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EX-10.35 - EX-10.35 - C & F FINANCIAL CORPcffi-20160331ex1035845aa.htm

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 March 31, 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 000-23423

 


 

C&F FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 


 

 

 

Virginia

54-1680165

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

802 Main Street West Point, VA

23181

(Address of principal executive offices)

(Zip Code)

 

(804) 843-2360

(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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the 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   

 

 

At May 6, 2016, the latest practicable date for determination, 3,451,784 shares of common stock, $1.00 par value, of the registrant were outstanding.

 

 

 


 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

 

 

PART I - Financial Information 

    

Page

 

 

 

 

 

 

Item 1. 

   Financial Statements

 

3

 

 

 

 

 

 

 

   Consolidated Balance Sheets - March 31, 2016 (unaudited) and December 31, 2015

 

3

 

 

 

 

 

 

 

   Consolidated Statements of Income (unaudited) - Three months ended March 31, 2016 and 2015

 

4

 

 

 

 

 

 

 

   Consolidated Statements of Comprehensive Income (unaudited) - Three months ended March 31, 2016 and 2015

 

5

 

 

 

 

 

 

 

   Consolidated Statements of Shareholders' Equity (unaudited) - Three months ended    March 31, 2016 and 2015

 

6

 

 

 

 

 

 

 

   Consolidated Statements of Cash Flows (unaudited) - Three months ended   March 31, 2016 and 2015

 

7

 

 

 

 

 

 

 

   Notes to Consolidated Financial Statements (unaudited)

 

8

 

 

 

 

 

 

Item 2. 

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

 

30

 

 

 

 

 

 

Item 3. 

   Quantitative and Qualitative Disclosures About Market Risk

 

52

 

 

 

 

 

 

Item 4. 

   Controls and Procedures

 

52

 

 

 

 

 

 

PART II - Other Information 

 

53

 

 

 

 

 

 

Item 1A. 

   Risk Factors

 

53

 

 

 

 

 

 

Item 2. 

   Unregistered Sales of Equity Securities and Use of Proceeds

 

53

 

 

 

 

 

 

Item 5. 

   Other Information

 

54

 

 

 

 

 

 

Item 6. 

   Exhibits

 

54

 

 

 

 

 

 

 

   Signatures

 

56

 

 

2


 

Part I – FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS

 

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

   March 31,    

 

December 31, 

 

 

    

2016

    

2015

  

Assets

 

 

(unaudited)

 

 

*

 

Cash and due from banks

 

$

10,429

 

$

9,679

 

Interest-bearing deposits in other banks

 

 

140,765

 

 

143,264

 

Total cash and cash equivalents

 

 

151,194

 

 

152,943

 

Securities—available for sale at fair value, amortized cost of $209,202 and $214,105, respectively

 

 

216,256

 

 

219,476

 

Loans held for sale, at fair value

 

 

25,426

 

 

44,000

 

Loans, net of allowance for loan losses of $35,838 and $35,569, respectively

 

 

889,172

 

 

865,892

 

Restricted stocks, at cost

 

 

3,403

 

 

3,345

 

Corporate premises and equipment, net

 

 

36,495

 

 

36,533

 

Other real estate owned, net of valuation allowance of $56 and $56, respectively

 

 

1,194

 

 

942

 

Accrued interest receivable

 

 

6,707

 

 

6,829

 

Goodwill

 

 

14,425

 

 

14,425

 

Core deposit intangible, net

 

 

1,411

 

 

1,618

 

Bank-owned life insurance

 

 

15,085

 

 

14,988

 

Other assets

 

 

44,056

 

 

44,085

 

Total assets

 

$

1,404,824

 

$

1,405,076

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

$

211,654

 

$

197,909

 

Savings and interest-bearing demand deposits

 

 

526,837

 

 

535,992

 

Time deposits

 

 

336,597

 

 

339,732

 

Total deposits

 

 

1,075,088

 

 

1,073,633

 

Short-term borrowings

 

 

12,538

 

 

12,093

 

Long-term borrowings

 

 

136,029

 

 

140,029

 

