UNITED STATES | |||||||||||||||
SECURITIES AND EXCHANGE COMMISSION | |||||||||||||||
Washington, D.C. 20549 | |||||||||||||||
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FORM 10-Q |
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| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||||||||
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| For the quarterly period ended | |||||||||||||
or | |||||||||||||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||||||||
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| For the transition period from ___________ to ___________ |
Commission File Number 001-36613
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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 |
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15985 East High Street, Middlefield, Ohio | 44062-0035 | |||||||||||||
Address of Principal Executive Offices | Zip Code |
| 440-632-1666 | |||||||
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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: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1
MIDDLEFIELD BANC CORP.
INDEX
2
MIDDLEFIELD BANC CORP. CONSOLIDATED BALANCE SHEET (Dollar amounts in thousands, except share data) (Unaudited)
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)
See accompanying notes to unaudited consolidated financial statements.
4
MIDDLEFIELD BANC CORP. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Dollar amounts in thousands) (Unaudited)
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)
(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)
See accompanying notes to unaudited consolidated financial statements.
7
MIDDLEFIELD BANC CORP. CONSOLIDATED STATEMENT OF CASH FLOWS (Dollar amounts in thousands) (Unaudited)
See accompanying notes to unaudited consolidated financial statements.
8
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. (MI), 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
In
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU In November 2019, the FASB issued ASU 2019-11,Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The In March 2020, the FASB issued ASU 2020-3,Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825,Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be Reclassification of Comparative Amounts Certain comparative amounts for prior years have been
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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
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
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:
11 NOTE 3 - STOCK-BASED COMPENSATION
The Company had no nonvested stock options outstanding as of
Stock option activity during the
The following table presents the activity during the
The Company recognizes restricted stock forfeitures in the period they occur.
Share-based compensation expense of
Total unrecognized stock compensation cost related to nonvested share-based compensation on restricted stock as of
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NOTE 4 - EARNINGS PER SHARE
The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income by the average shares outstanding. Diluted earnings per share adds the dilutive effects of stock options and restricted stock to average shares outstanding.
The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings-per-share computation.
Options to purchase
Options to purchase
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.
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:
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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.
Investment Securities Available for
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.
14 The following tables present the assets measured on a
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
The following tables present additional quantitative information about assets measured at fair value on a
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| Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal. |
The estimated fair value of the Company’s financial instruments not recorded at fair value on a recurring basis is as follows:
September 30, 2019 | June 30, 2020 | |||||||||||||||||||||||||||||||||||||||
Carrying | Total | Carrying | Total | |||||||||||||||||||||||||||||||||||||
Value | Level I | Level II | Level III | Fair Value | Value | Level I | Level II | Level III | Fair Value | |||||||||||||||||||||||||||||||
(Dollar amounts in thousands) | (Dollar amounts in thousands) | |||||||||||||||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 120,025 | $ | 120,025 | $ | - | $ | - | $ | 120,025 | $ | 58,286 | $ | 58,286 | $ | - | $ | - | $ | 58,286 | ||||||||||||||||||||
Loans held for sale | 791 | - | 791 | - | 791 | 4,151 | - | 4,151 | - | 4,151 | ||||||||||||||||||||||||||||||
Net loans | 992,281 | - | - | 988,336 | 988,336 | 1,100,049 | - | - | 1,100,623 | 1,100,623 | ||||||||||||||||||||||||||||||
Bank-owned life insurance | 16,403 | 16,403 | - | - | 16,403 | 16,723 | 16,723 | - | - | 16,723 | ||||||||||||||||||||||||||||||
Federal Home Loan Bank stock | 3,848 | 3,848 | - | - | 3,848 | 5,448 | 5,448 | - | - | 5,448 | ||||||||||||||||||||||||||||||
Accrued interest receivable | 3,684 | 3,684 | - | - | 3,684 | 5,541 | 5,541 | - | - | 5,541 | ||||||||||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||||||||||
Deposits | $ | 1,034,413 | $ | 643,692 | $ | - | $ | 393,068 | $ | 1,036,760 | $ | 1,158,267 | $ | 794,847 | $ | - | $ | 369,173 | $ | 1,164,020 | ||||||||||||||||||||
Short-term borrowings | 92,000 | 92,000 | - | - | 92,000 | 20,417 | 20,417 | - | - | 20,417 | ||||||||||||||||||||||||||||||
Other borrowings | 12,359 | - | - | 12,405 | 12,405 | 17,162 | - | - | 13,211 | 13,211 | ||||||||||||||||||||||||||||||
Accrued interest payable | 1,020 | 1,020 | - | - | 1,020 | 899 | 899 | - | - | 899 |
December 31, 2018 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||
Carrying | Total | Carrying | Total | |||||||||||||||||||||||||||||||||||||
Value | Level I | Level II | Level III | Fair Value | Value | Level I | Level II | Level III | Fair Value | |||||||||||||||||||||||||||||||
(Dollar amounts in thousands) | (Dollar amounts in thousands) | |||||||||||||||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 107,933 | $ | 107,933 | $ | - | $ | - | $ | 107,933 | $ | 35,113 | $ | 35,113 | $ | - | $ | - | $ | 35,113 | ||||||||||||||||||||
Loans held for sale | 597 | - | 597 | - | 597 | 1,220 | - | 1,220 | - | 1,220 | ||||||||||||||||||||||||||||||
Net loans | 984,681 | - | - | 973,124 | 973,124 | 977,490 | - | - | 974,213 | 974,213 | ||||||||||||||||||||||||||||||
Bank-owned life insurance | 16,080 | 16,080 | - | - | 16,080 | 16,511 | 16,511 | - | - | 16,511 | ||||||||||||||||||||||||||||||
Federal Home Loan Bank stock | 3,679 | 3,679 | - | - | 3,679 | 3,848 | 3,848 | - | - | 3,848 | ||||||||||||||||||||||||||||||
Accrued interest receivable | 3,633 | 3,633 | - | - | 3,633 | 3,471 | 3,471 | - | - | 3,471 | ||||||||||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||||||||||
Deposits | $ | 1,016,067 | $ | 715,153 | $ | - | $ | 298,891 | $ | 1,014,044 | $ | 1,020,843 | $ | 652,043 | $ | - | $ | 371,193 | $ | 1,023,236 | ||||||||||||||||||||
Short-term borrowings | 90,398 | 90,398 | - | - | 90,398 | 5,075 | 5,075 | - | - | 5,075 | ||||||||||||||||||||||||||||||
Other borrowings | 8,803 | - | - | 8,827 | 8,827 | 12,750 | - | - | 12,783 | 12,783 | ||||||||||||||||||||||||||||||
Accrued interest payable | 744 | 744 | - | - | 744 | 917 | 917 | - | - | 917 |
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.
NOTE 6 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the changes in accumulated other comprehensive income (loss) (“AOCI”) by component net of tax for the three and ninesix months ended SeptemberJune 30, 2019 2020 and 2018,2019, respectively:
(Dollars in thousands) | Accumulated Other Comprehensive Income (Loss) (a) | |||
Balance as of June 30, 2019 | $ | 1,377 | ||
Other comprehensive income | 783 | |||
Amount reclassified from accumulated other comprehensive income | (3 | ) | ||
Balance at September 30, 2019 | $ | 2,157 | ||
Balance as of December 31, 2018 | $ | (154 | ) | |
Other comprehensive income | 2,464 | |||
Amount reclassified from accumulated other comprehensive income | (153 | ) | ||
Balance at September 30, 2019 | $ | 2,157 |
(Dollars in thousands) | Unrealized gains/(losses) on available-for-sale securities (a) | |||
Balance as of March 31, 2020 | $ | (2,237 | ) | |
Other comprehensive income | 5,998 | |||
Balance at June 30, 2020 | $ | 3,761 | ||
Balance as of December 31, 2019 | $ | 1,842 | ||
Other comprehensive income | 1,919 | |||
Balance at June 30, 2020 | $ | 3,761 |
(Dollars in thousands) | Accumulated Other Comprehensive Income (Loss) (a) | |||
Balance as of June 30, 2018 | $ | (431 | ) | |
Other comprehensive loss | (1,025 | ) | ||
Balance at September 30, 2018 | $ | (1,456 | ) | |
Balance as of December 31, 2017 | $ | 1,091 | ||
Other comprehensive loss | (2,593 | ) | ||
Change in accounting principle, ASC 2016-01 (b) | (141 | ) | ||
Change in accounting principle, ASC 2018-02 (b) | 187 | |||
Period change | (2,547 | ) | ||
Balance at September 30, 2018 | $ | (1,456 | ) |
(Dollars in thousands) | Unrealized gains/(losses) 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 | ) | ||
Period change | 736 | |||
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 | ) | ||
Period change | 1,531 | |||
Balance at June 30, 2019 | $ | 1,377 |
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The following tables present significant amounts reclassified from or to each component of AOCI:
Amounts Reclassified from Accumulated Other | Affected Line Item in | |||||||||||||||||
Comprehensive Income | the Statement Where | |||||||||||||||||
(Dollars in thousands) | Amounts Reclassified from Accumulated Other Comprehensive Income | Affected Line Item in the Statement Where Net Income is | For the Three and Six Months Ended | Net Income is | ||||||||||||||
Details about other comprehensive income | September 30, 2019 | September 30, 2018 | Presented | June 30, 2020 | June 30, 2019 | Presented | ||||||||||||
Unrealized gains on available-for-sale securities (a) | ||||||||||||||||||
$ | 4 | $ | - | Investment securities gains on sale, net | $ | - | $ | 190 | Investment securities gains on sale, net | |||||||||
(1 | ) | - | Income taxes | - | (40 | ) | Income taxes | |||||||||||
$ | 3 | $ | - | $ | - | $ | 150 |
(a) | For unrealized gains on available-for-sale securities, amounts in parentheses indicate expenses and other amounts indicate income. |
(Dollars in thousands) | Amount Reclassified from Accumulated Other Comprehensive Income | Affected Line Item in the Statement Where Net Income is | |||||||
Details about other comprehensive income | September 30, 2019 | September 30, 2018 | Presented | ||||||
Unrealized gains on available-for-sale securities (a) | |||||||||
$ | 194 | $ | - | Investment securities gains on sale, net | |||||
(41 | ) | - | Income taxes | ||||||
$ | 153 | $ | - |
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NOTE 7 – INVESTMENT AND EQUITY SECURITIES
The amortized cost and fair values of investment securities available for sale are as follows:
September 30, 2019 | June 30, 2020 | |||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||||||||||
(Dollar amounts in thousands) | Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | ||||||||||||||||||||||||
U.S. government agency securities | $ | 2,000 | $ | - | $ | (1 | ) | $ | 1,999 | |||||||||||||||||||||||
Subordinated debt | 4,000 | 150 | - | 4,150 | $ | 11,050 | $ | 239 | $ | - | $ | 11,289 | ||||||||||||||||||||
Obligations of states and political subdivisions: | ||||||||||||||||||||||||||||||||
Taxable | 500 | 3 | - | 503 | 500 | 2 | - | 502 | ||||||||||||||||||||||||
Tax-exempt | 76,816 | 2,322 | - | 79,138 | 80,155 | 3,883 | - | 84,038 | ||||||||||||||||||||||||
Mortgage-backed securities in government-sponsored entities | 19,102 | 267 | (118 | ) | 19,251 | 16,063 | 637 | - | 16,700 | |||||||||||||||||||||||
Total | $ | 102,418 | $ | 2,742 | $ | (119 | ) | $ | 105,041 | $ | 107,768 | $ | 4,761 | $ | - | $ | 112,529 |
December 31, 2018 | December 31, 2019 | |||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | Amortized | Unrealized | Unrealized | Fair | |||||||||||||||||||||||||
(Dollar amounts in thousands) | Cost | Gains | Losses | Value | Cost | Gains | Losses | Value | ||||||||||||||||||||||||
U.S. government agency securities | $ | 7,442 | $ | 90 | $ | (61 | ) | $ | 7,471 | |||||||||||||||||||||||
Subordinated debt | $ | 4,000 | $ | 126 | $ | - | $ | 4,126 | ||||||||||||||||||||||||
Obligations of states and political subdivisions: | ||||||||||||||||||||||||||||||||
Taxable | 502 | 10 | - | 512 | 500 | 1 | - | 501 | ||||||||||||||||||||||||
Tax-exempt | 72,387 | 667 | (473 | ) | 72,581 | 80,436 | 2,065 | (25 | ) | 82,476 | ||||||||||||||||||||||
Mortgage-backed securities in government-sponsored entities | 18,185 | 88 | (515 | ) | 17,758 | 18,465 | 274 | (109 | ) | 18,630 | ||||||||||||||||||||||
Total | $ | 98,516 | $ | 855 | $ | (1,049 | ) | $ | 98,322 | $ | 103,401 | $ | 2,466 | $ | (134 | ) | $ | 105,733 |
The Company recognized a net gain (loss) gains on equity investments of ($32,000)$31,000 and $12,000,($129,000), respectively, for the three and ninesix months ended SeptemberJune 30, 2019. 2020. The Company recognized a net gains(loss) gain on equity investments of $15,000($14,000) and $46,000,$44,000, respectively, for the three and ninesix months ended SeptemberJune 30, 2018. 2019. No net gains or losses on sold equity securities were realized during these periods.
The amortized cost and fair value of debt securities at SeptemberJune 30, 2019, 2020, 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 | Amortized | Fair | |||||||||||||
(Dollar amounts in thousands) | Cost | Value | Cost | Value | ||||||||||||
Due in one year or less | $ | 5,094 | $ | 5,109 | $ | 3 | $ | 3 | ||||||||
Due after one year through five years | 1,276 | 1,296 | 887 | 911 | ||||||||||||
Due after five years through ten years | 15,267 | 15,592 | 22,176 | 22,713 | ||||||||||||
Due after ten years | 80,781 | 83,044 | 84,702 | 88,902 | ||||||||||||
Total | $ | 102,418 | $ | 105,041 | $ | 107,768 | $ | 112,529 |
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 September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||
(Dollars amounts in thousands) | For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Proceeds from sales | $ | 518 | $ | - | $ | 12,325 | $ | - | $ | - | $ | 11,807 | $ | - | $ | 11,807 | ||||||||||||||||
Gross realized gains | 4 | - | 227 | - | - | 223 | - | 223 | ||||||||||||||||||||||||
Gross realized losses | - | - | (33 | ) | - | - | (33 | ) | - | (33 | ) |
There were no securities sold during the six months ended June 30, 2020.
Investment securities with an approximate carrying value of $62.6$53.6 million and $63.5$55.6 million at SeptemberJune 30, 2019 2020 and December 31, 2018, 2019, respectively, were pledged to secure deposits and for other purposes as required by law.
The following tables showtable shows 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.
September 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 | $ | - | $ | - | $ | 1,999 | $ | (1 | ) | $ | 1,999 | $ | (1 | ) | ||||||||||
Mortgage-backed securities in government-sponsored entities | - | - | 9,275 | (118 | ) | 9,275 | (118 | ) | ||||||||||||||||
Total | $ | - | $ | - | $ | 11,274 | $ | (119 | ) | $ | 11,274 | $ | (119 | ) |
December 31, 2018 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
Less than Twelve Months | Twelve Months or Greater | Total | Less than Twelve Months | Twelve Months or Greater | Total | |||||||||||||||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||||||||||||||||||||
(Dollar amounts in thousands) | Value | Losses | Value | Losses | Value | Losses | 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 | ) | $ | 4,324 | $ | (25 | ) | $ | - | $ | - | $ | 4,324 | $ | (25 | ) | |||||||||||||||||||||||||
Mortgage-backed securities in government-sponsored entities | 2,068 | (9 | ) | 12,257 | (506 | ) | 14,325 | (515 | ) | 1,409 | (2 | ) | 8,223 | (107 | ) | 9,632 | (109 | ) | ||||||||||||||||||||||||||||||
Total | $ | 22,519 | $ | (295 | ) | $ | 27,415 | $ | (754 | ) | $ | 49,934 | $ | (1,049 | ) | $ | 5,733 | $ | (27 | ) | $ | 8,223 | $ | (107 | ) | $ | 13,956 | $ | (134 | ) |
There were 14no securities in a gross unrealized loss position at June 30, 2020.
There were no securities considered temporarily impaired at SeptemberJune 30, 2019.2020.
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.
Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises, and state and political subdivisions accounted for 96%90% of the total available-for-sale portfolio as of SeptemberJune 30, 2019 2020 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 ninesix months ended SeptemberJune 30, 2019 2020 and 2018,2019, 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 SeptemberJune 30, 2019 2020 or December 31, 2018 2019 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.
NOTE 8 - LOANS AND RELATED ALLOWANCE FOR LOAN AND LEASE LOSSES
Major classifications of loans are summarized as follows (in thousands):
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Commercial and industrial | $ | 85,861 | $ | 83,857 | ||||
Real estate - construction | 57,564 | 56,731 | ||||||
Real estate - mortgage: | ||||||||
Residential | 347,739 | 336,487 | ||||||
Commercial | 492,914 | 498,247 | ||||||
Consumer installment | 15,204 | 16,787 | ||||||
999,282 | 992,109 | |||||||
Less: Allowance for loan and lease losses | (7,001 | ) | (7,428 | ) | ||||
Net loans | $ | 992,281 | $ | 984,681 |
The amounts above include deferred loan origination costs of $1.4 million and $1.6 million at September 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, Plain City, Powell, Sunbury, Westerville, and Powell,Westerville, Ohio. Commercial, residential, consumer, and agricultural loans are granted. Although the Company has a diversified loan portfolio, loans outstanding to individuals and businesses are dependent upon the local economic conditions in the Company’s immediate trade area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances net of the allowance for loan and lease losses. Interest income is recognized on the accrual method. The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of interest is doubtful. Interest payments received on nonaccrual loans are applied against the unpaid principal balance until accrual status is restored.
