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CB Financial Services, Inc. - Quarter Report: 2016 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2016

 

OR

 

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

 

For the transition period from __________ to __________

 

 

Commission file number: 001-36706

 

  CB FINANCIAL SERVICES, INC.  
(Exact name of registrant as specified in its charter)

 

Pennsylvania   51-0534721
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

100 N. Market Street, Carmichaels, PA      15320
(Address of principal executive offices)   (Zip Code)

 

  (724) 966-5041  
(Registrant’s telephone number, including area code)

 

  N/A  
(Former name, former address and former fiscal year, if changed since last report)

 

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

Yes No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer ☒
Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company ☐

 

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

 

As of August 9, 2016, the number of shares outstanding of the Registrant’s Common Stock was 4,081,017.

 

 

FORM 10-Q

 

INDEX

 

Page

PART I – FINANCIAL INFORMATION  
Item 1. Financial Statements (Unaudited). 1
Consolidated Statement of Financial Condition 1
Consolidated Statement of Income 2
Consolidated Statement of Comprehensive Income 3
Consolidated Statement of Changes In Stockholders’ Equity 3
Consolidated Statement of Cash Flows 4
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 29
Item 3. Quantitative and Qualitative Disclosure about Market Risk. 38
Item 4. Controls and Procedures. 38
PART II - OTHER INFORMATION  
Item 1. Legal Proceedings. 39
Item 1A. Risk Factors. 39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 39
Item 3. Defaults Upon Senior Securities. 39
Item 4. Mine Safety Disclosures. 39
Item 5. Other Information. 39
Item 6. Exhibits 39
SIGNATURES 40

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

 

   (Unaudited)   
(Dollars in thousands, except share data)  June 30,
2016
  December 31,
2015
       
ASSETS          
Cash and Due From Banks:          
Interest Bearing  $6,935   $2,316 
Non-Interest Bearing   6,278    9,024 
Total Cash and Due From Banks   13,213    11,340 
           
Investment Securities:          
Available-for-Sale   94,419    95,863 
Loans, Net   671,784    676,864 
Premises and Equipment, Net   12,453    10,277 
Bank-Owned Life Insurance   18,448    18,209 
Goodwill   4,953    4,953 
Core Deposit Intangible, Net   4,086    4,353 
Accrued Interest and Other Assets   8,670    8,818 
TOTAL ASSETS  $828,026   $830,677 
           
LIABILITIES          
Deposits:          
Demand Deposits  $163,564   $161,053 
NOW Accounts   98,555    99,514 
Money Market Accounts   139,834    134,294 
Savings Accounts   122,487    121,415 
Time Deposits   134,286    145,651 
Brokered Deposits   16,540    17,372 
Total Deposits   675,266    679,299 
           
Short-Term Borrowings   31,530    32,448 
Other Borrowed Funds   28,000    28,000 
Accrued Interest and Other Liabilities   3,695    4,034 
TOTAL LIABILITIES   738,491    743,781 
           
STOCKHOLDERS' EQUITY          
Preferred Stock, No Par Value; 5,000,000 Shares Authorized   -    - 
Common Stock, $0.4167 Par Value; 35,000,000 Shares Authorized, 4,363,346 Shares Issued and 4,081,017 Shares Outstanding at June 30, 2016 and December 31, 2015, Respectively   1,818    1,818 
Capital Surplus   41,788    41,614 
Retained Earnings   49,912    47,725 
Treasury Stock, at Cost (282,329 Shares at June 30, 2016 and December 31, 2015, Respectively)   (4,836)   (4,836)
Accumulated Other Comprehensive Income   853    575 
TOTAL STOCKHOLDERS' EQUITY   89,535    86,896 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $828,026   $830,677 

 

The accompanying notes are an integral part of these consolidated financial statements

 1

 

CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

 

   Three Months Ended
June 30,
  Six Months Ended
June 30,
(Dollars in thousands, except share and per share data)  2016  2015  2016  2015
             
INTEREST AND DIVIDEND INCOME                    
Loans, Including Fees  $7,323   $7,385   $14,820   $14,866 
Federal Funds Sold   8    6    13    7 
Investment Securities:                    
Taxable   307    225    631    467 
Exempt From Federal Income Tax   266    274    526    570 
Other Interest and Dividend Income   46    49    83    204 
TOTAL INTEREST AND DIVIDEND INCOME   7,950    7,939    16,073    16,114 
                     
INTEREST EXPENSE                    
Deposits   560    594    1,121    1,192 
Federal Funds Purchased   -    -    1    1 
Short-Term Borrowings   15    15    29    45 
Other Borrowed Funds   127    62    254    152 
TOTAL INTEREST EXPENSE   702    671    1,405    1,390 
                     
NET INTEREST INCOME   7,248    7,268    14,668    14,724 
Provision For Loan Losses   300    375    1,150    675 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   6,948    6,893    13,518    14,049 
                     
NONINTEREST INCOME                    
Service Fees on Deposit Accounts   606    625    1,192    1,202 
Insurance Commissions   743    937    1,615    1,868 
Other Commissions   112    116    229    237 
Net Gains (Losses) on Sales of Loans   185    (28)   309    43 
Net Gains on Sales of Investments   58    -    58    - 
Income from Bank-Owned Life Insurance   119    117    239    235 
Other   45    39    73    47 
TOTAL NONINTEREST INCOME   1,868    1,806    3,715    3,632 
                     
NONINTEREST EXPENSE                    
Salaries and Employee Benefits   3,285    3,187    6,654    6,335 
Occupancy   438    427    912    898 
Equipment   432    399    854    804 
FDIC Assessment   115    115    241    253 
PA Shares Tax   203    165    405    348 
Contracted Services   156    147    289    284 
Legal and Professional Fees   114    110    255    241 
Advertising   189    221    354    446 
Bankcard Processing Expense   122    116    234    227 
Other Real Estate Owned Expense (Income)   10    (262)   (535)   (242)
Amortization of Core Deposit Intangible   133    133    267    267 
Other   891    777    1,672    1,421 
TOTAL NONINTEREST EXPENSE   6,088    5,535    11,602    11,282 
                     
Income Before Income Taxes   2,728    3,164    5,631    6,399 
Income Taxes   790    924    1,648    1,864 
NET INCOME  $1,938   $2,240   $3,983   $4,535 
                     
EARNINGS PER SHARE                    
Basic  $0.48   $0.55   $0.98   $1.11 
Diluted   0.48    0.55    0.98    1.11 
                     
WEIGHTED AVERAGE SHARES OUTSTANDING                    
Basic   4,081,017    4,071,462    4,081,017    4,071,462 
Diluted   4,084,695    4,071,462    4,083,313    4,071,462 

 

The accompanying notes are an integral part of these consolidated financial statements 

 2

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

 

   Three Months Ended
June 30,
  Six Months Ended
June 30,
(Dollars in thousands)  2016  2015  2016  2015
             
Net Income  $1,938   $2,240   $3,983   $4,535 
                     
Other Comprehensive Income (Loss)                    
Unrealized Gains (Losses) on Available-for-Sale Securities Net of Income Tax of $28 and $(194) for the Three Months Ended June 30, 2016 and 2015, Respectively, and $164 and $(22) for the Six Months Ended June 30, 2016 and 2015, Respectively   55    (376)   316    (45)
                     
Reclassification Adjustment for Gains on Securities Included in Net Income, Net of Income Tax of $20 for the Three and Six Months Ended June 30,2016, Respectively   (38)   -    (38)   - 
Other Comprehensive Income (Loss), Net of Income Tax   17    (376)   278    (45)
Total Comprehensive Income  $1,955   $1,864   $4,261   $4,490 

 

 

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

 

(Dollars in thousands, except share and per share data)  Shares
Issued
  Common
Stock
  Capital
Surplus
  Retained
Earnings
  Treasury
Stock
  Accumulated
Other
Comprehensive
Income
  Total
Stockholders'
Equity
                      
December 31, 2014   4,363,346   $1,818   $41,762   $42,766   $(4,999)  $565   $81,912 
Comprehensive income (loss):                                   
Net income   -    -    -    4,535    -    -    4,535 
Other comprehensive income (loss)   -    -    -    -    -    (45)   (45)
Dividends paid ($0.42 per share)   -    -    -    (1,710)   -    -    (1,710)
June 30, 2015   4,363,346   $1,818   $41,762   $45,591   $(4,999)  $520   $84,692 

 

(Dollars in thousands, except share and per share data)  Shares
Issued
  Common
Stock
  Capital
Surplus
  Retained
Earnings
  Treasury
Stock
  Accumulated
Other
Comprehensive
Income
  Total
Stockholders'
Equity
December 31, 2015   4,363,346   $1,818   $41,614   $47,725   $(4,836)  $575   $86,896 
Comprehensive income:                                   
Net income   -    -    -    3,983    -    -    3,983 
Other comprehensive income   -    -    -    -    -    278    278 
Stock-based compensation expense   -    -    174    -    -    -    174 
Dividends paid ($0.44 per share)   -    -    -    (1,796)   -    -    (1,796)
June 30, 2016   4,363,346   $1,818   $41,788   $49,912   $(4,836)  $853   $89,535 

 

The accompanying notes are an integral part of these consolidated financial statements 

 3

 

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

 

   Six Months Ended
June 30,
(Dollars in thousands)  2016  2015
       
OPERATING ACTIVITIES          
Net Income  $3,983   $4,535 
Αdjustmеnts to Rеconcilе Net Income to Net Cash Provided By Operating Activities:          
Net Amortization on Investments   116    366 
Depreciation and Amortization   1,510    1,221 
Provision for Loan Losses   1,150    675 
Income from Bank-Owned Life Insurance   (239)   (235)
Proceeds From Mortgage Loans Sold   11,574    45,801 
Originations of Mortgage Loans for Sale   (11,265)   (7,509)
Gains on Sales of Loans   (309)   (43)
Gains on Sales of Investment Securities   (58)   - 
Gains on Sales of Other Real Estate Owned and Repossessed Assets   (49)   (284)
Noncash Expense for Stock-Based Compensation   174    - 
Decrease in Accrued Interest Receivable   32    135 
Valuation Adjustment on Foreclosed Real Estate   (566)   - 
Increase (Decrease) in Taxes Payable   1,605    (91)
(Decrease) Increase in Accrued Interest Payable   (19)   13 
Net (Payment) Refund of Federal/State Income Taxes   (1,450)   1,218 
Other, Net   237    223 
NET CASH PROVIDED BY OPERATING ACTIVITIES   6,426    46,025 
           
INVESTING ACTIVITIES          
Investment Securities Available for Sale:          
Proceeds From Principal Repayments and Maturities   36,894    21,418 
Purchases of Securities   (35,388)   (13,789)
Proceeds from Sales of Securities   302    - 
Investment Securities Held-to-Maturity:          
Proceeds From Principal Repayments and Maturities   -    500 
Net Increase in Loans   (79)   (16,845)
Purchase of Premises and Equipment   (281)   (237)
Proceeds From Sales of Other Real Estate Owned and Repossessed Assets   175    15 
Decrease in Restricted Equity Securities   571    320 
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES   2,194    (8,618)
           
FINANCING ACTIVITIES          
Net Decrease in Deposits   (4,033)   (2,039)
Net Decrease in Short-Term Borrowings   (918)   (23,867)
Principal Payments on Other Borrowed Funds   -    (1,112)
Proceeds from Other Borrowed Funds   -    15,000 
Cash Dividends Paid   (1,796)   (1,710)
NET CASH USED IN FINANCING ACTIVITIES   (6,747)   (13,728)
           
INCREASE IN CASH AND CASH EQUIVALENTS   1,873    23,679 
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR   11,340    11,751 
CASH AND DUE FROM BANKS AT END OF PERIOD  $13,213   $35,430 
           
SUPPLEMENTAL CASH FLOW INFORMATION:          
Cash paid for:          
Interest on deposits and borrowings (including interest credited to deposit accounts of $576 and $1,198 respectively)  $720   $1,378 
Income taxes   1,450    203 
           
Real estate acquired in settlement of loans   3,236    431 
Transfer of real estate acquired in settlement of loans to premise and equipment   2,350    - 
Securities sold not settled   (70)   - 
Securities purchased not settled   60    - 

 

The accompanying notes are an integral part of these consolidated financial statements

 4

 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1. Summary of Significant Accounting Policies

 

Principles of Consolidation and Basis of Presentation

 

The accompanying consolidated financial statements include the accounts of CB Financial Services, Inc. (“CB Financial”) and its wholly owned subsidiary, Community Bank, (the “Bank”), and the Bank’s wholly-owned subsidiary, Exchange Underwriters, Inc. (“Exchange Underwriters”). CB Financial and the Bank are collectively referred to as the “Company”. All intercompany transactions and balances have been eliminated in consolidation.