Trust preferred capital notes

 

 

25,148

 

 

25,139

 

Accrued interest payable

 

 

725

 

 

698

 

Other liabilities

 

 

21,952

 

 

22,425

 

Total liabilities

 

 

1,271,480

 

 

1,274,017

 

 

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

Common stock ($1.00 par value, 8,000,000 shares authorized, 3,451,057 and 3,437,787 shares issued and outstanding, respectively, includes 145,700 and 137,200 of unvested shares, respectively)

 

 

3,305

 

 

3,301

 

Additional paid-in capital

 

 

10,622

 

 

10,420

 

Retained earnings

 

 

117,487

 

 

116,167

 

Accumulated other comprehensive income, net

 

 

1,930

 

 

1,171

 

Total shareholders’ equity

 

 

133,344

 

 

131,059

 

Total liabilities and shareholders’ equity

 

$

1,404,824

 

$

1,405,076

 


*     Derived from audited consolidated financial statements.

 

The accompanying notes are an integral part of the consolidated financial statements.

3


 

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except for share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

    

2016

    

2015

  

 

Interest income

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

20,206

 

$

19,018

 

 

Interest on interest-bearing deposits and federal funds sold

 

 

177

 

 

100

 

 

Interest and dividends on securities

 

 

 

 

 

 

 

 

U.S. government agencies and corporations

 

 

101

 

 

128

 

 

Mortgage-backed securities

 

 

334

 

 

299

 

 

Tax-exempt obligations of states and political subdivisions

 

 

981

 

 

1,079

 

 

Taxable obligations of states and political subdivisions

 

 

46

 

 

42

 

 

Corporate bonds and other

 

 

120

 

 

137

 

 

Total interest income

 

 

21,965

 

 

20,803

 

 

Interest expense

 

 

 

 

 

 

 

 

Savings and interest-bearing deposits

 

 

292

 

 

275

 

 

Time deposits

 

 

809

 

 

681

 

 

Borrowings

 

 

878

 

 

786

 

 

Trust preferred capital notes

 

 

283

 

 

289

 

 

Total interest expense

 

 

2,262

 

 

2,031

 

 

Net interest income

 

 

19,703

 

 

18,772

 

 

Provision for loan losses

 

 

4,600

 

 

3,515

 

 

Net interest income after provision for loan losses

 

 

15,103

 

 

15,257

 

 

Noninterest income

 

 

 

 

 

 

 

 

Gains on sales of loans

 

 

1,730

 

 

1,645

 

 

Service charges on deposit accounts

 

 

963

 

 

1,015

 

 

Other service charges and fees

 

 

1,684

 

 

1,441

 

 

Net gains on calls and sales of available for sale securities

 

 

1

 

 

1

 

 

Investment services income

 

 

276

 

 

377

 

 

Other

 

 

509

 

 

622

 

 

Total noninterest income

 

 

5,163

 

 

5,101

 

 

Noninterest expenses

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,171

 

 

10,164

 

 

Occupancy

 

 

2,334

 

 

2,160

 

 

Other

 

 

4,585

 

 

4,426

 

 

Total noninterest expenses

 

 

17,090

 

 

16,750

 

 

Income before income taxes

 

 

3,176

 

 

3,608

 

 

Income tax expense

 

 

752

 

 

963

 

 

Net income

 

$

2,424

 

$

2,645

 

 

Net income per share - basic

 

$

0.70

 

$

0.77

 

 

Net income per share - assuming dilution

 

$

0.70

 

$

0.77

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

4


 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2016

    

2015

  

Net income

 

$

2,424

 

$

2,645

 

Other comprehensive income:

 

 

 

 

 

 

 

Changes in defined benefit plan assets and benefit obligations

 

 

 

 

 

 

 

Changes in net (loss) gain arising during the period1

 

 

38

 

 

(29)

 

Tax effect

 

 

(13)

 

 

11

 

 

 

 

 

 

 

 

 

Amortization of prior service cost arising during the period1

 

 

(15)

 

 

14

 

Tax effect

 

 

5

 

 

(5)

 

Net of tax amount

 

 