Loan origination fees and certain direct loan origination costs are deferred with the net amount amortized over the contractual life of the loan as an adjustment of the related loan’s yield.
The following tables summarize the primary segments of the loan portfolio and allowance for loan and lease losses (in thousands):
Real Estate - Mortgage | ||||||||||||||||||||||||
September 30, 2019 | Commercial and industrial | Real estate- construction | Residential | Commercial | Consumer installment | Total | ||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 1,457 | $ | - | $ | 1,780 | $ | 11,261 | $ | 1 | $ | 14,499 | ||||||||||||
Collectively evaluated for impairment | 84,404 | 57,564 | 345,959 | 481,653 | 15,203 | 984,783 | ||||||||||||||||||
Total loans | $ | 85,861 | $ | 57,564 | $ | 347,739 | $ | 492,914 | $ | 15,204 | $ | 999,282 |
June 30, 2020 | ||||||||||||
Impairment Evaluation | ||||||||||||
Individually | Collectively | Total Loans | ||||||||||
Loans: | ||||||||||||
Commercial real estate: | ||||||||||||
Owner occupied | $ | 3,486 | $ | 106,648 | $ | 110,134 | ||||||
Non-owner occupied | 14,685 | 285,892 | 300,577 | |||||||||
Multifamily | - | 37,604 | 37,604 | |||||||||
Residential real estate | 1,259 | 226,168 | 227,427 | |||||||||
Commercial and industrial | 1,127 | 238,969 | 240,096 | |||||||||
Home equity lines of credit | 347 | 116,849 | 117,196 | |||||||||
Construction and other | - | 66,015 | 66,015 | |||||||||
Consumer installment | - | 11,210 | 11,210 | |||||||||
Total | $ | 20,904 | $ | 1,089,355 | $ | 1,110,259 |
Real Estate - Mortgage | ||||||||||||||||||||||||
December 31, 2018 | Commercial and industrial | Real estate- construction | Residential | Commercial | Consumer installment | Total | ||||||||||||||||||
Loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 2,570 | $ | - | $ | 1,970 | $ | 9,533 | $ | 2 | $ | 14,075 | ||||||||||||
Collectively evaluated for impairment | 81,287 | 56,731 | 334,517 | 488,714 | 16,785 | 978,034 | ||||||||||||||||||
Total loans | $ | 83,857 | $ | 56,731 | $ | 336,487 | $ | 498,247 | $ | 16,787 | $ | 992,109 |
December 31, 2019 | ||||||||||||
Impairment Evaluation | ||||||||||||
Individually | Collectively | Total Loans | ||||||||||
Loans: | ||||||||||||
Commercial real estate: | ||||||||||||
Owner occupied | $ | 3,474 | $ | 98,912 | $ | 102,386 | ||||||
Non-owner occupied | 7,084 | 295,096 | 302,180 | |||||||||
Multifamily | - | 62,028 | 62,028 | |||||||||
Residential real estate | 1,278 | 233,520 | 234,798 | |||||||||
Commercial and industrial | 882 | 88,645 | 89,527 | |||||||||
Home equity lines of credit | 351 | 111,897 | 112,248 | |||||||||
Construction and other | - | 66,680 | 66,680 | |||||||||
Consumer installment | 1 | 14,410 | 14,411 | |||||||||
Total | $ | 13,070 | $ | 971,188 | $ | 984,258 |
The amounts above include net deferred loan origination costs of $4.7 million and $1.3 million at June 30, 2020 and December 31, 2019, respectively. The net deferred loan origination costs at June 30, 2020 include $4.0 million of unearned deferred fees from PPP loans.
June 30, 2020 | ||||||||||||
Ending Allowance Balance Attributable to Loans: | ||||||||||||
Individually Evaluated for Impairment | Collectively Evaluated for Impairment | Total Allocation | ||||||||||
Loans: | ||||||||||||
Commercial real estate: | ||||||||||||
Owner occupied | $ | 10 | $ | 1,028 | $ | 1,038 | ||||||
Non-owner occupied | 1,874 | 3,285 | 5,159 | |||||||||
Multifamily | - | 291 | 291 | |||||||||
Residential real estate | 22 | 1,145 | 1,167 | |||||||||
Commercial and industrial | 43 | 1,062 | 1,105 | |||||||||
Home equity lines of credit | 27 | 1,176 | 1,203 | |||||||||
Construction and other | - | 236 | 236 | |||||||||
Consumer installment | - | 11 | 11 | |||||||||
Total | $ | 1,976 | $ | 8,234 | $ | 10,210 |
Real Estate - Mortgage | ||||||||||||||||||||||||
September 30, 2019 | Commercial and industrial | Real estate- construction | Residential | Commercial | Consumer installment | Total | ||||||||||||||||||
Allowance for loan and lease losses: | ||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 3 | $ | - | $ | 33 | $ | 670 | $ | - | $ | 706 | ||||||||||||
Collectively evaluated for impairment | 386 | 99 | 1,640 | 4,046 | 124 | 6,295 | ||||||||||||||||||
Total ending allowance balance | $ | 389 | $ | 99 | $ | 1,673 | $ | 4,716 | $ | 124 | $ | 7,001 |
Real Estate - Mortgage | ||||||||||||||||||||||||
December 31, 2018 | Commercial and industrial | Real estate- construction | Residential | Commercial | Consumer installment | Total | ||||||||||||||||||
Allowance for loan and lease losses: | ||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||
Individually evaluated for impairment | $ | 667 | $ | - | $ | 43 | $ | 643 | $ | 1 | $ | 1,354 | ||||||||||||
Collectively evaluated for impairment | 302 | 100 | 1,538 | 4,008 | 126 | 6,074 | ||||||||||||||||||
Total ending allowance balance | $ | 969 | $ | 100 | $ | 1,581 | $ | 4,651 | $ | 127 | $ | 7,428 |
December 31, 2019 | ||||||||||||
Ending Allowance Balance Attributable to Loans: | ||||||||||||
Individually Evaluated for Impairment | Collectively Evaluated for Impairment | Total Allocation | ||||||||||
Loans: | ||||||||||||
Commercial real estate: | ||||||||||||
Owner occupied | $ | 45 | $ | 756 | $ | 801 | ||||||
Non-owner occupied | 582 | 2,800 | 3,382 | |||||||||
Multifamily | - | 340 | 340 | |||||||||
Residential real estate | 28 | 698 | 726 | |||||||||
Commercial and industrial | 3 | 453 | 456 | |||||||||
Home equity lines of credit | 2 | 930 | 932 | |||||||||
Construction and other | - | 103 | 103 | |||||||||
Consumer installment | - | 28 | 28 | |||||||||
Total | $ | 660 | $ | 6,108 | $ | 6,768 |
The Company’s loan portfolio is segmented to a level that allows management to monitor risk and performance. The portfolio is segmented into Commercial Real Estate (“CRE”) which is further segmented into Owner Occupied (“CRE OO”), Non-owner Occupied (“CRE NOO”), and Multifamily Residential, Residential Real Estate (“RRE”), Commercial and Industrial (“C&I”), Real EstateHome Equity Lines of Credit (“HELOC”), Construction Real Estate - Mortgage which is further segmented into Residential and Commercial Real EstateOther (“CRE”Construction”), and Consumer Installment Loans. The commercial real estate loan segments consist of loans made for the purpose of financing the activities of commercial real estate owners and operators. The residential real estate and HELOC loan segments consist of loans made for the purpose of financing the activities of residential homeowners. The C&I loan segment consists of loans made for the purpose of financing the activities of commercial customers. The residential mortgage loan segment consistsAlthough PPP loans are included with C&I loans, the nature of PPP loans made fordiffers considerably from the purposerest of financing the activities of residential homeowners. The commercial mortgage loan segment consists of loans made for the purpose of financing the activities of commercial real estate owners and operators.category. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts. The increases in the allowance for loan loss for the ResidentialCRE, RRE, C&I, HELOC, and Commercial mortgageConstruction portfolios were partially offset by decreasesa decrease in the allowance for the C&I, Real Estate Constructions, and Consumer Installment portfolios.
Management evaluates individual loans in all of the commercial segments for possible impairment based on guidance established by the Board of Directors. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired, or the loan was modified in a troubled debt restructuring.
Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of the following methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.
The following tables present impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary (in thousands):
September 30, 2019 | ||||||||||||
Impaired Loans | ||||||||||||
Recorded Investment | Unpaid Principal Balance | Related Allowance | ||||||||||
With no related allowance recorded: | ||||||||||||
Commercial and industrial | $ | 1,308 | $ | 2,059 | $ | - | ||||||
Real estate - mortgage: | ||||||||||||
Residential | 1,126 | 1,406 | - | |||||||||
Commercial | 2,561 | 2,561 | - | |||||||||
Consumer installment | 1 | 1 | - | |||||||||
Total | $ | 4,996 | $ | 6,027 | $ | - | ||||||
With an allowance recorded: | ||||||||||||
Commercial and industrial | $ | 149 | $ | 149 | $ | 3 | ||||||
Real estate - mortgage: | ||||||||||||
Residential | 654 | 703 | 33 | |||||||||
Commercial | 8,700 | 8,710 | 670 | |||||||||
Total | $ | 9,503 | $ | 9,562 | $ | 706 | ||||||
Total: | ||||||||||||
Commercial and industrial | $ | 1,457 | $ | 2,208 | $ | 3 | ||||||
Real estate - mortgage: | ||||||||||||
Residential | 1,780 | 2,109 | 33 | |||||||||
Commercial | 11,261 | 11,271 | 670 | |||||||||
Consumer installment | 1 | 1 | - | |||||||||
Total | $ | 14,499 | $ | 15,589 | $ | 706 |
June 30, 2020 | ||||||||||||
Impaired Loans | ||||||||||||
Unpaid | ||||||||||||
Recorded | Principal | Related | ||||||||||
Investment | Balance | Allowance | ||||||||||
With no related allowance recorded: | ||||||||||||
Commercial real estate: | ||||||||||||
Owner occupied | $ | 3,028 | $ | 3,033 | $ | - | ||||||
Non-owner occupied | 7,538 | 7,538 | - | |||||||||
Residential real estate | 781 | 908 | - | |||||||||
Commercial and industrial | 659 | 1,148 | - | |||||||||
Home equity lines of credit | 179 | 189 | - | |||||||||
Total | $ | 12,185 | $ | 12,816 | $ | - | ||||||
With an allowance recorded: | ||||||||||||
Commercial real estate: | ||||||||||||
Owner occupied | $ | 458 | $ | 458 | $ | 10 | ||||||
Non-owner occupied | 7,147 | 7,147 | 1,874 | |||||||||
Residential real estate | 478 | 478 | 22 | |||||||||
Commercial and industrial | 468 | 468 | 43 | |||||||||
Home equity lines of credit | 168 | 168 | 27 | |||||||||
Total | $ | 8,719 | $ | 8,719 | $ | 1,976 | ||||||
Total: | ||||||||||||
Commercial real estate: | ||||||||||||
Owner occupied | $ | 3,486 | $ | 3,491 | $ | 10 | ||||||
Non-owner occupied | 14,685 | 14,685 | 1,874 | |||||||||
Residential real estate | 1,259 | 1,386 | 22 | |||||||||
Commercial and industrial | 1,127 | 1,616 | 43 | |||||||||
Home equity lines of credit | 347 | 357 | 27 | |||||||||
Total | $ | 20,904 | $ | 21,535 | $ | 1,976 |
December 31, 2018 | ||||||||||||
Impaired Loans | ||||||||||||
Recorded | Unpaid Principal | Related | ||||||||||
Investment | Balance | Allowance | ||||||||||
With no related allowance recorded: | ||||||||||||
Commercial and industrial | $ | 207 | $ | 413 | $ | - | ||||||
Real estate - mortgage: | ||||||||||||
Residential | 1,306 | 1,462 | - | |||||||||
Commercial | 1,867 | 2,186 | - | |||||||||
Total | $ | 3,380 | $ | 4,061 | $ | - | ||||||
With an allowance recorded: | ||||||||||||
Commercial and industrial | $ | 2,363 | $ | 3,013 | $ | 667 | ||||||
Real estate - mortgage: | ||||||||||||
Residential | 664 | 715 | 43 | |||||||||
Commercial | 7,666 | 7,676 | 643 | |||||||||
Consumer installment | 2 | 2 | 1 | |||||||||
Total | $ | 10,695 | $ | 11,406 | $ | 1,354 | ||||||
Total: | ||||||||||||
Commercial and industrial | $ | 2,570 | $ | 3,426 | $ | 667 | ||||||
Real estate - mortgage: | ||||||||||||
Residential | 1,970 | 2,177 | 43 | |||||||||
Commercial | 9,533 | 9,862 | 643 | |||||||||
Consumer installment | 2 | 2 | 1 | |||||||||
Total | $ | 14,075 | $ | 15,467 | $ | 1,354 |
December 31, 2019 | ||||||||||||
Impaired Loans | ||||||||||||
Unpaid | ||||||||||||
Recorded | Principal | Related | ||||||||||
Investment | Balance | Allowance | ||||||||||
With no related allowance recorded: | ||||||||||||
Commercial real estate: | ||||||||||||
Owner occupied | $ | 1,772 | $ | 1,772 | $ | - | ||||||
Non-owner occupied | 3,845 | 3,845 | - | |||||||||
Residential real estate | 759 | 829 | - | |||||||||
Commercial and industrial | 747 | 1,524 | - | |||||||||
Home equity lines of credit | 220 | 228 | - | |||||||||
Consumer installment | 1 | 1 | - | |||||||||
Total | $ | 7,344 | $ | 8,199 | $ | - | ||||||
With an allowance recorded: | ||||||||||||
Commercial real estate: | ||||||||||||
Owner occupied | $ | 1,702 | $ | 1,713 | $ | 45 | ||||||
Non-owner occupied | 3,239 | 3,239 | 582 | |||||||||
Residential real estate | 519 | 569 | 28 | |||||||||
Commercial and industrial | 135 | 135 | 3 | |||||||||
Home equity lines of credit | 131 | 131 | 2 | |||||||||
Total | $ | 5,726 | $ | 5,787 | $ | 660 | ||||||
Total: | ||||||||||||
Commercial real estate: | ||||||||||||
Owner occupied | $ | 3,474 | $ | 3,485 | $ | 45 | ||||||
Non-owner occupied | 7,084 | 7,084 | 582 | |||||||||
Residential real estate | 1,278 | 1,398 | 28 | |||||||||
Commercial and industrial | 882 | 1,659 | 3 | |||||||||
Home equity lines of credit | 351 | 359 | 2 | |||||||||
Consumer installment | 1 | 1 | - | |||||||||
Total | $ | 13,070 | $ | 13,986 | $ | 660 |
The tables above include troubled debt restructuring totaling $3.2 million and $3.6 million as of SeptemberJune 30, 2019 2020 and $4.4 million as of December 31, 2018.2019, respectively. The amounts allocated within the allowance for losses for troubled debt restructurings was $40,000$37,000 and $459,000$33,000 at SeptemberJune 30, 2019 2020 and December 31, 2018, 2019, respectively.
