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Section 1: 10-Q (FORM 10-Q)

mbcn20190630_10q.htm
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

X

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

    For the quarterly period ended June 30, 2019

or

 

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

    For the transition period from                        to                        

 

Commission File Number 001-36613

Middlefield Banc Corp.

(Exact Name of Registrant as Specified in its Charter)

 

Ohio

 

34-1585111

State or Other Jurisdiction of

 

I.R.S. Employer Identification No.

Incorporation or Organization

 

 

 

 

 

15985 East High Street, Middlefield, Ohio

 

44062-0035

Address of Principal Executive Offices

 

Zip Code

 

 

 

 

440-632-1666

 

 

 

Registrant’s Telephone Number, Including Area Code

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Securities Registered Pursuant to Section 12(b) of The Act:

 

 

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, Without Par Value

MBCN

The NASDAQ Stock Market, LLC

(NASDAQ Capital Market)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes X     No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes X    No ☐

 

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

 

Large accelerated filer ☐

Accelerated filer X

Non-accelerated filer ☐  

Smaller reporting company X

Emerging growth company ☐

 

 

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

 

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

 

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

 

Outstanding at August 6, 2019: 3,242,842

 

 

 

 

 

MIDDLEFIELD BANC CORP.

 

INDEX

 

Part I – Financial Information

 
     

Item 1.

Financial Statements (unaudited)

 

     
 

Consolidated Balance Sheet as of June 30, 2019 and December 31, 2018

3
     
 

Consolidated Statement of Income for the Three and Six Months ended June 30, 2019 and 2018

4

     
 

Consolidated Statement of Comprehensive Income for the Three and Six Months ended June 30, 2019 and 2018

5

     
 

Consolidated Statement of Changes in Stockholders' Equity for the Three and Six Months ended June 30, 2019 and 2018

6

     
 

Consolidated Statement of Cash Flows for the Six Months ended June 30, 2019 and 2018

8

     
 

Notes to Unaudited Consolidated Financial Statements

10

     

Item 2.

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

31

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

41

     

Item 4.

Controls and Procedures

42

   

Part II – Other Information

 
   

Item 1.

Legal Proceedings

42

     

Item 1a.

Risk Factors

43

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

     

Item 3.

Defaults by the Company on its Senior Securities

43

     

Item 4.

Mine Safety Disclosures

43

     

Item 5.

Other Information

43

     

Item 6.

Exhibits and Reports on Form 8-K

43

     

Signatures

  48
     

Exhibit 31.1

   
     

Exhibit 31.2

   
     

Exhibit 32

   

 

2

 

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET

(Dollar amounts in thousands, except share data)

(Unaudited)

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 
                 

ASSETS

               

Cash and due from banks

  $ 133,372     $ 107,933  

Federal funds sold

    2,010       -  

Cash and cash equivalents

    135,382       107,933  

Equity securities, at fair value

    660       616  

Investment securities available for sale, at fair value

    98,809       98,322  

Loans held for sale

    431       597  

Loans

    998,232       992,109  

Less allowance for loan and lease losses

    7,304       7,428  

Net loans

    990,928       984,681  

Premises and equipment, net

    16,788       13,003  

Goodwill

    15,071       15,071  

Core deposit intangibles

    2,227       2,397  

Bank-owned life insurance

    16,294       16,080  

Accrued interest receivable and other assets

    11,832       9,698  
                 

TOTAL ASSETS

  $ 1,288,422     $ 1,248,398  
                 

LIABILITIES

               

Deposits:

               

Noninterest-bearing demand

  $ 198,817     $ 203,410  

Interest-bearing demand

    94,266       92,104  

Money market

    152,885       196,685  

Savings

    194,505       222,954  

Time

    411,034       300,914  

Total deposits

    1,051,507       1,016,067  

Short-term borrowings:

               

Federal funds purchased

    -       398  

Federal Home Loan Bank advances

    85,000       90,000  

Total short-term borrowings

    85,000       90,398  

Other borrowings

    12,449       8,803  

Accrued interest payable and other liabilities

    5,206       4,840  

TOTAL LIABILITIES

    1,154,162       1,120,108  
                 

STOCKHOLDERS' EQUITY

               

Common stock, no par value; 10,000,000 shares authorized, 3,646,497 and 3,630,497 shares issued; 3,242,585 and 3,244,332 shares outstanding

    86,590       85,925  

Retained earnings

    60,517       56,037  

Accumulated other comprehensive income (loss)

    1,377       (154 )

Treasury stock, at cost; 403,912 and 386,165 shares

    (14,224 )     (13,518 )

TOTAL STOCKHOLDERS' EQUITY

    134,260       128,290  
                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 1,288,422     $ 1,248,398  

 

See accompanying notes to unaudited consolidated financial statements.

