   

Total

 

Allowance for loan and lease losses:

                                               

Ending allowance balance attributable to loans:

                                               

Individually evaluated for impairment

  $ 388     $ 130     $ 276     $ 39     $ -     $ 833  

Collectively evaluated for impairment

    479       146       2,863       2,039       25       5,552  

Total ending allowance balance

  $ 867     $ 276     $ 3,139     $ 2,078     $ 25     $ 6,385  

 

 

The Company’s loan portfolio is segmented to a level that allows management to monitor risk and performance.  The portfolio is segmented into Commercial and Industrial (“C&I”), Real Estate Construction, Real Estate - Mortgage which is further segmented into Residential and Commercial real estate (“CRE”), and Consumer Installment Loans.  The C&I loan segment consists of loans made for the purpose of financing the activities of commercial customers.  The residential mortgage loan segment consists of loans made for the purpose of financing the activities of residential homeowners. The commercial mortgage loan segment consists of loans made for the purpose of financing the activities of commercial real estate owners and operators. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.

 

The decrease in C&I collectively evaluated loans during the three month period ended March 31, 2016 is due primarily to reclassification of loans to CRE in the first quarter of 2016. The impact on CRE collective evaluation, outside of reclassification, as well as residential real estate, is due to updates to the qualitative factors in the ALLL calculation. These factors were increased based on economic conditions, loan volume, and external factors.

 

Management evaluates individual loans in all of the commercial segments for possible impairment based on guidance established by the Board of Directors.  Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.  The Company does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired.

 

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of the following methods:  (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs.  The method is selected on a loan-by-loan basis, with management primarily utilizing the fair value of collateral method.  The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis.  The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

 

 
25

 

 

The following tables present impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary (in thousands):

  

March 31, 2016  
Impaired Loans  
                       
           

Unpaid

         
   

Recorded

    Principal    

Related

 
   

Investment

    Balance    

Allowance

 

With no related allowance recorded:

                       

Commercial and industrial

  $ 477     $ 477     $ -  

Real estate - construction

    1,335       1,330       -  

Real estate - mortgage:

                       

Residential

    2,928       2,926       -  

Commercial

    2,319       2,315       -  

Consumer installment

    5       5       -  

Total

  $ 7,064     $ 7,053     $ -  
                         

With an allowance recorded:

                       

Commercial and industrial

  $ 388     $ 388     $ 323  

Real estate - construction

    118       118       118  

Real estate - mortgage:

                       

Residential

    1,157       1,155       269  

Commercial

    6,920       6,906       101  

Total

  $ 8,583     $ 8,567     $ 811  
                         

Total:

                       

Commercial and industrial

  $ 865     $ 865     $ 323  

Real estate - construction

    1,453       1,448       118  

Real estate - mortgage:

                       

Residential

    4,085       4,081       269  

Commercial

    9,239       9,221       101  

Consumer installment

    5       5       -  

Total

  $ 15,647     $ 15,620     $ 811  

 

 
26

 

 

December 31, 2015  
Impaired Loans  
                       
           

Unpaid

         
   

Recorded

    Principal    

Related

 
   

Investment

    Balance    

Allowance

 

With no related allowance recorded:

                       

Commercial and industrial

  $ 1,027     $ 1,025     $ -  

Real estate - construction

    1,657       1,651       -  

Real estate - mortgage:

                       

Residential

    2,445       2,443       -  

Commercial

    2,337       2,335       -  

Total

  $ 7,466     $ 7,454     $ -  
                         

With an allowance recorded:

                       

Commercial and industrial

  $ 781     $ 781     $ 388  

Real estate - construction

    130       130       130  

Real estate - mortgage:

                       

Residential

    1,436       1,436       276  

Commercial

    3,862       3,846       39  

Consumer installment

    6       6       -  

Total

  $ 6,215     $ 6,199     $ 833  
                         

Total:

                       

Commercial and industrial

  $ 1,808     $ 1,806     $ 388  

Real estate - construction

    1,787       1,781       130  

Real estate - mortgage:

                       

Residential

    3,881       3,879       276  

Commercial

    6,199       6,181       39  

Consumer installment

    6       6       -  

Total

  $ 13,681     $ 13,653     $ 833  

 

The following tables present interest income by class, recognized on impaired loans (in thousands):

  

   

For the Three Months Ended March 31, 2016

 
                 
   

Average Recorded Investment

   

Interest Income Recognized

 

Total:

               

Commercial and industrial

  $ 1,337     $ 13  

Real estate - construction

    1,620       25  

Real estate - mortgage:

               

Residential

    3,983       36  

Commercial

    7,719       123  

Consumer installment

    6       -  
    $ 14,665     $ 197  

 

 
27

 

 

   

For the Three Months Ended March 31, 2015

 
       
   

Average Recorded Investment

   

Interest Income Recognized

 

Total:

               

Commercial and industrial

  $ 1,227     $ 14  

Real estate - construction

    2,882       20  

Real estate - mortgage:

               

Residential

    4,833       38  

Commercial

    4,266       39  

Consumer installment

    6       -  
    $ 13,214     $ 111  

 

Management uses a nine-point internal risk-rating system to monitor the credit quality of the overall loan portfolio. The first five categories are considered not criticized and are aggregated as Pass rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification.  Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected.  All loans greater than 90 days past due are considered Substandard.   Any portion of a loan that has been charged off is placed in the Loss category.  

 

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan-rating process with several layers of internal and external oversight.  Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death, occurs to raise awareness of a possible credit event.  The Company’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis with the Chief Credit Officer ultimately responsible for accurate and timely risk ratings.  The Credit Department performs an annual review of all commercial relationships with loan balances of $1,000,000 or greater.  Confirmation of the appropriate risk grade is included in the review on an ongoing basis.  The Company engages an external consultant to conduct loan reviews on a semiannual basis. Generally, the external consultant reviews commercial relationships greater than $250,000 and/or criticized relationships greater than $125,000.  Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis.  Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

 

The primary risk of commercial and industrial loans is the current economic uncertainties. C&I loans are, by nature, secured by less substantial collateral than real estate-secured loans. The primary risk of real estate construction loans is potential delays and /or disputes during the completion process. The primary risk of residential real estate loans is current economic uncertainties along with the slow recovery in the housing market. The primary risk of commercial real estate loans is loss of income of the owner or occupier of the property and the inability of the market to sustain rent levels. Consumer installment loans historically have experienced higher delinquency rates. Consumer installments are typically secured by less substantial collateral than other types of credits.