The following tables present the average balance and interest income by class, recognized on impaired loans (in thousands):
For the Three Months Ended September 30, 2019 | For the Nine Months Ended September 30, 2019 | |||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||
Commercial and industrial | $ | 1,786 | $ | 20 | $ | 1,992 | $ | 44 | ||||||||
Real estate - construction | - | - | 810 | - | ||||||||||||
Real estate - mortgage: | ||||||||||||||||
Residential | 1,782 | 14 | 1,847 | 38 | ||||||||||||
Commercial | 11,344 | 95 | 10,317 | 286 | ||||||||||||
Consumer installment | 2 | - | 2 | - | ||||||||||||
Total | $ | 14,914 | $ | 129 | $ | 14,968 | $ | 368 |
For the Three Months Ended June 30, 2020 | For the Six Months Ended June 30, 2020 | |||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||
Commercial real estate: | ||||||||||||||||
Owner occupied | $ | 3,459 | $ | 32 | $ | 3,464 | $ | 65 | ||||||||
Non-owner occupied | 10,864 | 209 | 9,604 | 258 | ||||||||||||
Residential real estate | 1,206 | 14 | 1,230 | 25 | ||||||||||||
Commercial and industrial | 1,019 | 11 | 973 | 21 | ||||||||||||
Home equity lines of credit | 347 | 2 | 348 | 4 | ||||||||||||
Consumer installment | 1 | - | 1 | - | ||||||||||||
Total | $ | 16,896 | $ | 268 | $ | 15,620 | $ | 373 |
For the Three Months Ended September 30, 2018 | For the Nine Months Ended September 30, 2018 | |||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||
Commercial and industrial | $ | 2,984 | $ | 32 | $ | 4,620 | $ | 100 | ||||||||
Real estate - construction | - | - | 11 | - | ||||||||||||
Real estate - mortgage: | ||||||||||||||||
Residential | 2,574 | 18 | 2,672 | 49 | ||||||||||||
Commercial | 6,132 | 50 | 6,123 | 151 | ||||||||||||
Consumer installment | 3 | - | 3 | - | ||||||||||||
Total | $ | 11,693 | $ | 100 | $ | 13,429 | $ | 300 |
For the Three Months Ended June 30, 2019 | For the Six Months Ended June 30, 2019 | |||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||
Commercial real estate: | ||||||||||||||||
Owner occupied | $ | 3,819 | $ | 35 | $ | 4,014 | $ | 72 | ||||||||
Non-owner occupied | 6,419 | 50 | 5,989 | 100 | ||||||||||||
Residential real estate | 1,716 | 15 | 1,761 | 27 | ||||||||||||
Commercial and industrial | 1,970 | 23 | 2,170 | 45 | ||||||||||||
Home equity lines of credit | 104 | - | 109 | - | ||||||||||||
Construction and other | 1,620 | - | 1,080 | - | ||||||||||||
Consumer installment | 2 | - | 2 | - | ||||||||||||
Total | $ | 15,650 | $ | 123 | $ | 15,125 | $ | 244 |
Management uses a nine-pointnine-point internal risk-rating system to monitor the credit quality of the overall loan portfolio. The firstfive categories are considered not criticized and are aggregated as Pass rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but have potential weaknesses, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan-rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as payment delinquency, bankruptcy, repossession, or death, occurs to raise awareness of a possible credit quality event. The Company’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Credit Department performs an annual review of all commercial relationships with loan balances of $500,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Company engages an external consultant to conduct loan reviews on a semiannual basis. Generally, the external consultant reviews commercial relationships greater than $250,000 and criticized relationships greater than $150,000. Detailed reviews, including plans for resolution, are performed on criticized loans on at least a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.
The primary risk of commercial and industrial loans is related to deterioration in the cash flow of the business that may result in the liquidation of the business assets securing the loan. C&I loans are, by nature, secured by less substantial collateral than real estate-secured loans. The primary risk of real estate construction loans is potential delays and disputes during the completion process. The primary risk of residential real estate loans is current economic uncertainties along with the slow recovery in the housing market.uncertainties. The primary risk of commercial real estate loans is loss of income of the owner or occupier of the property and the inability of the market to sustain rent levels. Consumer installment loans historically have experienced higher delinquency rates. Consumer installments are typically secured by less substantial collateral than other types of credits.
The following tables present the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk-rating system (in thousands):
Special | Total | |||||||||||||||||||
September 30, 2019 | Pass | Mention | Substandard | Doubtful | Loans | |||||||||||||||
Commercial and industrial | $ | 78,163 | $ | 4,585 | $ | 3,113 | $ | - | $ | 85,861 | ||||||||||
Real estate - construction | 57,564 | - | - | - | 57,564 | |||||||||||||||
Real estate - mortgage: | ||||||||||||||||||||
Residential | 342,571 | 989 | 4,179 | - | 347,739 | |||||||||||||||
Commercial | 474,166 | 7,043 | 11,705 | - | 492,914 | |||||||||||||||
Consumer installment | 15,195 | - | 9 | - | 15,204 | |||||||||||||||
Total | $ | 967,659 | $ | 12,617 | $ | 19,006 | $ | - | $ | 999,282 |
Special | Total | |||||||||||||||||||
June 30, 2020 | Pass | Mention | Substandard | Doubtful | Loans | |||||||||||||||
Commercial real estate: | ||||||||||||||||||||
Owner occupied | $ | 103,644 | $ | 3,042 | $ | 3,448 | $ | - | $ | 110,134 | ||||||||||
Non-owner occupied | 270,678 | 3,749 | 26,150 | - | 300,577 | |||||||||||||||
Multifamily | 37,604 | - | - | - | 37,604 | |||||||||||||||
Residential real estate | 224,316 | 410 | 2,701 | - | 227,427 | |||||||||||||||
Commercial and industrial | 235,535 | 2,658 | 1,903 | - | 240,096 | |||||||||||||||
Home equity lines of credit | 115,617 | - | 1,579 | - | 117,196 | |||||||||||||||
Construction and other | 66,015 | - | - | - | 66,015 | |||||||||||||||
Consumer installment | 11,191 | - | 19 | - | 11,210 | |||||||||||||||
Total | $ | 1,064,600 | $ | 9,859 | $ | 35,800 | $ | - | $ | 1,110,259 |
Special | Total | |||||||||||||||||||
December 31, 2018 | Pass | Mention | Substandard | Doubtful | Loans | |||||||||||||||
Commercial and industrial | $ | 77,002 | $ | 4,572 | $ | 2,283 | $ | - | $ | 83,857 | ||||||||||
Real estate - construction | 55,397 | 1,334 | - | - | 56,731 | |||||||||||||||
Real estate - mortgage: | ||||||||||||||||||||
Residential | 332,475 | 553 | 3,459 | - | 336,487 | |||||||||||||||
Commercial | 483,516 | 6,617 | 8,114 | - | 498,247 | |||||||||||||||
Consumer installment | 16,776 | - | 11 | - | 16,787 | |||||||||||||||
Total | $ | 965,166 | $ | 13,076 | $ | 13,867 | $ | - | $ | 992,109 |
Special | Total | |||||||||||||||||||
December 31, 2019 | Pass | Mention | Substandard | Doubtful | Loans | |||||||||||||||
Commercial real estate: | ||||||||||||||||||||
Owner occupied | $ | 95,518 | $ | 3,951 | $ | 2,917 | $ | - | $ | 102,386 | ||||||||||
Non-owner occupied | 292,192 | 3,038 | 6,950 | - | 302,180 | |||||||||||||||
Multifamily | 62,028 | - | - | - | 62,028 | |||||||||||||||
Residential real estate | 231,633 | 420 | 2,745 | - | 234,798 | |||||||||||||||
Commercial and industrial | 84,136 | 3,619 | 1,772 | - | 89,527 | |||||||||||||||
Home equity lines of credit | 111,354 | - | 894 | - | 112,248 | |||||||||||||||
Construction and other | 66,680 | - | - | - | 66,680 | |||||||||||||||
Consumer installment | 14,398 | - | 13 | - | 14,411 | |||||||||||||||
Total | $ | 957,939 | $ | 11,028 | $ | 15,291 | $ | - | $ | 984,258 |
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due.
Nonperforming assets are nonaccrual loans including nonaccrual troubled debt restructurings (“TDR”), loans 90 days or more past due, EMORECO assets, other real estate owned, and repossessed assets. A loan is classified as nonaccrual when, in the opinion of management, there are serious doubts about collectability of interest and principal. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of principal and interest is doubtful. Payments received on nonaccrual loans are applied against the principal balance.
The following tables present the aging of the recorded investment in past-due loans by class of loans (in thousands):
30-59 Days | 60-89 Days | 90 Days+ | Total | Total | ||||||||||||||||||||
September 30, 2019 | Current | Past Due | Past Due | Past Due | Past Due | Loans | ||||||||||||||||||
Commercial and industrial | $ | 84,689 | $ | 623 | $ | 190 | $ | 359 | $ | 1,172 | $ | 85,861 | ||||||||||||
Real estate - construction | 57,564 | - | - | - | - | 57,564 | ||||||||||||||||||
Real estate - mortgage: | ||||||||||||||||||||||||
Residential | 343,400 | 1,813 | 358 | 2,168 | 4,339 | 347,739 | ||||||||||||||||||
Commercial | 486,821 | 1,796 | 8 | 4,289 | 6,093 | 492,914 | ||||||||||||||||||
Consumer installment | 15,179 | 14 | 11 | - | 25 | 15,204 | ||||||||||||||||||
Total | $ | 987,653 | $ | 4,246 | $ | 567 | $ | 6,816 | $ | 11,629 | $ | 999,282 |
30-59 Days | 60-89 Days | 90 Days+ | Total | Total | ||||||||||||||||||||
June 30, 2020 | Current | Past Due | Past Due | Past Due | Past Due | Loans | ||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Owner occupied | $ | 108,989 | $ | - | $ | 350 | $ | 795 | $ | 1,145 | $ | 110,134 | ||||||||||||
Non-owner occupied | 295,729 | - | 742 | 4,106 | 4,848 | 300,577 | ||||||||||||||||||
Multifamily | 37,604 | - | - | - | - | 37,604 | ||||||||||||||||||
Residential real estate | 223,820 | 1,539 | 893 | 1,175 | 3,607 | 227,427 | ||||||||||||||||||
Commercial and industrial | 239,836 | 160 | - | 100 | 260 | 240,096 | ||||||||||||||||||
Home equity lines of credit | 116,818 | 189 | 50 | 139 | 378 | 117,196 | ||||||||||||||||||
Construction and other | 60,524 | 5,491 | - | - | 5,491 | 66,015 | ||||||||||||||||||
Consumer installment | 10,977 | - | 1 | 232 | 233 | 11,210 | ||||||||||||||||||
Total | $ | 1,094,297 | $ | 7,379 | $ | 2,036 | $ | 6,547 | $ | 15,962 | $ | 1,110,259 |
30-59 Days | 60-89 Days | 90 Days+ | Total | Total | ||||||||||||||||||||
December 31, 2018 | Current | Past Due | Past Due | Past Due | Past Due | Loans | ||||||||||||||||||
Commercial and industrial | $ | 82,770 | $ | 288 | $ | 213 | $ | 586 | $ | 1,087 | $ | 83,857 | ||||||||||||
Real estate - construction | 56,731 | - | - | - | - | 56,731 | ||||||||||||||||||
Real estate - mortgage: | ||||||||||||||||||||||||
Residential | 331,379 | 2,612 | 1,083 | 1,413 | 5,108 | 336,487 | ||||||||||||||||||
Commercial | 496,597 | 664 | - | 986 | 1,650 | 498,247 | ||||||||||||||||||
Consumer installment | 16,768 | 19 | - | - | 19 | 16,787 | ||||||||||||||||||
Total | $ | 984,245 | $ | 3,583 | $ | 1,296 | $ | 2,985 | $ | 7,864 | $ | 992,109 |
30-59 Days | 60-89 Days | 90 Days+ | Total | Total | ||||||||||||||||||||
December 31, 2019 | Current | Past Due | Past Due | Past Due | Past Due | Loans | ||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Owner occupied | $ | 101,264 | $ | 64 | $ | - | $ | 1,058 | $ | 1,122 | $ | 102,386 | ||||||||||||
Non-owner occupied | 298,941 | - | - | 3,239 | 3,239 | 302,180 | ||||||||||||||||||
Multifamily | 62,028 | - | - | - | - | 62,028 | ||||||||||||||||||
Residential real estate | 232,518 | 1,439 | 34 | 807 | 2,280 | 234,798 | ||||||||||||||||||
Commercial and industrial | 88,965 | 190 | 66 | 306 | 562 | 89,527 | ||||||||||||||||||
Home equity lines of credit | 111,792 | 274 | 29 | 153 | 456 | 112,248 | ||||||||||||||||||
Construction and other | 66,680 | - | - | - | - | 66,680 | ||||||||||||||||||
Consumer installment | 13,378 | 622 | 216 | 195 | 1,033 | 14,411 | ||||||||||||||||||
Total | $ | 975,566 | $ | 2,589 | $ | 345 | $ | 5,758 | $ | 8,692 | $ | 984,258 |
The following tables present the recorded investment in nonaccrual loans and loans past due over 89 days and still on accrual by class of loans (in thousands):
September 30, 2019 | Nonaccrual | 90+ Days Past Due and Accruing | ||||||
Commercial and industrial | $ | 868 | $ | - | ||||
Real estate - construction | - | - | ||||||
Real estate - mortgage: | ||||||||
Residential | 4,732 | - | ||||||
Commercial | 4,450 | - | ||||||
Consumer installment | 3 | - | ||||||
Total | $ | 10,053 | $ | - |
90+ Days Past Due | ||||||||
June 30, 2020 | Nonaccrual | and Accruing | ||||||
Commercial real estate: | ||||||||
Owner occupied | $ | 1,266 | $ | - | ||||
Non-owner occupied | 4,106 | - | ||||||
Residential real estate | 2,646 | - | ||||||
Commercial and industrial | 519 | - | ||||||
Home equity lines of credit | 1,021 | - | ||||||
Consumer installment | 245 | - | ||||||
Total | $ | 9,803 | $ | - |
December 31, 2018 | Nonaccrual | 90+ Days Past Due and Accruing | ||||||
Commercial and industrial | $ | 996 | $ | 91 | ||||
Real estate - construction | - | - | ||||||
Real estate - mortgage: | ||||||||
Residential | 2,731 | 754 | ||||||
Commercial | 2,864 | 100 | ||||||
Consumer installment | 4 | - | ||||||
Total | $ | 6,595 | $ | 945 |
90+ Days Past Due | ||||||||
December 31, 2019 | Nonaccrual | and Accruing | ||||||
Commercial real estate: | ||||||||
Owner occupied | $ | 1,162 | $ | - | ||||
Non-owner occupied | 3,289 | - | ||||||
Residential real estate | 2,576 | - | ||||||
Commercial and industrial | 946 | - | ||||||
Home equity lines of credit | 709 | - | ||||||
Consumer installment | 197 | - | ||||||
Total | $ | 8,879 | $ | - |
Interest income that would have been recorded had these loans not been placed on nonaccrual status was $295,000$128,000 for the ninethree months ended SeptemberJune 30, 2019 2020 and $456,000$47,000 for the three months ended December 31, 2019. Interest income that would have been recorded had these loans not been placed on nonaccrual status was $228,000 for the six months ended June 30, 2020 and $342,000 for the year ended December 31, 2018.2019.
An allowance for loan and lease losses (“ALLL”) is maintained to absorb losses from the loan portfolio. The ALLL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of nonperforming loans.
The Company’s methodology for determining the ALLL is based on the requirements of ASC Section 310-10-35310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Company’s ALLL. Management also performs impairment analyses on TDRs, which may result in specific reserves.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.
The classes described above, which are based on the purpose code assigned to each loan, provide the starting point for the ALLL analysis. Management tracks the historical net charge-off activity at the call code level. The historical charge-off factor was calculated using the last twelve consecutive historical quarters.
Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and nonaccrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and geographic standpoint.
Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALLL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALLL.