 

The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for losses on loans, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, evaluation of securities for other-than-temporary impairment including related cash flow projections, goodwill impairment, and the valuation of deferred tax assets.

 

In the opinion of management, the accompanying unaudited interim financial statements include all adjustments considered necessary for a fair presentation of the Company’s financial position and results of operations at the dates and for the periods presented. All of these adjustments are of a normal, recurring nature, and they are the only adjustments included in the accompanying unaudited interim financial statements. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Interim results are not necessarily indicative of results for a full year.

 

The Company evaluated the provisions of Accounting Standards Codification (“ASC”) Topic 280 and determined that segment reporting information related to Exchange Underwriters was not required to be presented because the segment comprises less than 10% of total interest and noninterest income and less than 10% of the combined assets of the Company.

 

The Company evaluated subsequent events through the date the consolidated financial statements were filed with the Securities and Exchange Commission and incorporated into the consolidated financial statements the effect of all material known events determined by ASC Topic 855, Subsequent Events, to be recognizable events.

 

Nature of Operations

 

The Company derives substantially all its income from banking and bank-related services which include interest earnings on commercial, commercial mortgage, residential real estate and consumer loan financing, as well as interest earnings on investment securities and fees generated from deposit services to its customers. The Company provides banking services primarily to communities in Greene, Allegheny, Washington, Fayette, and Westmoreland Counties located in southwestern Pennsylvania. The Company also conducts insurance brokerage activities through Exchange Underwriters.

 

Acquired Loans

 

Loans that were acquired in the merger with FedFirst Financial Corporation were recorded at fair value with no carryover of the related allowance for credit losses. The fair value of the acquired loans was estimated by management with the assistance of a third party valuation specialist.

 

The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows require an evaluation to determine the need for an allowance for loan losses. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the nonaccretable discount which is then reclassified as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method. The evaluation of the amount of future cash flows that is expected to be collected is performed in a similar manner as that used to determine our allowance for credit losses. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable discount portion of the fair value adjustment.

 

 5

 

Reclassifications

 

Certain comparative amounts for the prior year have been reclassified to conform to the current year presentation. Such reclassifications did not affect net income or stockholders’ equity.

 

Recent Accounting Standards

 

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASU 2016-13 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however this ASU will require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects companies holding financial assets and net investment in leases that are not accounted for at fair value through net income. The ASU 2016-13 amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted.  The Company is currently evaluating the impact that the amendments of ASU 2016-13, will have on the Company’s financial condition and results of operations.

 

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.  ASU 2016-09 introduces amendments intended to simplify the accounting for stock compensation.  ASU 2016-09 requires all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement.  The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur.  An entity should also recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period.  The ASU also requires excess tax benefits be classified along with other income tax cash flows as an operating activity in the statement of cash flows.  ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted.  The Company is evaluating the provisions of ASU 2016-09, but, believes that its adoption will not have a material impact on the Company’s financial condition or results of operations.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which increases the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 will require lessees to recognize a right-of-use (ROU) asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation for leases with terms of more than twelve months. Both the ROU asset and lease liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either a finance or an operating lease. Accounting by lessors will remain largely unchanged from current U.S. GAAP. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted, and is to be applied as of the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact that the provisions of ASU 2016-02, will have on the Company’s financial condition and results of operations.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10), which enhances the reporting model for financial instruments regarding certain aspects of recognition, measurement, presentation, and disclosure. ASU 2016-01 (i) requires equity investments (except those accounted for under the equity method or that are consolidated) to be measured at fair value with changes in fair value recognized in net income; (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement for an entity to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost; (iv) requires an entity to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and (v) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and is to be applied using a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company is evaluating the provisions of ASU 2016-01, but does not believe that its adoption will have a material impact on the Company’s financial condition and results of operations.

 

 6

 

Recent Accounting Standards (continued)

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which establishes a comprehensive revenue recognition standard for virtually all industries under GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. ASU 2014-09 specifies that an entity shall recognize revenue when, or as, the entity satisfies a performance obligation by transferring a promised good or service (i.e. an asset) to a customer. An asset is transferred when, or as, the customer obtains control of the asset. Entities are required to disclose qualitative and quantitative information on the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company may elect, to early adopt the standard, but not before fiscal years beginning after December 15, 2016. The amendments may be applied retrospectively to each period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company is evaluating the provisions of ASUs 2014-09 and 2015-14, but does not believe that their adoption will have a material impact on the Company’s financial condition and results of operations.

 

Note 2. Earnings Per Share

 

There are no convertible securities which would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated Statement of Income is used as the numerator.

 

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

 

   Three Months Ended
June 30,
  Six Months Ended
June 30,
   2016  2015  2016  2015
Weighted-Average Common Shares Outstanding   4,363,346    4,363,346    4,363,346    4,363,346 
Average Treasury Stock Shares   (282,329)   (291,884)   (282,329)   (291,884)
Weighted-Average Common Shares and Common Stock Equivalents Used to Calculate Basic Earnings Per Share   4,081,017    4,071,462    4,081,017    4,071,462 
Additional Common Stock Equivalents (Restricted Stock) Used to Calculate Diluted Earnings Per Share   3,678    -    2,296    - 
Weighted-Average Common Shares and Common Stock Equivalents Used to Calculate Diluted Earnings Per Share   4,084,695    4,071,462    4,083,313    4,071,462 
                     
Earnings per share:                    
Basic  $0.48   $0.55   $0.98   $1.11 
Diluted   0.48    0.55    0.98    1.11 

 

 7

 

Note 3. Investment Securities

 

The following table presents the amortized cost and fair value of investment securities available-for-sale at the dates indicated:

 

   (Dollars in thousands)
   June 30, 2016
   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
             
U.S. Government Agencies  $49,309   $306   $(3)  $49,612 
Obligations of States and Political Subdivisions   39,642    882    (6)   40,518 
Mortgage-Backed Securities - Government-Sponsored Enterprises   2,987    75    -    3,062 
Equity Securities - Mutual Funds   500    17    -    517 
Equity Securities - Other   688    28    (6)   710 
Total  $93,126   $1,308   $(15)  $94,419 

 

   December 31, 2015
   Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair
Value
             
U.S. Government Agencies  $51,151   $147   $(110)  $51,188 
Obligations of States and Political Subdivisions   39,351    760    (37)   40,074 
Mortgage-Backed Securities - Government-Sponsored Enterprises   3,390    13    -    3,403 
Equity Securities - Mutual Funds   500    13    -    513 
Equity Securities - Other   600    85    -    685 
Total  $94,992   $1,018   $(147)  $95,863 

 

 8

 

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 at the dates indicated:

 

   (Dollars in thousands)
   June 30, 2016
   Less than 12 months  12 Months or Greater  Total
   Number
of
Securities
  Fair
Value
  Gross
Unrealized
Losses
  Number
of
Securities
  Fair
Value
  Gross
Unrealized
Losses
  Number
of
Securities
  Fair
Value
  Gross
Unrealized
Losses
U.S. Government Agencies   2   $5,502   $(3)   -   $-   $-    2   $5,502   $(3)
Obligations of States and                                             
Political Subdivisions   3    1,389    (4)   2    762    (2)   5    2,151    (6)
Equity Securities - Other   5    235    (6)   -    -    -    5    235    (6)
Total   10   $7,126   $(13)   2   $762   $(2)   12   $7,888   $(15)

 

   December 31, 2015
   Less than 12 months  12 Months or Greater  Total
   Number
of
Securities
  Fair
Value
  Gross
Unrealized
Losses
  Number
of
Securities
  Fair
Value
  Gross
Unrealized
Losses
  Number
of
Securities
  Fair
Value
  Gross
Unrealized
Losses
U.S. Government Agencies   6   $14,928   $(110)   -   $-   $-    6   $14,928   $(110)
Obligations of States and                                             
Political Subdivisions   11    5,333    (25)   8    4,549    (12)   19    9,882    (37)
Total   17   $20,261   $(135)   8   $4,549   $(12)   25   $24,810   $(147)

 

For debt securities, the Company does not believe any individual unrealized loss as of June 30, 2016 and December 31, 2015 represents an other-than-temporary impairment. The Company performs a review of the entire securities portfolio on a quarterly basis to identify securities that may indicate an other-than-temporary impairment. The Company’s management considers the length of time and the extent to which the fair value has been less than cost, and the financial condition of the issuer. The securities that are temporarily impaired at June 30, 2016 and December 31, 2015 relate principally to changes in interest rates subsequent to the acquisition of the specific securities. The Company does not intend to sell or it is not more likely than not that it will be required to sell any of the securities in an unrealized loss position before recovery of its amortized cost or maturity of the security.

 

The following table presents the scheduled maturities of investment securities as of the date indicated:

 

   (Dollars in thousands)
   June 30, 2016
   Available-for-Sale
   Amortized
Cost
  Fair
Value
Due in One Year or Less  $11,372   $11,473 
Due after One Year through Five Years   16,718    17,032 
Due after Five Years through Ten Years   59,302    59,953 
Due after Ten Years   5,734    5,961 
Total  $93,126   $94,419 

 

Equity Securities – Mutual Funds and Equity Securities – Other do not have a scheduled maturity date, but have been included in the Due After Ten Years category.

 

 9

 

Note 4. Loans and Related Allowance for Loan Loss

 

The Company’s loan portfolio is made up of four segments: real estate loans, commercial and industrial loans, consumer loans and other loans. These segments are further segregated between loans accounted for under the amortized cost method (“Originated Loans”) and acquired loans that were originally recorded at fair value with no carryover of the related pre-merger allowance for loan losses (“Loans Acquired at Fair Value”). The following table presents the major classifications of loans as of the dates indicated.