 

3

 

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF INCOME  

(Dollar amounts in thousands, except per share data)

(Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2019

   

2018

   

2019

   

2018

 

INTEREST AND DIVIDEND INCOME

                               

Interest and fees on loans

  $ 12,706     $ 11,197     $ 25,194     $ 22,251  

Interest-earning deposits in other institutions

    169       115       356       234  

Federal funds sold

    25       7       32       21  

Investment securities:

                               

Taxable interest

    214       170       393       339  

Tax-exempt interest

    553       550       1,118       1,075  

Dividends on stock

    53       53       111       112  

Total interest and dividend income

    13,720       12,092       27,204       24,032  
                                 

INTEREST EXPENSE

                               

Deposits

    3,277       1,979       6,222       3,619  

Short-term borrowings

    79       192       292       468  

Other borrowings

    95       118       191       240  

Total interest expense

    3,451       2,289       6,705       4,327  
                                 

NET INTEREST INCOME

    10,269       9,803       20,499       19,705  
                                 

Provision for loan losses

    110       210       350       420  
                                 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

    10,159       9,593       20,149       19,285  
                                 

NONINTEREST INCOME

                               

Service charges on deposit accounts

    530       472       1,038       925  

Investment securities gains on sale, net

    190       -       190       -  

(Loss) gain on equity securities

    (14 )     13       44       31  

Earnings on bank-owned life insurance

    109       98       214       210  

Gain on sale of loans

    98       154       157       158  

Other income

    386       311       788       510  

Total noninterest income

    1,299       1,048       2,431       1,834  
                                 

NONINTEREST EXPENSE

                               

Salaries and employee benefits

    4,078       3,866       8,202       7,845  

Occupancy expense

    496       472       1,049       1,008  

Equipment expense

    291       201       526       434  

Data processing costs

    549       402       1,014       879  

Ohio state franchise tax

    261       244       520       359  

Federal deposit insurance expense

    100       150       230       300  

Professional fees

    403       327       834       772  

Advertising expense

    200       230       403       458  

Software amortization expense

    152       155       297       305  

Core deposit intangible amortization

    85       87       170       178  

Other expense

    867       929       1,737       1,870  

Total noninterest expense

    7,482       7,063       14,982       14,408  
                                 

Income before income taxes

    3,976       3,578       7,598       6,711  

Income taxes

    686       481       1,297       1,009  
                                 

NET INCOME

  $ 3,290     $ 3,097     $ 6,301     $ 5,702  
                                 

EARNINGS PER SHARE

                               

Basic

  $ 1.01     $ 0.96     $ 1.94     $ 1.77  

Diluted

  $ 1.01     $ 0.96     $ 1.93     $ 1.76  

 

See accompanying notes to unaudited consolidated financial statements.

 

4

 
 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Dollar amounts in thousands)

(Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net income

  $ 3,290     $ 3,097     $ 6,301     $ 5,702  
                                 

Other comprehensive income (loss):

                               

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

    1,122       (73 )     2,128       (1,985 )

Tax effect

    (236 )     15       (447 )     417  
                                 

Reclassification adjustment for investment securities gains included in net income

    (190 )     -       (190 )     -  

Tax effect

    40       -       40       -  
                                 

Total other comprehensive income (loss)

    736       (58 )     1,531       (1,568 )
                                 

Comprehensive income

  $ 4,026     $ 3,039     $ 7,832     $ 4,134  

 

See accompanying notes to unaudited consolidated financial statements.