The following tables summarize the primary segments of the loan portfolio and the activity within those segments (in thousands):
Commercial and industrial | Real estate- construction | Real estate- residential mortgage | Real estate- commercial mortgage | Consumer installment | Total | |||||||||||||||||||
ALLL balance at December 31, 2018 | $ | 969 | $ | 100 | $ | 1,581 | $ | 4,651 | $ | 127 | $ | 7,428 | ||||||||||||
Charge-offs | (393 | ) | - | (517 | ) | (31 | ) | (110 | ) | (1,051 | ) | |||||||||||||
Recoveries | 55 | 57 | 72 | 3 | 7 | 194 | ||||||||||||||||||
Provision | (242 | ) | (58 | ) | 537 | 93 | 100 | 430 | ||||||||||||||||
ALLL balance at September 30, 2019 | $ | 389 | $ | 99 | $ | 1,673 | $ | 4,716 | $ | 124 | $ | 7,001 |
For the six months ended June 30, 2020 | ||||||||||||||||||||
Allowance for Loan and Lease Losses | ||||||||||||||||||||
Balance | Balance | |||||||||||||||||||
December 31, 2019 | Charge-offs | Recoveries | Provision | June 30, 2020 | ||||||||||||||||
Loans: | ||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||
Owner occupied | $ | 801 | $ | (50 | ) | $ | 14 | $ | 273 | $ | 1,038 | |||||||||
Non-owner occupied | 3,382 | - | 74 | 1,703 | 5,159 | |||||||||||||||
Multifamily | 340 | - | - | (49 | ) | 291 | ||||||||||||||
Residential real estate | 726 | (51 | ) | 30 | 462 | 1,167 | ||||||||||||||
Commercial and industrial | 456 | (170 | ) | 239 | 580 | 1,105 | ||||||||||||||
Home equity lines of credit | 932 | (54 | ) | 16 | 309 | 1,203 | ||||||||||||||
Construction and other | 103 | - | 34 | 99 | 236 | |||||||||||||||
Consumer installment | 28 | (391 | ) | 11 | 363 | 11 | ||||||||||||||
Total | $ | 6,768 | $ | (716 | ) | $ | 418 | $ | 3,740 | $ | 10,210 |
For the six months ended June 30, 2019 | ||||||||||||||||||||
Allowance for Loan and Lease Losses | ||||||||||||||||||||
Balance | Balance | |||||||||||||||||||
December 31, 2018 | Charge-offs | Recoveries | Provision | June 30, 2019 | ||||||||||||||||
Loans: | ||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||
Owner occupied | $ | 1,315 | $ | (32 | ) | $ | 2 | $ | (419 | ) | $ | 866 | ||||||||
Non-owner occupied | 2,862 | - | - | 726 | 3,588 | |||||||||||||||
Multifamily | 474 | - | - | (62 | ) | 412 | ||||||||||||||
Residential real estate | 761 | - | 39 | (53 | ) | 747 | ||||||||||||||
Commercial and industrial | 969 | (355 | ) | 40 | (115 | ) | 539 | |||||||||||||
Home equity lines of credit | 820 | (138 | ) | 7 | 247 | 936 | ||||||||||||||
Construction and other | 100 | - | 45 | (48 | ) | 97 | ||||||||||||||
Consumer installment | 127 | (88 | ) | 6 | 74 | 119 | ||||||||||||||
Total | $ | 7,428 | $ | (613 | ) | $ | 139 | $ | 350 | $ | 7,304 |
Commercial and industrial | Real estate- construction | Real estate- residential mortgage | Real estate- commercial mortgage | Consumer installment | Total | |||||||||||||||||||
ALLL balance at December 31, 2017 | $ | 999 | $ | 313 | $ | 1,760 | $ | 4,036 | $ | 82 | $ | 7,190 | ||||||||||||
Charge-offs | (284 | ) | - | (119 | ) | (111 | ) | (138 | ) | (652 | ) | |||||||||||||
Recoveries | 167 | 46 | 76 | - | 37 | 326 | ||||||||||||||||||
Provision | 274 | (258 | ) | (12 | ) | 483 | 143 | 630 | ||||||||||||||||
ALLL balance at September 30, 2018 | $ | 1,156 | $ | 101 | $ | 1,705 | $ | 4,408 | $ | 124 | $ | 7,494 |
Commercial and industrial | Real estate- construction | Real estate- residential mortgage | Real estate- commercial mortgage | Consumer installment | Total | |||||||||||||||||||
ALLL balance at June 30, 2019 | $ | 539 | $ | 90 | $ | 1,681 | $ | 4,875 | $ | 119 | $ | 7,304 | ||||||||||||
Charge-offs | (38 | ) | - | (378 | ) | - | (22 | ) | (438 | ) | ||||||||||||||
Recoveries | 16 | 11 | 26 | 1 | 1 | 55 | ||||||||||||||||||
Provision | (128 | ) | (2 | ) | 344 | (160 | ) | 26 | 80 | |||||||||||||||
ALLL balance at September 30, 2019 | $ | 389 | $ | 99 | $ | 1,673 | $ | 4,716 | $ | 124 | $ | 7,001 |
Commercial and industrial | Real estate- construction | Real estate- residential mortgage | Real estate- commercial mortgage | Consumer installment | Total | |||||||||||||||||||
ALLL balance at June 30, 2018 | $ | 1,180 | $ | 89 | $ | 1,743 | $ | 4,361 | $ | 129 | $ | 7,502 | ||||||||||||
Charge-offs | (275 | ) | - | (45 | ) | - | (3 | ) | (323 | ) | ||||||||||||||
Recoveries | 28 | 28 | 47 | - | 2 | 105 | ||||||||||||||||||
Provision | 223 | (16 | ) | (40 | ) | 47 | (4 | ) | 210 | |||||||||||||||
ALLL balance at September 30, 2018 | $ | 1,156 | $ | 101 | $ | 1,705 | $ | 4,408 | $ | 124 | $ | 7,494 |
For the three months ended June 30, 2020 | ||||||||||||||||||||
Allowance for Loan and Lease Losses | ||||||||||||||||||||
Balance | Balance | |||||||||||||||||||
March 31, 2020 | Charge-offs | Recoveries | Provision | June 30, 2020 | ||||||||||||||||
Loans: | ||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||
Owner occupied | $ | 1,099 | $ | (50 | ) | $ | 11 | $ | (22 | ) | $ | 1,038 | ||||||||
Non-owner occupied | 4,364 | - | - | 795 | 5,159 | |||||||||||||||
Multifamily | 386 | - | - | (95 | ) | 291 | ||||||||||||||
Residential real estate | 1,164 | (5 | ) | - | 8 | 1,167 | ||||||||||||||
Commercial and industrial | 716 | (109 | ) | 132 | 366 | 1,105 | ||||||||||||||
Home equity lines of credit | 1,240 | (41 | ) | 12 | (8 | ) | 1,203 | |||||||||||||
Construction and other | 254 | - | 17 | (35 | ) | 236 | ||||||||||||||
Consumer installment | 21 | (3 | ) | 2 | (9 | ) | 11 | |||||||||||||
Total | $ | 9,244 | $ | (208 | ) | $ | 174 | $ | 1,000 | $ | 10,210 |
For the three months ended June 30, 2019 | ||||||||||||||||||||
Allowance for Loan and Lease Losses | ||||||||||||||||||||
Balance | Balance | |||||||||||||||||||
March 31, 2019 | Charge-offs | Recoveries | Provision | June 30, 2019 | ||||||||||||||||
Loans: | ||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||
Owner occupied | $ | 830 | $ | - | $ | 1 | $ | 35 | $ | 866 | ||||||||||
Non-owner occupied | 2,857 | - | - | 731 | 3,588 | |||||||||||||||
Multifamily | 492 | - | - | (80 | ) | 412 | ||||||||||||||
Residential real estate | 773 | - | 30 | (56 | ) | 747 | ||||||||||||||
Commercial and industrial | 586 | (9 | ) | 24 | (62 | ) | 539 | |||||||||||||
Home equity lines of credit | 832 | (48 | ) | 3 | 149 | 936 | ||||||||||||||
Construction and other | 748 | - | 23 | (674 | ) | 97 | ||||||||||||||
Consumer installment | 88 | (41 | ) | 5 | 67 | 119 | ||||||||||||||
Total | $ | 7,206 | $ | (98 | ) | $ | 86 | $ | 110 | $ | 7,304 |
The provision fluctuations during the nine-monthsix-month period ended SeptemberJune 30, 2020 allocated to:
● | a $2.2 million increase in all lending categories’ qualitative factors during the second quarter of 2020 due to the economic uncertainty resulting from the COVID-19 pandemic. |
● | non-owner occupied portfolio are due to the increase of specific reserves for two relationships totaling $1.3 million. |
● | commercial and industrial loans are due to growth in loan volume along with an allocation for the PPP loans in the amount of $423,000. |
The provision fluctuations during the six-month period ended June 30, 2019 allocated to:
● | commercial and industrial loans are due to the charge-off of a large relationship of $336,000 from a previous reserve of $358,000 in the first quarter. |
● | residential |
● |
|
The provision fluctuations during the three-monththree-month period ended SeptemberJune 30, 2019 2020 allocated to:
● | non-owner occupied portfolio are due to the increase of specific reserves for two relationships totaling $776,000. |
● | commercial and industrial loans |
The provision fluctuation during the three-month period ended June 30, 2019 allocated to:
● |
|
TDR describes loans on which the bank has granted concessions for reasons related to the customer’s financial difficulties. Such concessions may include one or more of the following:
● | reduction in the interest rate to below-market rates |
● | extension of repayment requirements beyond normal terms |
● | reduction of the principal amount owed |
● | reduction of accrued interest due |
● | acceptance of other assets in full or partial payment of a debt |
In each case, the concession is made due to deterioration in the borrower’s financial condition, and the new terms are less stringent than those required on a new loan with similar risk.
On April 7, 2020, federal banking regulators issued a revised interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.
The following tables summarize troubled debt restructurings (in thousands):
For the Three Months Ended | ||||||||||||||||||||
September 30, 2019 | ||||||||||||||||||||
Number of Contracts | Pre-Modification | Post-Modification | ||||||||||||||||||
| Term | Outstanding Recorded | Outstanding Recorded | |||||||||||||||||
Troubled Debt Restructurings | Modification | Other | Total | Investment | Investment | |||||||||||||||
Residential real estate | - | 1 | 1 | $ | 38 | $ | 38 |
For the Nine Months Ended | ||||||||||||||||||||
September 30, 2019 | ||||||||||||||||||||
Number of Contracts | Pre-Modification | Post-Modification | ||||||||||||||||||
| Term | Outstanding Recorded | Outstanding Recorded | |||||||||||||||||
Troubled Debt Restructurings | Modification | Other | Total | Investment | Investment | |||||||||||||||
Residential real estate | - | 2 | 2 | $ | 123 | $ | 178 |
For the Three Months Ended | ||||||||||||||||||||
September 30, 2018 | ||||||||||||||||||||
Number of Contracts | Pre-Modification | Post-Modification | ||||||||||||||||||
| Term | Outstanding Recorded | Outstanding Recorded | |||||||||||||||||
Troubled Debt Restructurings | Modification | Other | Total | Investment | Investment | |||||||||||||||
Residential real estate | 1 | - | 1 | $ | 86 | $ | 86 |
For the Nine Months Ended | For the Six Months Ended | |||||||||||||||||||||||||||||||||||||||
September 30, 2018 | June 30, 2020 | |||||||||||||||||||||||||||||||||||||||
Number of Contracts | Pre-Modification | Post-Modification | Number of Contracts | Pre-Modification | Post-Modification | |||||||||||||||||||||||||||||||||||
| Term | Outstanding Recorded | Outstanding Recorded | Term | Outstanding Recorded | Outstanding Recorded | ||||||||||||||||||||||||||||||||||
Troubled Debt Restructurings | Modification | Other | Total | Investment | Investment | Modification | Other | Total | Investment | Investment | ||||||||||||||||||||||||||||||
Residential real estate | 2 | 2 | 4 | $ | 261 | $ | 261 | 1 | - | 1 | $ | 39 | $ | 39 | ||||||||||||||||||||||||||
Commercial and industrial | 2 | - | 2 | 118 | 117 |
The following table summarizes TDR modifications within the previous 12 months for which there was a payment default during the nine-month period ended September 30, 2018 (in thousands):
For the Nine Months Ended | For the Three and Six Months Ended | |||||||||||||||||||||||||||
September 30, 2018 | June 30, 2019 | |||||||||||||||||||||||||||
Troubled Debt Restructurings subsequently defaulted | Number of Contracts | Recorded Investment | ||||||||||||||||||||||||||
Number of Contracts | Pre-Modification | Post-Modification | ||||||||||||||||||||||||||
| Term | Outstanding Recorded | Outstanding Recorded | |||||||||||||||||||||||||
Troubled Debt Restructurings | Modification | Other | Total | Investment | Investment | |||||||||||||||||||||||
Residential real estate | 1 | $ | 20 | - | 1 | 1 | $ | 85 | $ | 140 |
There were no troubled debt restructurings during the three-month period ended June 30, 2020.
There were no subsequent defaults of troubled debt restructurings for the three-monththree-month periods ended SeptemberJune 30, 2020 and June 30, 2019, and September 30, 2018, or for the nine-month periodsix-month periods ended SeptemberJune 30, 2020 and June 30, 2019.
NOTE NOTE 9 – LEASESTOCK SPLIT DISCLOSURE COMMITMENTS
The Company leases six of its branch locations. As of September 30, 2019, net assets recorded under leases amounted to $4.5 million and have remaining lease terms of 1 year to 6 years. As of September 30, 2019, finance lease assets included in premises and equipment, net, totaled $3.5 million and operating lease assets included in accrued interest receivable and other assets on the Consolidated Balance Sheet totaled $943,000. As of September 30, 2019, finance lease obligations included in other borrowings totaled $3.6 million and operating lease obligations included in accrued interest payable and other liabilities on the Consolidated Balance Sheet totaled $945,000.
On April 17, 2019, the Company purchased a building to relocate the Mantua branch which is and has been at a leased location as of September 30, 2019. The relocation is planned for 2020, and the Company entered into an amended lease agreement with the Mantua lessor which does not exceed 12 months. As such, the lease for the Mantua location is not considered a capitalized lease as of September 30, 2019.
Lease costs incurred are as follows:
For the Three | For the Nine | |||||||
Months Ended | Months Ended | |||||||
September 30, 2019 | September 30, 2019 | |||||||
Lease Costs: | ||||||||
Finance lease cost: | ||||||||
Amortization of right-of-use asset | $ | 91 | $ | 264 | ||||
Interest Expense | 31 | 100 | ||||||
Other | 10 | 25 | ||||||
Operating lease cost | 52 | 178 | ||||||
Total lease cost | $ | 184 | $ | 567 |
The following table displays the weighted-average term and discount rates for both operating and finance leases outstanding as of September 30, 2019:
Operating | Finance | |||||||
Weighted-average term (years) | 1.9 | 4.6 | ||||||
Weighted-average discount rate | 2.9 | % | 3.4 | % |
The following table displays the undiscounted cash flows due related to operating and finance leases as of September 30, 2019, along with a reconciliation to the discounted amount recorded on the September 30, 2019 balance sheet:
Operating | Finance | |||||||
Undiscounted cash flows due within: | ||||||||
2019 | $ | 56 | $ | 100 | ||||
2020 | 226 | 411 | ||||||
2021 | 210 | 424 | ||||||
2022 | 211 | 431 | ||||||
2023 | 211 | 431 | ||||||
2024 and thereafter | 339 | 2,792 | ||||||
Total undiscounted cash flows | 1,253 | 4,589 | ||||||
Impact of present value discount | (310 | ) | (1,051 | ) | ||||
Amount reported on balance sheet | $ | 943 | $ | 3,538 |
On September 11, 2019, the Company entered into a lease agreement for a new branch to be located in Plain City, Ohio. The commencement date of the lease is November 1, 2019, and the estimated value of the related right-of-use asset and liability to be recorded at this time is $571,000. This lease is expected to be classified as a finance lease included in premises and equipment, net, on the Consolidated Balance Sheet. The Company has no other purchase obligations for leases executed but not yet recorded.
NOTE 10 – SUBSEQUENT EVENT
On October 9, 2019, the Board of Directors of Middlefield Banc Corp. authorized a two-for-onetwo-for-one stock split. Each shareholder of record at the close of business on October 25, 2019, will receive received one additional share for every outstanding share held on the record date. The additional shares are payablewere paid on November 8, 2019. As a result, the number of outstanding sharesall share and treasury shares will increase to approximately 6.4 million shares and 871,000 shares, respectively. The basic earnings per share determined asinformation have been retroactively adjusted to reflect the stock split.
With respect to the June 30, 2020 and 2019 financial statements, the effect of Septemberthe stock split on June 30, 2019 is $2.95amounts was recognized retroactively in the stockholders’ equity accounts in the Consolidated Balance Sheets, and in all share data in the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations. The effect of the stock split on per share amounts and would have been approximately $1.48 per share had this stock split occurred priorweighted average common shares outstanding for the three and six months ended June 30, 2019 is as follows:
For the three months ended | For the six months ended | |||||||
June 30, 2019 | June 30, 2019 | |||||||
Restated net income per common share - basic | $ | 0.51 | $ | 0.97 | ||||
Restated net income per common share - diluted | $ | 0.50 | $ | 0.97 | ||||
Restated weighted-average common shares issued | 7,286,542 | 7,278,620 | ||||||
Restated average treasury stock shares | 784,034 | 778,214 | ||||||
Restated average shares outstanding - basic | 6,502,508 | 6,500,406 | ||||||
Restated stock options and restricted stock | 12,438 | 12,644 | ||||||
Restated average shares outstanding - diluted | 6,514,946 | 6,513,050 | ||||||
Restated period ending shares outstanding | 6,485,170 | 6,485,170 | ||||||
Restated treasury shares outstanding | 807,824 | 807,824 |
NOTE 10 – RISKS AND UNCERTAINTIES
COVID-19 Update
The following table provides information with respect to Septemberour commercial loans by type at June 30, 2019.2020 that management considers to be at the highest exposure to risk related to the COVID-19 pandemic.
At Risk Loans at June 30, 2020 | ||||||||||||
Loan Type | Number of Loans | Balance | % of Total Loans | |||||||||
Retail | 270 | $ | 195,550 | 17.6 | % | |||||||
Multifamily & Residential NOO | 354 | 120,697 | 10.9 | % | ||||||||
Ambulatory Care, Nursing/Rehabilitation and Social Assistance | 218 | 81,491 | 7.3 | % | ||||||||
Hospitality and tourism | 58 | 44,923 | 4.1 | % | ||||||||
Restaurant/food service/bar | 136 | 24,938 | 2.2 | % | ||||||||
Other | 219 | 20,208 | 1.8 | % | ||||||||
Total | 1,255 | $ | 487,807 | 43.9 | % |
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). As a qualified SBA lender, we were automatically authorized to originate PPP loans.
As of June 30, 2020, we approved 1,343 applications for up to $142.7 million of loans under the PPP.
As of June 30, 2020, we modified 362 loans aggregating $214.8 million primarily consisting of the deferral of principal and interest payments and the extension of the maturity date for up to three months.
Details with respect to actual commercial loan deferrals are as follows:
Type | Number of Loans | Balance | % of Total Loans | |||||||||
Retail | 58 | $ | 89,438 | 8.1 | % | |||||||
Hospitality and tourism | 23 | 35,700 | 3.2 | % | ||||||||
Ambulatory Care, Nursing/Rehabilitation and Social Assistance | 10 | 22,456 | 2.0 | % | ||||||||
Multifamily & Residential NOO | 16 | 7,628 | 0.7 | % | ||||||||
Restaurant/food service/bar | 10 | 5,216 | 0.5 | % | ||||||||
Other | 245 | 54,379 | 4.9 | % | ||||||||
Total | 362 | $ | 214,817 | 19.4 | % |
An eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly payroll costs; or (2) $10.0 million. PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses.