 

   (Dollars in thousands)
   June 30, 2016  December 31, 2015
   Amount  Percent  Amount  Percent
Originated Loans                    
Real Estate:                    
Residential  $173,734    34.8%  $170,169    35.2%
Commercial   131,147    26.2    127,614    26.4 
Construction   11,918    2.4    17,343    3.6 
Commercial and Industrial   67,636    13.5    60,487    12.5 
Consumer   109,250    21.9    103,605    21.4 
Other   6,203    1.2    4,592    0.9 
Total Originated Loans   499,888    100.0%   483,810    100.0%
Allowance for Loan Losses   (7,055)        (6,490)     
Loans, Net  $492,833        $477,320      
                     
Loans Acquired at Fair Value                    
Real Estate:                    
Residential  $95,753    53.5%  $103,058    51.7%
Commercial   68,030    38.0    75,406    37.8 
Construction   1,878    1.0    3,870    1.9 
Commercial and Industrial   13,230    7.4    16,660    8.3 
Consumer   196    0.1    550    0.3 
Total Loans Acquired at Fair Value   179,087    100.0%   199,544    100.0%
Allowance for Loan Losses   (136)        -      
Loans, Net  $178,951        $199,544      
                     
Total Loans                    
Real Estate:                    
Residential  $269,487    39.7%  $273,227    40.0%
Commercial   199,177    29.3    203,020    29.7 
Construction   13,796    2.1    21,213    3.1 
Commercial and Industrial   80,866    11.9    77,147    11.3 
Consumer   109,446    16.1    104,155    15.2 
Other   6,203    0.9    4,592    0.7 
Total Loans   678,975    100.0%   683,354    100.0%
Allowance for Loan Losses   (7,191)        (6,490)     
Loans, Net  $671,784        $676,864      

 

Total unamortized net deferred loan fees were $733,000 and $705,000 at June 30, 2016 and December 31, 2015, respectively.

 

Real estate loans serviced for others, which are not included in the Consolidated Statement of Financial Condition, totaled $78.8 million and $73.1 million at June 30, 2016 and December 31, 2015, respectively.

 

 10

 

The following table presents loans summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of the dates indicated. At June 30, 2016 and December 31, 2015, there were no loans in the criticized category of Loss within the internal risk rating system.

 

   (Dollars in thousands)
   June 30, 2016
   Pass  Special
Mention
  Substandard  Doubtful  Total
Originated Loans                         
Real Estate:                         
Residential  $172,910   $452   $372   $-   $173,734 
Commercial   112,025    13,725    4,317    1,080    131,147 
Construction   11,038    699    -    181    11,918 
Commercial and Industrial   63,782    1,730    2,124    -    67,636 
Consumer   109,174    -    76    -    109,250 
Other   6,203    -    -    -    6,203 
Total Originated Loans  $475,132   $16,606   $6,889   $1,261   $499,888 
                          
Loans Acquired at Fair Value                         
Real Estate:                         
Residential  $93,123   $-   $2,630   $-   $95,753 
Commercial   63,357    1,522    3,151    -    68,030 
Construction   1,878    -    -    -    1,878 
Commercial and Industrial   12,623    45    562    -    13,230 
Consumer   196    -    -    -    196 
Total Loans Acquired at Fair Value  $171,177   $1,567   $6,343   $-   $179,087 
                          
Total Loans                         
Real Estate:                         
Residential  $266,033   $452   $3,002   $-   $269,487 
Commercial   175,382    15,247    7,468    1,080    199,177 
Construction   12,916    699    -    181    13,796 
Commercial and Industrial   76,405    1,775    2,686    -    80,866 
Consumer   109,370    -    76    -    109,446 
Other   6,203    -    -    -    6,203 
Total Loans  $646,309   $18,173   $13,232   $1,261   $678,975 

 

 11

 

   December 31, 2015
   Pass  Special
Mention
  Substandard  Doubtful  Total
Originated Loans                         
Real Estate:                         
Residential  $169,233   $249   $682   $5   $170,169 
Commercial   113,087    6,870    6,565    1,092    127,614 
Construction   16,384    729    -    230    17,343 
Commercial and Industrial   57,586    2,145    756    -    60,487 
Consumer   103,591    -    14    -    103,605 
Other   4,592    -    -    -    4,592 
Total Originated Loans  $464,473   $9,993   $8,017   $1,327   $483,810 
                          
Loans Acquired at Fair Value                         
Real Estate:                         
Residential  $100,633   $-   $2,425   $-   $103,058 
Commercial   69,539    2,252    3,615    -    75,406 
Construction   3,870    -    -    -    3,870 
Commercial and Industrial   15,601    996    63    -    16,660 
Consumer   550    -    -    -    550 
Total Loans Acquired at Fair Value  $190,193   $3,248   $6,103   $-   $199,544 
                          
Total Loans                         
Real Estate:                         
Residential  $269,866   $249   $3,107   $5   $273,227 
Commercial   182,626    9,122    10,180    1,092    203,020 
Construction   20,254    729    -    230    21,213 
Commercial and Industrial   73,187    3,141    819    -    77,147 
Consumer   104,141    -    14    -    104,155 
Other   4,592    -    -    -    4,592 
Total Loans  $654,666   $13,241   $14,120   $1,327   $683,354 

 

 12

 

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of the dates indicated.

 

   (Dollars in thousands)
   June 30, 2016
   Loans
Current
  30-59
Days
Past Due
  60-89
Days
Past Due
 

90 Days

Or More
Past Due

  Total
Past Due
  Non-
Accrual
  Total
Loans
Originated Loans                                   
Real Estate:                                   
Residential  $173,215   $-   $144   $-   $144   $375   $173,734 
Commercial   130,564    266    -    -    266    317    131,147 
Construction   11,737    -    -    -    -    181    11,918 
Commercial and Industrial   67,381    255    -    -    255    -    67,636 
Consumer   108,288    813    73    -    886    76    109,250 
Other   6,203    -    -    -    -    -    6,203 
Total Originated Loans  $497,388   $1,334   $217   $-   $1,551   $949   $499,888 
                                    
Loans Acquired at Fair Value                                   
Real Estate:                                   
Residential  $93,824   $82   $131   $-   $213   $1,716   $95,753 
Commercial   67,021    -    652    -    652    357    68,030 
Construction   1,878    -    -    -    -    -    1,878 
Commercial and Industrial   13,085    -    145    -    145    -    13,230 
Consumer   195    -    -    1    1    -    196 
Total Loans Acquired at Fair Value  $176,003   $82   $928   $1   $1,011   $2,073   $179,087 
                                    
Total Loans                                   
Real Estate:                                   
Residential  $267,039   $82   $275   $-   $357   $2,091   $269,487 
Commercial   197,585    266    652    -    918    674    199,177 
Construction   13,615    -    -    -    -    181    13,796 
Commercial and Industrial   80,466    255    145    -    400    -    80,866 
Consumer   108,483    813    73    1    887    76    109,446 
Other   6,203    -    -    -    -    -    6,203 
Total Loans  $673,391   $1,416   $1,145   $1   $2,562   $3,022   $678,975 

 

 13

 

   December 31, 2015
   Loans
Current
  30-59
Days
Past Due
  60-89
Days
Past Due
  90 Days
Or More
Past Due
  Total
Past Due
  Non-
Accrual
  Total
Loans
Originated Loans                                   
Real Estate:                                   
Residential  $168,786   $563   $133   $-   $696   $687   $170,169 
Commercial   124,037    114    -    -    114    3,463    127,614 
Construction   17,113    -    -    -    -    230    17,343 
Commercial and Industrial   60,442    45    -    -    45    -    60,487 
Consumer   102,629    923    39    -    962    14    103,605 
Other   4,592    -    -    -    -    -    4,592 
Total Originated Loans  $477,599   $1,645   $172   $-   $1,817   $4,394   $483,810 
                                    
Loans Acquired at Fair Value                                   
Real Estate:                                   
Residential  $99,794   $1,308   $263   $193   $1,764   $1,500   $103,058 
Commercial   73,988    1,019    -    -    1,019    399    75,406 
Construction   3,870    -    -    -    -    -    3,870 
Commercial and Industrial   16,450    38    130    -    168    42    16,660 
Consumer   542    8    -    -    8    -    550 
Total Loans Acquired at Fair Value  $194,644   $2,373   $393   $193   $2,959   $1,941   $199,544 
                                    
Total Loans                                   
Real Estate:                                   
Residential  $268,580   $1,871   $396   $193   $2,460   $2,187   $273,227 
Commercial   198,025    1,133    -    -    1,133    3,862    203,020 
Construction   20,983    -    -    -    -    230    21,213 
Commercial and Industrial   76,892    83    130    -    213    42    77,147 
Consumer   103,171    931    39    -    970    14    104,155 
Other   4,592    -    -    -    -    -    4,592 
Total Loans  $672,243   $4,018   $565   $193   $4,776   $6,335   $683,354 

 

 14

 

The following table sets forth the amounts and categories of our nonperforming assets at the dates indicated. Included in nonperforming loans and assets are troubled debt restructurings (“TDRs”), which are loans whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties. Nonaccrual TDRs are included in their specific loan category in the nonaccrual loans section.

 

   (Dollars in Thousands)
   June 30,
2016
  December 31,
2015
Nonaccrual Loans:          
Real Estate:          
Residential  $2,091   $2,187 
Commercial   674    3,862 
Construction   181    230 
Commercial and Industrial   -    42 
Consumer   76    14 
Total Nonaccrual Loans   3,022    6,335 
           
Accruing Loans Past Due 90 Days or More:          
Real Estate:          
Residential   -    193 
Consumer   1    - 
Total Accruing Loans 90 Days or More Past Due   1    193 
Total Nonaccrual Loans and Accruing Loans 90 Days or More Past Due   3,023    6,528 
           
Troubled Debt Restructurings, Accruing:          
Originated Loans:          
Real Estate - Commercial   1,352    1,375 
Commercial and Industrial   7    7 
Other   6    - 
Total Originated Loans   1,365    1,382 
Loans Acquired at Fair Value:          
Real Estate - Residential   1,320    1,296 
Real Estate - Commercial   698    1,488 
Commercial and Industrial   518    - 
Total Loans Acquired at Fair Value   2,536    2,784 
Total Troubled Debt Restructurings, Accruing   3,901    4,166 
           
Total Nonperforming Loans   6,924    10,694 
           
Real Estate Owned:          
Residential   78    138 
Commercial   174    174 
Total Real Estate Owned   252    312 
           
Total Nonperforming Assets  $7,176   $11,006 
           
Nonperforming Loans to Total Loans   1.02%   1.56%
Nonperforming Assets to Total Assets   0.87    1.32 

 

The recorded investment of residential real estate loans for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdiction was $1.8 million and $3.8 million at June 30, 2016 and December 31, 2015, respectively.

 

TDRs typically are the result of our loss mitigation activities whereby concessions are granted to minimize loss and avoid foreclosure or repossession of collateral. The concessions granted for the TDRs in our portfolio primarily consist of, but are not limited to, modification of payment or other terms, temporary rate modification and extension of maturity date. Loans classified as TDRs consisted of 15 loans totaling $3.9 million and 13 loans totaling $4.2 million at June 30, 2016 and December 31, 2015, respectively. Originated loans classified as TDRs consisted of 5 loans totaling $1.4 million and 4 loans totaling $1.4 million at June 30, 2016 and December 31, 2015, respectively. Loans acquired at fair value as TDRs consisted of 10 loans totaling $2.5 million and 9 loans totaling $2.8 million at June 30, 2016 and December 31, 2015, respectively.

 

 15

 

During the three months ended June 30, 2015, one commercial loan previously identified as an originated TDR and two other commercial loans were consolidated into one loan in a new TDR transaction. During the six months ended June 30, 2016, one commercial loan previously identified as an acquired loan at fair value TDR paid off, an originated consumer loan modified terms in a new TDR transaction and one commercial and one residential real estate loan that were acquired at fair value modified terms into new TDR transactions. During the six months ended June 30, 2015, two commercial loans previously identified as originated TDRs were refinanced in new TDR transactions. During the three and six months ended June 30, 2015, one commercial loan TDR acquired at fair value paid off. No TDRs have subsequently defaulted during the three or six months ended June 30, 2016 and 2015, respectively.

 

The following table presents information at the time of modification related to loans modified as TDRs during the periods indicated. No loans were modified in a TDR during the three months ended June 30, 2016.