 

 
28

 

 

The following tables present the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk-rating system (in thousands):

  

           

Special

                   

Total

 
   

Pass

   

Mention

   

Substandard

   

Doubtful

   

Loans

 

March 31, 2016

                                       
                                         

Commercial and industrial

  $ 45,742     $ 485     $ 1,209     $ -     $ 47,436  

Real estate - construction

    20,886       -       -       119       21,005  

Real estate - mortgage:

                                       

Residential

    231,785       493       6,211       -       238,489  

Commercial

    208,808       1,223       8,332       -       218,363  

Consumer installment

    5,060       -       3       -       5,063  

Total

  $ 512,281     $ 2,201     $ 15,755     $ 119     $ 530,356  

 

 

           

Special

                   

Total

 

 

 

Pass

   

Mention

   

Substandard

   

Doubtful

   

Loans

 
December 31, 2015                                        
                                         

Commercial and industrial

  $ 40,560     $ 242     $ 1,734     $ -     $ 42,536  

Real estate - construction

    22,007       -       -       130       22,137  

Real estate - mortgage:

                                       

Residential

    225,945       728       5,805       -       232,478  

Commercial

    219,331       4,327       8,043       -       231,701  

Consumer installment

    4,854       -       4       -       4,858  

Total

  $ 512,697     $ 5,297     $ 15,586     $ 130     $ 533,710  

 

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due.

 

Nonperforming assets include nonaccrual loans, troubled debt restructurings (TDRs), loans 90 days or more past due, EMORECO assets, other real estate owned, and repossessed assets. A loan is classified as nonaccrual when, in the opinion of management, there are serious doubts about collectability of interest and principal. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of principal and interest is doubtful.  Payments received on nonaccrual loans are applied against the principal balance.

 

The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans (in thousands):

 

           

30-59 Days

   

60-89 Days

   

90 Days+

   

Total

   

Total

 
   

Current

   

Past Due

   

Past Due

   

Past Due

   

Past Due

   

Loans

 

March 31, 2016

                                               
                                                 

Commercial and industrial

  $ 47,080     $ 2     $ 9     $ 345     $ 356     $ 47,436  

Real estate - construction

    21,005       -       -       -       -       21,005  

Real estate - mortgage:

                                               

Residential

    236,114       1,261       91       1,023       2,375       238,489  

Commercial

    217,625       21       112       605       738       218,363  

Consumer installment

    5,063       -       -       -       -       5,063  

Total

  $ 526,887     $ 1,284     $ 212     $ 1,973     $ 3,469     $ 530,356  

 

 
29

 

 

           

30-59 Days

   

60-89 Days

   

90 Days+

   

Total

   

Total

 
   

Current

   

Past Due

   

Past Due

   

Past Due

   

Past Due

   

Loans

 

December 31, 2015

                                               
                                                 

Commercial and industrial

  $ 41,544     $ 225     $ 26     $ 741     $ 992     $ 42,536  

Real estate - construction

    22,137       -       -       -       -       22,137  

Real estate - mortgage:

                                               

Residential

    229,725       1,482       92       1,179       2,753       232,478  

Commercial

    230,903       189       -       609       798       231,701  

Consumer installment

    4,837       16       3       2       21       4,858  

Total

  $ 529,146     $ 1,912     $ 121     $ 2,531     $ 4,564     $ 533,710  

 

The following tables present the classes of the loan portfolio summarized by nonaccrual loans (in thousands):

 

March 31, 2016

         

90+ Days Past

 
   

Nonaccrual

    Due and Accruing  
                 
                 

Commercial and industrial

  $ 1,058     $ -  

Real estate - construction

    118       -  

Real estate - mortgage:

               

Residential

    4,435       67  

Commercial

    1,922       -  

Consumer installment

    1       -  

Total

  $ 7,534     $ 67  

 

 

December 31, 2015

 

December 31, 2015

   

90+ Days Past

 
   

Nonaccrual

    Due and Accruing  
                 
                 

Commercial and industrial

  $ 1,450     $ -  

Real estate - construction

    130       -  

Real estate - mortgage:

               

Residential

    4,122       -  

Commercial

    1,842       -  

Consumer installment

    1       2  

Total

  $ 7,545     $ 2  

 

An allowance for loan and lease losses (“ALLL”) is maintained to absorb losses from the loan portfolio.  The ALLL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of nonperforming loans.

 

The Company’s methodology for determining the ALLL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance.   The total of the two components represents the Company’s ALLL. Management also performs impairment analyses on TDRs, which may result in specific reserves.

 

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate.  For general allowances, historical loss trends are used in the estimation of losses in the current portfolio.  These historical loss amounts are modified by other qualitative factors.

 

 
30

 

 

The classes described above, which are based on the purpose code assigned to each loan, provide the starting point for the ALLL analysis.  Management tracks the historical net charge-off activity at the purpose code level.  A historical charge-off factor is calculated using the last four consecutive historical quarters.

 

Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience.  The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and nonaccrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and/or geographic standpoint.

 

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALLL.  When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALLL.