As of June 30, 2020, PPP loan amounts that could be forgiven under this provision are as follows:
Number of Loans | Loan Balance | |||||||
> $2 million | 6 | $ | 14,774 | |||||
$350,000 - $2 million | 92 | 69,361 | ||||||
$150,000 - $350,000 | 96 | 20,768 | ||||||
< $150,000 | 1,108 | 36,397 | ||||||
Total | 1,302 | $ | 141,300 |
Since the opening of the PPP, several larger banks have been subject to litigation regarding the process and procedures that those banks used in processing applications for the PPP. Middlefield Bank may be exposed to the risk of similar litigation, from both customers and non-customers that approached the bank regarding PPP loans, regarding the process and procedures used in processing applications for the PPP. If any such litigation is filed against Middlefield Bank and is not resolved in a manner favorable to Middlefield Bank, it may result in significant financial liability or adversely affect Middlefield Bank’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of operations.
Middlefield Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by Middlefield Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by Middlefield Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from Middlefield Bank.
COVID-19 Loan Forbearance Programs. Section 4013 of the CARES Act provides that banks may elect not to categorize a loan modification as a TDR if the loan modification is (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date on which the national emergency concerning the novel coronavirus disease (COVID–19) outbreak declared by the President on March 13, 2020, under the National Emergencies Act terminates, or (B) December 31, 2020. According to the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) issued by the federal bank regulatory agencies on April 7, 2020, short-term loan modifications not otherwise eligible under Section 4013 that are made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. See Note 8 of the financial statements for additional disclosure of TDRs at June 30, 2020.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’sManagement’s discussion and analysis (MD&A) provideprovides further detail to the financial condition and results of operations of the Company. The MD&A should be read in conjunction with the notes and financial statements presented in this report.
The information contained or incorporated by reference in this report on Form 10-Q contains forward-looking statements, including certain plans, expectations, goals, and projections, which are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those contained or implied by such statements for a variety of factors, including: changes in economic conditions; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the nature, extent, and timing of government actions and reforms; and extended disruption of vital infrastructure.infrastructure and the potential impact of the COVID-19 pandemic. All forward-looking statements included in this report on Form 10-Q are based on information available at the time of the report. Middlefield Banc Corp. assumes no obligation to update any forward-looking statement.
CHANGES IN FINANCIAL CONDITION
General. The Company’s total assets ended the SeptemberJune 30, 20192020 quarter at $1.28$1.34 billion, an increase of $32.2$160.8 million from December 31, 2018.2019. For the same time period, cash and cash equivalents increased $12.1$23.2 million, or 11.2%66.0%, while net loans increased $7.6$122.6 million, or 0.8%12.5%. Total liabilities increased $24.6$157.9 million or 2.2%15.1%, while stockholders’ equity increased $7.6$2.9 million, or 5.9%2.1%.
Cash and cash equivalents. Cash and cash equivalents increased $12.1$23.2 million, or 11.2%66.0%, to $120.0$58.3 million at SeptemberJune 30, 20192020 from $107.9$35.1 million at December 31, 2018.2019. Deposits from customers into savings and checking accounts, loan and securities repayments, and proceeds from borrowed funds typically increase these accounts. Decreases result from customer withdrawals, new loan originations, purchases of investment securities and repayments of borrowed funds.
The Company will continue to hold elevated levels of cash and cash equivalents to meet the demands of customers during the economic downturn. The Company monitors cash and cash equivalents on a daily basis to ensure adequate liquidity positions are maintained.
Investment securities. Investment securities available for sale on SeptemberJune 30, 20192020 totaled $105.0$112.5 million, an increase of $6.7$6.8 million, or 6.8%6.4%, from $98.3$105.7 million at December 31, 2018.2019. During this period, the Company recorded repayments, calls, and maturities of $8.6$7.8 million and a net unrealized holding gain through AOCI of $2.4 million. Securities purchased were $24.8$12.3 million, and there were no sales of securities were $12.3 million.for the six months ended June 30, 2020. The Company recorded $194,000$129,000 in gains on sales of investment securities and $12,000 in gainslosses on equity securities as of SeptemberJune 30, 20192020 on the Company’s Consolidated Statement of Income and Consolidated Statement of Cash Flows. The gainloss on equity securities is the result of remeasurements of fair value of the equity securities held during this nine-monthsix-month period. Included
Periodically, management reviews the entire municipal bond portfolio to assess credit quality. Each security held in this portfolio is assessed on attributes that have historically influenced default incidence in the Company’s available-for-sale investmentmunicipal market, such as: sector, security, impairment filing, timeliness of disclosure, external credit assessment(s), credit spread, state, vintage, and underwriter. Municipal bonds compose 75% of the overall portfolio. While these investments have historically proven to have extremely low credit risk, the current economic environment may pose a threat to the cash flows of these governmental entities. The March 31, 2020 review shows portfolio credit quality to be strong with 99.5% of the portfolio having an assigned investment-grade rating or secured by an escrow of US government or agency securities, as80% of September 30, 2019the portfolio is an investmenteither pre-refunded or rated in the subordinated debtbroad rating categories of an Ohio-based community bankAA or AAA. While not included in the amountassessment of $4.0 million atthe credit quality of portfolio holdings, 17.6% benefit from a bond insurance policy, which provides an annual interest rateadditional layer of 6%.payment support for the securities.
Loans receivable.receivable. The loans receivable category consists primarily of single-family mortgage loans used to purchase or refinance personal residences located within the Company’s market area, commercial and industrial loans, home equity lines of credit, and commercial real estate loans used to finance properties that are used in the borrowers’ businesses, or to finance investor-owned rental properties, and, to a lesser extent, construction and consumer loans. The portfolio is well disbursed, geographically, with the fourfive branches in the central Ohio market comprising 24.0%23.6% of the Company’s total loans. Since December 31, 2017, however, 79.4% of all loan growth has come from the central Ohio footprint. Net loans receivable increased $7.6$122.6 million, or 0.8%12.5%, to $992.3 million$1.10 billion as of SeptemberJune 30, 20192020 from $984.7$977.5 million at December 31, 2018 due to loan growth targeted in the mid-single digits.2019. Included in the total increase for loans receivable were increases in the residential real estate, commercial and industrial, CRE owner occupied, and real estate-constructionhome equity lines of credit portfolios of $11.3$150.6 million, or 3.3%168.2%, $2.0$7.8 million, or 2.4%7.6%, and $833,000,$5.0 million, or 1.5%4.4%, respectively. This increase is net of decreases in the construction and other, CRE non-owner occupied, consumer installment, and commercialresidential real estate, and CRE multifamily portfolios of $665,000, or 1.0%, $1.6 million, or 9.4%0.5%, $3.2 million, or 22.2%, $7.4 million, or 3.1%, and $5.3$24.4 million, or 1.1%39.4%, respectively. The increase in the commercial and industrial portfolio includes the PPP loans issued as of June 30, 2020 of $142.7 million.
The Company’s Mortgage Banking operation generates loans for sale to the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Loans held for sale on SeptemberJune 30, 20192020 totaled $791,000,$4.2 million, an increase of $194,000,$2.9 million, or 32.5%240.2%, from December 31, 2018.2019. This increase is the result of more saleable loans being fundedheld at quarter end. The Company recorded proceeds from the sale of $18.6 million of these loans of $12.9 million and $285,000for $495,000 in gains on sale of loans as of SeptemberJune 30, 20192020 on the Company’s Consolidated Statement of Cash Flows.
The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. At SeptemberJune 30, 20192020 non-owner-occupied commercial real estate loans (including construction, land and land development loans) represent 351.5%295.5% of total risk-based capital. Construction, land and land development loans represent 46.0%46.1% of total risk-based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, and strong underwriting criteria with respect to its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital, and may adversely affect shareholder returns. The Company has an extensive capital planning policy, which includes proformapro forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well-capitalized ratios.
The Company monitors daily fluctuations in unused commitments as a means of identifying potentially material drawdowns on existing lines of credit. At June 30, 2020, unused line of credit commitments is unchanged from December 31, 2019.
Allowance for Loan and Lease Losses and Asset Quality.Quality. The allowance for loan and lease losses decreased $427,000,increased $3.4 million, or 5.7%50.9%, to $7.0$10.2 million at SeptemberJune 30, 20192020 from $7.4$6.8 million at December 31, 2018.2019. For the three months ended SeptemberJune 30, 2019,2020, net loan charge-offs totaled $383,000,$34,000, or 0.15%0.01% of average loans, compared to net charge-offs of $218,000, or 0.09% of average loans,$12,000 for the same period in 2018.2019. To maintain the allowance for loan and lease losses, the Company recorded a provision for loan loss of $80,000$1.0 million in the three-month period ended SeptemberJune 30, 2019.2020. For the ninesix months ended SeptemberJune 30, 2019,2020, net loan charge-offs totaled $857,000,$298,000, or 0.11%0.06% of average loans, compared to net charge-offs of $326,000,$474,000, or 0.05%,0.10% of average loans, for the same period in 2018.2019. To maintain the allowance for loan and lease losses, the Company recorded a provision for loan loss of $430,000$3.7 million in the nine-monthsix-month period ended SeptemberJune 30, 2019. Also for this period, the2020. The ratio of the allowance for loan and lease losses to nonperforming loans was 69.64%,104.2% for the three-month period ended June 30, 2020, compared to 102.83%68.1% for the same period in the prior year. This is due to nonperformingan increase in impaired loans and the allowance being well secured and not requiring specific reserves as of September 30, 2019. Duringadjusted to address the nineeconomic slowdown during the six months ended SeptemberJune 30, 2019, one central Ohio2020. See additional discussions on the provision for loan of $3.2 million negatively affected nonperforming loans. The reserve for this credit is $614,000. The issue is isolated to this particular borrower and it is not indicative of a trend in the market, portfolio, or an issue in underwriting. Offsetting this amount is a reserve reduction of $358,000 due to a charge off of $336,000, as well as a reserve reduction of $435,000 from the payoff of one impaired commercial real estate loan.losses section below.
Management analyzes the adequacy of the allowance for loan and lease losses regularly through reviews of the performance of the loan portfolio considering economic conditions, changes in interest rates and the effect of such changes on real estate values, and changes in the amount and composition of the loan portfolio. The allowance for loan and lease losses is a significant estimate that is particularly susceptible to changes in the near term. Management’s analysis includes a review of all loans designated as impaired, historical loan loss experience, the estimated fair value of the underlying collateral, economic conditions, current interest rates, trends in the borrower’s industry and other factors that management believes warrant recognition in providing for an appropriate allowance for loan and lease losses. Future additions or reductions to the allowance for loan and lease losses will be dependent on these factors. Additionally, the Company uses an outside party to conduct an independent review of commercial and commercial real estate loans that is designed to validate management conclusions of risk ratings and the appropriateness of the allowance allocated to these loans. The Company uses the results of this review to help determine the effectiveness of policies and procedures and to assess the adequacy of the allowance for loan and lease losses allocated to these types of loans. Management believes the allowance for loan and lease losses is appropriately stated at SeptemberJune 30, 2019.2020. Based on the variables involved and management’s judgments about uncertain outcomes, the determination of the allowance for loan and lease losses is considered a critical accounting policy.
Goodwill. The Company considers the negative economic impact resulting from the COVID-19 shutdowns to be a triggering event necessitating a mid-cycle analysis for impairment. Based on the analysis performed as of March 31, 2020, the Company determined that goodwill was not impaired.
Accrued Interest Receivable and Other Assets. Accrued interest receivable and other assets increased $4.4 million, or 41.0%, to $15.1 million at June 30, 2020 from $10.7 million at December 31, 2019. Income receivable on loans has increased $2.1 million as a result of the COVID-19 payment deferral program. Also included in this increase are increases in FHLB stock owned of $1.6 million, other real estate owned of $532,000, and an increase in the holding company franchise tax asset of $551,000.
Nonperforming assets. Nonperforming assets include nonaccrual loans, loans 90 days or more past due, other real estate owned, and repossessed assets. Real estate owned is written down to fair value at its initial recording and continually monitored for changes in fair value. A loan is classified as nonaccrual when, in the opinion of management, there are serious doubts about collectability of interest and principal. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of principal and interest is doubtful. Payments received on nonaccrual loans are applied against principal until doubt about collectability ceases.
Asset Quality History | Asset Quality History | |||||||||||||||||||||||||||||||||||||||
(Dollar amounts in thousands) | September 30, 2019 | June 30, 2019 | March 31, 2019 | December 31, 2018 | September 30, 2018 | June 30, 2020 | March 31, 2020 | December 31, 2019 | September 30, 2019 | June 30, 2019 | ||||||||||||||||||||||||||||||
Nonperforming loans | $ | 10,053 | $ | 10,729 | $ | 10,472 | $ | 7,540 | $ | 7,288 | $ | 9,803 | $ | 8,405 | $ | 8,879 | $ | 10,053 | $ | 10,729 | ||||||||||||||||||||
Other real estate owned | 89 | 89 | 687 | 456 | 155 | 89 | 89 | |||||||||||||||||||||||||||||||||
Nonperforming assets | $ | 10,142 | $ | 10,818 | $ | 10,598 | $ | 7,810 | $ | 7,545 | $ | 10,490 | $ | 8,861 | $ | 9,034 | $ | 10,142 | $ | 10,818 | ||||||||||||||||||||
Allowance for loan and lease losses | 7,001 | 7,304 | 7,206 | 7,428 | 7,494 | 10,210 | 9,244 | 6,768 | 7,001 | 7,304 | ||||||||||||||||||||||||||||||
Ratios: | ||||||||||||||||||||||||||||||||||||||||
Nonperforming loans to total loans | 1.01 | % | 1.07 | % | 1.04 | % | 0.76 | % | 0.75 | % | 0.88 | % | 0.84 | % | 0.90 | % | 1.01 | % | 1.07 | % | ||||||||||||||||||||
Nonperforming assets to total assets | 0.79 | % | 0.84 | % | 0.83 | % | 0.63 | % | 0.63 | % | 0.78 | % | 0.73 | % | 0.76 | % | 0.79 | % | 0.84 | % | ||||||||||||||||||||
Allowance for loan and lease losses to total loans | 0.70 | % | 0.73 | % | 0.72 | % | 0.75 | % | 0.77 | % | 0.92 | % | 0.93 | % | 0.69 | % | 0.70 | % | 0.73 | % | ||||||||||||||||||||
Allowance for loan and lease losses to nonperforming loans | 69.64 | % | 68.08 | % | 68.81 | % | 98.51 | % | 102.83 | % | 104.15 | % | 109.98 | % | 76.22 | % | 69.64 | % | 68.08 | % |
Nonperforming loans exclude TDRs that are performing in accordance with their terms over a prescribed period of time. TDRs are those loans which the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. The Company has 2625 TDRs accruing interest with a balance of $3.0$2.8 million as of SeptemberJune 30, 2019.2020. A TDR that yields a market interest rate at the time of restructuring and is in compliance with its modified terms is no longer reported as a TDR in calendar years after the year in which the restructuring took place. To be in compliance with its modified terms, a loan that is a TDR must not be in nonaccrual status and must be current or less than 30 days past due on its contractual principal and interest payments under the modified repayment terms. Nonperforming loans secured by real estate totaled $9.2$9.1 million as of SeptemberJune 30, 2019,2020, an increase of $3.6$1.3 million from $5.6$7.8 million at December 31, 2018.2019.
A major factor in determining the appropriateness of the allowance for loan and lease losses is the type of collateral which secures the loans. Of the total nonperforming loans at SeptemberJune 30, 2019, 91.9%2020, 93.3% were secured by real estate. Although this does not insure against all losses, real estate typically provides for at least partial recovery, even in a distressed-sale and declining-value environment. The Company’s objective is to minimize the future loss exposure of the Company.
The allowance for loan and lease losses to total loans ratio decreasedincreased from 0.75%0.69% as of December 31, 20182019 to 0.70%0.92% as of SeptemberJune 30, 2019.2020.
Deposits. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which are a significant source of funds, totaling $1.03$1.16 billion or 90.8%103.9% of the Company’s total average funding sources at SeptemberJune 30, 2019.2020. Total deposits increased $18.3$137.4 million, or 1.8%13.5%, at SeptemberJune 30, 20192020 from $1.02 billion at December 31, 2018.2019. The total increase in deposits is the net of increases in time and interest-bearingnoninterest-bearing demand deposits, of $89.8 million, or 29.8%, and $14.9 million, or 16.2%, respectively, and decreases in noninterest-bearinginterest-bearing demand deposits, savings, and money market deposits of $4.2$79.4 million, or 2.1%41.5%, $40.9$28.9 million, or 18.4%26.8%, $26.5 million, or 13.8%, and $41.3$8.0 million, or 21.0%5.0%, respectively, and a decrease in time deposits of $5.4 million, or 1.5%, at SeptemberJune 30, 2019.2020, as some maturing certificates are not being renewed in the current low interest rate environment. Included in the net increase are $58.8 million of new PPP deposits. The Company uses certain non-core funding instruments in order to grow the balance sheet and maintain liquidity. These deposits, either from a broker or a listing service, were $144.4$54.9 million at SeptemberJune 30, 2019,2020, as compared to $148.8$117.1 million at December 31, 2018. The expansion of net interest margin in the third quarter of 2019 is largely the result of the use of these deposits.2019.