15

 

 

(9)

 

 

 

 

 

 

 

 

 

Unrealized loss on cash flow hedging instruments

 

 

 

 

 

 

 

Unrealized holding loss arising during the period

 

 

(538)

 

 

(148)

 

Tax effect

 

 

188

 

 

52

 

Net of tax amount

 

 

(350)

 

 

(96)

 

 

 

 

 

 

 

 

 

Unrealized holding gains on securities

 

 

 

 

 

 

 

Unrealized holding gains arising during the period

 

 

1,684

 

 

523

 

Tax effect

 

 

(589)

 

 

(183)

 

Reclassification adjustment for gains included in net income2

 

 

(1)

 

 

(1)

 

Tax effect

 

 

 —

 

 

 —

 

Net of tax amount

 

 

1,094

 

 

339

 

Other comprehensive income

 

 

759

 

 

234

 

Comprehensive income

 

$

3,183

 

$

2,879

 


1

These items are included in the computation of net periodic benefit cost. See Note 6, Employee Benefit Plans, for additional information.

2

Gains are included in “Net gains on calls and sales of available for sale securities" on the consolidated statements of income.

 

The accompanying notes are an integral part of the consolidated financial statements.

5


 

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

Accumulated

   

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

 

 

Common

 

Paid - In

 

Retained

 

Comprehensive

 

Shareholders’

 

 

 

Stock

 

Capital

 

Earnings

 

Income

 

Equity

 

Balance December 31, 2015

 

$

3,301

 

$

10,420

 

$

116,167

 

$

1,171

 

$

131,059

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

2,424

 

 

 —

 

 

2,424

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

759

 

 

759

 

Share-based compensation

 

 

 —

 

 

305

 

 

 —

 

 

 —

 

 

305

 

Restricted stock vested

 

 

7

 

 

(7)

 

 

 —

 

 

 —

 

 

 —

 

Common stock issued

 

 

1

 

 

36

 

 

 —

 

 

 —

 

 

37

 

Common stock purchased

 

 

(4)

 

 

(132)

 

 

 —

 

 

 —

 

 

(136)

 

Cash dividends declared – common stock ($0.32 per share)

 

 

 —

 

 

 —

 

 

(1,104)

 

 

 —

 

 

(1,104)

 

Balance March 31, 2016

 

$

3,305

 

$

10,622

 

$

117,487

 

$

1,930

 

$

133,344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

   

Additional

   

 

 

   

Accumulated Other

   

   

Total

 

 

 

Common

 

Paid - In

 

Retained

 

Comprehensive

 

 

Shareholders’

 

 

 

Stock

 

Capital

 

Earnings

 

Income

 

 

Equity

 

Balance December 31, 2014

 

$

3,283

 

$

9,456

 

$

107,785

 

$

3,086

 

$

123,610

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 —

 

 

 —

 

 

2,645

 

 

 —

 

 

2,645

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

234

 

 

234

 

Share-based compensation

 

 

 —

 

 

264

 

 

 —

 

 

 —

 

 

264

 

Restricted stock vested

 

 

7

 

 

(7)

 

 

 —

 

 

 —

 

 

 —

 

Common stock issued

 

 

1

 

 

32

 

 

 —

 

 

 —

 

 

33

 

Common stock purchased

 

 

(41)

 

 

(1,409)

 

 

 —

 

 

 —

 

 

(1,450)

 

Cash dividends declared – common stock ($0.30 per share)

 

 

 —

 

 

 —

 

 

(1,018)

 

 

 —

 

 

(1,018)

 

Balance March 31, 2015

 

$

3,250

 

$

8,336

 

$

109,412

 

$

3,320

 

$

124,318

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

6


 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2016

    

2015

  

Operating activities:

 

 

 

 

 

 

 

Net income

 

$

2,424

 

$

2,645

 

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

 

 

 

 

 

 

 

Depreciation

 

 

621

 

 

653

 

Provision for loan losses

 

 

4,600

 

 

3,515

 

Provision for indemnifications

 

 

52

 

 

58

 

Share-based compensation

 

 

305

 

 

264

 