 

The following tables summarize the primary segments of the loan portfolio (in thousands):

  

   

Commercial

and industrial

   

Real estate-

construction

   

Real estate-

residential

mortgage

   

Real estate-

commercial

mortgage

   

Consumer

installment

   

Total

 

ALLL balance at December 31, 2015

  $ 867     $ 276     $ 3,139     $ 2,078     $ 25     $ 6,385  

Charge-offs

    (120 )     -       (42 )     -       (15 )     (177 )

Recoveries

    37       -       4       -       3       44  

Provision

    (201 )     (29 )     (385 )     705       15       105  

ALLL balance at March 31, 2016

  $ 583     $ 247     $ 2,716     $ 2,783     $ 28     $ 6,357  

 

 

   

Commercial

and industrial

   

Real estate-

construction

   

Real estate-

residential

mortgage

   

Real estate-

commercial

mortgage

   

Consumer

installment

   

Total

 

ALLL balance at December 31, 2014

  $ 642     $ 868     $ 3,703     $ 1,576     $ 57     $ 6,846  

Charge-offs

    (100 )     (385 )     (191 )     -       (3 )     (679 )

Recoveries

    162       -       12       -       1       175  

Provision

    (211 )     11       (65 )     382       (12 )     105  

ALLL balance at March 31, 2015

  $ 493     $ 494     $ 3,459     $ 1,958     $ 43     $ 6,447  

 

The following tables summarize troubled debt restructurings (in thousands):

 

   

For the Three Months Ended

 
   

March 31, 2016

 
   

 

   

Pre-Modification

   

Post-Modification

 
    Number of Contracts     Outstanding     Outstanding  
   

Term

                     Recorded      Recorded  
Troubled Debt Restructurings   Modification    

Other

   

Total

    Investment     Investment  

Commercial and industrial

    2         -       2     $ 33     $ 33  

Residential real estate

    2         -       2       74       74  

Commercial real estate

    2         -       2       581       581  

 

 

   

For the Three Months Ended

 
   

March 31, 2015

 
   

 

   

Pre-Modification

   

Post-Modification

 
    Number of Contracts     Outstanding     Outstanding  
   

Term

                     Recorded      Recorded  
Troubled Debt Restructurings   Modification    

Other

   

Total

    Investment     Investment  

Commercial and industrial

    1         -       1     $ 48     $ 48  

Residential real estate

    1         -       1       175       195  

 

No TDRs, modified in the twelve months prior to March 31, 2016 and March 31, 2015, subsequently defaulted in the three months ended March 31, 2016 and March 31, 2015.

 

 
31

 

 

NOTE 8 OTHER REAL ESTATE OWNED (“OREO”)

 

OREO comprises foreclosed assets acquired in settlement of loans and is carried at fair value less estimated cost to sell and is included in other assets on the Consolidated Balance Sheet. At March 31, 2016 and December 31, 2015, there was $1.4 million of OREO. As of March 31, 2016, the Company has initiated formal foreclosure proceedings on $2.0 million of real estate.

 

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

 

The following discussion and analysis provides further detail to the financial condition and results of operations of the Company. The MD&A should be read in conjunction with the notes and financial statements presented in this report.

 

 
32

 

 

CHANGES IN FINANCIAL CONDITION

 

General. The Company’s total assets ended the March 31, 2016 quarter at $732.9 million, a decrease of $2.3 million or 0.3% from December 31, 2015. For the same time period, cash and cash equivalents increased $6.5 million, or 27.2% while net loans decreased $3.3 million, or 0.6%. Total liabilities decreased $3.7 million, or 0.6% while stockholders’ equity increased $1.5 million, or 2.3%.

 

Cash and cash equivalents. Cash and due from banks and Federal funds sold represent cash and cash equivalents. Cash and cash equivalents increased $6.5 million at March 31, 2016 from $23.8 million at December 31, 2015. Deposits from customers into savings and checking accounts, loan and securities repayments and proceeds from borrowed funds typically increase these accounts. Decreases result from customer withdrawals, new loan originations, purchases of investment securities and repayments of borrowed funds.

 

Investment securities. Investment securities available for sale on March 31, 2016 totaled $142.6 million, a decrease of $4.0 million or 2.7% from $146.5 million at December 31, 2015. During this period the Company recorded repayments, calls, and maturities of $4.8 million. Sales of securities were $1.3 million with a net realized gain of $51,000. Securities purchases were $1.7 million during this period.

 

Loans receivable. The loans receivable category consists primarily of single-family mortgage loans used to purchase or refinance personal residences located within the Company’s market area and commercial real estate loans used to finance properties that are used in the borrowers’ businesses or to finance investor-owned rental properties, and to a lesser extent, construction and consumer loans. Net loans receivable decreased $3.3 million or 0.6% to $524.0 million as of March 31, 2016 from $527.3 million at December 31, 2015. Included in this amount were increases in the residential real estate and commercial and industrial portfolios of $6.0 million, or 2.6% and $4.9 million, or 11.5%, respectively. The commercial real estate and construction portfolios decreased by $13.3 million and $1.1 million, respectively.

 

The Company’s Mortgage Banking operation generates loans for sale to FHLMC. Loans held for sale on March 31, 2016 totaled $0.2 million, a decrease of $0.9 million, or 84.1%, from December 31, 2015. This decrease is the result of fewer funded loans being held in the warehouse at quarter end.

 

Allowance for loan and lease losses and Asset Quality. The Company maintained the allowance for loan and lease losses at $6.4 million, or 1.2% of total loans, at March 31, 2016. For the three months ended March 31, 2016, net loan charge-offs totaled $133,000, or 0.10% of average loans, compared to net charge-offs of $504,000, or 0.43%, for the same period in 2015. To maintain the allowance for loan and lease losses, the Company recorded a provision for loan loss of $105,000 in the three month periods ending March 31, 2016 and 2015.

 

Management analyzes the adequacy of the allowance for loan and lease losses regularly through reviews of the performance of the loan portfolio considering economic conditions, changes in interest rates and the effect of such changes on real estate values and changes in the amount and composition of the loan portfolio. The allowance for loan and lease losses is a significant estimate that is particularly susceptible to changes in the near term. Such evaluation includes a review of all loans designated as impaired, historical loan loss experience, the estimated fair value of the underlying collateral, economic conditions, current interest rates, trends in the borrower’s industry and other factors that management believes warrant recognition in providing for an appropriate allowance for loan and lease losses. Future additions or reductions to the allowance for loan and lease losses will be dependent on these factors. Additionally, the Company uses an outside party to conduct an independent review of commercial and commercial real estate loans that is designed to test management conclusions of risk ratings and the appropriateness of the allowance allocated to these loans. The Company uses the results of this review to help determine the effectiveness of policies and procedures and to assess the adequacy of the allowance for loan and lease losses allocated to these types of loans. Management believes the allowance for loan and lease losses is appropriately stated at March 31, 2016. Based on the variables involved and management’s judgments about uncertain outcomes, the determination of the allowance for loan and lease losses is considered a critical accounting policy.