 

5

 

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

 

                            Accumulated                
                           

Other

           

Total

 
   

Common Stock

   

Retained

   

Comprehensive

   

Treasury

   

Stockholders'

 
   

Shares

   

Amount

   

Earnings

   

Income

   

Stock

   

Equity

 
                                                 

Balance, March 31, 2019

    3,642,535     $ 86,437     $ 58,139     $ 641     $ (13,518 )   $ 131,699  
                                                 

Net income

                    3,290                       3,290  

Other comprehensive income

                            736               736  

Dividend reinvestment and purchase plan

    3,762       149                               149  

Stock options exercised

    200       4                               4  

Treasury shares acquired (17,747)

                                    (706 )     (706 )

Cash dividends ($0.28 per share)

                    (912 )                     (912 )
                                                 

Balance, June 30, 2019

    3,646,497     $ 86,590     $ 60,517     $ 1,377     $ (14,224 )   $ 134,260  

 

                            Accumulated                
                           

Other

           

Total

 
   

Common Stock

   

Retained

   

Comprehensive

   

Treasury

   

Stockholders'

 
   

Shares

   

Amount

   

Earnings

   

Loss

   

Stock

   

Equity

 
                                                 

Balance, March 31, 2018

    3,609,149     $ 85,116     $ 48,927     $ (373 )   $ (13,518 )   $ 120,152  
                                                 

Net income

                    3,097                       3,097  

Other comprehensive loss

                            (58 )             (58 )

Dividend reinvestment and purchase plan

    2,624       141                               141  

Stock options exercised

    4500       104                               104  

Stock-based compensation, net

    3,570       183                               183  

Cash dividends ($0.28 per share)

                    (903 )                     (903 )
                                                 

Balance, June 30, 2018

    3,619,843     $ 85,544     $ 51,121     $ (431 )   $ (13,518 )   $ 122,716  

 

(continued on following page)

See accompanying notes to unaudited consolidated financial statements.

 

6

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollar amounts in thousands, except share and per share data)

(Unaudited, continued from previous page)

 

                           

Accumulated

                 
                           

Other

           

Total

 
   

Common Stock

   

Retained

   

Comprehensive

   

Treasury

   

Stockholders'

 
   

Shares

   

Amount

   

Earnings

   

Income (Loss)

   

Stock

   

Equity

 
                                                 

Balance, December 31, 2018

    3,630,497     $ 85,925     $ 56,037     $ (154 )   $ (13,518 )   $ 128,290  
                                                 

Net income

                    6,301                       6,301  

Other comprehensive income

                            1,531               1,531  

Dividend reinvestment and purchase plan

    8,284       345                               345  

Stock options exercised

    200       4                               4  

Stock-based compensation, net

    7,516       316                               316  

Treasury shares acquired (17,747)

                                    (706 )     (706 )

Cash dividends ($0.56 per share)

                    (1,821 )                     (1,821 )
                                                 

Balance, June 30, 2019

    3,646,497     $ 86,590     $ 60,517     $ 1,377     $ (14,224 )   $ 134,260  

 

                           

Accumulated

                 
                           

Other

           

Total

 
   

Common Stock

   

Retained

   

Comprehensive

   

Treasury

   

Stockholders'

 
   

Shares

   

Amount

   

Earnings

   

Income (Loss)

   

Stock

   

Equity

 
                                                 

Balance, December 31, 2017

    3,603,881     $ 84,859     $ 47,431     $ 1,091     $ (13,518 )   $ 119,863  
                                                 

Change in accounting principle for adoption of ASU 2016-01

                    141       (141 )             -  

Change in accounting principle for adoption of ASU 2018-02

                    (187 )     187               -  

Net income

                    5,702                       5,702  

Other comprehensive loss

                            (1,568 )             (1,568 )

Dividend reinvestment and purchase plan

    5,902       301                               301  

Stock options exercised

    4,500       104                               104  

Stock-based compensation, net

    5,560       280                               280  

Cash dividends ($0.61 per share)

                    (1,966 )                     (1,966 )
                                                 

Balance, June 30, 2018

    3,619,843     $ 85,544     $ 51,121     $ (431 )   $ (13,518 )   $ 122,716  

 

See accompanying notes to unaudited consolidated financial statements.