Net accretion of certain acquisition-related fair value adjustments

 

 

(312)

 

 

(738)

 

Accretion of discounts and amortization of premiums on securities, net

 

 

423

 

 

372

 

Realized gains on sales and calls of securities

 

 

(1)

 

 

(1)

 

Net realized gains on sales of other real estate owned

 

 

(18)

 

 

 —

 

Net realized gains on sale of corporate premises and equipment

 

 

(46)

 

 

(3)

 

Increase in bank-owned life insurance cash surrender value

 

 

(86)

 

 

(88)

 

Origination of loans held for sale

 

 

(103,972)

 

 

(115,948)

 

Proceeds from sales of loans held for sale

 

 

124,276

 

 

104,395

 

Gains on sales of loans held for sale

 

 

(1,730)

 

 

(1,645)

 

Change in other assets and liabilities:

 

 

 

 

 

 

 

Accrued interest receivable

 

 

122

 

 

342

 

Other assets

 

 

(717)

 

 

(910)

 

Accrued interest payable

 

 

27

 

 

(10)

 

Other liabilities

 

 

(857)

 

 

387

 

Net cash provided by (used in) operating activities

 

 

25,111

 

 

(6,712)

 

Investing activities:

 

 

 

 

 

 

 

Proceeds from maturities, calls and sales of securities available for sale

 

 

12,222

 

 

8,554

 

Purchases of securities available for sale

 

 

(7,649)

 

 

(7,220)

 

Net (redemptions) issuance of restricted stocks

 

 

(58)

 

 

97

 

Net increase in loans

 

 

(27,674)

 

 

(10,855)

 

Proceeds from sales of other real estate owned

 

 

160

 

 

46

 

Purchases of corporate premises and equipment, net

 

 

(558)

 

 

(305)

 

Net cash used in investing activities

 

 

(23,557)

 

 

(9,683)

 

Financing activities:

 

 

 

 

 

 

 

Net increase in demand, interest-bearing demand and savings deposits

 

 

4,590

 

 

32,550

 

Net decrease in time deposits

 

 

(3,135)

 

 

(6,537)

 

Net decrease in borrowings

 

 

(3,555)

 

 

(1,364)

 

Issuance of common stock

 

 

37

 

 

33

 

Purchase of common stock 

 

 

(136)

 

 

(1,450)

 

Cash dividends

 

 

(1,104)

 

 

(1,018)

 

Net cash (used in) provided by financing activities

 

 

(3,303)

 

 

22,214

 

Net (decrease) increase in cash and cash equivalents

 

 

(1,749)

 

 

5,819

 

Cash and cash equivalents at beginning of period

 

 

152,943

 

 

167,616

 

Cash and cash equivalents at end of period

 

$

151,194

 

$

173,435

 

Supplemental disclosure

 

 

 

 

 

 

 

Interest paid

 

$

2,226

 

$

2,279

 

Income taxes paid

 

 

13

 

 

92

 

Supplemental disclosure of noncash investing and financing activities

 

 

 

 

 

 

 

Unrealized gains on securities available for sale

 

$

1,684

 

$

523

 

Transfers between loans and other real estate owned

 

 

394

 

 

50

 

Pension adjustment

 

 

23

 

 

(15)

 

Unrealized losses on cash flow hedging instruments

 

 

(538)

 

 

(148)

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

7


 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

NOTE 1: Summary of Significant Accounting Policies

 

Principles of Consolidation: The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial reporting and with applicable quarterly reporting regulations of the Securities and Exchange Commission (the SEC). They do not include all of the information and notes required by U.S. GAAP for complete financial statements. Therefore, these consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the C&F Financial Corporation Annual Report on Form 10-K for the year ended December 31, 2015.

 

The unaudited consolidated financial statements include the accounts of C&F Financial Corporation (the Corporation) and its wholly-owned subsidiary, Citizens and Farmers Bank (the Bank or C&F Bank). All significant intercompany accounts and transactions have been eliminated in consolidation. In addition, the Corporation owns C&F Financial Statutory Trust I, C&F Financial Statutory Trust II and Central Virginia Bankshares Statutory Trust I, all of which are unconsolidated subsidiaries. The subordinated debt owed to these trusts is reported as a liability of the Corporation.