 

Nonperforming assets. Nonperforming assets includes nonaccrual loans, troubled debt restructurings (TDRs), loans 90 days or more past due, EMORECO assets, other real estate, and repossessed assets. Real estate owned is written down to fair value at its initial recording and continually monitored for changes in fair value. A loan is classified as nonaccrual when, in the opinion of management, there are serious doubts about collectability of interest and principal. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of principal and interest is doubtful. Payments received on nonaccrual loans are applied against principal until doubt about collectability ceases. TDRs are those loans which the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. The Company has 33 TDRs with a total balance of $3.3 million as of March 31, 2016. A TDR that yields market interest rate at the time of restructuring and is in compliance with its modified terms is no longer reported as TDR in calendar years after the year in which the restructuring took place. To be in compliance with its modified terms, a loan that is a TDR must not be in nonaccrual status and must be current or less than 30 days past due on its contractual principal and interest payments under the modified repayment terms. Nonperforming loans secured by real estate totaled $9.3 million as of March 31, 2016, an increase of $1.0 million from $8.3 million at December 31, 2015.

 

 
33

 

 

   

Asset Quality History

 
                                         

(Dollar amounts in thousands)

 

3/31/2016

   

12/31/2015

   

9/30/2015

   

6/30/2015

   

3/31/2015

 
                                         

Nonperforming loans

  $ 10,508     $ 10,263     $ 8,921     $ 7,777     $ 8,262  

Real estate owned

    1,447       1,412       2,006       2,308       2,203  
                                         

Nonperforming assets

  $ 11,955     $ 11,675     $ 10,927     $ 10,085     $ 10,465  
                                         

Allowance for loan and lease losses

    6,357       6,385       6,320       6,346       6,447  
                                         

Ratios

                                       

Nonperforming loans to total loans

    1.98 %     1.92 %     1.75 %     1.58 %     1.74 %

Nonperforming assets to total assets

    1.63 %     1.59 %     1.54 %     1.43 %     1.50 %

Allowance for loan and lease losses to total loans

    1.20 %     1.20 %     1.24 %     1.29 %     1.35 %

Allowance for loan and lease losses to nonperforming loans

    60.50 %     62.21 %     70.84 %     81.60 %     78.03 %

 

The increase in nonperforming loans is due to an effort to be more aggressive in moving accounts to nonaccrual. Specifically, five loans averaging $0.4 million were added. These loans were either charged down to a reliable carrying amount or specific reserves were taken. Total ALLL is sufficient to absorb any expected losses.

 

A major factor in determining the appropriateness of the allowance for loan and lease losses is the type of collateral which secures the loans. Of the total nonperforming loans at March 31, 2016, 88.6% were secured by real estate. Although this does not insure against all losses, the real estate typically provides for at least partial recovery, even in a distressed-sale and declining-value environment. The Company’s objective is to minimize the future loss exposure to the Company.

 

Deposits. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which are a significant source of funds totaling $631.4 million or 94.6% of the Company’s total funding sources at March 31, 2016. Total deposits increased $7.0 million or 1.1% at March 31, 2016 from $624.4 million at December 31, 2015. The increase in deposits is primarily related to the increase in interest-bearing demand and money market accounts of $9.9 million or 17.2%, and $3.3 million or 4.2%, respectively, at March 31, 2016. These increases were partially offset by decreases in time, savings, and noninterest-bearing demand accounts of $2.8 million, $2.4 million, and $1.0 million, respectively.

 

Borrowed funds. The Company uses short and long-term borrowings as another source of funding used for asset growth and liquidity needs. These borrowings primarily include FHLB advances, junior subordinated debt, short-term borrowings from other banks, federal funds purchased, and repurchase agreements. Short-term borrowings decreased $9.7 million, or 27.1%, to $26.1 million as of March 31, 2016.     

 

Stockholders’ equity. Stockholders’ equity increased $1.5 million, or 2.3%, to $63.8 million at March 31, 2016 from $62.3 million at December 31, 2015. This growth was the result of increases in retained earnings and accumulated other comprehensive income (“AOCI”) of $1.0 million and $0.3 million, respectively. The change to AOCI is due to available-for-sale securities fair value adjustments and the change in retained earnings is due to the year to date net income offset by dividends paid.

 

 

RESULTS OF OPERATIONS

 

General. Net income for the three months ended March 31, 2016, was $1.5 million, a $141,000, or 8.7% decrease from the amount earned during the same period in 2015. Diluted earnings per share for the quarter was unchanged from the same period in 2015 at $0.79.

 

The Company’s annualized return on average assets (ROA) and return on average equity (ROE) for the quarter were 0.81% and 9.34%, respectively, compared with 0.96% and 10.23% for the same period in 2015.

 

Net interest income. Net interest income, the primary source of revenue for the Company, is determined by the Company’s interest rate spread, which is defined as the difference between income on earning assets and the cost of funds supporting those assets, and the relative amounts of interest-earning assets and interest-bearing liabilities. Management periodically adjusts the mix of assets and liabilities, as well as the rates earned or paid on those assets and liabilities in order to manage and improve net interest income. The level of interest rates and changes in the amount and composition of interest-earning assets and liabilities affect the Company’s net interest income. Historically from an interest rate risk perspective, it has been management’s goal to maintain a balance between steady net interest income growth and the risks associated with interest rate fluctuations.