 

   (Dollars in thousands)
   Three Months Ended June 30, 2015
   Pre-
Modification
Number
of
Contracts
  Post-
Modification
Outstanding
Recorded
Investment
  Outstanding
Recorded
Investment
  Related
Allowance
Originated Loans                    
Real Estate                    
Commercial   1   $675   $705   $108 
Total   1   $675   $705   $108 

 

   Six Months Ended June 30, 2016
   Number
of
Contracts
  Pre-
Modification
Outstanding
Recorded
Investment
  Post-
Modification
Outstanding
Recorded
Investment
  Related
Allowance
Originated Loans                    
Other   1   $7   $7   $- 
Total   1   $7   $7   $- 
                     
Loans Acquired at Fair Value                    
Real Estate                    
Residential   1   $37   $45   $- 
Commercial   1    539    539    - 
Total   2   $576   $584   $- 

 

   Six Months Ended June 30, 2015
   Number
of
Contracts
  Pre-
Modification
Outstanding
Recorded
Investment
  Post-
Modification
Outstanding
Recorded
Investment
  Related
Allowance
Originated Loans                    
Real Estate                    
Commercial   2   $912   $1,135   $108 
Total   2   $912   $1,135   $108 

 

 16

 

The following table presents a summary of the loans considered to be impaired as of the dates indicated.

 

   (Dollars in thousands)
   June 30, 2016
   Recorded
Investment
  Related
Allowance
  Unpaid
Principal
Balance
  Average
Recorded
Investment
  Interest
Income
Recognized
With No Related Allowance Recorded:                         
Originated Loans                         
Real Estate:                         
Commercial  $4,390   $-   $4,390   $4,479   $94 
Construction   181    -    181    194    - 
Commercial and Industrial   685    -    685    682    15 
Other   6    -    6    6    - 
Total With No Related Allowance Recorded  $5,262   $-   $5,262   $5,361   $109 
                          
Loans Acquired at Fair Value                         
Real Estate:                         
Residential  $1,276   $-   $1,276   $1,285   $33 
Commercial   3,022    -    3,131    3,213    73 
Commercial and Industrial   562    -    562    591    12 
Total With No Related Allowance Recorded  $4,860   $-   $4,969   $5,089   $118 
                          
Total Loans                         
Real Estate:                         
Residential  $1,276   $-   $1,276   $1,285   $33 
Commercial   7,412    -    7,521    7,692    167 
Construction   181    -    181    194    - 
Commercial and Industrial   1,247    -    1,247    1,273    27 
Other   6    -    6    6    - 
Total With No Related Allowance Recorded  $10,122   $-   $10,231   $10,450   $227 
                          
With A Related Allowance Recorded:                         
Originated Loans                         
Real Estate:                         
Commercial  $1,412   $392   $1,417   $1,423   $33 
Commercial and Industrial   1,445    647    1,445    1,453    26 
Total With A Related Allowance Recorded  $2,857   $1,039   $2,862   $2,876   $59 
                          
Loans Acquired at Fair Value                         
Real Estate:                         
Residential  $161   $81   $168   $226   $2 
Commercial   652    133    652    657    - 
Total With A Related Allowance Recorded  $813   $214   $820   $883   $2 
                          
Total Loans                         
Real Estate:                         
Residential  $161   $81   $168   $226   $2 
Commercial   2,064    525    2,069    2,080    33 
Construction   -    -    -    -    - 
Commercial and Industrial   1,445    647    1,445    1,453    26 
Other   -    -    -    -    - 
Total With A Related Allowance Recorded  $3,670   $1,253   $3,682   $3,759   $61 

 

 17

 

    June 30, 2016 (cont.)
Total Impaired Loans:                         
Originated Loans                         
Real Estate:                         
Commercial  $5,802   $392   $5,807   $5,902   $127 
Construction   181    -    181    194    - 
Commercial and Industrial   2,130    647    2,130    2,135    41 
Other   6    -    6    6    - 
Total Impaired Loans  $8,119   $1,039   $8,124   $8,237   $168 
Loans Acquired at Fair Value                         
Real Estate:                         
Residential  $1,437   $81   $1,444   $1,511   $35 
Commercial   3,674    133    3,783    3,870    73 
Construction   -    -    -    -    - 
Commercial and Industrial   562    -    562    591    12 
Other   -    -    -    -    - 
Total Impaired Loans  $5,673   $214   $5,789   $5,972   $120 
Total Loans                         
Real Estate:                         
Residential  $1,437   $81   $1,444   $1,511   $35 
Commercial   9,476    525    9,590    9,772    200 
Construction   181    -    181    194    - 
Commercial and Industrial   2,692    647    2,692    2,726    53 
Other   6    -    6    6    - 
Total Impaired Loans  $13,792   $1,253   $13,913   $14,209   $288 

 

 18

 

   December 31, 2015
   Recorded
Investment
  Related
Allowance
  Unpaid
Principal
Balance
  Average
Recorded
Investment
  Interest
Income
Recognized
With No Related Allowance Recorded:                         
Originated Loans                         
Real Estate:                         
Residential  $5   $-   $17   $6   $- 
Commercial   6,636    -    6,636    7,095    232 
Construction   229    -    230    292    - 
Commercial and Industrial   627    -    627    756    35 
Total With No Related Allowance Recorded  $7,497   $-   $7,510   $8,149   $267 
Loans Acquired at Fair Value                         
Real Estate:                         
Residential  $1,296   $-   $1,296   $1,315   $67 
Commercial   4,188    -    4,263    4,449    214 
Commercial and Industrial   63    -    63    79    3 
Total With No Related Allowance Recorded  $5,547   $-   $5,622   $5,843   $284 
Total Loans                         
Real Estate:                         
Residential  $1,301   $-   $1,313   $1,321   $67 
Commercial   10,824    -    10,899    11,544    446 
Construction   229    -    230    292    - 
Commercial and Industrial   690    -    690    835    38 
Total With No Related Allowance Recorded  $13,044   $-   $13,132   $13,992   $551 
With A Related Allowance Recorded:                         
Originated Loans                         
Real Estate:                         
Commercial  $1,436   $408   $1,441   $1,457   $37 
Commercial and Industrial   136    9    137    128    5 
Total With A Related Allowance Recorded  $1,572   $417   $1,578   $1,585   $42 
Total Impaired Loans                         
Originated Loans                         
Real Estate:                         
Residential  $5   $-   $17   $6   $- 
Commercial   8,072    408    8,077    8,552    269 
Construction   229    -    230    292    - 
Commercial and Industrial   763    9    764    884    40 
Total Impaired Loans  $9,069   $417   $9,088   $9,734   $309 
Loans Acquired at Fair Value                         
Real Estate:                         
Residential  $1,296   $-   $1,296   $1,315   $67 
Commercial   4,188    -    4,263    4,449    214 
Commercial and Industrial   63    -    63    79    3 
Total Impaired Loans  $5,547   $-   $5,622   $5,843   $284 
Total Loans                         
Real Estate:                         
Residential  $1,301   $-   $1,313   $1,321   $67 
Commercial   12,260    408    12,340    13,001    483 
Construction   229    -    230    292    - 
Commercial and Industrial   826    9    827    963    43 
Total Impaired Loans  $14,616   $417   $14,710   $15,577   $593 

 

 19

 

The following table presents the activity in the allowance for loan losses summarized by major classifications and segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for potential impairment for the periods indicated.

 

   (Dollars in thousands)
   June 30, 2016
   Real
Estate
Residential
  Real
Estate
Commercial
  Real
Estate
Construction
  Commercial
and
Industrial
  Consumer  Other  Unallocated  Total
Originated Loans                                        
March 31, 2016  $1,259   $2,036   $117   $1,103   $2,176   $2   $244    6,937 
Charge-offs   -    -    -    -    (120)   (14)   -    (134)
Recoveries   3    -    -    -    53    5    -    61 
Provision   (152)   (80)   (35)   365    34    8    51    191 
June 30, 2016  $1,110   $1,956   $82   $1,468   $2,143   $1   $295   $7,055 
                                         
Loans Acquired at Fair Value                                        
March 31, 2016  $-   $-   $-   $-   $-   $-   $36   $36 
Charge-offs   (14)   -    -    -    -    -    -    (14)
Recoveries   3    1    -    -    1    -    -    5 
Provision   11    10    -    115    (1)   -    (26)   109 
June 30, 2016  $-   $11   $-   $115   $-   $-   $10   $136 
                                         
Total Allowance for Loan Losses                                        
March 31, 2016  $1,259   $2,036   $117   $1,103   $2,176   $2   $280   $6,973 
Charge-offs   (14)   -    -    -    (120)   (14)   -    (148)
Recoveries   6    1    -    -    54    5    -    66 
Provision   (141)   (70)   (35)   480    33    8    25    300 
June 30, 2016  $1,110   $1,967   $82   $1,583   $2,143   $1   $305   $7,191 
                                         
Originated Loans                                        
December 31, 2015  $1,623   $2,045   $137   $784   $1,887   $-   $14    6,490 
Charge-offs   (20)   -    -    -    (310)   (26)   -    (356)
Recoveries   4    -    -    -    80    11    -    95 
Provision   (497)   (89)   (55)   684    486    16    281    826 
June 30, 2016  $1,110   $1,956   $82   $1,468   $2,143   $1   $295   $7,055 
                                         
Loans Acquired at Fair Value                                        
December 31, 2015  $-   $-   $-   $-   $-   $-   $-   $- 
Charge-offs   (16)   (180)   -    -    (4)   -    -    (200)
Recoveries   5    2    -    -    5    -    -    12 
Provision   11    189    -    115    (1)   -    10    324 
June 30, 2016  $-   $11   $-   $115   $-   $-   $10   $136 
                                         
Total Allowance for Loan Losses                                        
December 31, 2015  $1,623   $2,045   $137   $784   $1,887   $-   $14   $6,490 
Charge-offs   (36)   (180)   -    -    (314)   (26)   -    (556)
Recoveries   9    2    -    -    85    11    -    107 
Provision   (486)   100    (55)   799    485    16    291    1,150 
June 30, 2016  $1,110   $1,967   $82   $1,583   $2,143   $1   $305   $7,191 

 

 20

 

   June 30, 2016 (cont.)
   Real
Estate
Residential
  Real
Estate
Commercial
  Real
Estate
Construction
  Commercial
and
Industrial
  Consumer  Other  Unallocated  Total
Originated Loans                                        
Individually Evaluated for Impairment  $-   $392   $-   $647   $-   $-   $-   $1,039 
Collectively Evaluated for Potential Impairment  $1,110   $1,564   $82   $821   $2,143   $1   $295   $6,016 
                                         
Loans Acquired at Fair Value                                        
Individually Evaluated for Impairment  $81   $133   $-   $-   $-   $-   $-   $214 
Collectively Evaluated for Potential Impairment  $(81)  $(122)  $-   $115   $-   $-   $10   $(78)
                                         
Total Allowance for Loan Losses                                        
Individually Evaluated for Impairment  $81   $525   $-   $647   $-   $-   $-   $1,253 
Collectively Evaluated for Potential Impairment  $1,029   $1,442   $82   $936   $2,143   $1   $305   $5,938 

 

 

   June 30, 2015
   Real
Estate
Residential
  Real
Estate
Commercial
  Real
Estate
Construction
  Commercial
and
Industrial
  Consumer  Other  Unallocated  Total
Originated Loans                                        
March 31, 2015  $2,513   $608   $145   $913   $1,011   $-   $288   $5,478 
Charge-offs   (111)   (12)   -    -    (69)   -    -    (192)
Recoveries   2    1    -    10    12    -    -    25 
Provision   (737)   1,149    (58)   (6)   384    -    (357)   375 
June 30, 2015  $1,667   $1,746   $87   $917   $1,338   $-   $(69)  $5,686 
                                         
December 31, 2014  $2,690   $582   $122   $684   $1,015   $-   $102   $5,195 
Charge-offs   (111)   (18)   -    -    (116)   -    -    (245)
Recoveries   5    3    -    10    43    -    -    61 
Provision   (917)   1,179    (35)   223    396    -    (171)   675 
June 30, 2015  $1,667   $1,746   $87   $917   $1,338   $-   $(69)  $5,686 
                                         
Originated Loans                                        
Individually Evaluated for Impairment  $-   $370   $5   $159   $-   $-   $-   $534 
Collectively Evaluated for Potential Impairment  $1,667   $1,376   $82   $758   $1,338   $-   $(69)  $5,152 

 

 

   December 31, 2015
Originated Loans  Real
Estate
Residential
  Real
Estate
Commercial
  Real
Estate
Construction
  Commercial
and
Industrial
  Consumer  Other  Unallocated  Total
Individually Evaluated for Impairment  $-   $408   $-   $9   $-   $-   $-   $417 
Collectively Evaluated for Potential Impairment  $1,623   $1,637   $137   $775   $1,887   $-   $14   $6,073 

 

The following table presents changes in the accretable discount on the loans acquired at fair value for the dates indicated.