 

7

 

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

 

   

Six Months Ended

 
   

June 30,

 
   

2019

   

2018

 

OPERATING ACTIVITIES

               

Net income

  $ 6,301     $ 5,702  

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

               

Provision for loan losses

    350       420  

Investment securities gains on sale, net

    (190 )     -  

Gain on equity securities

    (44 )     (31 )

Depreciation and amortization of premises and equipment, net

    524       457  

Software amortization expense

    297       305  

Financing lease amortization expense

    173       -  

Amortization of premium and

               

discount on investment securities, net

    176       208  

Accretion of deferred loan fees, net

    (429 )     (564 )

Amortization of core deposit intangibles

    170       178  

Stock-based compensation expense

    186       280  

Origination of loans held for sale

    (6,781 )     (6,694 )

Proceeds from sale of loans

    7,104       6,146  

Gain on sale of loans

    (157 )     (121 )

Earnings on bank-owned life insurance

    (214 )     (210 )

Deferred income tax

    183       132  

Net gain on other real estate owned

    (106 )     5  

Decrease (increase) in accrued interest receivable

    66       (7 )

Increase in accrued interest payable

    292       83  

Other, net

    (2,991 )     (1,268 )

Net cash provided by operating activities

    4,910       5,021  
                 

INVESTING ACTIVITIES

               

Investment securities available for sale:

               

Proceeds from repayments and maturities

    6,851       2,304  

Proceeds from sale of securities

    11,807       -  

Purchases

    (17,193 )     (9,862 )

Increase in loans, net

    (6,206 )     (20,005 )

Proceeds from the sale of other real estate owned

    325       26  

Purchase of premises and equipment

    (681 )     (1,582 )

Purchase of restricted stock

    (29 )     (90 )

Net cash used in investing activities

    (5,126 )     (29,209 )
                 

FINANCING ACTIVITIES

               

Net increase in deposits

    35,440       54,052  

Increase (decrease) in short-term borrowings, net

    (5,398 )     13,126  

Repayment of other borrowings

    (155 )     (10,069 )

Restricted stock cash portion

    (44 )     -  

Stock options exercised

    4       104  

Proceeds from dividend reinvestment and purchase plan

    345       301  

Repurchase of treasury shares

    (706 )     -  

Cash dividends

    (1,821 )     (1,966 )

Net cash provided by financing activities

    27,665       55,548  
                 

Increase in cash and cash equivalents

    27,449       31,360  
                 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

    107,933       39,886  
                 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $ 135,382     $ 71,246  

 

See accompanying notes to unaudited consolidated financial statements.

 

8

 

 

   

Six Months Ended

 
   

June 30,

 
   

2019

   

2018

 

SUPPLEMENTAL INFORMATION

               

Cash paid during the year for:

               

Interest on deposits and borrowings

  $ 6,413     $ 4,238  

Income taxes

    1,330       1,075  
                 

Noncash operating transactions:

               

Operating lease assets added to other, net

  $ (1,071 )   $ -  

Operating lease liabilities added to other, net

    1,071       -  

Noncash investing transactions:

               

Transfers from loans to other real estate owned

  $ 38     $ -  

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

    -       (625 )

Finance lease assets added to premises and equipment

    (3,801 )     -  

Noncash financing transactions:

               

Finance lease liabilities added to borrowed funds

  $ 3,801     $ -  

 

See accompanying notes to unaudited consolidated financial statements.

 

9

 

 

MIDDLEFIELD BANC CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1 - BASIS OF PRESENTATION

 

The consolidated financial statements of Middlefield Banc Corp. ("Company") include its bank subsidiary, The Middlefield Banking Company (“MBC” or “Middlefield Bank”), and a nonbank asset resolution subsidiary EMORECO, Inc. The consolidated financial statements also include the accounts of MBC’s subsidiary, Middlefield Investments, Inc. (MII), established March 13, 2019. All significant inter-company items have been eliminated.

 

The unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements.  The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2018.  The interim consolidated financial statements include all adjustments (consisting of only normal recurring items) that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented.  The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year.  

 

Recently Adopted Accounting Pronouncements –

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. On January 1, 2019, the Company adopted ASU 2016-02 which resulted in the recording of finance lease assets and liabilities of $3.8 million and operating lease assets and liabilities of $1.1 million on the Consolidated Balance Sheet. See Note 9 to the financial statements.

 

Recently Issued Accounting Pronouncements –

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“CECL”), which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The CECL model has been completed and runs concurrently with the existing incurred loss model each month.  Management continues monitoring model output, with final assumption changes expected to be made in the third quarter.