Borrowed funds. The Company uses short-term and long-term borrowings as another source of funding for asset growth and liquidity needs. These borrowings primarily include FHLB advances, junior subordinated debt, short-term borrowings from other banks, and federal funds purchased. Short-term borrowings increased $1.6$15.3 million or 1.8%, to $92.0$20.4 million as of SeptemberJune 30, 2019.2020. Other borrowings increased $3.6$4.4 million, or 40.4%34.6%, to $12.4$17.2 million as of SeptemberJune 30, 20192020 from $8.8$12.8 million as of December 31, 2018. This increase is mainly due to the adoption of ASU 2016-02, “Leases (Topic 842)” effective January 1, 2019, which resulted in the recording of financial lease liabilities in the amount of $2.7 million (see Note 9). This quarter, the Company tested its ability to shift off balance sheet liquidity to the balance sheet by borrowing an advance of $80.0 million for one day.2019.
Stockholders’ equity. Stockholders’ equity increased $7.6$2.9 million, or 5.9%2.1%, to $135.9$140.7 million at SeptemberJune 30, 20192020 from $128.3$137.8 million at December 31, 2018.2019. This growthincrease was the result of increases in retained earnings of $2.1 million, AOCI of $1.9 million, and common stock of $6.8 million, $2.3 million, and $692,000, respectively.$105,000. This increase is net of an increase in treasury stock of $2.2$1.2 million, or 16.5%7.6%, to $15.7$16.9 million as of SeptemberJune 30, 2019,2020, from $13.5$15.7 million as of December 31, 2018.2019. The change in retained earnings is due to the year-to-date net income offset by dividends paid, the change in AOCI is due to fair value adjustments of available-for-sale securities, the change in common stock is due to regular stock grants and dividend reinvestment and purchase plan distributions, and the change in treasury stock is due to the Company repurchasing 49,41658,200 of its outstanding shares during the ninesix months ended SeptemberJune 30, 2019.2020.
The Company suspended its stock repurchase program as a result of the economic slowdown and the focus on capital preservation. The suspension will continue until economic clarity arises and the Company is certain it is the best use of capital.
RESULTS OF OPERATIONS
General. Net income for the three months ended SeptemberJune 30, 2019,2020, was $3.3$3.0 million, a $35,000,$324,000, or 1.1%9.8%, decrease from the amount earned during the same period in 2018.2019. Diluted earnings per share for the quarter decreased to $1.01,$0.46, compared to $1.02$0.50 from the same period in 2018.2019. Net income for the ninesix months ended SeptemberJune 30, 2019,2020, was $9.6$4.0 million, a $564,000,$2.3 million, or 6.3%36.4%, increasedecrease from the amount earned during the same period in 2018.2019. Diluted earnings per share for this nine-monthsix-month period increaseddecreased to $2.94,$0.62, compared to $2.78 for$0.97 from the same period in 2018.2019.
The Company’s annualized return on average assets (“ROA”) and return on average equity (“ROE”) for the quarter were 1.07%0.90% and 9.41%8.56%, respectively, compared with 1.13%1.09% and 10.33%9.79% for the same period in 2018.2019. The Company’s ROA and ROE for the nine-monthsix-month period were 1.06%0.78% and 9.52%5.79%, respectively, compared with 1.06%1.05% and 9.73%9.58% for the same period in 2018.2019.
Net interest income. Net interest income, the primary source of revenue for the Company, is determined by the interest rate spread, which is defined as the difference between income on earning assets and the cost of funds supporting those assets, and the relative amounts of interest-earning assets and interest-bearing liabilities. Management periodically adjusts the mix of assets and liabilities, as well as the rates earned or paid on those assets and liabilities, in order to manage and improve net interest income. The level of interest rates and changes in the amount and composition of interest-earning assets and liabilities affect the Company’s net interest income. Management’s goal is to maintain a balance between steady net interest income growth and the risks associated with interest rate fluctuations.
Net interest income for the three months ended SeptemberJune 30, 20192020 totaled $10.6$10.7 million, an increase of 3.2%4.4% from that reported in the comparable period of 2018.2019. The net interest margin was 3.72%3.49% for the thirdsecond quarter of 2019, no change2020, a decrease from the 3.72%3.65% reported for the same quarter of 2018. Net interest income for the nine months ended September 30, 2019 totaled $31.1 million, an increase of 3.6% from that reported in the comparable period of 2018. The net interest margin was 3.69% for the nine-month period ended September 30, 2019, down from the 3.77% reported for the comparable period of 2018.2019. The decline in the net interest margin is attributable to a 3956 basis points increasepoint decrease in total interest bearing liabilitiesloans receivable yield along with a 198 basis point decrease in the yield on interest-earning deposits with other banks. This decline was partially offset by an increase in average loan balances of 24$89.8 million or 9.0%. PPP loans reduced the net interest margin for the second quarter by 10 basis points from the first quarter of 2020. Net interest income for the six months ended June 30, 2020 totaled $20.8 million, an increase of 1.3% from that reported in the comparable period of 2019. The net interest margin was 3.56% for the six-month period ended June 30, 2020, a decrease from the 3.67% reported for the comparable period of 2019. The decline in the net interest margin is attributable to a 35 basis point decrease in loans receivable yield along with a 152 basis point decrease in the yield on total interest earning assets for the nine-month period ended September 30, 2019. Netinterest-earning deposits with other banks. This decline was partially offset by an increase in average loan balances of $36.7 million or 3.7%. The Company’s net interest margin continuesmay be subject to compare favorablyfurther decline as a result of the abrupt decrease in interest rates during the first quarter of 2020, the reduced interest income on floating-rate commercial loans, and the business disruptions caused by the COVID-19 pandemic. As the Company is in an asset-sensitive position, reductions in market interest rates have a negative impact on margin as the Company’s interest-earning assets reprice faster than its interest-bearing liabilities. Much of our asset-sensitivity is due to peercommercial and strengthenedconsumer loans that have variable interest rates. Both loan types have floor rates. The benefit of these floors will become more evident in future quarters if the Federal Reserve maintains short-term interest rates at the low level established in March 2020. For the three months ended SeptemberJune 30, 2019, as2020, the decrease in yield on interest-earning deposits with other banks led to a result of$213,000 decline in interest income. The $565,000 overall decrease in interest income was offset by a $1.0 million decrease in interest expense. For the six months ended June 30, 2020, the decrease in yield on interest-earning deposits repricing faster than assets.with other banks led to a $320,000 decline in interest income. The $1.0 million overall decrease in interest income was offset by a $1.3 million decrease in interest expense.
Interest and dividend income. Interest and dividend income increased $1.1 million,decreased $565,000, or 8.2%4.1%, for the three months ended SeptemberJune 30, 2019, compared to the same period in the prior year. This is mainly attributable to an increase in interest and fees on loans of $983,000. Interest and dividend income increased $4.2 million, or 11.4%, for the nine months ended September 30, 2019, compared to the same period in the prior year. This is mainly attributable to an increase in interest and fees on loans of $3.9 million.
Interest and fees earned on loans receivable increased $983,000, or 8.3%, for the three months ended September 30, 2019,2020, compared to the same period in the prior year. This is attributable to an increasea decrease in average loan balancesinterest and fees on loans of $38.6 million, accompanied by a 20 basis point increase in the average yield to 5.09%.$425,000. Interest and fees earned on loans receivable increased $3.9dividend income decreased $1.0 million, or 11.4%3.8%, for the ninesix months ended SeptemberJune 30, 2019,2020, compared to the same period in the prior year. This is attributable to a decrease in interest and fees on loans of $835,000.
Interest and fees earned on loans receivable decreased $425,000, or 3.3%, for the three months ended June 30, 2020, compared to the same period in the prior year. This is attributable to a 56 basis point decrease in the average yield to 4.53%, partially offset by an increase in average loan balances of $59.8 million, accompanied by$89.8 million. Interest and fees earned on loans receivable decreased $835,000, or 3.3%, for the six months ended June 30, 2020, compared to the same period in the prior year. This is attributable to a 2335 basis point increasedecrease in the average yield to 5.08%.4.73%, partially offset by an increase in average loan balances of $36.7 million. The increase in the average loan balance is due in part to the issuance of PPP loans in 2020, the related income of which was $927,000 as of June 30, 2020.
Net interest earned on securities increased by $54,000$73,000 for the three months ended SeptemberJune 30, 20192020 when compared to the same period in the prior year. The average balance of investment securities increased $4.4$8.7 million, or 4.3%8.8%, while the 3.80%3.76% yield on the investment portfolio increased by 136 basis points, from 3.67%3.70%, for the same period in the prior year. Net interest earned on securities increased by $151,000$115,000 for the ninesix months ended SeptemberJune 30, 20192020 when compared to the same period in the prior year. The average balance of investment securities increased $4.2$8.6 million, or 4.4%8.7%, while the 3.80%3.69% yield on the investment portfolio increaseddecreased by 132 basis points, from 3.67%3.71%, for the same period in the prior year.
Interest expense. Interest expense increased $729,000,decreased $1.0 million, or 28.3%29.6%, for the three months ended SeptemberJune 30, 2019,2020, compared to the same period in the prior year. The increasedecrease is attributable to increasesa decrease in the average balancesbalance of certificates of deposit,deposits of $40.7 million, or 10.4%, and is further attributable to decreases of 214, 48, 47, and 35 basis points in short-term borrowings, savings, money market deposits, and interest-bearing demand deposits of $103.1 million, or 35.4%, $10.0 million, or 6.8%, and $3.6 million, or 3.6%, respectively. This increase was accompanied by increases in costs of 115, 44, 34, and 2 basis points for the average balances of short-term borrowings, money market deposits, certificates of deposit, and interest-bearing demand deposits respectively. The overallcost. This decrease was partially offset by an increase in deposits was utilized to pay down short-term borrowings, the average balance of which decreased by $51.2short-term borrowings of $42.6 million, or 90.9%319.2%. Interest expense increased $3.1decreased $1.3 million, or 44.9%19.4%, for the ninesix months ended SeptemberJune 30, 2019,2020, compared to the same period in the prior year. The increasedecrease is attributable to increasesdecreases in the average balances of certificates of deposit, money market deposits, and interest-bearing demand deposits of $91.4 million, or 33.0%, $24.1 million, or 16.5%, and $5.0 million, or 5.3%, respectively. This increase was accompanied by increases in costs of 58, 55, 47, 37, 14, and 3 basis points for the average balances of money market deposits and savings deposits of $15.8 million, or 8.9%, and $10.6 million, or 5.3%, respectively. This decrease is further attributable to decreases in costs of 204, 90, 40, 33, and 21 basis points in short-term borrowings, certificates of deposit, other borrowings, savings, money market deposits, and interest-bearing demandcertificates of deposits respectively. The overallcosts. This decrease was partially offset by an increase in deposits was utilized to pay down short-term borrowings and other borrowings, the average balance of which decreased by $34.9short-term borrowings of $11.0 million, or 66.0%,45.2%.
The decreases in costs were primarily due to decreasing interest rates on all deposit products in response to the unprecedented decrease in the targeted federal funds rate in March 2020. The COVID-19 pandemic could result in lower levels of deposits in future periods, which could decrease our average interest-bearing deposits for the remainder of 2020. Also, as a result of the reductions in the targeted federal funds interest rate, as well as the impact of the COVID-19 pandemic, we expect that our net interest income and $5.2 million, or 28.3%, respectively. net interest margin could decrease in future periods.
Provision for loan losses. The provision for loan losses represents the charge to income necessary to adjust the allowance for loan and lease losses to an amount that represents management’s assessment of the estimated probable incurred credit losses inherent in the loan portfolio. Each quarter, management performs a review of estimated probable incurred credit losses in the loan portfolio. Based on this review, a provision for loan losses of $80,000$1.0 million was recorded for the quarter ended SeptemberJune 30, 2019, a decrease2020, an increase of $130,000, or 61.9%,$890,000 from the quarter ended SeptemberJune 30, 2018.2019. A provision for loan losses of $430,000$3.7 million was recorded for the nine-monthsix-month period ended SeptemberJune 30, 2019, a decrease2020, an increase of $200,000, or 31.7%,$3.4 million from the same period in 2018. 2019. The Company remains confident in the conservative and disciplined approach to credit and risk management. However, the economic challenges caused by the COVID-19 crisis has an immediate impact on credit quality.
At June 30, 2020, we considered the effect of the economic shutdown to combat COVID-19 on our borrowers and local economy. Although stimulus and mitigation efforts are expected to reduce the impact, we believe a 20 basis point increase to the economic qualitative factor was warranted. Most of the increased provision is the result of increases to the current economic condition’s qualitative factors. The impact of those increases for the six months ended June 30, 2020 is (in thousands):
Commercial real estate: | ||||
Owner occupied | $ | 191 | ||
Non-owner occupied | 542 | |||
Multifamily | 63 | |||
Residential real estate | 458 | |||
Commercial and industrial | 646 | |||
Home equity lines of credit | 228 | |||
Construction and other | 112 | |||
Consumer installment | 8 | |||
Total | $ | 2,248 |
Nonperforming loans were $10.0$9.8 million, or 1.01%.88%, of total loans at SeptemberJune 30, 20192020 compared with $7.3$10.7 million, or 0.75%1.07%, at SeptemberJune 30, 2018.2019. For the three months ended SeptemberJune 30, 2019,2020, net loan charge-offs totaled $383,000,$34,000, or 0.15%0.01% of average loans, compared to net charge-offs of $218,000, or 0.09% of average loans,$12,000, for the thirdsecond quarter of 2018.2019. For the ninesix months ended SeptemberJune 30, 2019,2020, net loan charge-offs totaled $857,000,$298,000, or 0.11%0.06% of average loans, compared to net charge-offs of $326,000,$474,000, or 0.05%,0.10% of average loans, for the same period in 2018.2019.
Noninterest income. Noninterest income increased $157,000,$196,000, or 16.6%15.1%, for the three months ended SeptemberJune 30, 20192020 over the comparable 20182019 period. This increase was the result of increasesan increase in gains on sale of loans of $283,000, or 288.8%, partially offset by a decrease in investment securities gains on sale, net, of $190,000. The increase in gains on sale of loans is due to an increase in refinancing of mortgages due to a decrease in rates. Noninterest income increased $138,000, or 5.7%, during the six months ended June 30, 2020 over the comparable 2019 period. This increase was the result of an increase in gains on sale of loans of $338,000, or 215.3%, partially offset by decreases in investment securities gains on sale, net, and in service chargesgains on deposit accountsequity securities (Note 7) of $85,000, or 197.7%,$190,000, and $80,000, or 16.3%,$173,000, respectively. The increase in gains on sale of loans is due to an increase in saleable loans being sold during the quarter, and the increasethis time period. The decrease in service charges on deposit accounts is due to an increase in fees assessed for statement printing services. Noninterest income increased $785,000, or 28.5%, for the nine months ended September 30, 2019 over the comparable 2018 period. This increase was the result of an increase in other income, investment securities gains on sale and service charges on deposit accounts of $306,000, $194,000, and $193,000, respectively. The increase in other income is due to increases in revenue from investment services and income received from recoveries on acquired student loans.no available-for-sale securities being sold during the second quarter of 2020.
Noninterest expense. Noninterest expense of $7.7 million for the thirdsecond quarter 20192020 was 8.2%2.8%, or $581,000,$207,000, higher than the thirdsecond quarter of 2018. Salaries and employee benefits and data2019. Data processing costs and other expenses increased $433,000,$135,000, or 11.3%24.6%, and $99,000,$70,000, or 20.6%7.2%, respectively. These increases were offset by a decrease in federal deposit insurance expense of $150,000, or 100.0%. The salary increase is mostly due to annual pay adjustments and an increase in employees. The increase in data processing costs is due to new and increased costs of processing agreements. The decreaseincrease in federal deposit insuranceother expense is due to the Company being determined to be eligible for small bank assessment credits.increases in directors' fees, miscellaneous loan expenses, sundry gains and losses, and pandemic response-related expenses. Noninterest expense of $22.7$14.9 million for the nine-monthsix-month period ended SeptemberJune 30, 20192020 was 5.4%0.3%, or $1.2 million, higher$41,000, lower than the same period in 2018. Salaries and employee benefits, data2019. Data processing costs and Ohio state franchise tax,other expense increased $790,000,$336,000, or 6.8%, $234,000, or 17.2%33.1%, and $179,000,$264,000, or 29.7%14.3%, respectively. These increases were offset by decreasesa decrease in federal deposit insurance expensesalaries and advertising expenseemployee benefits of $220,000,$602,000, or 48.9%, and $89,000, or 12.8%, respectively. The salary increase is mostly due to annual pay adjustments and an increase in employees.7.3%. The increase in data processing costs is due to new and increased costs of processing agreements, and the increase in Ohio state franchise taxother expense is due to increases in miscellaneous loan expenses, postage, sundry gains and losses, and fewer offsetting gains on sales of OREO properties. The decrease in salary expense is due to the increasevaluation adjustment for share-based compensation liability (see Note 3), as well as a decrease in the Company’s franchise value. profit sharing expense recorded.