 

   Accretable
Discount
Balance at December 31, 2015  $3,302 
Accretable yield   (1,223)
Nonaccretable premium   225 
Balance at June 30, 2016  $2,304 

 

 21

 

The following table presents the major classifications of loans summarized by individually evaluated for impairment and collectively evaluated for potential impairment as of the dates indicated.

 

   (Dollars in thousands)
   June 30, 2016
   Real
Estate
Residential
  Real
Estate
Commercial
  Real
Estate
Construction
  Commercial
and
Industrial
  Consumer  Other  Total
Originated Loans                                   
Individually Evaluated for Impairment  $-   $5,802   $181   $2,130   $-   $6   $8,119 
Collectively Evaluated for Potential Impairment   173,734    125,345    11,737    65,506    109,250    6,197    491,769 
   $173,734   $131,147   $11,918   $67,636   $109,250   $6,203   $499,888 
                                    
Loans Acquired at Fair Value                                   
Individually Evaluated for Impairment  $1,437   $3,674   $-   $562   $-   $-   $5,673 
Collectively Evaluated for Potential Impairment   94,316    64,356    1,878    12,668    196    -    173,414 
   $95,753   $68,030   $1,878   $13,230   $196   $-   $179,087 
                                    
Total Loans                                   
Individually Evaluated for Impairment  $1,437   $9,476   $181   $2,692   $-   $6   $13,792 
Collectively Evaluated for Potential Impairment   268,050    189,701    13,615    78,174    109,446    6,197    665,183 
   $269,487   $199,177   $13,796   $80,866   $109,446   $6,203   $678,975 

 

   December 31, 2015
   Real
Estate
Residential
  Real
Estate
Commercial
  Real
Estate
Construction
  Commercial
and
Industrial
  Consumer  Other  Total
Originated Loans                                   
Individually Evaluated for Impairment  $5   $8,072   $229   $763   $-   $-   $9,069 
Collectively Evaluated for Potential Impairment   170,164    119,542    17,114    59,724    103,605    4,592    474,741 
   $170,169   $127,614   $17,343   $60,487   $103,605   $4,592   $483,810 
                                    
Loans Acquired at Fair Value                                   
Individually Evaluated for Impairment  $1,296   $4,188   $-   $63   $-   $-   $5,547 
Collectively Evaluated for Potential Impairment   101,762    71,218    3,870    16,597    550    -    193,997 
   $103,058   $75,406   $3,870   $16,660   $550   $-   $199,544 
                                    
Total Loans                                   
Individually Evaluated for Impairment  $1,301   $12,260   $229   $826   $-   $-   $14,616 
Collectively Evaluated for Potential Impairment   271,926    190,760    20,984    76,321    104,155    4,592    668,738 
   $273,227   $203,020   $21,213   $77,147   $104,155   $4,592   $683,354 

 

 22

 

Note 5. Deposits

 

The following table shows the maturities of time deposits for the next five years and beyond at the date indicated (dollars in thousands).

 

Maturity Period:  June 30,
2016
One Year or Less  $55,698 
Over One Through Two Years   25,293 
Over Two Through Three Years   14,136 
Over Three Through Four Years   17,580 
Over Four Through Five Years   12,920 
Over Five Years   8,659 
Total  $134,286 

 

The balance in time deposits that meet or exceed the FDIC insurance limit of $250,000 totaled $27.6 million and $33.1 million as of June 30, 2016 and December 31, 2015, respectively.

 

Note 6. Short-Term Borrowings

 

The following table sets forth the components of short-term borrowings as of the dates indicated.

 

   (Dollars in thousands)
   June 30, 2016  December 31, 2015
   Amount  Weighted
Average
Rate
  Amount  Weighted
Average
Rate
Short-term Borrowings                    
Federal Funds Purchased:                    
Balance at Period End  $6,000    0.70%  $-    -%
Average Balance Outstanding During the Period   259    0.78    485    0.41 
Maximum Amount Outstanding at any Month End   6,000         5,900      
                     
FHLB Borrowings:                    
Balance at Period End   -    -    9,360    0.51 
Average Balance Outstanding During the Period   291    0.69    7,347    0.37 
Maximum Amount Outstanding at any Month End   -         30,950      
                     
Securities Sold Under Agreements to Repurchase:                    
Balance at Period End   25,530    0.19    23,088    0.18 
Average Balance Outstanding During the Period   24,336    0.23    23,303    0.24 
Maximum Amount Outstanding at any Month End   26,373         27,908      
                     
Securities Collaterizing the Agreements at Period-End:                    
Carrying Value   28,765         26,033      
Market Value   28,913         26,063      

 

 23

 

Note 7. Other Borrowed Funds

 

Other borrowed funds consist of fixed rate advances from the Federal Home Loan Bank of Pittsburgh (“FHLB”). The following table sets forth the scheduled maturities of other borrowed funds at the dates indicated.

 

   (Dollars in thousands)
   June 30, 2016  December 31, 2015
   Amount  Weighted
Average
Rate
  Amount  Weighted
Average
Rate
Due in One Year  $3,500    0.94%  $-    -%
Due After One Year to Two Years   3,500    1.35    3,500    0.94 
Due After Two Years to Three Years   4,000    1.67    4,500    1.41 
Due After Three Years to Four Years   6,000    1.88    6,000    1.78 
Due After Four Years to Five Years   5,000    2.09    6,000    1.97 
Due After Five Years   6,000    2.32    8,000    2.27 
Total  $28,000    1.80   $28,000    1.80 

 

As of June 30, 2016, the Company maintained a credit arrangement with a maximum borrowing limit of approximately $293.0 million with the FHLB. This arrangement is subject to annual renewal, incurs no service charge, and is secured by a blanket security agreement on outstanding residential mortgage loans and the Company’s investment in FHLB stock. Under this arrangement the Company had available a variable rate Line of Credit in the amount of $20.0 million as of June 30, 2016 and December 31, 2015.

 

The Company maintains a Borrower-In-Custody of Collateral line of credit agreement with the Federal Reserve Bank for $84.1 million that requires quarterly certification of collateral, is subject to annual renewal, incurs no service charge and is secured by commercial and consumer indirect auto loans. The Company also maintains multiple line of credit arrangements with various banks totaling $40.0 million. As of June 30, 2016 and December 31, 2015, no draws had been taken on these facilities.

 

 24

 

Note 8. Commitments and Contingent Liabilities

 

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business primarily to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and performance letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Statement of Financial Condition. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

 

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and performance letters of credit written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

 

Commitments and conditional obligations are evaluated the same as on-balance-sheet instruments but do not have a corresponding reserve recorded. The Company’s opinion on not implementing a corresponding reserve for off-balance-sheet instruments is supported by historical factors of no losses recorded due to these items. The Company is continually evaluating these items for credit quality and any future need for the corresponding reserve.

 

The following table presents the unused and available credit balances of financial instruments whose contracts represent credit risk at the dates indicated.

 

   (Dollars in thousands)
   June 30,
2016
  December 31,
2015
Standby Letters of Credit  $10,844   $18,316 
Performance Letters of Credit   2,359    1,358 
Construction Mortgages   22,580    21,144 
Personal Lines of Credit   5,990    5,810 
Overdraft Protection Lines   5,839    6,051 
Home Equity Lines of Credit   14,449    14,491 
Commercial Lines of Credit   46,663    45,584 
   $108,724   $112,754 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

 

Performance letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance-related contracts. The coverage period for these instruments is typically a one-year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized upon expiration of the letter. For secured letters of credit, the collateral is typically Company deposit instruments or customer business assets.

 

 25

 

Note 9. Fair Value Disclosure

 

FASB ASC 820 “Fair Value Measurement” defines fair value and provides the framework for measuring fair value and required disclosures about fair value measurements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the market date. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used in valuation methods to determine fair value.

 

The three levels of fair value hierarchy are as follows:

 

  Level I –   Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.
       
  Level II –   Fair value is based on significant inputs, other than Level I inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level II inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets, and other observable inputs.
       
  Level III –   Fair value would be based on significant unobservable inputs. Examples of valuation methodologies that would result in Level III classification include option pricing models, discounted cash flows, and other similar techniques.

 

This hierarchy requires the use of observable market data when available. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.

 

The following table presents the financial assets measured at fair value on a recurring basis and reported on the Consolidated Statement of Financial Condition as of the dates indicated, by level within the fair value hierarchy. The majority of the Company’s securities are included in Level II of the fair value hierarchy. Fair values for Level II securities were primarily determined by a third party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. The standard inputs that are normally used include benchmark yields of like securities, reportable trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications.

 

      (Dollars in thousands)
   Fair Value
Heirarchy
  June 30,
2016
  December 31,
2015
Available for Sales Securities:             
U.S. Government Agencies  Level II  $49,612   $51,188 
Obligations of States and Political Subdivisions  Level II   40,518    40,074 
Mortgage-Backed Securities - Government-Sponsored Enterprises  Level II   3,062    3,403 
Equity Securities - Mutual Funds  Level I   517    513 
Equity Securities - Other  Level I   710    685 
Total Available for Sale Securities     $94,419   $95,863 

 

The following table presents the financial assets measured at fair value on a nonrecurring basis on the Consolidated Statement of Financial Condition as of the dates indicated by level within the fair value hierarchy. The table also presents the significant unobservable inputs used in the fair value measurements. 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 loans include quoted market prices for identical assets classified as Level I inputs or 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.

 

 26

 

      (Dollars in thousands)           
      Fair Value at        Significant  
Financial Asset  Fair Value
Heirarchy
  June 30,
2016
  December 31,
2015
  Valuation
Techniques
  Significant
Unobservable Inputs
  Unobservable
Input Value
 
Impaired Loans   Level III  $2,417   $1,155   Market Comparable Properties  Marketability Discount  10% to  30% (1)
OREO   Level III   -    111   Market Comparable Properties  Marketability Discount  10% to 50% (1)

  (1) Range includes discounts taken since appraisal and estimated values.          

 

Impaired loans are evaluated when the loan is identified as impaired and valued at the lower of cost or fair value at that time. Fair value is measured based on the value of the collateral securing these loans and is classified as Level III in the fair value hierarchy. At June 30, 2016 and December 31, 2015, the fair value of impaired loans consists of the loan balances of $3.7 million and $1.6 million, respectively, less their specific valuation allowances of $1.3 million and $417,000, respectively.