 

 
34

 

 

Net interest income for the three months ended March 31, 2016 totaled $6.3 million, an increase of 2.8% from that reported in the comparable period of 2015. The net interest margin was 3.87% for the first quarter of 2015, down from the 4.02% reported for the same quarter of 2015. The decrease is attributable to lower interest-earning asset yields, which decreased 10 basis points to 4.46%, on average interest-earning assets that increased by $37.7 million, or 5.7%. The decrease is also the result of a 5 basis point increase to 0.75% in the cost of interest-bearing liabilities on average interest-earning assets that increased by $39.6 million, or 7.7%.

 

Interest income. Interest income increased $313,000, or 4.4%, for the three months ended March 31, 2016, compared to the same period in the prior year. This is attributable to an increase in interest and fees on loans, partially offset by a decrease in interest earned on taxable investment securities.

 

Interest earned on loans receivable increased $330,000, or 5.6%, for the three months ended March 31, 2016, compared to the same period in the prior year. This is attributable to an increase in average loan balances of $58.6 million, partially offset by a 10 basis point decrease in the average yield, to 4.46%.

 

Interest earned on securities was unchanged for the three months ended March 31, 2016 when compared to the same period in the prior year. The average balance decreased $6.3 million, or 4.2% while the 4.23% yield on the investment portfolio was an increase of 12 basis points, from 4.11%, for the same period in the prior year.

 

Interest expense. Interest expense increased $142,000, or 16.1%, for the three months ended March 31, 2016, compared to the same period in the prior year. The increase is attributable to average balance increases to borrowings, time deposits, and money market deposits of $23.3 million, or 116.2%, $9.5 million, or 5.2%, and $4.1 million, or 5.4%, respectively. The increase was also the result of a 5 basis point increase in the cost of interest-bearing liabilities from the same period in 2015.

 

Provision for loan losses. The provision for loan losses represents the charge to income necessary to adjust the allowance for loan and lease losses to an amount that represents management’s assessment of the estimated probable incurred credit losses inherent in the loan portfolio. Each quarter management performs a review of estimated probable incurred credit losses in the loan portfolio. Based on this review, a provision for loan losses of $105,000 was recorded for the quarter ended March 31, 2016 unchanged from the quarter ended March 31, 2015. Nonperforming loans were $10.5 million, or 2.0% of total loans at March 31, 2016 compared with $8.3 million, or 1.7% at March 31, 2015. For the three months ended March 31, 2016, net loan charge-offs totaled $133,000, or 0.10% of average loans, compared to net charge-offs of $504,000, or 0.43%, for the first quarter of 2015.

 

Noninterest income. Noninterest income increased $113,000 for the three months ended March 31, 2016 over the comparable 2015 period. This increase was largely the result of increases in gain on sale of loans, earnings on bank-owned life insurance, and net investment security gains of $34,000, $30,000, and $27,000, respectively.

 

Noninterest expense. Noninterest expense of $5.3 million for the first quarter of 2016 was 11.0% or $527,000 more than the first quarter of 2015. Salaries and benefits and other expense increased $420,000, or 17.8%, and $78,000, or 20.7%, respectively. The salary increase is mostly due to an additional pay cycle in the first three months of 2016.

 

Provision for income taxes. The Company recognized $302,000 in income tax expense, which reflected an effective tax rate of 16.9% for the three months ended March 31, 2016, as compared to $404,000 with an effective tax rate of 19.9% for the comparable 2015 period.

 

 

CRITICAL ACCOUNTING ESTIMATES

 

The Company’s critical accounting estimates involving the more significant judgments and assumptions used in the preparation of the consolidated financial statements as of March 31, 2016, have remained unchanged from December 31, 2015.

 

Average Balance Sheet and Yield/Rate Analysis. The following tables set forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resultant average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resultant average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average balances are calculated using monthly averages and the average loan balances include nonaccrual loans and exclude the allowance for loan and lease losses, and interest income includes accretion of net deferred loan fees. Interest and yields on tax-exempt securities (tax exempt for federal income tax purposes) are shown on a fully tax-equivalent basis utilizing a federal tax rate of 34%. Yields and rates have been calculated on an annualized basis utilizing monthly interest amounts.

 

 
35

 

 

 

   

For the Three Months Ended March 31,

 
   

2016

   

2015

 
                                                 
   

Average

           

Average

   

Average

           

Average

 

(Dollars in thousands)

 

Balance

   

Interest

   

Yield/Cost

   

Balance

   

Interest

   

Yield/Cost

 
                                                 

Interest-earning assets:

                                               

Loans receivable

  $ 531,196     $ 6,173       4.67 %   $ 472,569     $ 5,843       5.01 %

Investment securities (3)

    146,245       1,130       4.23 %     152,584       1,154       4.11 %

Interest-bearing deposits with other banks

    21,134       45       0.86 %     35,702       38       0.43 %

Total interest-earning assets

    698,575       7,348       4.46 %     660,855       7,035       4.56 %

Noninterest-earning assets

    36,695                       24,338                  

Total assets

  $ 735,270                     $ 685,193                  

Interest-bearing liabilities:

                                               

Interest-bearing demand deposits

  $ 59,931     $ 42       0.28 %   $ 57,931     $ 44       0.31 %

Money market deposits

    79,964       83       0.42 %     75,853       75       0.40 %

Savings deposits

    178,827       128       0.29 %     178,044       137       0.31 %

Certificates of deposit

    191,016       602       1.27 %     181,558       575       1.28 %

Borrowings

    43,331       170       1.58 %     20,038       52       1.05 %

Total interest-bearing liabilities

    553,069       1,025       0.75 %     513,424       883       0.70 %

Noninterest-bearing liabilities

                                               

Other liabilities

    118,313                       107,227                  

Stockholders' equity

    63,888                       64,542                  

Total liabilities and stockholders' equity

  $ 735,270                     $ 685,193                  

Net interest income

          $ 6,323                     $ 6,152          

Interest rate spread (1)

                    3.72 %                     3.86 %

Net interest margin (2)

                    3.87 %                     4.02 %

Ratio of average interest-earning assets to average interest-bearing liabilities

                    126.31 %                     128.72 %

 


(1) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities

(2) Net interest margin represents net interest income as a percentage of average interest-earning assets.