 

Reclassification of Comparative Amounts –

 

Certain comparative amounts from prior years have been reclassified to conform to current-year presentations. Such reclassifications did not affect net income or retained earnings.

 

10

 

 

 

NOTE 2 REVENUE RECOGNITION

 

In accordance with ASC Topic 606, management determined that the primary sources of revenue, which emanate from interest income on loans and investments, along with noninterest revenue resulting from investment security gains, gains on the sale of loans, and BOLI income, are not within the scope of ASC 606. These revenue sources cumulatively comprise 92.2% of the total revenue of the Company.

 

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

 

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

 

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

 

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

 

   

For the Three Months Ended June 30,

   

For the Six Months Ended June 30,

 

Noninterest Income

 

2019

   

2018

   

2019

   

2018

 

(Dollar amounts in thousands)

                               
                                 

Service charges on deposit accounts:

                               

Overdraft fees

  $ 190     $ 197     $ 438     $ 390  

ATM banking fees

    241       214       435       415  

Service charges and other fees

    99       61       165       120  

Investment securities gains on sale, net (a)

    190       -       190       -  

(Loss) gain on equity securities (a)

    (14 )     13       44       31  

Earnings on bank-owned life insurance (a)

    109       98       214       210  

Gain on sale of loans (a)

    98       154       157       158  

Other income

    386       311       788       510  

Total noninterest income

  $ 1,299     $ 1,048     $ 2,431     $ 1,834  

 

(a) Not within scope of ASC 606

 

11

 

 

 

NOTE 3 - STOCK-BASED COMPENSATION

 

The Company had no unvested stock options outstanding as of June 30, 2019 and 2018.

 

Stock option activity during the six months ended June 30, 2019 is as follows:

 

           

Weighted-

 
           

average

 
           

Exercise Price

 
   

Shares

   

Per Share

 
                 

Outstanding, January 1, 2019

    7,450     $ 17.55  

Exercised

    (200 )     17.55  
                 

Outstanding, June 30, 2019

    7,250     $ 17.55  
                 

Exercisable, June 30, 2019

    7,250     $ 17.55  

 

The following table presents the activity during the six months ended June 30, 2019 related to awards of restricted stock:

 

           

Weighted-

 
           

average

 
           

Grant Date Fair

 
   

Units

   

Value Per Unit

 
                 

Nonvested at January 1, 2019

    21,072     $ 41.96  

Granted

    14,565       41.90  

Vested

    (4,970 )     32.40  

Nonvested at June 30, 2019

    30,667     $ 43.48  
                 

Expected to vest at June 30, 2019

    750     $ 46.03  

 

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

 

Share-based compensation expense of $0 and $91,000 was recognized for the three-month periods ended June 30, 2019 and 2018, respectively. Share-based compensation expense of $90,000 and $136,000 was recognized for the six-month periods ended June 30, 2019 and 2018, respectively. Since the shares of restricted stock are historically paid out at the vesting date in a combination of shares and cash, the Company has recorded a liability related to this plan which totals $236,000 and $261,000 at June 30, 2019 and 2018, respectively.

 

Total unrecognized stock compensation cost related to nonvested share-based compensation on restricted stock as of June 30, 2019 totals $517,000, of which $123,000 is estimated for the rest of 2019, $201,000 for 2020, $168,000 for 2021, and $25,000 for 2022.

 

12

 
 

 

 

NOTE 4 - EARNINGS PER SHARE

 

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

 

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

 

   

For the Three

   

For the Six

 
   

Months Ended

   

Months Ended

 
   

June 30,

   

June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Weighted-average common shares issued

    3,643,271       3,611,891       3,639,310       3,609,174  
                                 

Average treasury stock shares

    (392,017 )     (386,165 )     (389,107 )     (386,165 )
                                 

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

    3,251,254       3,225,726       3,250,203       3,223,009  
                                 

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

    6,219       14,603       6,322       15,227  
                                 

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

    3,257,473       3,240,329       3,256,525       3,238,236  

 

Options to purchase 7,250 shares of common stock at $17.55 per share, were outstanding during the three and six months ended June 30, 2019. Also outstanding were 30,667 shares of restricted stock. None of the outstanding options or restricted stock were anti-dilutive.