 

Other real estate owned (OREO), properties are evaluated at the time of acquisition and recorded at fair value less estimated selling costs. After acquisition, other real estate owned is recorded at the lower of cost or fair value less estimated selling costs. The fair value of an other real estate owned property is determined from a qualified independent appraisal and is classified as Level III in the fair value hierarchy. In the six months ended June 30, 2016, two commercial real estate properties for $3.2 million were foreclosed on, moved into OREO, evaluated for fair value and recorded a prior quarter gain on the valuation adjustment on foreclosed real estate for approximately $566,000. This recognized gain on the valuation adjustment was supported by independent appraisals of the two properties. One property was entered into a tentative sales agreement with a current customer which closed in the current period The other property was transferred into premise and equipment of the Company due to the location and the Company’s need of a new location for company headquarters. At December 31, 2015, two residential real estate loans for $111,000 were moved into OREO and at June 30, 2016, one has since been sold at a loss of approximately $5,000.

 

Financial instruments are defined as cash, evidence of an ownership 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 the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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. As 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 the assumptions on which the estimated fair values are based may have 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 employs simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices are not available, based upon the following assumptions:

 

Cash and Due From Banks, Restricted Stock, Bank-Owned Life Insurance, Accrued Interest Receivable, Short-Term Borrowings, and Accrued Interest Payable

 

The fair value is equal to the current carrying value.

 

Investment Securities

 

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 or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted prices.

 

Loans Receivable

 

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans are estimated using discounted cash flow analyses, using market interest rates for comparable loans. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

 

 27

 

Deposit Liabilities

 

The fair values disclosed for demand deposits, are, by definition, equal to the amount payable on demand at the reporting date. The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a schedule of aggregated expected monthly maturities on time deposits.

 

Borrowed Funds

 

Fair values of borrowed funds are estimated using discounted cash flow analyses based on current market rates for similar types of borrowing arrangements.

 

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. The contractual amounts of unfunded commitments and letters of credit are presented in Note 8.

 

The following table presents the estimated fair values of the Company’s financial instruments at the dates indicated.

 

      (Dollars in thousands)
      June 30, 2016  December 31, 2015
   Fair Value
Heirarchy
  Carrying
Value
  Fair
Value
  Carrying
Value
  Fair
Value
Financial Assets:                       
Cash and Due From Banks:                       
Interest Bearing  Level I  $6,935   $6,935   $2,316   $2,316 
Non-Interest Bearing  Level I   6,278    6,278    9,024    9,024 
Investment Securities:                       
Available for Sale  See Above   94,419    94,419    95,863    95,863 
Loans, Net  Level III   671,784    690,824    676,864    692,373 
Restricted Stock  Level II   3,253    3,253    3,824    3,824 
Bank-Owned Life Insurance  Level II   18,448    18,448    18,209    18,209 
Accrued Interest Receivable  Level II   2,387    2,387    2,419    2,419 
                        
Financial Liabilities:                       
Deposits  Level II   675,266    672,356    679,299    678,921 
Short-term Borrowings  Level II   31,530    31,530    32,448    32,448 
Other Borrowed Funds  Level II   28,000    28,648    28,000    27,830 
Accrued Interest Payable  Level II   287    287    305    305 

 

 28

 

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

 

This discussion should be read in conjunction with the unaudited consolidated financial statements, notes and tables included in this report. For further information, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

Forward-Looking Statements

 

This report contains certain “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, but rather statements based on the Company’s current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions. Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include the following:

 

·General and local economic conditions;
·Changes in interest rates, deposit flows, demand for loans, real estate values and competition;
·Competitive products and pricing;
·The ability of our customers to make scheduled loan payments;
·Loan delinquency rates;
·Our ability to manage the risks involved in our business;
·Our ability to integrate the operations of businesses we acquire;
·Inflation, market and monetary fluctuations;
·Our ability to control costs and expenses;
·Changes in federal and state legislation and regulation (i.e. the effect of new capital standards imposed by banking regulators and the implementation of the Dodd-Frank Act).

 

The Company assumes no obligation to update any forward-looking statements except as may be required by applicable law or regulation.

 

General

 

CB Financial Services, Inc. (“CB Financial”) is a bank holding company established in 2006. CB Financial’s business activity is conducted through its wholly owned banking subsidiary Community Bank (“the Bank”). CB Financial and the Bank are collectively referred to as the “Company.” All significant intercompany transactions have been eliminated.

 

The Bank is a Pennsylvania-chartered commercial bank headquartered in Carmichaels, Pennsylvania. The Bank operates from 16 offices in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania. The Bank is a community-oriented institution offering residential and commercial real estate loans, commercial and industrial loans, and consumer loans as well as a variety of deposit products for individuals and businesses in its market area. Property and casualty, commercial liability, surety and other insurance products are offered through Exchange Underwriters, Inc, the Bank’s wholly-owned subsidiary that is a full-service, independent insurance agency.

 

On October 31, 2014, the Company completed its merger with FedFirst Financial Corporation (“FedFirst” or the “merger”), the holding company for First Federal Savings Bank, a community bank based in Monessen, Pennsylvania. The merger resulted in the addition of five branches and expanded the Company’s reach into Fayette and Westmoreland counties in southwestern Pennsylvania.

 

The Bank’s website address is www.communitybank.tv. Information on the website is not and should not be considered a part of this Form 10-Q.

 

Overview

 

The following discussion and analysis is presented to assist in the understanding and evaluation of our consolidated financial condition and results of operations. It is intended to complement the unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and should be read in conjunction therewith. The detailed discussion focuses on our consolidated financial condition as of June 30, 2016 compared to the financial condition as of December 31, 2015 and the consolidated results of operations for the three and six months ended June 30, 2016 and 2015.

 

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, noninterest income and noninterest expense. Noninterest income consists primarily of fees and service charges on deposit accounts, fees and charges on loans, insurance commissions, income from bank-owned life insurance and other income. Noninterest expense consists primarily of expenses related to salaries and employee benefits, occupancy and equipment, contracted services, legal fees, other real estate owned, advertising and promotion, stationery and supplies, deposit and general insurance and other expenses.

 

 29

 

Financial institutions like us, in general, are significantly affected by economic conditions, competition, and the monetary and fiscal policies of the federal government. Lending activities are influenced by the demand for and supply of housing, competition among lenders, interest rate conditions, and funds availability. Our operations and lending are principally concentrated in the southwestern Pennsylvania market area.

 

Statement of Financial Condition Analysis

 

Assets. Total assets decreased $2.7 million, or 0.3%, to $828.0 million at June 30, 2016 compared to $830.7 million at December 31, 2015.

 

Investment securities classified as available-for-sale decreased $1.4 million, or 1.5%, to $94.4 million at June 30, 2016 compared to $95.9 million at December 31, 2015. This decrease was primarily the result of calls and maturities of U.S. government agencies and obligations of states and political subdivisions that were utilized to pay down short-term borrowings and were partially reinvested in U.S. government agencies and obligations of states and political subdivisions.

 

Loans, net, decreased $5.1 million, or 0.8%, to $671.8 million at June 30, 2016 compared to $676.9 million at December 31, 2015. This was due to $7.4 million of net paydowns on construction loans, $3.8 million on commercial real estate loans and $3.7 million on residential mortgage loans, partially offset by increases of $5.3 million in consumer loans (mainly indirect auto loans), $3.7 million in commercial and industrial loans and $1.6 million in other loans. The net loan payoffs were utilized to fund loan originations and deposit runoff during the current period.

 

Premises and equipment, net, increased $2.2 million, or 21.2%, to $12.5 million at June 30, 2016 compared to $10.3 million at December 31, 2015. This was mainly due to the prior quarter other real estate owned property being reclassified into fixed assets in process. This property will undergo an extensive renovation and will be placed into Bank operations.

 

Liabilities. Total liabilities decreased $5.3 million, or 0.7%, to $738.5 million at June 30, 2016 compared to $743.8 million at December 31, 2015.

 

Total deposits decreased $4.0 million, or 0.6%, to $675.3 million at June 30, 2016 compared to $679.3 million at December 31, 2015. There were decreases of $11.4 million in time deposits, $959,000 in NOW accounts and $832,000 in brokered deposits, partially offset by increases of $5.5 million in money market accounts, $2.5 million in demand deposits and $1.1 million in savings accounts. The decrease in deposit balances is partly attributable to maturing time deposits seeking a higher renewal rate outside of the Bank in an ever low competitive interest rate environment and a decline in oil and gas industry-related deposits. In addition, school district and municipal deposits decreased due to utilization of funds as a result of the prior year impact of the State of Pennsylvania budget impasse. Due to the low interest rate environment, the Bank has been selective on offering promotional interest rates and has concentrated its efforts on increasing noninterest-bearing accounts by building strong customer relationships.

 

Short-term borrowings decreased $918,000, or 2.8%, to $31.5 million at June 30, 2016 compared to $32.4 million at December 31, 2015. Other borrowed funds remained constant at $28.0 million at June 30, 2016 and December 31, 2015. At June 30, 2016, short-term borrowings were comprised of $25.5 million of securities sold under agreements to repurchase, compared to $23.1 million at December 31, 2015. The increase is related to business deposit customers whose funds, above designated target balances, are transferred into an overnight interest-earning investment account by purchasing securities from the Bank’s investment portfolio under an agreement to repurchase. Short-term borrowings decreased by $3.4 million, to $6.0 million at June 30, 2016 compared to $9.4 million at December 31, 2015. In the prior year, a portion of FHLB short-term borrowings were replaced with $28.0 million in long-term borrowings with laddered maturities designed to mitigate the Company’s interest rate risk in the event of rising interest rates. Funds generated from security maturities and calls and loans sales in the current period were utilized for loan funding and liquidity needs. As a result of prior year activity, the weighted average interest rate on long-term borrowings remained constant at 1.80%.

 

Stockholders’ Equity. Stockholders’ equity increased $2.6 million, or 3.0%, to $89.5 million at June 30, 2016 compared to $86.9 million at December 31, 2015. During the period, net income was $4.0 million and the Company paid $1.8 million in dividends to stockholders.

 

 30

 

Results of Operations for the Three Months Ended June 30, 2016 and 2015

 

Overview. Net income decreased $302,000, to $1.9 million, for the three months ended June 30, 2016 compared to $2.2 million for the three months ended June 30, 2015. The quarterly results were largely impacted by a decrease of $436,000 in pre-tax income, primarily related to increases in non-interest expense.

 

Net Interest Income. Net interest income decreased $20,000, or 0.3%, to $7.2 million for the three months ended June 30, 2016 compared to $7.3 million for the three months ended June 30, 2015.

 

Interest and dividend income increased $11,000, or 0.1%, to $8.0 million for the three months ended June 30, 2016 compared to $7.9 million for the three months ended June 30, 2015. Despite a decrease of $989,000 in the average balance, interest income on taxable securities increased $82,000 due to an increase of 64 basis points in yield from new purchases and from higher yields on the remaining securities in the portfolio. Interest income on loans decreased $62,000 due to a decrease in average loans outstanding of $4.4 million primarily due to mortgage and installment loan payoffs. In addition, $38.2 million of residential loans were sold in the second quarter of the prior year. The loan sales were primarily comprised of 30-year fixed rate mortgage loans that were acquired in the merger and were secured by properties located outside the Bank’s traditional lending area within the five counties it conducts business. Interest income on securities exempt from federal tax decreased $8,000 due to deploying proceeds from security calls and maturities into loan funding and liquidity needs. There was a decrease of $2.8 million in the average balance on securities exempt from federal tax and an increase of 15 basis points in yield as a result of purchasing securities with higher earning yields.