(3) Tax-equivalent adjustments to interest income for tax-exempt securities were $407 and $391 for the three months ended March 31, 2016 and 2015, respectively.

 

 

Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense, between the three month periods ended March 31, 2016 and 2015, in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Company’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior period rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on securities reflects the changes in interest income on a fully tax-equivalent basis.

 

 
36

 

 

   

2016 versus 2015

 
                         
   

Increase (decrease) due to

 

(Dollars in thousands)

 

Volume

   

Rate

   

Total

 
                         

Interest-earning assets:

                       

Loans receivable

  $ 730     $ (400 )   $ 330  

Investment securities

    (65 )     41       (24 )

Interest-bearing deposits with other banks

    (16 )     23       7  

Total interest-earning assets

    649       (336 )     313  
                         
                         

Interest-bearing liabilities:

                       

Interest-bearing demand deposits

    2       (4 )     (2 )

Money market deposits

    4       4       8  

Savings deposits

    1       (10 )     (9 )

Certificates of deposit

    30       (3 )     27  

Borrowings

    61       57       118  

Total interest-bearing liabilities

    98       44       142  
                         
                         

Net interest income

  $ 551     $ (380 )   $ 171  

 

LIQUIDITY

 

Management's objective in managing liquidity is maintaining the ability to continue meeting the cash flow needs of banking customers, such as borrowings or deposit withdrawals, as well as the Company’s own financial commitments. The principal sources of liquidity are net income, loan payments, maturing and principal reductions on securities and sales of securities available for sale, federal funds sold and cash and deposits with banks. Along with its liquid assets, the Company has additional sources of liquidity available to ensure that adequate funds are available as needed. These include, but are not limited to, the purchase of federal funds, and the ability to borrow funds under line of credit agreements with correspondent banks and a borrowing agreement with the Federal Home Loan Bank of Cincinnati, Ohio and the adjustment of interest rates to obtain depositors. Management believes the Company has the capital adequacy, profitability and reputation to meet the current and projected needs of its customers.

 

For the three months ended March 31, 2016, the adjustments to reconcile net income to net cash from operating activities consisted mainly of depreciation and amortization of premises and equipment, the provision for loan losses, net amortization of securities and net changes in other assets and liabilities. For a more detailed illustration of sources and uses of cash, refer to the Condensed Consolidated Statements of Cash Flows.

 

INFLATION

 

Substantially all of the Company's assets and liabilities relate to banking activities and are monetary in nature. The consolidated financial statements and related financial data are presented in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). GAAP currently requires the Company to measure the financial position and results of operations in terms of historical dollars, with the exception of securities available for sale, impaired loans and other real estate loans that are measured at fair value. Changes in the value of money due to rising inflation can cause purchasing power loss.

 

Management's opinion is that movements in interest rates affect the financial condition and results of operations to a greater degree than changes in the rate of inflation. It should be noted that interest rates and inflation do affect each other, but do not always move in correlation with each other. The Company's ability to match the interest sensitivity of its financial assets to the interest sensitivity of its liabilities in its asset/liability management may tend to minimize the effect of changes in interest rates on the Company's performance.

 

REGULATORY MATTERS

 

The Company is subject to the regulatory requirements of the Federal Reserve System as a bank holding company. The bank subsidiary is subject to regulations of the Federal Deposit Insurance Corporation (“FDIC”) and the State of Ohio, Division of Financial Institutions.

 

The Federal Reserve Board and the FDIC have extensive authority to prevent and to remedy unsafe and unsound practices and violations of applicable laws and regulations by institutions and holding companies. The agencies may assess civil money penalties, issue cease-and-desist or removal orders, seek injunctions, and publicly disclose those actions. In addition, the Ohio Division of Financial Institutions possesses enforcement powers to address violations of Ohio banking law by Ohio-chartered banks.

 

 
37

 

 

REGULATORY CAPITAL REQUIREMENTS

 

Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. The net unrealized gain or loss on available-for-sale securities is generally not included in computing regulatory capital. In order to avoid limitations on capital distributions, including dividend payments, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2016 to 2.50% by 2019. The amounts shown below as the adequately capitalized ratio plus capital conservation buffer includes the fully phased-in 2.50% buffer.

 

The Bank met each of the well-capitalized ratio guidelines at March 31, 2016. The following table indicates the capital ratios for the Bank and Company at March 31, 2016 and December 31, 2015.

  

   

As of March 31, 2016

 
           

Tier 1 Risk

   

Common

   

Total Risk

 
   

Leverage

    Based     Equity Tier 1     Based  

The Middlefield Banking Company

    9.19 %     12.21 %     12.21 %     13.38 %

Middlefield Banc Corp.

    8.73 %     11.80 %     11.80 %     12.96 %

Adequately capitalized ratio

    4.00 %     6.00 %     4.50 %     8.00 %
Adequately capitalized ratio plus capital conservation buffer     4.00 %     8.50 %     7.00 %     10.50 %

Well-capitalized ratio (Bank only)

    5.00 %     8.00 %     6.50 %     10.00 %

 

 

   

As of December 31, 2015

 
           

Tier 1 Risk

   

Common

   

Total Risk

 
   

Leverage

    Based     Equity Tier 1     Based  

The Middlefield Banking Company

    9.23 %     12.52 %     12.52 %     13.73 %

Middlefield Banc Corp.