 

Nature of Operations: The Corporation is a bank holding company incorporated under the laws of the Commonwealth of Virginia. The Corporation owns all of the stock of its subsidiary, C&F Bank, which is an independent commercial bank chartered under the laws of the Commonwealth of Virginia.

 

The Bank has five wholly-owned subsidiaries: C&F Mortgage Corporation and Subsidiaries (C&F Mortgage), C&F Finance Company (C&F Finance), C&F Wealth Management Corporation (C&F Wealth Management), C&F Insurance Services, Inc. and CVB Title Services, Inc., all incorporated under the laws of the Commonwealth of Virginia. C&F Mortgage, organized in September 1995, was formed to originate and sell residential mortgages and through its subsidiary, Certified Appraisals LLC, provides ancillary mortgage loan production services for residential appraisals. C&F Finance, acquired on September 1, 2002, is a finance company providing automobile loans through indirect lending programs. C&F Wealth Management, organized in April 1995 as C&F Investment Services, Inc. and renamed in May 2015, is a full-service brokerage firm offering a comprehensive range of investment services and insurance products through an alliance with an independent broker/dealer. C&F Insurance Services, Inc., organized in July 1999, owns an equity interest in an insurance agency that sells insurance products to customers of C&F Bank, C&F Mortgage and other financial institutions that have an equity interest in the agency. CVB Title Services, Inc., was organized for the primary purpose of owning membership interests in two insurance-related limited liability companies. Business segment data is presented in Note 8.

 

Basis of Presentation: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the allowance for indemnifications, impairment of loans, impairment of securities, the valuation of other real estate owned, the projected benefit obligation under the defined benefit pension plan, the valuation of deferred taxes, fair value measurements and goodwill impairment. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made.

 

Reclassification: Certain reclassifications have been made to prior period amounts to conform to the current period presentation. None of these reclassifications are considered material. 

 

Derivative Financial Instruments: The Corporation recognizes derivative financial instruments at fair value as either an other asset or other liability in the consolidated balance sheet. The Corporation’s derivative financial instruments as of March 31, 2016 and December 31, 2015 consisted of (1) the fair value of interest rate lock commitments (IRLCs) on mortgage loans that will be sold in the secondary market on a best efforts basis and the related forward commitments to

8


 

sell mortgage loans and (2) interest rate swaps that qualified as cash flow hedges on the Corporation's trust preferred capital notes. Because the IRLCs and forward sales commitments are not designated as hedging instruments, adjustments to reflect unrealized gains and losses resulting from changes in fair value of the Corporation's IRLCs and forward sales commitments and realized gains and losses upon ultimate sale of the loans are reported as noninterest income. The effective portion of the gain or loss on the Corporation's cash flow hedges is reported as a component of other comprehensive income, net of deferred income taxes, and reclassified into earnings in the same period or period(s) during which the hedged transactions affect earnings.

 

Share-Based Compensation: Shared-based compensation expense for the first quarter of 2016 included expense, net of forfeitures, of $305,000 ($189,000 after tax) for restricted stock granted during 2011 through 2016. As of March 31, 2016, there was $3.11 million of total unrecognized compensation expense related to unvested restricted stock that will be recognized over the remaining requisite service periods.

 

A summary of activity for restricted stock awards during the first three months of 2016 and 2015 is presented below:

 

 

 

 

 

 

 

 

 

 

2016

 

 

    

 

    

Weighted-

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Unvested, December 31, 2015

 

137,200

 

$

36.50

 

Granted

 

16,150

 

 

38.16

 

Vested

 

(7,350)

 

 

23.20

 

Forfeitures

 

(300)

 

 

41.78

 

Unvested, March 31, 2016

 

145,700

 

$

37.34

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

    

 

    

Weighted-

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Unvested, December 31, 2014

 

135,600

 

$

34.34

 

Granted

 

16,650

 

 

37.72

 

Vested

 

(6,750)

 