 

Interest expense increased $31,000, or 4.6%, to $702,000 for the three months ended June 30, 2016 compared to $671,000 for the three months ended June 30, 2015. Interest expense on other borrowed funds increased $65,000 primarily due to an increase in long-term borrowings resulting from the Bank laddering $13.0 million of FHLB borrowings in late 2015 to mitigate the Company’s interest rate risk in the event of rising interest rates. Interest expense on deposits decreased $34,000 due to a decrease in average interest-bearing deposits of $15.1 million, primarily due to deposit runoff from municipalities and school districts utilizing funds recently released from the State of Pennsylvania budget impasse. Decreases in average deposit balances and the Bank holding rates constant throughout 2016 resulted in the average cost of interest-bearing deposits decreasing 1 basis point, primarily related to the repricing of maturing certificates of deposit to lower rates.

 

 31

 

Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. Average balances are derived from daily balances over the periods indicated. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal tax rate of 34%. As such, amounts will not agree to income as reported in the consolidated financial statements. Average balances for loans are net of the allowance for loan losses, but include non-accrual loans. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented and are expressed in annualized rates.

 

   (Dollars in thousands)
   Three Months Ended June 30,
   2016  2015
   Average
Balance
  Interest
and
Dividends
  Yield/
Cost (1)
  Average
Balance
  Interest
and
Dividends
  Yield/
Cost (1)
Assets:                              
Interest-Earning Assets:                              
Loans, Net  $669,534   $7,352    4.42%  $673,922   $7,413    4.41%
Investment Securities                              
Taxable   53,716    307    2.29    54,705    225    1.65 
Exempt From Federal Tax   39,016    396    4.06    41,776    408    3.91 
Other Interest-Earning Assets   16,579    54    1.31    18,912    55    1.17 
Total Interest-Earning Assets   778,845    8,109    4.19    789,315    8,101    4.12 
Noninterest-Earning Assets   52,616              55,577           
Total Assets  $831,461             $844,892           
                               
Liabilities and Stockholders' equity:                              
Interest-Bearing Liabilities:                              
Interest-Bearing Demand Deposits  $114,549    49    0.17%  $101,105    40    0.16%
Savings   124,473    57    0.18    124,267    56    0.18 
Money Market   144,195    91    0.25    157,657    91    0.23 
Time Deposits   137,174    363    1.06    152,430    407    1.07 
Total Interest-Bearing Deposits   520,391    560    0.43    535,459    594    0.44 
                               
Borrowings   53,443    142    1.07    54,212    77    0.57 
Total Interest-Bearing Liabilities   573,834    702    0.49    589,671    671    0.46 
                               
Noninterest-Bearing Demand Deposits   164,750              164,967           
Other Liabilities   3,765              5,701           
Total Liabilities   742,349              760,339           
                               
Stockholders' Equity   89,112              84,553           
Total Liabilities and Stockholders' Equity  $831,461             $844,892           
                               
Net Interest Income       $7,407             $7,430      
                               
Net Interest Rate Spread (2)             3.70%             3.66%
Net Interest-Earning Assets (3)  $205,011             $199,644           
Net Interest Margin (4)             3.82              3.78 
Return on Average Assets             0.94              1.06 
Return on Average Equity             8.75              10.63 
Average Equity to Average Assets             10.72              10.01 
Average Interest-Earning Assets to Average Interest-Bearing Liabilities             135.73              133.86 

 _________________

(1)Annualized.
(2)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin represents net interest income divided by average total interest-earning assets.

 32

 

Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal tax rate of 34%. The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. The total column represents the sum of the prior columns.

 

   (Dollars in thousands)
   Three Months Ended June 30, 2016
Compared To
Three Months Ended June 30, 2015
   Increase (Decrease) Due to
   Volume  Rate  Total
          
Interest and Dividend Income:               
Loans, net  $(78)  $17   $(61)
Investment Securities:               
Taxable   (4)   86    82 
Exempt From Federal Tax   (28)   16    (12)
Other Interest-Earning Assets   (8)   7    (1)
Total Interest-Earning Assets   (118)   126    8 
                
Interest Expense:               
Deposits   (21)   (13)   (34)
Borrowings   (1)   66    65 
Total Interest-Bearing Liabilities   (22)   53    31 
Change in Net Interest Income  $(96)  $73   $(23)

 

Provision for Loan Losses. The provision for loan losses was $300,000 for the three months ended June 30, 2016 compared to $375,000 for the three months ended June 30, 2015. The originated loan portfolio had $190,000 of provision applied and the acquired at fair value loan portfolio had $110,000 of provision applied for the three months ended June 30, 2016. This compared to the entire $375,000 provision for the three months ended June 30, 2015 being applied to the originated loan portfolio. Net charge-offs for the three months ended June 30, 2016 were $83,000 compared to net charge-offs of $167,000 for the three months ended June 30, 2015. Management analyzes the loan portfolio on a quarterly basis to determine the adequacy of the allowance for loan losses and the need for additional provisions for loan losses and determined the current quarter provision was necessary due to an increase in special mention loans, quarterly charge-offs and commercial and indirect auto loan growth.

 

Noninterest Income. Noninterest income increased $62,000, or 3.4% to $1.9 million for the three months ended June 30, 2016 compared to $1.8 million for the three months ended June 30, 2015, primarily due to an increase in the net gains on the sales of residential mortgage loans of $213,000. The increase in gains was primarily due an increase in the number of loans originated and subsequently sold to the FHLB as part of the Mortgage Partnership Finance® (“MPF®”) program. The MPF® program enables member financial institutions to offer competitive interest rates for fixed-rate mortgage loans without assuming any of the interest rate risk associated with a long-term asset. This was compared to the prior period net losses on the sales of loans of $28,000 that the Company incurred mainly due to approximately $38.2 million of residential loans that were acquired in the merger. In addition, net gains on the sales of investments increased $58,000 due to the sale of equity securities. These sales were transacted to recognize capital gains that will be offset by a capital loss carry forward deferred tax asset that was acquired in the merger. These increases were partially offset by a $194,000 decrease in insurance commission from Exchange Underwriters due to reduced contingency fees received in the current period, which are commissions that are contingent upon several factors including, but not limited to, eligible written premiums, earned premiums, incurred losses and stop loss charges. Service fees on deposit accounts decreased $19,000 primarily due to a first-year incentive for a check card brand change and an increase in check card fees from deposit accounts acquired in the merger recognized in the prior period.

 

 33

 

Noninterest Expense. Noninterest expense increased $553,000, or 10.0%, to $6.1 million for the three months ended June 30, 2016 compared to $5.5 million for the three months ended June 30, 2015. Other real estate owned expense increased $272,000 primarily due to gains from the sales of other real estate owned properties in the prior period only. Other noninterest expense increased $114,000 primarily due to current period expenses related to non-employee stock options and restricted stock awards, and an increase in various miscellaneous expenses, such as supplies, charitable contributions and telephone expense. Salaries and employee benefits increased $98,000 primarily due to employee stock options and restricted stock awards expense as well as normal salary increases. Occupancy and equipment increased $11,000 and $33,000, respectively, primarily due to the opening of the Uniontown Business Center in the current period. PA shares tax, which is calculated based on the Bank’s stockholders’ equity, increased $38,000 due to an anticipated rate increase by the State of Pennsylvania. As of July 1, 2016, the PA Shares Tax rate of 0.95% has been ratified by the state legislature, becoming effective for tax years starting January 1, 2017. Advertising decreased $32,000 related to the termination of a cooperative marketing agreement at Exchange Underwriters.

 

Income Tax Expense. Income taxes decreased $134,000 to $790,000 for the three months ended June 30, 2016 compared to $924,000 for the three months ended June 30, 2015. The effective tax rate for the three months ended June 30, 2016 was 29.0% compared to 29.2% for the three months ended June 30, 2015. The decrease in income taxes was due to a decrease of $436,000 in net income before income tax expense. The decrease in the effective tax rate was related to an increase in tax-exempt yield in the current period.

 

Results of Operations for the Six Months Ended June 30, 2016 and 2015

 

Overview. Net income decreased $552,000, to $4.0 million, for the six months ended June 30, 2016 compared to $4.5 million for the six months ended June 30, 2015.

 

Net Interest Income. Net interest income decreased $56,000 , or 0.4%, to $14.7 million and remained constant for the six months ended June 30, 2016 and June 30, 2015.

 

Interest and dividend income decreased $41,000, or 0.3%, to $16.1 million and remained constant for the six months ended June 30, 2016 and June 30, 2015. Other interest and dividend income decreased $121,000 primarily due to a decrease in FHLB stock dividends which included the payment of a special dividend in the first quarter of 2015 of $56,000. As a result of receiving no special dividend in the current period and a decrease in short-term borrowings compared to the prior period, the Bank was required to hold less FHLB stock. Interest income on loans decreased $46,000 due to a decrease in average loans outstanding of $3.6 million primarily due to loan payoffs for mortgage and installment loans. Interest income on securities exempt from federal tax decreased $44,000 due to deploying proceeds from security calls and maturities into loan funding and liquidity needs in the current period. There was a decrease of $3.3 million in average balance on securities exempt from federal tax and an increase of 1 basis point in yield as a result of purchasing securities with higher earning yields. Despite a decrease of $3.3 million in average balance, interest income on taxable securities increased $164,000 due to an increase of 70 basis points in yield from new purchases and from higher yields on the remaining securities in the portfolio.

 

Interest expense increased $15,000, or 1.1%, to $1.4 million to remain constant for the six months ended June 30, 2016 and June 30, 2015. Non deposit interest expense on other borrowed funds increased $102,000, and average other borrowed funds increased $3.1 million. This was primarily due to the Bank laddering $15.0 million in short-term borrowings in the first quarter of 2015 and $13.0 million in short-term borrowings in late 2015 into a series of long-term FHLB borrowings to mitigate the Company’s interest rate risk in the event of rising interest rates. Interest expense on deposits decreased $71,000 due to a decrease in average interest-bearing deposits of $8.5 million primarily due to deposit runoff. The average cost of interest-bearing deposits decreased 2 basis points, primarily related to the repricing of maturing certificates of deposit to lower rates. In addition, short-term borrowings decreased $16,000 in the current period due to the laddering of FHLB long-term borrowings.

 

 34

 

Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. Average balances are derived from daily balances over the periods indicated. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. Tax-equivalent yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal tax rate of 34%. Average balances for loans are net of the allowance for loan losses, but include non-accrual loans. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented and are expressed in annualized rates.