    8.69 %     12.00 %     12.00 %     13.20 %

Adequately capitalized ratio

    4.00 %     6.00 %     4.50 %     8.00 %
Adequately capitalized ratio plus capital conservation buffer     4.00 %     8.50 %     7.00 %     10.50 %

Well-capitalized ratio (Bank only)

    5.00 %     8.00 %     6.50 %     10.00 %

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

ASSET AND LIABILITY MANAGEMENT

 

The primary objective of the Company’s asset and liability management function is to maximize the Company’s net interest income while simultaneously maintaining an acceptable level of interest rate risk given the Company’s operating environment, capital and liquidity requirements, performance objectives and overall business focus. The principal determinant of the exposure of the Company’s earnings to interest rate risk is the timing difference between the re-pricing or maturity of interest-earning assets and the re-pricing or maturity of its interest-bearing liabilities. The Company’s asset and liability management policies are designed to decrease interest rate sensitivity primarily by shortening the maturities of interest-earning assets while at the same time extending the maturities of interest-bearing liabilities. The Board of Directors of the Company continues to believe in a strong asset/liability management process in order to insulate the Company from material and prolonged increases in interest rates. Mortgage-backed securities generally increase the quality of the Company’s assets by virtue of the insurance or guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Company.

 

The Company’s Board of Directors has established an Asset and Liability Management Committee consisting of outside directors and senior management. This committee, which meets quarterly, generally monitors various asset and liability management policies and strategies.

 

 
38

 

 

Interest Rate Sensitivity Simulation Analysis

 

The Company engages an external consultant to facilitate income simulation modeling on a quarterly basis. This modeling measures interest rate risk and sensitivity. The Asset and Liability Management Committee of the Company believes the various rate scenarios of the simulation modeling enables the Company to more accurately evaluate and manage the exposure of interest rate fluctuations on net interest income, the yield curve, various loan and mortgage-backed security prepayments, and deposit decay assumptions.

 

Earnings simulation modeling and assumptions about the timing and volatility of cash flows are critical in net portfolio equity valuation analysis. Particularly important are the assumptions driving mortgage prepayments and expected attrition of the core deposit portfolios. These assumptions are based on the Company’s historical experience and industry standards and are applied consistently across all rate risk measures.

 

The Company has established the following guidelines for assessing interest rate risk:

 

Net interest income simulation- Projected net interest income over the next twelve months will not be reduced by more than 10% given a gradual shift (i.e., over 12-months) in interest rates of up to 200 basis points (+ or -) and assuming no balance sheet growth.

 

Portfolio equity simulation- Portfolio equity is the net present value of the Company’s existing assets and liabilities. Given a 200 basis point immediate and permanent increase in market interest rates, portfolio equity may not correspondingly decrease or increase by more than 20% of stockholders’ equity. Given a 100 basis point immediate and permanent decrease in market interest rates, portfolio equity may not correspondingly decrease or increase by more than 10% of stockholders’ equity.

 

The following table presents the simulated impact of a 200 basis point upward or 100 basis point downward shift of market interest rates on net interest income, and the change in portfolio equity. This analysis was done assuming the interest-earning asset and interest-bearing liability levels at March 31, 2016 remained constant. The impact of the market rate movements was developed by simulating the effects of rates changing gradually over a one-year period from the March 31, 2016 levels for net interest income, and portfolio equity. The impact of market rate movements was developed by simulating the effects of an immediate and permanent change in rates at March 31, 2016 for portfolio equity:  

 

   

Increase

   

Decrease

 
   

200 Basis Points

   

100 Basis Points

 
                 

Net interest income - increase (decrease)

    (2.41

)%

    (1.82

)%

                 

Portfolio equity - increase (decrease)

    6.10

%

    (21.40

)%

 

 

Item 4. Controls and Procedures

 

Controls and Procedures Disclosure

 

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

As of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Corporation in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in internal control or in other factors that could significantly affect the Company’s internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

 
39

 

 

A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 2), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course of performing their assigned functions.

 

Changes in Internal Control over Financial Reporting

 

There have not been any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1.

Legal Proceedings

   
  None
   
Item 1a. There are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Please refer to that section for disclosures regarding the risks and uncertainties related to the Company’s business.
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
  None
   
Item 3. Defaults by the Company on its Senior Securities
   
  None
   
Item 4. Mine Safety Disclosures
   
  N/A
   
Item 5. Other information
   
  None
   
Item 6. Exhibits and Reports on Form 8-K

 

 
40

 

 

Exhibit list for Middlefield Banc Corp.’s Form 10-Q Quarterly Report for the Period Ended March 31, 2016

 

3.1

 

Second Amended and Restated Articles of Incorporation of Middlefield Banc Corp., as amended

 

Incorporated by reference to Exhibit 3.1 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2005, filed on March 29, 2006

         

3.2

 

Regulations of Middlefield Banc Corp.

 

Incorporated by reference to Exhibit 3.2 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001

         

4.0

 

Specimen stock certificate

 

Incorporated by reference to Exhibit 4 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001

         

4.1

 

Amended and Restated Trust Agreement, dated as of December 21, 2006, between Middlefield Banc Corp., as Depositor, Wilmington Trust Company, as Property trustee, Wilmington Trust Company, as Delaware Trustee, and Administrative Trustees

 

Incorporated by reference to Exhibit 4.1 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006

         

4.2

 

Junior Subordinated Indenture, dated as of December 21, 2006, between Middlefield Banc Corp. and Wilmington Trust Company

 

Incorporated by reference to Exhibit 4.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006

         

4.3

 

Guarantee Agreement, dated as of December 21, 2006, between Middlefield Banc Corp. and Wilmington Trust Company

 

Incorporated by reference to Exhibit 4.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006

         

10.1.0*

 

1999 Stock Option Plan of Middlefield Banc Corp.

 

Incorporated by reference to Exhibit 10.1 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001

         

10.1.1*

 

2007 Omnibus Equity Plan

 

Incorporated by reference to Middlefield Banc Corp.’s definitive proxy statement for the 2008 Annual Meeting of Shareholders, Appendix A, filed on April 7, 2008

         

10.2*

 

Severance Agreement between Middlefield Banc Corp. and Thomas G. Caldwell, dated January 7, 2008

 

Incorporated by reference to Exhibit 10.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

         

10.3*

 

Severance Agreement between Middlefield Banc Corp. and James R. Heslop, II, dated January 7, 2008

 

Incorporated by reference to Exhibit 10.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

         

10.4.1*

 