 

20.21

 

Forfeitures

 

(1,100)

 

 

36.98

 

Unvested, March 31, 2015

 

144,400

 

$

35.37

 

 

There was no stock option activity during the three months ended March 31, 2016 and 2015.  Stock options outstanding at March 31, 2016 and 2015 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intrinsic

 

 

 

 

 

 

 

 

 

 

Value of

 

 

 

 

 

 

 

 

 

 

Unexercised

 

 

 

 

 

 

 

 

Remaining

 

In-The

 

 

 

 

 

 

 

 

Contractual

 

Money

 

 

 

 

Exercise

 

 

Life

 

Options

 

 

Shares

 

Price*

 

 

(in years)*

 

(in 000’s)

Options outstanding and exercisable at March 31, 2016

 

24,000

 

$

38.39

 

 

0.6

 

$

12

Options outstanding and exercisable at March 31, 2015

 

100,762

 

$

37.75

 

 

0.9

 

$

 —


*     Weighted average

 

9


 

Recent Significant Accounting Pronouncements:

 

In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-12, “Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965) – 1. Fully Benefit-Responsive Investment Contracts, 2. Plan Investment Disclosures, and 3. Measurement Date Practical Expedient.” The amendments within this ASU are in three parts. Among other things, Part I amendments designate contract value as the only required measure for fully benefit-responsive investment contracts; Part II amendments eliminate the requirement that plans disclose: (a) individual investments that represent five percent or more of net assets available for benefits; and (b) the net appreciation or depreciation for investments for both participant-directed investments and nonparticipant-directed investments; and Part III amendments provide a practical expedient to permit plans to measure investments and investment-related accounts (e.g., a liability for a pending trade with a broker) as of a month-end date that is closest to the plan’s fiscal year-end, when the fiscal period does not coincide with month-end. The amendments in Parts I and II of this ASU are effective on a retrospective basis and Part III is effective on a prospective basis, for fiscal years beginning after December 15, 2015. Early adoption is permitted. The adoption of ASU 2015-12 did not have a material effect on its financial statements. 

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The adoption of ASU 2015-16 did not have a material effect on its financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.”  The amendments in ASU 2016-01 require, among other things, equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). It also eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  The Corporation is currently assessing the effect that ASU 2016-01 may have on its financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not

10


 

apply a full retrospective transition approach. The Corporation is currently assessing the effect that ASU 2016-02 may have on its financial statements.

 

In March 2016, the FASB issued ASU No. 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” The amendments in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria remain intact. The amendments are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Corporation does not expect the adoption of ASU 2016-05 to have a material effect on its financial statements.

 

On March 30, 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, in an effort to improve the accounting for employee share-based payments.  ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, such as accounting for income taxes, classification of excess tax benefits on the Statement of Cash Flows, accounting for forfeitures, minimum statutory tax withholding requirements and classification of employee taxes paid on the Statement of Cash Flows.  Additionally, ASU 2016-09 also simplifies two areas specific to entities other than public business entities, such as the practical expedient for expected term and the option to use intrinsic value for measuring awards.   For public business entities, the amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any organization in any interim or annual period. The Corporation is currently assessing the effect that ASU 2016-09 may have on its financial statements.

 

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material effect on the Corporation’s financial position, results of operations or cash flows.

 

 

 

 

NOTE 2: Securities

 

Debt and equity securities, all of which are classified as available for sale are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

(Dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

 

U.S. government agencies and corporations

 

$

16,159

 

$

22

 

$

(5)

 

$

16,176

 

Mortgage-backed securities

 

 

75,044

 

 

1,245

 

 

(11)

 

 

76,278

 

Obligations of states and political subdivisions

 

 

117,999

 

 

5,898

 

 

(95)

 

 

123,802

 

 

 

$

209,202

 

$

7,165

 

$

(111)

 

$

216,256

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

    

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

(Dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Fair Value

 

U.S. government agencies and corporations

 

$

18,759

 

$

 —

 

$

(258)

 

$

18,501

 

Mortgage-backed securities

 

 

76,957

 

 

513

 

 

(443)