Provision for income taxes. The Company recognized $661,000$565,000 in income tax expense, which reflected an effective tax rate of 16.8%16.0% for the three months ended SeptemberJune 30, 2019,2020, as compared to $593,000$686,000 with an effective tax rate of 15.2%17.3% for the comparable 20182019 period. The Company recognized $2.0 million$639,000 in income tax expense, which reflected an effective tax rate of 17.0%13.8% for the ninesix months ended SeptemberJune 30, 2019,2020, as compared to $1.6$1.3 million with an effective tax rate of 15.1%17.1% for the comparable 20182019 period. The decrease in the effective tax rate is due to the reduction of net income.
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resultant average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resultant average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average balances are calculated using monthly averages and the average loan balances include nonaccrual loans and exclude the allowance for loan and lease losses, and interest income includes accretion of net deferred loan fees. Yields on tax-exempt securities and loans (tax exempt for federal income tax purposes) are shown on a fully tax-equivalent basis utilizing a federal tax rate of 21%. Yields and rates have been calculated on an annualized basis utilizing monthly interest amounts.
For the Three Months Ended September 30, | For the Three Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Balance | Interest | Yield/Cost | Balance | Interest | Yield/Cost | Balance | Interest | Yield/Cost | Balance | Interest | Yield/Cost | ||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans receivable (3) | $ | 998,183 | $ | 12,804 | 5.09 | % | $ | 959,576 | $ | 11,821 | 4.89 | % | $ | 1,092,095 | $ | 12,281 | 4.53 | % | $ | 1,002,346 | $ | 12,706 | 5.09 | % | ||||||||||||||||||||||||
Investment securities (3) | 104,878 | 819 | 3.80 | % | 100,518 | 765 | 3.67 | % | 107,765 | 840 | 3.76 | % | 99,022 | 767 | 3.70 | % | ||||||||||||||||||||||||||||||||
Interest-earning deposits with other banks (4) | 44,925 | 262 | 2.31 | % | 49,517 | 243 | 1.95 | % | 58,541 | 34 | 0.23 | % | 44,747 | 247 | 2.21 | % | ||||||||||||||||||||||||||||||||
Total interest-earning assets | 1,147,986 | 13,885 | 4.86 | % | 1,109,611 | 12,829 | 4.65 | % | 1,258,401 | 13,155 | 4.27 | % | 1,146,115 | 13,720 | 4.86 | % | ||||||||||||||||||||||||||||||||
Noninterest-earning assets | 60,261 | 53,237 | 62,976 | 61,267 | ||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 1,208,247 | $ | 1,162,848 | $ | 1,321,377 | $ | 1,207,382 | ||||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 104,212 | $ | 103 | 0.39 | % | $ | 100,605 | $ | 94 | 0.37 | % | $ | 129,917 | $ | 112 | 0.35 | % | $ | 98,929 | $ | 88 | 0.36 | % | ||||||||||||||||||||||||
Money market deposits | 157,691 | 568 | 1.43 | % | 147,702 | 367 | 0.99 | % | 164,434 | 381 | 0.93 | % | 159,705 | 558 | 1.40 | % | ||||||||||||||||||||||||||||||||
Savings deposits | 196,187 | 337 | 0.68 | % | 214,300 | 366 | 0.68 | % | 198,967 | 104 | 0.21 | % | 195,451 | 336 | 0.69 | % | ||||||||||||||||||||||||||||||||
Certificates of deposit | 394,381 | 2,165 | 2.18 | % | 291,251 | 1,351 | 1.84 | % | 350,298 | 1,739 | 2.00 | % | 390,997 | 2,295 | 2.35 | % | ||||||||||||||||||||||||||||||||
Short-term borrowings | 5,156 | 42 | 3.23 | % | 56,348 | 296 | 2.08 | % | 55,973 | 32 | 0.23 | % | 13,354 | 79 | 2.37 | % | ||||||||||||||||||||||||||||||||
Other borrowings | 12,397 | 92 | 2.94 | % | 12,512 | 104 | 3.30 | % | 15,615 | 62 | 1.60 | % | 12,489 | 95 | 3.05 | % | ||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | 870,024 | 3,307 | 1.51 | % | 822,718 | 2,578 | 1.24 | % | 915,204 | 2,430 | 1.07 | % | 870,925 | 3,451 | 1.59 | % | ||||||||||||||||||||||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing demand deposits | 197,015 | $ | 210,746 | 262,575 | 198,234 | |||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 3,365 | 2,519 | 4,311 | 3,387 | ||||||||||||||||||||||||||||||||||||||||||||
Stockholders' equity | 137,843 | 126,865 | 139,287 | 134,836 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 1,208,247 | $ | 1,162,848 | $ | 1,321,377 | $ | 1,207,382 | ||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 10,578 | $ | 10,251 | $ | 10,725 | $ | 10,269 | ||||||||||||||||||||||||||||||||||||||||
Interest rate spread (1) | 3.35 | % | 3.41 | % | 3.20 | % | 3.27 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest margin (2) | 3.72 | % | 3.72 | % | 3.49 | % | 3.65 | % | ||||||||||||||||||||||||||||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 131.95 | % | 134.87 | % | 137.50 | % | 131.60 | % |
(1) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. | ||
(2) Net interest margin represents net interest income as a percentage of average interest-earning assets. | ||
(3) Tax-equivalent adjustments to calculate the yield on tax-exempt securities and loans were | ||
(4) Includes dividends received on restricted stock. |
Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense, between the three-month periods ended SeptemberJune 30, 20192020 and 2018,2019, in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Company’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior period rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances.
2019 versus 2018 | 2020 versus 2019 | |||||||||||||||||||||||
Increase (decrease) due to | Increase (decrease) due to | |||||||||||||||||||||||
(Dollars in thousands) | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans receivable | $ | 476 | $ | 507 | $ | 983 | $ | 1,136 | $ | (1,561 | ) | $ | (425 | ) | ||||||||||
Investment securities | 40 | 14 | 54 | 80 | (7 | ) | 73 | |||||||||||||||||
Interest-earning deposits with other banks | (23 | ) | 42 | 19 | 76 | (289 | ) | (213 | ) | |||||||||||||||
Total interest-earning assets | 493 | 563 | 1,056 | 1,292 | (1,857 | ) | (565 | ) | ||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing demand deposits | 3 | 6 | 9 | 28 | (4 | ) | 24 | |||||||||||||||||
Money market deposits | 25 | 176 | 201 | 16 | (193 | ) | (177 | ) | ||||||||||||||||
Savings deposits | (31 | ) | 2 | (29 | ) | 6 | (238 | ) | (232 | ) | ||||||||||||||
Certificates of deposit | 478 | 336 | 814 | (238 | ) | (318 | ) | (556 | ) | |||||||||||||||
Short-term borrowings | (269 | ) | 15 | (254 | ) | 251 | (298 | ) | (47 | ) | ||||||||||||||
Other borrowings | (1 | ) | (11 | ) | (12 | ) | 24 | (57 | ) | (33 | ) | |||||||||||||
Total interest-bearing liabilities | 205 | 524 | 729 | 87 | (1,108 | ) | (1,021 | ) | ||||||||||||||||
Net interest income | $ | 288 | $ | 39 | $ | 327 | $ | 1,205 | $ | (749 | ) | $ | 456 |
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resultant average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resultant average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average balances are calculated using monthly averages and the average loan balances include nonaccrual loans and exclude the allowance for loan and lease losses, and interest income includes accretion of net deferred loan fees. Yields on tax-exempt securities and loans (tax exempt for federal income tax purposes) are shown on a fully tax-equivalent basis utilizing a federal tax rate of 21%. Yields and rates have been calculated on an annualized basis utilizing monthly interest amounts.
For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | For the Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | Average | Average | |||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Balance | Interest | Yield/Cost | Balance | Interest | Yield/Cost | Balance | Interest | Yield/Cost | Balance | Interest | Yield/Cost | ||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans receivable (3) | $ | 1,000,291 | $ | 37,998 | 5.08 | % | $ | 940,468 | $ | 34,109 | 4.85 | % | $ | 1,038,064 | $ | 24,359 | 4.73 | % | $ | 1,001,344 | $ | 25,194 | 5.08 | % | ||||||||||||||||||||||||
Investment securities (3) | 100,461 | 2,330 | 3.80 | % | 96,222 | 2,179 | 3.67 | % | 106,829 | 1,626 | 3.69 | % | 98,253 | 1,511 | 3.71 | % | ||||||||||||||||||||||||||||||||
Interest-earning deposits with other banks (4) | 44,985 | 761 | 2.26 | % | 44,207 | 610 | 1.84 | % | 50,129 | 179 | 0.72 | % | 45,015 | 499 | 2.24 | % | ||||||||||||||||||||||||||||||||
Total interest-earning assets | 1,145,737 | 41,089 | 4.86 | % | 1,080,897 | 36,898 | 4.62 | % | 1,195,022 | 26,164 | 4.47 | % | 1,144,612 | 27,204 | 4.85 | % | ||||||||||||||||||||||||||||||||
Noninterest-earning assets | 60,695 | 53,388 | 63,990 | 60,912 | ||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 1,206,432 | $ | 1,134,285 | $ | 1,259,012 | $ | 1,205,524 | ||||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 100,822 | $ | 263 | 0.35 | % | $ | 95,784 | $ | 231 | 0.32 | % | $ | 121,804 | 229 | 0.38 | % | $ | 96,594 | $ | 160 | 0.33 | % | |||||||||||||||||||||||||
Money market deposits | 170,544 | 1,880 | 1.47 | % | 146,420 | 981 | 0.90 | % | 161,221 | 934 | 1.17 | % | 176,970 | 1,313 | 1.50 | % | ||||||||||||||||||||||||||||||||
Savings deposits | 199,829 | 1,090 | 0.73 | % | 215,165 | 941 | 0.58 | % | 191,052 | 331 | 0.35 | % | 201,650 | 753 | 0.75 | % | ||||||||||||||||||||||||||||||||
Certificates of deposit | 368,540 | 6,162 | 2.24 | % | 277,145 | 3,650 | 1.76 | % | 362,082 | 3,707 | 2.06 | % | 355,620 | 3,996 | 2.27 | % | ||||||||||||||||||||||||||||||||
Short-term borrowings | 17,967 | 334 | 2.49 | % | 52,893 | 764 | 1.93 | % | 35,390 | 67 | 0.38 | % | 24,372 | 292 | 2.42 | % | ||||||||||||||||||||||||||||||||
Other borrowings | 13,114 | 283 | 2.89 | % | 18,282 | 344 | 2.52 | % | 14,159 | 138 | 1.96 | % | 13,473 | 191 | 2.86 | % | ||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | 870,816 | 10,012 | 1.54 | % | 805,689 | 6,911 | 1.15 | % | 885,708 | 5,406 | 1.23 | % | 868,679 | 6,705 | 1.56 | % | ||||||||||||||||||||||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Noninterest-bearing demand deposits | 196,871 | 201,994 | 228,993 | 199,332 | ||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 4,369 | 2,904 | 5,024 | 4,870 | ||||||||||||||||||||||||||||||||||||||||||||
Stockholders' equity | 134,376 | 123,698 | 139,287 | 132,643 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 1,206,432 | $ | 1,134,285 | $ | 1,259,012 | $ | 1,205,524 | ||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 31,077 | $ | 29,987 | $ | 20,758 | $ | 20,499 | ||||||||||||||||||||||||||||||||||||||||
Interest rate spread (1) | 3.32 | % | 3.47 | % | 3.24 | % | 3.29 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest margin (2) | 3.69 | % | 3.77 | % | 3.56 | % | 3.67 | % | ||||||||||||||||||||||||||||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 131.57 | % | 134.16 | % | 134.92 | % | 131.76 | % |
(1) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. | ||
(2) Net interest margin represents net interest income as a percentage of average interest-earning assets. | ||
(3) Tax-equivalent adjustments to calculate the yield on tax-exempt securities and loans were | ||
(4) Includes dividends received on restricted stock. |
Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense, between the nine-monthsix-month periods ended SeptemberJune 30, 20192020 and 2018,2019, in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Company’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior period rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances.
2019 versus 2018 | 2020 versus 2019 | |||||||||||||||||||||||
Increase (decrease) due to | Increase (decrease) due to | |||||||||||||||||||||||
(Dollars in thousands) | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans receivable | $ | 2,170 | $ | 1,719 | $ | 3,889 | $ | 928 | $ | (1,763 | ) | $ | (835 | ) | ||||||||||
Investment securities | 116 | 35 | 151 | 158 | (43 | ) | 115 | |||||||||||||||||
Interest-earning deposits with other banks | 11 | 140 | 151 | 57 | (377 | ) | (320 | ) | ||||||||||||||||
Total interest-earning assets | 2,297 | 1,894 | 4,191 | 1,143 | (2,183 | ) | (1,040 | ) | ||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing demand deposits | 12 | 20 | 32 | 41 | 28 | 69 | ||||||||||||||||||
Money market deposits | 162 | 737 | 899 | (117 | ) | (262 | ) | (379 | ) | |||||||||||||||
Savings deposits | (67 | ) | 216 | 149 | (40 | ) | (382 | ) | (422 | ) | ||||||||||||||
Certificates of deposit | 1,204 | 1,308 | 2,512 | 73 | (362 | ) | (289 | ) | ||||||||||||||||
Short-term borrowings | (504 | ) | 74 | (430 | ) | 133 | (358 | ) | (225 | ) | ||||||||||||||
Other borrowings | (97 | ) | 36 | (61 | ) | 10 | (63 | ) | (53 | ) | ||||||||||||||
Total interest-bearing liabilities | 710 | 2,391 | 3,101 | 100 | (1,399 | ) | (1,299 | ) | ||||||||||||||||
Net interest income | $ | 1,587 | $ | (497 | ) | $ | 1,090 | $ | 1,043 | $ | (784 | ) | $ | 259 |
LIQUIDITYLIQUIDITY
Management's objective in managing liquidity is maintaining the ability to continue meeting the cash flow needs of banking customers, such as borrowings or deposit withdrawals, as well as the Company’s own financial commitments. The principal sources of liquidity are net income, loan payments, maturing and principal reductions on securities and sales of securities available for sale, federal funds sold and cash and deposits with banks. The Company introducedoffers a new line of retail deposit products during the second quarter of 2019. These products were created to more closely align with customer expectations while expanding the Company’s core funding base. Along with its liquid assets, the Company has additional sources of liquidity available to ensure that adequate funds are available as needed. These include, but are not limited to, the purchase of federal funds, the ability to borrow funds under line of credit agreements with correspondent banks and a borrowing agreement with the Federal Home Loan Bank of Cincinnati (the “FHLB”), and the adjustment of interest rates to obtain depositors. Management believes the Company has the capital adequacy, profitability and reputation to meet the current and projected needs of its customers.
At June 30, 2020, additional borrowing capacity at the FHLB was $383.3 million, as compared to $273.4 million at December 31, 2020. This increase was the result of collateralizing additional assets. For the ninesix months ended SeptemberJune 30, 2019,2020, wholesale funding decreased $52.2 million. The Company also has the option of borrowing from the Federal Reserve discount window with any assets not currently pledged elsewhere. Management believes that the combination of high levels of potentially liquid assets, cash flows from operations, and additional borrowing capacity provided Middlefield Bank with strong liquidity as of June 30, 2020. Management plans to continually monitor liquidity in future periods to look for signs of stress resulting from the COVID-19 pandemic.
For the six months ended June 30, 2020, the adjustments to reconcile net income to net cash from operating activities consisted mainly of depreciation and amortization of premises and equipment and software, the provision for loan losses, net amortization of securities, earnings on bank-owned life insurance, accretion of net deferred loan fees, and net changes in other assets and liabilities. For a more detailed illustration of sources and uses of cash, refer to the Condensed Consolidated Statements of Cash Flows.
INFLATION
Substantially all of the Company's assets and liabilities relate to banking activities and are monetary in nature. The consolidated financial statements and related financial data are presented in accordance with GAAP. GAAP currently requires the Company to measure the financial position and results of operations in terms of historical dollars, with the exception of securities available for sale, impaired loans and other real estate loans that are measured at fair value. Changes in the value of money due to rising inflation can cause purchasing power loss.
Management's opinion is that movements in interest rates affect the financial condition and results of operations to a greater degree than changes in the rate of inflation. It should be noted that interest rates and inflation do affect each other, but do not always move in correlation with each other. The Company's ability to match the interest sensitivity of its financial assets to the interest sensitivity of its liabilities in its asset/liability management may tend to minimize the effect of changes in interest rates on the Company's performance.
REGULATORY MATTERS
The Company is subject to the regulatory requirements of the Federal Reserve System as a bank holding company. The bank subsidiary is subject to regulations of the Federal Deposit Insurance Corporation (“FDIC”) and the Ohio Division of Financial Institutions.
The Federal Reserve Board and the FDIC have extensive authority to prevent and to remedy unsafe and unsound practices and violations of applicable laws and regulations by institutions and holding companies. The agencies may assess civil money penalties, issue cease-and-desist or removal orders, seek injunctions, and publicly disclose those actions. In addition, the Ohio Division of Financial Institutions possesses enforcement powers to address violations of Ohio banking law by Ohio-chartered banks.
REGULATORY CAPITAL REQUIREMENTS
Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank and thrift holding companies. The net unrealized gain or loss on available-for-sale securities is generally not included in computing regulatory capital. In order to avoid limitations on capital distributions, including dividend payments, Middlefield Bank and the Company must each hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The implementation of the capital ratio buffer began January 1, 2016 at the 0.625% level and has been fully phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1, 2019). Within the tabular presentation that follows is the adequately capitalized ratio plus capital conservation buffer that includes the fully phased-in 2.50% buffer.