Severance Agreement between Middlefield Banc Corp. and Teresa M. Hetrick, dated January 7, 2008

 

Incorporated by reference to Exhibit 10.4.1 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

         

10.4.2

 

[reserved]

   
         

10.4.3*

 

Severance Agreement between Middlefield Banc Corp. and Donald L. Stacy, dated January 7, 2008

 

Incorporated by reference to Exhibit 10.4.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

         

10.4.4*

 

Severance Agreement between Middlefield Banc Corp. and Alfred F. Thompson Jr., dated January 7, 2008

 

Incorporated by reference to Exhibit 10.4.4 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

         

10.5

 

Federal Home Loan Bank of Cincinnati Agreement for Advances and Security Agreement dated September 14, 2000

 

Incorporated by reference to Exhibit 10.4 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001

         

10.6*

 

Amended Director Retirement Agreement with Richard T. Coyne

 

Incorporated by reference to Exhibit 10.6 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

 

 
41

 

 

10.7*

 

Amended Director Retirement Agreement with Frances H. Frank

 

Incorporated by reference to Exhibit 10.7 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

         

10.8*

 

Amended Director Retirement Agreement with Thomas C. Halstead

 

Incorporated by reference to Exhibit 10.8 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

         

10.9*

 

Director Retirement Agreement with George F. Hasman

 

Incorporated by reference to Exhibit 10.9 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2001, filed on March 28, 2002

         

10.10*

 

Director Retirement Agreement with Donald D. Hunter

 

Incorporated by reference to Exhibit 10.10 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2001, filed on March 28, 2002

         

10.11*

 

Director Retirement Agreement with Martin S. Paul

 

Incorporated by reference to Exhibit 10.11 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2001, filed on March 28, 2002

         

10.12*

 

Amended Director Retirement Agreement with Donald E. Villers

 

Incorporated by reference to Exhibit 10.12 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

         

10.13*

 

Executive Survivor Income Agreement (aka DBO agreement [death benefit only]) with Donald L. Stacy

 

Incorporated by reference to Exhibit 10.14 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

         

10.14*

 

DBO Agreement with Jay P. Giles

 

Incorporated by reference to Exhibit 10.15 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

         

10.15*

 

DBO Agreement with Alfred F. Thompson Jr.

 

Incorporated by reference to Exhibit 10.16 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

         

10.16

 

[reserved]

   
         

10.17*

 

DBO Agreement with Teresa M. Hetrick

 

Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

         

10.18 *

 

Executive Deferred Compensation Agreement with Jay P. Giles

 

Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2011, filed on March 20, 2012

         

10.19*

 

DBO Agreement with James R. Heslop, II

 

Incorporated by reference to Exhibit 10.20 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

         

10.20*

 

DBO Agreement with Thomas G. Caldwell

 

Incorporated by reference to Exhibit 10.21 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

         

10.21*

 

Form of Indemnification Agreement with directors of Middlefield Banc Corp. and with executive officers of Middlefield Banc Corp. and The Middlefield Banking Company

 

Incorporated by reference to Exhibit 99.1 of Middlefield Banc Corp.’s registration statement on Form 10, Amendment No. 1, filed on June 14, 2001

 

 
42

 

 

10.22*

 

Annual Incentive Plan

 

Incorporated by reference to Exhibit 10.22 of Middlefield Banc Corp.’s Form 8-K Current Report filed on June 12, 2012

         

10.22.1*

 

Annual Incentive Plan 2016 Award Summary

 

Incorporated by reference to Exhibit 10.22.1 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 9, 2016

         

10.23*

 

Amended Executive Deferred Compensation Agreement with Thomas G. Caldwell

 

Incorporated by reference to Exhibit 10.23 of Middlefield Banc Corp.’s Form 8-K Current Report filed on May 9, 2008

         

10.24*

 

Amended Executive Deferred Compensation Agreement with James R. Heslop, II

 

Incorporated by reference to Exhibit 10.24 of Middlefield Banc Corp.’s Form 8-K Current Report filed on May 9, 2008

         

10.25*

 

Amended Executive Deferred Compensation Agreement with Donald L. Stacy

 

Incorporated by reference to Exhibit 10.25 of Middlefield Banc Corp.’s Form 8-K Current Report filed on May 9, 2008

         

10.26

 

[reserved]

   
         

10.27

 

[reserved]

   
         

10.28

 

[reserved]

   
         

10.29*

 

Form of conditional stock award

 

Incorporated by reference to Exhibit 10.29 of Middlefield Banc Corp.’s From 8-K Current Report filed on March 4, 2016

         

31.1

 

Rule 13a-14(a) certification of Chief Executive Officer

 

filed herewith

         

31.2

 

Rule 13a-14(a) certification of Chief Financial Officer

 

filed herewith

         

32

 

Rule 13a-14(b) certification

 

filed herewith

         

101.INS**

 

XBRL Instance

 

furnished herewith

         

101.SCH**

 

XBRL Taxonomy Extension Schema

 

furnished herewith

         

101.CAL**

 

XBRL Taxonomy Extension Calculation

 

furnished herewith

         

101.DEF**

 

XBRL Taxonomy Extension Definition

 

furnished herewith

         

101.LAB**

 

XBRL Taxonomy Extension Labels

 

furnished herewith

         

101.PRE**

 

XBRL Taxonomy Extension Presentation

 

furnished herewith

 

 

* management contract or compensatory plan or arrangement

 

 
43

 

 

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

 
44

 

 

 

 

  

 

SIGNATURES

  

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned and hereunto duly authorized.

  

 

 

 

 

 

 

MIDDLEFIELD BANC CORP.

 

 

 

 

 

       
       
       

Date: May 11, 2016    

By:

/s/ Thomas G. Caldwell

 

 

 

Thomas G. Caldwell

 

 

 

President and Chief Executive Officer

 

       
       
       
       
       
Date: May 11, 2016      By: /s/Donald L. Stacy  
    Donald L. Stacy  
    Principal Financial and Accounting Officer  
       

  

 

45