UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 001-36613
Middlefield Banc Corp.
(Exact Name of Registrant as Specified in its Charter)
Ohio
34-1585111
State or Other Jurisdiction of
I.R.S. Employer Identification No.
Incorporation or Organization
15985 East High Street, Middlefield, Ohio
44062-0035
Address of Principal Executive Offices
Zip Code
440-632-1666
Registrant’s Telephone Number, Including Area Code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer X
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No X
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class: Common Stock, without par value
Outstanding at May 9, 2018: 3,224,499
MIDDLEFIELD BANC CORP.
INDEX
Part I – Financial Information
Item 1.
3
4
5
6
7
9
Item 2.
28
Item 3.
35
Item 4.
36
Part II – Other Information
37
Item 1A.
Item 5.
Item 6.
Signatures
42
Exhibit 31.1
Exhibit 31.2
Exhibit 32
CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands, except share data)
(Unaudited)
2018
2017
ASSETS
Cash and cash equivalents
Equity securities, at fair value
Investment securities available for sale, at fair value
Loans held for sale
Loans
Less allowance for loan and lease losses
Net loans
Premises and equipment, net
Goodwill
Core deposit intangibles
Bank-owned life insurance
Other real estate owned
Accrued interest receivable and other assets
TOTAL ASSETS
LIABILITIES
Deposits:
Noninterest-bearing demand
Interest-bearing demand
Money market
Savings
Time
Total deposits
Short-term borrowings
Other borrowings
Accrued interest payable and other liabilities
TOTAL LIABILITIES
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized, 3,609,149 and 3,603,881 shares issued; 3,222,984 and 3,217,716 shares outstanding
Retained earnings
Accumulated other comprehensive (loss) income
Treasury stock, at cost; 386,165 shares
TOTAL STOCKHOLDERS' EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
See accompanying notes to unaudited consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME
(Dollar amounts in thousands, except per share data)
Three Months Ended
March 31,
INTEREST AND DIVIDEND INCOME
Interest and fees on loans
Interest-bearing deposits in other institutions
Federal funds sold
Investment securities:
Taxable interest
Tax-exempt interest
Dividends on stock
Total interest and dividend income
INTEREST EXPENSE
Deposits
Total interest expense
NET INTEREST INCOME
Provision for loan losses
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
NONINTEREST INCOME
Service charges on deposit accounts
Investment securities gains on sale, net
Gain on equity securities
Earnings on bank-owned life insurance
Gain on sale of loans
Other income
Total noninterest income
NONINTEREST EXPENSE
Salaries and employee benefits
Occupancy expense
Equipment expense
Data processing costs
Ohio state franchise tax
Federal deposit insurance expense
Professional fees
Advertising expense
Core deposit intangible amortization
Merger expense
Other expense
Total noninterest expense
Income before income taxes
Income taxes
NET INCOME
EARNINGS PER SHARE
Basic
Diluted
DIVIDENDS DECLARED PER SHARE
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
Net income
Other comprehensive loss:
Net unrealized holding (loss) gain on available-for-sale investment securities
Tax effect
Reclassification adjustment for investment securities gains included in net income
Total other comprehensive loss
Comprehensive income
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
(Dollar amounts in thousands, except share and per share data)
Accumulated
Other
Total
Common
Retained
Comprehensive
Treasury
Stockholders'
Stock
Earnings
Income (Loss)
Equity
Balance, December 31, 2017
Change in accounting principle for adoption of ASU 2016-01
Change in accounting principle for adoption of ASU 2018-02
Other comprehensive loss
Dividend reinvestment and purchase plan (3,278 shares)
Stock-based compensation expense (1,990 shares)
Cash dividends ($0.33 per share)
Balance, March 31, 2018
CONSOLIDATED STATEMENT OF CASH FLOWS
OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment, net
Amortization of premium and discount on investment securities, net
Accretion of deferred loan fees, net
Amortization of core deposit intangibles
Stock-based compensation expense
Origination of loans held for sale
Proceeds from sale of loans
Origination of student loans held for sale
Proceeds from sale of student loans
Gain on sale of student loans
Deferred income tax
Net gain loss on other real estate owned
Decrease (increase) in accrued interest receivable
Decrease in accrued interest payable
Other, net
Net cash provided by (used in) operating activities
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from repayments and maturities
Increase in loans, net
Proceeds from the sale of other real estate owned
Purchase of bank-owned life insurance
Purchase of premises and equipment
Purchase of restricted stock