 

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

 

When shares recognized as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognized as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury share reserve. When treasury shares are sold or reissued subsequently, the amount received is recognized as an increase in equity and the resulting surplus or deficit on the transaction is presented within the share premium. The reserve for the Company’s treasury shares comprises the cost of the Company’s shares held by the Company. As of June 30, 2019, the Company held 403,912 of the Company’s shares, which is an increase of 17,747 from the 386,165 shares held as of December 31, 2018.

 

13

 

 

 

NOTE 5 - FAIR VALUE MEASUREMENTS

 

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

 

Level I:

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

 

Level II:

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

 

Level III:

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

 

This hierarchy requires the use of observable market data when available.

 

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

 

           

June 30, 2019

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a recurring basis:

                               

U.S. government agency securities

  $ -     $ 1,995     $ -     $ 1,995  

Subordinated debt

    -       4,086       -       4,086  

Obligations of states and political subdivisions

    -       72,911       -       72,911  

Mortgage-backed securities in government-sponsored entities

    -       19,817       -       19,817  

Total debt securities

    -       98,809       -       98,809  

Equity securities in financial institutions

    660       -       -       660  

Total

  $ 660     $ 98,809     $ -     $ 99,469  

 

           

December 31, 2018

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a recurring basis:

                               

U.S. government agency securities

  $ -     $ 7,471     $ -     $ 7,471  

Obligations of states and political subdivisions

    -       73,093       -       73,093  

Mortgage-backed securities in government-sponsored entities

    -       17,758       -       17,758  

Total debt securities

    -       98,322       -       98,322  

Equity securities in financial institutions

    616       -       -       616  

Total

  $ 616     $ 98,322     $ -     $ 98,938  

 

Investment Securities Available for Sale - The Company obtains fair values from an independent pricing service which represent quoted prices for similar assets, fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level II).

 

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

 

14

 

 

The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Collateral-dependent impaired loans are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. A new cost basis is established at the time a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken to the property’s value subsequent to the initial measurement. No such devaluation occurred in the three months ended June 30, 2019.

 

           

June 30, 2019

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a non-recurring basis:

                               

Impaired loans

  $ -     $ -     $ 5,025     $ 5,025  

 

           

December 31, 2018

         

(Dollar amounts in thousands)

 

Level I

   

Level II

   

Level III

   

Total

 

Assets measured on a non-recurring basis:

                               

Impaired loans

  $ -     $ -     $ 1,075     $ 1,075  

 

Impaired Loans – The Company has measured impairment on collateral-dependent impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral-dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the above table as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the above table as it is not currently being carried at its fair value. The fair values in the above table exclude estimated selling costs of $1.8 million and $492,000 as of June 30, 2019 and December 31, 2018, respectively.

 

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

 

   

Quantitative Information about Level III Fair Value Measurements

   
(Dollar amounts in thousands)                  
    Fair Value Estimate  

Valuation Techniques

Unobservable Input

 

Range (Weighted Average)

 
June 30, 2019  

 

                 

Impaired loans

  $ 5,025  

Appraisal of collateral (1)

Appraisal adjustments (2)

   0% to 56.6% (0.9%)  

 

   

Quantitative Information about Level III Fair Value Measurements

   
(Dollar amounts in thousands)                  

 

  Fair Value Estimate  

Valuation Techniques

Unobservable Input

 

Range (Weighted Average)

 

December 31, 2018

                       

Impaired loans

  $ 1,075  

Appraisal of collateral (1)

Appraisal adjustments (2)

   0% to 100.0% (40.6%)  

 

 

(1)

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

 

 

(2)

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

 

15

 

 

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

 

   

June 30, 2019

 
   

Carrying

                           

Total

 
   

Value

   

Level I

   

Level II

   

Level III

   

Fair Value

 
   

(Dollar amounts in thousands)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 135,382     $ 135,382     $ -     $ -     $ 135,382  

Loans held for sale

    431       -       431       -       431  

Net loans

    990,928       -       -       987,542       987,542  

Bank-owned life insurance

    16,294       16,294       -       -       16,294  

Federal Home Loan Bank stock

    3,708       3,708       -       -       3,708  

Accrued interest receivable

    3,567       3,567       -       -       3,567  
                                         

Financial liabilities:

                                       

Deposits

  $ 1,051,507     $ 640,473     $ -     $ 412,944     $ 1,053,417  

Short-term borrowings

    85,000       85,000       -       -       85,000  

Other borrowings

    12,449       -       -       12,490       12,490  

Accrued interest payable

    1,036       1,036       -       -       1,036  

 