 

 

77,027

 

Obligations of states and political subdivisions

 

 

118,389

 

 

5,640

 

 

(81)

 

 

123,948

 

 

 

$

214,105

 

$

6,153

 

$

(782)

 

$

219,476

 

 

11


 

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

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

 

    

Amortized

    

 

 

(Dollars in thousands)

 

Cost

 

Fair Value

 

Due in one year or less

 

$

26,642

 

$

26,943

 

Due after one year through five years

 

 

133,804

 

 

138,273

 

Due after five years through ten years

 

 

35,801

 

 

37,102

 

Due after ten years

 

 

12,955

 

 

13,938

 

 

 

$

209,202

 

$

216,256

 

 

Proceeds from the maturities, calls and sales of securities available for sale for the three months ended March 31, 2016 and 2015 were $12.22 million and $8.55 million, respectively, resulting in gross realized gains of $1,000 for both the three months ended March 31, 2016 and 2015.

 

The Corporation pledges securities to primarily secure public deposits and repurchase agreements. Securities with an aggregate amortized cost of $90.16 million and an aggregate fair value of $93.88 million were pledged at March 31, 2016. Securities with an aggregate amortized cost of $91.93 million and an aggregate fair value of $95.13 million were pledged at December 31, 2015.

 

Securities in an unrealized loss position at March 31, 2016, by duration of the period of the unrealized loss, are shown below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

12 Months or More

 

Total

 

 

   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

(Dollars in thousands)

 

Value

 

Loss

 

Value

 

Loss

 

   Value   

 

Loss

 

U.S. government agencies and corporations

 

$

 —

 

$

 —

 

$

994

 

$

5

 

$

994

 

$

5

 

Mortgage-backed securities

 

 

1,969

 

 

3

 

 

2,223

 

 

8

 

 

4,192

 

 

11

 

Obligations of states and political subdivisions

 

 

2,882

 

 

17

 

 

3,816

 

 

78

 

 

6,698

 

 

95

 

Total temporarily impaired securities

 

$

4,851

 

$

20

 

$

7,033

 

$

91

 

$

11,884

 

$

111

 

 

There were 25 debt securities totaling $11.88 million considered temporarily impaired at March 31, 2016. The primary cause of the temporary impairments in the Corporation's investments in debt securities was fluctuations in interest rates. Interest rates decreased during the first quarter of 2016, primarily in the middle and long-end of the United States Treasury yield curve, thereby decreasing unrealized losses on certain of the Corporation's debt securities as compared to December 31, 2015. Prices for debt securities were higher as interest rates declined, primarily due to the Federal Open Market Committee’s (FOMC) decision to reduce the number of anticipated increases in the Federal Funds rate in 2016, citing the weakness of the global economy as a reason for greater caution about the prospects for domestic growth.  Interest rates in the municipal bond sector, which includes the Corporation's obligations of states and political subdivisions, were also lower during the first quarter of 2016, driven by the same factors noted above that affected the overall interest rate environment, offset to some degree by an increase in the overall supply of municipal debt due to an increase in new issuance volume. At March 31, 2016, approximately 97 percent of the Corporation's obligations of states and political subdivisions, as measured by market value, were rated “A” or better by Standard & Poor's or Moody's Investors Service. Of those in a net unrealized loss position, approximately 83 percent were rated “A” or better, as measured by market value, at  March 31, 2016.  For the approximately 17 percent not rated “A” or better, as measured by market value at March 31, 2016, the Corporation considers these to meet regulatory credit quality standards, such that the securities have low risk of default by the obligor, and the full and timely repayment of principal and interest is expected over the expected life of the investment. Because the Corporation intends to hold these investments in debt securities to maturity and it is more likely than not that the Corporation will not be required to sell these investments before a recovery of unrealized losses, the Corporation does not consider these investments to be other-than-temporarily impaired at March 31, 2016 and no other-than-temporary impairment has been recognized. 

12


 

 

Securities in an unrealized loss position at December 31, 2015, by duration of the period of the unrealized loss, are shown below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less Than 12 Months

 

12 Months or More

 

Total