Middlefield Bank and the Company met each of the well-capitalized ratio guidelines at SeptemberJune 30, 2019.2020. The following table indicates the capital ratios for Middlefield Bank and Company at SeptemberJune 30, 20192020 and December 31, 2018.2019.
As of June 30, 2020 | ||||||||||||||||||||||||||||||||
As of September 30, 2019 | Tier 1 Risk | Common | Total Risk | |||||||||||||||||||||||||||||
Leverage | Tier 1 Risk Based | Common Equity Tier 1 | Total Risk Based | Leverage | Based | Equity Tier 1 | Based | |||||||||||||||||||||||||
The Middlefield Banking Company | 9.97 | % | 11.68 | % | 11.68 | % | 12.37 | % | 9.64 | % | 11.13 | % | 11.13 | % | 12.04 | % | ||||||||||||||||
Middlefield Banc Corp. | 10.46 | % | 12.24 | % | 11.45 | % | 12.93 | % | 10.28 | % | 11.34 | % | 10.63 | % | 12.24 | % | ||||||||||||||||
Adequately capitalized ratio | 4.00 | % | 6.00 | % | 4.50 | % | 8.00 | % | 4.00 | % | 6.00 | % | 4.50 | % | 8.00 | % | ||||||||||||||||
Adequately capitalized ratio plus fully phased-in capital conservation buffer | 4.00 | % | 8.50 | % | 7.00 | % | 10.50 | % | 4.00 | % | 8.50 | % | 7.00 | % | 10.50 | % | ||||||||||||||||
Well-capitalized ratio (Bank only) | 5.00 | % | 8.00 | % | 6.50 | % | 10.00 | % | 5.00 | % | 8.00 | % | 6.50 | % | 10.00 | % |
As of December 31, 2019 | ||||||||||||||||
Tier 1 Risk | Common | Total Risk | ||||||||||||||
Leverage | Based | Equity Tier 1 | Based | |||||||||||||
The Middlefield Banking Company | 10.35 | % | 12.12 | % | 12.12 | % | 12.79 | % | ||||||||
Middlefield Banc Corp. | 10.23 | % | 12.56 | % | 11.77 | % | 13.23 | % | ||||||||
Adequately capitalized ratio | 4.00 | % | 6.00 | % | 4.50 | % | 8.00 | % | ||||||||
Adequately capitalized ratio plus fully phased-in capital conservation buffer | 4.00 | % | 8.50 | % | 7.00 | % | 10.50 | % | ||||||||
Well-capitalized ratio (Bank only) | 5.00 | % | 8.00 | % | 6.50 | % | 10.00 | % |
As of December 31, 2018 | ||||||||||||||||
Leverage | Tier 1 Risk Based | Common Equity Tier 1 | Total Risk Based | |||||||||||||
The Middlefield Banking Company | 9.60 | % | 11.09 | % | 11.09 | % | 11.83 | % | ||||||||
Middlefield Banc Corp. | 10.26 | % | 11.83 | % | 11.03 | % | 12.57 | % | ||||||||
Adequately capitalized ratio | 4.00 | % | 6.00 | % | 4.50 | % | 8.00 | % | ||||||||
Adequately capitalized ratio plus fully phased-in capital conservation buffer | 4.00 | % | 8.50 | % | 7.00 | % | 10.50 | % | ||||||||
Well-capitalized ratio (Bank only) | 5.00 | % | 8.00 | % | 6.50 | % | 10.00 | % |
While we believe that Middlefield Bank is well prepared to weather the COVID-19 global pandemic, Middlefield Bank’s regulatory capital ratios could be adversely affected by credit losses and other adverse consequences associated with the pandemic.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
ASSET AND LIABILITY MANAGEMENT
The primary objective of the Company’s asset and liability management function is to maximize the Company’s net interest income while simultaneously maintaining an acceptable level of interest rate risk given the Company’s operating environment, capital and liquidity requirements, performance objectives and overall business focus. The principal determinant of the exposure of the Company’s earnings to interest rate risk is the timing difference between the re-pricing or maturity of interest-earning assets and the re-pricing or maturity of interest-bearing liabilities. The Company’s asset and liability management policies are designed to decrease interest rate sensitivity primarily by shortening the maturities of interest-earning assets while at the same time extending the maturities of interest-bearing liabilities. The Board of Directors of the Company continues to believe in a strong asset/liability management process in order to insulate the Company from material and prolonged increases in interest rates.
The Company’s Board of Directors has established an Asset and Liability Management Committee consisting of outside directors and senior management. This committee, which meets quarterly, generally monitors various asset and liability management policies and strategies.
Interest Rate Sensitivity Simulation Analysis
The Company engages an external consultant to facilitate income simulation modeling on a quarterly basis. This modeling measures interest rate risk and sensitivity. The Asset and Liability Management Committee of the Company believes the various rate scenarios of the simulation modeling enable the Company to more accurately evaluate and manage the exposure of interest rate fluctuations on net interest income, the yield curve, various loan and mortgage-backed security prepayments, and deposit decay assumptions.
Earnings simulation modeling and assumptions about the timing and volatility of cash flows are critical in net portfolio equity valuation analysis. Particularly important are the assumptions driving mortgage prepayments and expected attrition of the core deposit portfolios. These assumptions are based on the Company’s historical experience and industry standards and are applied consistently across all rate risk measures.
The Company has established the following guidelines for assessing interest rate risk:
Net interest income simulation (“NII”) - Projected net interest income over the next twelve months will not be reduced by more than 10% given a gradual shift (i.e., over 12 months) in interest rates of up to 200 basis points (+ or -) and assuming no balance sheet growth.
Portfolio equity simulation - Portfolio equity is the net present value of the Company’s existing assets and liabilities. The Company uses an Economic Value of Equity (“EVE”) analysis which shows the estimated changes in portfolio equity taking certain long-term shock rates into consideration. Given a 200 basis point immediate and permanent increase in market interest rates, portfolio equity may not correspondingly decrease or increase by more than 20% of stockholders’ equity. Given a 100 basis point immediate and permanent decrease in market interest rates, portfolio equity may not correspondingly decrease or increase by more than 10% of stockholders’ equity.
The following table presents the simulated impact of a 200 basis point upward or 100 basis point downward shift of market interest rates on net interest income, and the change in portfolio equity. This analysis was done assuming the interest-earning asset and interest-bearing liability levels at SeptemberJune 30, 20192020 and December 31, 20182019 remained constant. The impact of the market rate movements was developed by simulating the effects of rates changing gradually over a one-year period from the SeptemberJune 30, 20192020 and December 31, 20182019 levels for net interest income and portfolio equity. The impact of market rate movements was developed by simulating the effects of an immediate and permanent change in rates at SeptemberJune 30, 20192020 and December 31, 20182019 for portfolio equity:
September 30, 2019 | December 31, 2018 | |||||||||||||||
Change in Rates | % Change in NII | % Change in EVE | % Change in NII | % Change in EVE | ||||||||||||
+200bp | 0.10 | % | 22.80 | % | (0.12 | %) | 12.40 | % | ||||||||
-100bp | (1.50 | %) | (26.90 | %) | (1.56 | %) | (17.20 | %) |
June 30, 2020 | December 31, 2019 | |||||||||||||||
Change in Rates | % Change in NII | % Change in EVE | % Change in NII | % Change in EVE | ||||||||||||
+200bp | (0.30 | )% | 4.90 | % | 0.20 | % | 6.20 | % | ||||||||
-100bp | 0.20 | % | (17.50 | )% | (0.60 | )% | (9.40 | )% |
CRITICAL ACCOUNTING ESTIMATES
The Company’s critical accounting estimates involving the more significant judgments and assumptions used in the preparation of the consolidated financial statements as of SeptemberJune 30, 2019,2020, have remained unchanged from December 31, 2018.2019.
Item 4. Controls and Procedures
Controls and Procedures Disclosure
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in internal control or in other factors that could significantly affect the Company’s internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 2), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course of performing their assigned functions.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company and MBC may be involved in litigation relating to claims arising out of their normal course of business. Currently, the Company and MBC are not involved in any legal proceedings the outcome of which, in management’s opinion, would be material to their financial condition or results of operations.
Item 1a. There are noRisk Factors
In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material changesupdates and additions to the risk factors set forthpreviously disclosed in Part I, Item 1A, “Risk Factors,” of the Company’sour Annual
Report on Form 10-K for the fiscal year ended December 31, 2018. Please refer2019 as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that section for disclosures regardingwe currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.
risks
The economic impact of the novel COVID-19 outbreak could adversely affect our financial condition and uncertaintiesresults of operations.
In December 2019, a novel coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, more than 32 million people have filed claims for unemployment. In response to the COVID-19 outbreak, the Federal Reserve Board has reduced the benchmark federal funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies have encouraged lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies encouraged financial institutions to prudently work with affected borrowers and issued guidance providing relief from reporting loan classifications due to modifications related to the Company’sCOVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:
● | demand for our products and services may decline, making it difficult to increase our assets and income; |
● | if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, nonperforming assets, and foreclosures may increase, resulting in increased loan charge-offs and additions to loan loss reserves and reduced income; |
● | collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; |
● | our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income; |
● | the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; |
● | as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; |
● | a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend; |
● | we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and |
● | Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs for bank failures. |
Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Details of repurchases of Company common stock during the third quarter of 2019 are included in the following table:None
2019 period In thousands, except per share data | Total shares purchased | Average price paid per share | Total shares purchased as part of a publicly announced program (a) | Maximum number of shares that may yet be purchased under the program | ||||||||||||
July 1-31 | - | $ | - | - | 132,253 | |||||||||||
August 1-31 | 31,669 | $ | 48.04 | 31,669 | 100,584 | |||||||||||
September 1-30 | - | $ | - | - | 100,584 | |||||||||||
Total | 31,669 | $ | 48.04 |
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Item 3. Defaults by the Company on its Senior Securities
None
Item 4. Mine Safety Disclosures
N/A
Item 5. Other information
None
Item 6. Exhibits
Exhibit list for Middlefield Banc Corp.’s Form 10-Q Quarterly Report for the Period Ended SeptemberJune 30, 20192020
Exhibit Number | Description |
| Location | |||
3.1 | Second Amended and Restated Articles of Incorporation of Middlefield Banc Corp., as amended |
| Incorporated by reference to Exhibit 3.1 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2005, filed on March 29, 2006 | |||
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3.2 |
| Incorporated by reference to Exhibit 3.2 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001 | ||||
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4 |
| Incorporated by reference to Exhibit 4 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001 | ||||
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4.1 |
| Incorporated by reference to Exhibit 4.1 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006 | ||||
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4.2 |
| Incorporated by reference to Exhibit 4.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006 | ||||
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4.3 |
| Incorporated by reference to Exhibit 4.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006 | ||||
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10.1.0* |
| Incorporated by reference to Middlefield Banc Corp.’s definitive proxy statement for the 2017 Annual Meeting of Shareholders, Appendix A, filed on April 4, 2017 | ||||
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10.1.1* |
| Incorporated by reference to Middlefield Banc Corp.’s definitive proxy statement for the 2008 Annual Meeting of Shareholders, Appendix A, filed on April 7, 2008 | ||||
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10.2* | Change in Control Agreement between Middlefield Banc Corp. and Thomas G. Caldwell |
| Incorporated by reference to Exhibit 10.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019 | |||
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10.3* | Change in Control Agreement between Middlefield Banc Corp. and James R. Heslop, II | Incorporated by reference to Exhibit 10.3 of Middlefield Banc Corp. |
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10.4 |
| Incorporated by reference to Exhibit 10.4 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001 | ||
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10.4.1* | Severance Agreement between Middlefield Banc Corp. and Teresa M. Hetrick, dated January 7, 2008 |
| Incorporated by reference to Exhibit 10.4.1 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008 | |
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10.4.2* | Change in Control Agreement between Middlefield Banc Corp. and Charles O. Moore |
| Incorporated by reference to Exhibit 10.4.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019 | |
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10.4.3* | Change in Control Agreement between Middlefield Banc Corp. and Donald L. Stacy |
| Incorporated by reference to Exhibit 10.4.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019 | |
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10.4.4* |
| Incorporated by reference to Exhibit 10.4.4 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008 | ||
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10.4.5* | Change in Control Agreement between Middlefield Banc Corp. and Michael L. Allen |
| Incorporated by reference to Exhibit 10.4.5 of Middlefield Banc Corp.’s Form 10-Q Current Report filed | |
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10.4.6* | Change in Control Agreement between Middlefield Banc Corp. and John D. Lane |
| Incorporated by reference to Exhibit 10.4.6 of Middlefield Banc Corp.’s Form 10-Q Current Report filed | |
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10.5 | [reserved] |
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10.6* |
| Incorporated by reference to Exhibit 10.6 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008 | ||
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10.7* |
| Incorporated by reference to Exhibit 10.7 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008 | ||
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| [reserved] |
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| [reserved] |
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| [reserved] |
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10.11* |
| Incorporated by reference to Exhibit 10.11 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2001, filed on March 28, 2002 |
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| [reserved] |
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10.13 | [reserved] |
10.14* | Executive Survivor Income Agreement (aka DBO agreement [death benefit only]) with Donald L. Stacy |
| Incorporated by reference to Exhibit 10.14 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004 | |
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10.15* |
| Incorporated by reference to Exhibit 10.15 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004 | ||
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10.16* |
| Incorporated by reference to Exhibit 10.16 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004 | ||
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10.17* |
| Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004 | ||
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10.18 * |
| Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2011, filed on March 20, 2012 | ||
10.19 | ||||
| [reserved] |
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10.20* |
| Incorporated by reference to Exhibit 10.20 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004 | ||
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10.21* |
| Incorporated by reference to Exhibit 10.21 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004 | ||
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10.22* |
| Incorporated by reference to Exhibit 10.22 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019 | ||
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| [reserved] |
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10.23** | Amended Executive Deferred Compensation Agreement with Thomas G. Caldwell |
| Incorporated by reference to Exhibit 10.23 of Middlefield Banc Corp.’s Annual Report on Form |
10.24** | Amended Executive Deferred Compensation Agreement with James R. Heslop, II |
| Incorporated by reference to Exhibit 10.24 of Middlefield Banc Corp.’s Annual Report on Form | |||
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10.25** | Amended Executive Deferred Compensation Agreement with Donald L. Stacy |
| Incorporated by reference to Exhibit 10.25 of Middlefield Banc Corp.’s Annual Report on Form | |||
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10.26** | Executive Variable Benefit Deferred Compensation Agreement with James R. Heslop, II |
| Incorporated by reference to Exhibit 10.26 of Middlefield Banc Corp.’s Annual Report on Form | |||
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10.27** | Executive Variable Benefit Deferred Compensation Agreement with Donald L. Stacy |
| Incorporated by reference to Exhibit 10.27 of Middlefield Banc Corp.’s Annual Report on Form | |||
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10.28** | Executive Deferred Compensation Agreement with Charles O. Moore |
| Incorporated by reference to Exhibit 10.28 of Middlefield Banc Corp.’s Annual Report on Form | |||
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10.29* | Form of conditional stock award under the 2007 Omnibus Equity Plan |
| Incorporated by reference to Exhibit 10.29 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 4, 2016 | |||
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10.29.1 | Form of conditional stock award under the 2017 Omnibus Equity Plan |
| Incorporated by reference to Exhibit 10.29 of Middlefield Banc Corp.’s Form 8-K Current Report filed on July 24, 2017 | |||
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10.30** | Executive Deferred Compensation Agreement with Michael L. Allen |
| Incorporated by reference to Exhibit 10.30 of Middlefield Banc Corp.’s Form 10-Q Current Report filed on May 7, 2019 | |||
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10.31** |
| Incorporated by reference to Exhibit 10.31 of Middlefield Banc Corp.’s Form 10-Q Current Report filed on May 7, 2019 | ||||
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31.1 |
| filed herewith | ||||
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31.2 |
| filed herewith | ||||
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32 |
| filed herewith | ||||
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99.1 | Incorporated by reference to Exhibit 99.1 of Middlefield Banc Corp. |
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101.INS*** | Inline XBRL Instance |
| furnished herewith | |
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101.SCH*** | Inline XBRL Taxonomy Extension Schema |
| furnished herewith | |
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101.CAL*** | Inline XBRL Taxonomy Extension Calculation |
| furnished herewith | |
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101.DEF*** | Inline XBRL Taxonomy Extension Definition |
| furnished herewith | |
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101.LAB*** | Inline XBRL Taxonomy Extension Labels |
| furnished herewith | |
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101.PRE*** | Inline XBRL Taxonomy Extension Presentation |
| furnished herewith | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* management contract or compensatory plan or arrangement
** management contract or compensatory plan or arrangement, a schedule has been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be provided on a supplemental basis to the Securities and Exchange Commission upon request
*** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned and hereunto duly authorized.
MIDDLEFIELD BANC CORP. | ||
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Date: August 4, 2020 | By: /s/Thomas G. Caldwell
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Thomas G. Caldwell | ||
President and Chief Executive Officer |
Date: August 4, 2020 | By: /s/Donald L. Stacy | |
Donald L. Stacy | ||
Principal Financial and Accounting Officer |
50