 

   

December 31, 2018

 
   

Carrying

                           

Total

 
   

Value

   

Level I

   

Level II

   

Level III

   

Fair Value

 
   

(Dollar amounts in thousands)

 

Financial assets:

                                       

Cash and cash equivalents

  $ 107,933     $ 107,933     $ -     $ -     $ 107,933  

Loans held for sale

    597       -       597       -       597  

Net loans

    984,681       -       -       973,124       973,124  

Bank-owned life insurance

    16,080       16,080       -       -       16,080  

Federal Home Loan Bank stock

    3,679       3,679       -       -       3,679  

Accrued interest receivable

    3,633       3,633       -       -       3,633  
                                         

Financial liabilities:

                                       

Deposits

  $ 1,016,067     $ 715,153     $ -     $ 298,891     $ 1,014,044  

Short-term borrowings

    90,398       90,398       -       -       90,398  

Other borrowings

    8,803       -       -       8,827       8,827  

Accrued interest payable

    744       744       -       -       744  

 

All financial instruments included in the above tables, with the exception of net loans, deposits, and other borrowings, are carried at cost, which approximates the fair value of the instrument.

 

16

 

 

 

NOTE 6 – ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The following table presents the changes in accumulated other comprehensive income (loss) (“AOCI”) by component net of tax for the three and six months ended June 30, 2019 and 2018, respectively:

 

(Dollars in thousands)   

Unrealized gains on

available-for-sale securities

(a)

 

Balance as of March 31, 2019

  $ 641  

Other comprehensive income

    886  

Amount reclassified from accumulated other comprehensive income

    (150 )

Balance at June 30, 2019

  $ 1,377  
         

Balance as of December 31, 2018

  $ (154 )

Other comprehensive income

    1,681  

Amount reclassified from accumulated other comprehensive income

    (150 )

Balance at June 30, 2019

  $ 1,377  

 

 

(Dollars in thousands)  

Unrealized gains on

available-for-sale securities

(a)

 

Balance as of March 31, 2018

  $ (373 )

Other comprehensive loss before reclassification

    (58 )

Balance at June 30, 2018

  $ (431 )
         

Balance as of December 31, 2017

  $ 1,091  

Other comprehensive loss before reclassification

    (1,568 )

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

    (141 )

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

    187  

Period change

    (1,522 )

Balance at June 30, 2018

  $ (431 )

 

 

(a)

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

 

 

(b)

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

 

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

 

   

Amounts Reclassified from Accumulated Other Comprehensive

Income

 

Affected Line Item in

the Statement Where

(Dollars in thousands)

  For the Three and Six Months Ended  

Net Income is

Details about other comprehensive income

 

June 30, 2019

   

June 30, 2018

 

Presented

Unrealized gains on available-for-sale securities (a)    $ 190     $ -  

Investment securities gains on sale, net

      (40 )     -  

Income taxes

    $ 150     $ -    

 

 

(a)

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

 

17

 

 

 

NOTE 7 INVESTMENT AND EQUITY SECURITIES

 

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

 

   

June 30, 2019

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

(Dollar amounts in thousands)

 

Cost

   

Gains

   

Losses

   

Value

 
                                 

U.S. government agency securities

  $ 2,000     $ -     $ (5 )   $ 1,995  

Subordinated debt

    4,000       86       -       4,086  

Obligations of states and political subdivisions:

                               

Taxable

    501       7       -       508  

Tax-exempt

    70,818       1,585       -       72,403  

Mortgage-backed securities in government-sponsored entities

    19,746       223       (152 )     19,817  

Total

  $ 97,065     $ 1,901     $ (157 )   $ 98,809  

 

   

December 31, 2018

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 

(Dollar amounts in thousands)

 

Cost

   

Gains

   

Losses

   

Value

 
                                 

U.S. government agency securities

  $ 7,442     $ 90     $ (61 )   $ 7,471  

Obligations of states and political subdivisions:

                               

Taxable

    502       10       -       512  

Tax-exempt

    72,387       667       (473 )     72,581  

Mortgage-backed securities in government-sponsored entities

    18,185       88       (515 )     17,758  

Total

  $ 98,516     $ 855     $ (1,049 )   $ 98,322  

 

The Company recognized net (loss) gains on equity investments of ($14,000) and $44,000, respectively, for the three and six months ended June 30, 2019. The Company recognized net gains on equity investments of $13,000 and $31,000, respectively, for the three and six months ended June 30, 2018. No net gains on sold equity securities were realized during this period.