 

   (Dollars in thousands)
   Six Months Ended June 30,
   2016  2015
(Dollars in thousands)  Average
Balance
  Interest
and
Dividends
  Yield/
Cost (1)
  Average
Balance
  Interest
and
Dividends
  Yield/
Cost (1)
Assets:                              
Interest-Earning Assets:                              
Loans, Net  $674,513   $14,878    4.44%  $678,084   $14,917    4.44%
Investment Securities                              
Taxable   54,651    631    2.31    57,985    467    1.61 
Exempt From Federal Tax   38,636    784    4.06    41,924    850    4.05 
Other Interest-Earning Assets   12,664    96    1.52    13,964    211    3.05 
Total Interest-Earning Assets   780,464    16,389    4.22    791,957    16,445    4.19 
Noninterest-Earning Assets   53,463              55,967           
Total Assets  $833,927             $847,924           
                               
Liabilities and Stockholders' equity:                              
Interest-Bearing Liabilities:                              
Interest-Bearing Demand Deposits  $116,112    97    0.17%  $100,533    80    0.16%
Savings   123,908    113    0.18    122,623    110    0.18 
Money Market   145,240    181    0.25    158,375    181    0.23 
Time Deposits   140,260    730    1.05    152,443    821    1.09 
Total Interest-Bearing Deposits   525,520    1,121    0.43    533,974    1,192    0.45 
                               
Borrowings   52,886    284    1.08    58,436    198    0.68 
Total Interest-Bearing Liabilities   578,406    1,405    0.49    592,410    1,390    0.47 
                               
Noninterest-Bearing Demand Deposits   163,002              165,416           
Other Liabilities   4,028              6,256           
Total Liabilities   745,436              764,082           
                               
Stockholders' Equity   88,491              83,842           
Total Liabilities and Stockholders' Equity  $833,927             $847,924           
                               
Net interest income       $14,984             $15,055      
                               
Net Interest Rate Spread (2)             3.73%             3.72%
Net Interest-Earning Assets (3)  $202,058             $199,547           
Net Interest Margin (4)             3.86              3.83 
Return on Average Assets             0.96              1.08 
Return on Average Equity             9.05              10.91 
Average Equity to Average Assets             10.61              9.89 
Average Interest-Earning Assets to Average Interest-Bearing Liabilities             134.93              133.68 

______________

(1)Annualized.
(2)Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin represents net interest income divided by average total interest-earning assets. Interest income and yields are on a fully tax equivalent basis utilizing a marginal tax rate of 34%.

 

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Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. The total column represents the sum of the prior columns.

 

   (Dollars in thousands)
   Six Months Ended June 30, 2016
Compared To
Six Months Ended June 30, 2015
   Increase (Decrease) Due to
(Dollars in thousands)  Volume  Rate  Total
          
Interest and Dividend Income:               
Loans, net  $(39)  $-   $(39)
Investment Securities:               
Taxable   (28)   192    164 
Exempt From Federal Tax   (68)   2    (66)
Other Interest-Earning Assets   (17)   (98)   (115)
Total Interest-Earning Assets   (152)   96    (56)
                
Interest Expense:               
Deposits   (19)   (52)   (71)
Borrowings   (21)   107    86 
Total Interest-Bearing Liabilities   (40)   55    15 
Change in Net Interest Income  $(112)  $41   $(71)

 

Provision for Loan Losses. The provision for loan losses was $1.2 million for the six months ended June 30, 2016 compared to $675,000 in the six months ended June 30, 2015. Net charge-offs for the six months ended June 30, 2016 were $450,000 compared to net charge-offs of $184,000 for the six months ended June 30, 2015. Management analyzes the loan portfolio on a quarterly basis to determine the adequacy of the allowance for loan losses and the need for additional provisions for loan losses and determined the current provision was necessary due to an increase in special mention loans, current period charge-offs and commercial and indirect auto loan growth.

 

Noninterest Income. Noninterest income increased $83,000, or 2.3% to $3.7 million for the six months ended June 30, 2016 compared to $3.6 million for the six months ended June 30, 2015 primarily due to an increase in the net gains on sale of residential mortgage loans of $266,000. The increase in gains was primarily due to an increase in the number of loans originated and subsequently sold to the FHLB as part of the MPF® programs. This offset prior period losses on the sales of $38.2 million of residential loans that were acquired in the merger. In addition, net gains on the sales of investments increased $58,000 due to the sale of equity securities. These sales were transacted to recognize capital gains that will be offset by a capital loss carry forward deferred tax asset that was acquired in the merger. Other miscellaneous income increased $26,000 primarily due to an increase in the servicing income received from mortgage loans sold to the FHLB as part of the MPF® program and a decline in amortization on mortgage servicing rights related to loans sold to the FHLB. These increases were partially offset by a $253,000 decrease in insurance commission from Exchange Underwriters due to reduced contingency fees received in the current period. Service fees on deposit accounts decreased $10,000 primarily due to check card fees from deposit accounts acquired in the merger and a first-year incentive for a check card brand change recognized in the prior period.

 

Noninterest Expense. Noninterest expense increased $320,000, or 2.8%, to $11.6 million for the six months ended June 30, 2016 compared to $11.3 million for the six months ended June 30, 2015. Salaries and employee benefits increased $319,000, primarily due to additional employees as well as normal salary increases and employee stock options and restricted stock awards expense. Other noninterest expense increased $251,000 primarily due to an increase in various miscellaneous expenses, such as non-employee stock options and restricted stock awards, supplies, telephone, other losses attributable to debit card fraud losses and charitable contributions. Occupancy and equipment increased $14,000 and $50,000, respectively, primarily due to the opening of the Uniontown Business Center in the current period. PA shares tax, which is calculated based on the Bank’s stockholders’ equity, increased $57,000 due to the above mentioned rate increase by the State of Pennsylvania. Other real estate owned income was $535,000 in the current period compared to $242,000 in the prior period resulting in a decrease of $293,000 in expense. This change is primarily due to the $566,000 pre-tax gain recognized due to the foreclosure procedures on two commercial real estate loans that moved into other real estate owned properties in the first quarter of 2016. Advertising decreased $92,000 related to the termination of a cooperative marketing agreement at Exchange Underwriters, partially offset by advertising initiatives to promote the Bank.

 

 36

 

Income Tax Expense. Income taxes decreased $216,000 to $1.6 million for the six months ended June 30, 2016 compared to $1.9 million for the six months ended June 30, 2015. The effective tax rate for the six months ended June 30, 2016 was 29.3% compared to 29.1% for the six months ended June 30, 2015. The decrease in income taxes was due to a decrease of $768,000 in net income before income tax expense. The increase in the effective tax rate was due to a decrease in tax-exempt income.

 

Off-Balance Sheet Arrangements.

 

Other than loan commitments and standby and performance letters of credit, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a significant current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors. Refer to Note 8 in the Notes to Consolidated Financial Statements for a summary of commitments outstanding as of June 30, 2016.

 

Liquidity and Capital Management

 

Liquidity. Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Company’s primary sources of funds consist of deposit inflows, loan repayments and maturities, calls and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

 

The Company regularly adjusts its investments in liquid assets based upon its assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits with other banks and short- and intermediate-term securities. The Company believes that it had sufficient liquidity at June 30, 2016 to satisfy its short- and long-term liquidity needs at that date.

 

The Company’s most liquid assets are cash and due from banks, which totaled $13.2 million at June 30, 2016. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. Unpledged securities, which provide an additional source of liquidity, totaled $19.6 million at June 30, 2016. In addition, at June 30, 2016, the Company had the ability to borrow up to $293.0 million from the FHLB of Pittsburgh, of which $28.0 million was outstanding and $9.8 million was utilized toward a standby letter of credit. The Company also has the ability to borrow up to $84.1 million from the Federal Reserve Bank through its Borrower-In-Custody line of credit agreement and $40.0 million from multiple line of credit arrangements with various banks, none of which were outstanding.

 

At June 30, 2016, time deposits due within one year of that date totaled $55.7 million, or 41.5% of total time deposits. If these time deposits do not remain with the Company, the Company will be required to seek other sources of funds. Depending on market conditions, the Company may be required to pay higher rates on such deposits or other borrowings than it currently pays on these certificates of deposit. The Company believes, however, based on past experience that a significant portion of its certificates of deposit will remain with it, either as certificates of deposit or as other deposit products. The Company has the ability to attract and retain deposits by adjusting the interest rates offered.

 

CB Financial is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividends to its shareholders and for other corporate purposes. Its primary source of liquidity is dividend payments it receives from the Bank. The Bank’s ability to pay dividends to CB Financial is subject to regulatory limitations. At June 30, 2016, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $1.1 million.

 

We are committed to maintaining a strong liquidity position; therefore, we monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. The marginal cost of new funding, however, whether from deposits or borrowings from the Federal Home Loan Bank, will be carefully considered as we monitor our liquidity needs. Therefore, in order to minimize our cost of funds, we may consider additional borrowings from the Federal Home Loan Bank in the future.

 

Capital Management. The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

 

 37

 

Under the Regulatory Capital Rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier I capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The capital conservation buffer, which is composed of common equity Tier I capital, began on January 1, 2016 at the 0.625% level and will be phased in over a three year period (increasing by that amount on each January 1, until it reaches 2.5% on January 1, 2019).

 

At June 30, 2016 and December 31, 2015, the Company was categorized as well capitalized under the regulatory framework for prompt corrective action. The following table presents the Bank’s regulatory capital amounts and ratios, as well as the minimum amounts and ratios required to be well capitalized as of the dates indicated.

 

   (Dollars in thousands)
   June 30, 2016  December 31, 2015
   Amount  Ratio  Amount  Ratio
Common Equity Tier 1 (to risk weighted assets)                    
Actual  $79,953    13.09%  $78,702    12.83%
For Capital Adequacy Purposes   27,486    4.50    27,597    4.50 
To Be Well Capitalized   39,702    6.50    39,862    6.50 
                     
Tier 1 Capital (to risk weighted assets)                    
Actual   79,953    13.09    78,702    12.83 
For Capital Adequacy Purposes   36,648    6.00    36,795    6.00 
To Be Well Capitalized   48,864    8.00    49,060    8.00 
                     
Total Capital (to risk weighted assets)                    
Actual   87,151    14.27    85,192    13.89 
For Capital Adequacy Purposes   48,864    8.00    49,060    8.00 
To Be Well Capitalized   61,080    10.00    61,326    10.00 
                     
Tier 1 Leverage (to adjusted total assets)                    
Actual   79,953    9.70    78,702    9.60 
For Capital Adequacy Purposes   32,959    4.00    32,777    4.00 
To Be Well Capitalized   41,199    5.00    40,972    5.00 

 

Item 3. Quantitative and Qualitative Disclosure about Market Risk.

 

The Company believes that as of June 30, 2016, there was no material change in the quantitative and qualitative disclosure about market risk data as of December 31, 2015, as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

Item 4. Controls and Procedures.

 

CB Financial’s management, including CB Financial’s principal executive officer and principal financial officer, have evaluated the effectiveness of CB Financial’s “disclosure controls and procedures” as such term is defined in Rule 13a-15(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, CB Financial’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that CB Financial files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to CB Financial’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.

 

There have been no changes in CB Financial’s internal control over financial reporting during the quarter ended June 30, 2016, that has materially affected, or is reasonably likely to materially affect, CB Financial’s internal control over financial reporting.

 

 38

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, claims seeking damages for improper collection procedures or misrepresentations, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any other pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

 

Item 1A. Risk Factors.

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.

 

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

 

Not applicable.

 

Item 3. Defaults Upon Senior Securities.

 

Not applicable.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

 

Item 6. Exhibits

 

31.1Rule 13a-14(a) / 15d-14(a) Certification (President and Chief Executive Officer)
31.2Rule 13a-14(a) / 15d-14(a) Certification (Chief Financial Officer)
32.1Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002
32.2Chief Financial Officer Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.0The following materials for the quarter ended June 30, 2016, formatted in XBRL (Extensible Business Reporting Language); (i) the Consolidated Statement of Financial Condition, (ii) the Consolidated Statement of Operations, (iii) the Consolidated Statement of Comprehensive Income, (iv) the Consolidated Statement of Stockholders’ Equity, (v) the Consolidated Statement of Cash Flows and (vi) the Notes to the Unaudited Consolidated Financial Statements

 

 39

 

SIGNATURES

 

Pursuant to the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

  CB FINANCIAL SERVICES, INC.  
  (Registrant)  
     
Date:       August 9, 2016 /s/ Barron P. McCune, Jr.  
  Barron P. McCune, Jr.  
  President and Chief Executive Officer
     
Date:       August 9, 2016 /s/ Kevin D. Lemley  
  Kevin D. Lemley  
  Executive Vice President and Chief Financial Officer
  (Principal Financial Officer and Chief Accounting Officer)

 

 

 

40