 

The amortized cost and fair value of debt securities at June 30, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   

Amortized

   

Fair

 

(Dollar amounts in thousands)

 

Cost

   

Value

 
                 

Due in one year or less

  $ 5,094     $ 5,122  

Due after one year through five years

    1,790       1,820  

Due after five years through ten years

    13,446       13,658  

Due after ten years

    76,735       78,209  

Total

  $ 97,065     $ 98,809  

 

18

 

 

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

 

(Dollar amounts in thousands)

 

For the Three Months Ended June 30,

   

For the Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 

Proceeds from sales

  $ 11,807     $ -     $ 11,807     $ -  

Gross realized gains

    223       -       223       -  

Gross realized losses

    (33 )     -       (33 )     -  

 

Investment securities with an approximate carrying value of $51.1 million and $63.5 million at June 30, 2019 and December 31, 2018, respectively, were pledged to secure deposits and for other purposes as required by law.

 

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

 

   

June 30, 2019

 
   

Less than Twelve Months

   

Twelve Months or Greater

   

Total

 
           

Gross

           

Gross

           

Gross

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

(Dollar amounts in thousands)

 

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 
                                                 

U.S. government agency securities

  $ -     $ -     $ 1,995     $ (5 )   $ 1,995     $ (5 )

Mortgage-backed securities in government-sponsored entities

    -       -       10,945       (152 )     10,945       (152 )

Total

  $ -     $ -     $ 12,940     $ (157 )   $ 12,940     $ (157 )

 

   

December 31, 2018

 
   

Less than Twelve Months

   

Twelve Months or Greater

   

Total

 
           

Gross

           

Gross

           

Gross

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 

(Dollar amounts in thousands)

 

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 
                                                 

U.S. government agency securities

  $ -     $ -     $ 4,105     $ (61 )   $ 4,105     $ (61 )

Obligations of states and political subdivisions:

                                               

Tax-exempt

    20,451       (286 )     11,053       (187 )     31,504       (473 )

Mortgage-backed securities in government-sponsored entities

    2,068       (9 )     12,257       (506 )     14,325       (515 )

Total

  $ 22,519     $ (295 )   $ 27,415     $ (754 )   $ 49,934     $ (1,049 )

 

There were 16 securities considered temporarily impaired at June 30, 2019.

 

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

 

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

 

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

 

19

 

 

Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises, and state and political subdivisions accounted for 96% of the total available-for-sale portfolio as of June 30, 2019 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government and the lack of prolonged unrealized loss positions within the obligations of the state and political subdivisions security portfolio. The Company considers the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

 

 

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

 

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

 

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

 

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

 

For the six months ended June 30, 2019 and 2018, there were no available-for-sale debt securities with an unrealized loss that suffered OTTI. Management does not believe any individual unrealized loss as of June 30, 2019 or December 31, 2018 represented an other-than-temporary impairment. The unrealized losses on debt securities are primarily the result of interest rate changes. These conditions will not prohibit the Company from receiving its contractual principal and interest payments on these debt securities. The fair value of these debt securities is expected to recover as payments are received on these securities and they approach maturity. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

 

20

 

 

 

NOTE 8 - LOANS AND RELATED ALLOWANCE FOR LOAN AND LEASE LOSSES

 

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

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 
                 

Commercial and industrial

  $ 85,520     $ 83,857  

Real estate - construction

    54,619       56,731  

Real estate - mortgage:

               

Residential

    345,830       336,487  

Commercial

    496,300       498,247  

Consumer installment

    15,963       16,787  
      998,232       992,109  

Less: Allowance for loan and lease losses

    (7,304 )     (7,428 )
                 

Net loans

  $ 990,928     $ 984,681  

 

The amounts above include deferred loan origination costs of $1.4 million and $1.6 million at June 30, 2019 and December 31, 2018.

 

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

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances net of the allowance for loan and lease losses. Interest income is recognized on the accrual method. The accrual of interest is discontinued