Redemption of restricted stock
Acquisition, net of cash paid
Net cash used in investing activities
FINANCING ACTIVITIES
Net increase in deposits
(Decrease) increase in short-term borrowings, net
Repayment of other borrowings
Proceeds from other borrowings
Proceeds from common stock issued
Proceeds from dividend reinvestment and purchase plan
Cash dividends
Net cash (used in) provided by financing activities
(Decrease) increase in cash and cash equivalents
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS AT END OF PERIOD
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings
Noncash investing transactions:
Transfers from loans to other real estate owned
Common stock issued in business acquisition
Transfer of equity securities from investment securities available for sale, at fair value
Acquisition of Liberty Bank
Noncash assets acquired
Accrued interest receivable
Core deposit intangible
Other assets
Liabilities assumed
Time deposits
Deposits other than time deposits
Accrued interest payable
Deferred taxes
Other liabilities
Liberty stock acquired in business combination
Net noncash assets acquired
Cash and cash equivalents acquired, net
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. All significant inter-company items have been eliminated.
The accompanying unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles and the instructions for Form 10-Q and Article 10 of Regulation S-X. In management’s opinion, the financial statements include all adjustments, consisting of normal recurring adjustments, that the Company considers necessary to fairly state the Company’s financial position and the results of operations and cash flows. The consolidated balance sheet at December 31, 2017, has been derived from the audited financial statements at that date but does not include all of the necessary informational disclosures and footnotes as required by U.S. generally accepted accounting principles. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included with the Company’s Form 10-K for the year ended December 31, 2017. The results of the Company’s operations for any interim period are not necessarily indicative for the results of the Company’s operations for any other interim period or for a full fiscal year.
Recent Accounting Pronouncements –
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact on the financial statements. Based on the Company’s preliminary analysis of its current portfolio, the impact to the Company’s balance sheet is estimated to result in less than a 1 percent increase in assets and liabilities. The Company also anticipates additional disclosures to be provided at adoption.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (“CECL”), which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. Management is currently evaluating the impact of the adoption of this guidance on the Company’s consolidated financial statements. Management will oversee the implementation of CECL and is currently in the process of implementing a software solution to assist in the adoption of this ASU. Management plans to run the current incurred loss model and the CECL model concurrently for 12 months prior to the adoption of this guidance on January 1, 2020.
In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10), to clarify certain aspects of the guidance issued in ASU 2016-01. (1) An entity measuring an equity security using the measurement alternative may change its measurement approach to a fair value method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer. Once an entity makes this election, the entity should measure all future purchases of identical or similar investments of the same issuer using a fair value method in accordance with Topic 820. (2) Adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place. (3) Re-measuring the entire value of forward contracts and purchased options is required when observable transactions occur on the underlying equity securities. (4) When the fair value option is elected for a financial liability, the guidance in paragraph 825-10- 45-5 should be applied, regardless of whether the fair value option was elected under either Subtopic 815-15, Derivatives and Hedging—Embedded Derivatives, or 825-10, Financial Instruments—Overall. (5) Financial liabilities for which the fair value option is elected, the amount of change in fair value that relates to the instrument specific credit risk should first be measured in the currency of denomination when presented separately from the total change in fair value of the financial liability. Then, both components of the change in the fair value of the liability should be re-measured into the functional currency of the reporting entity using end-of-period spot rates. (6) The prospective transition approach for equity securities without a readily determinable fair value in the amendments in Update 2016-01 is meant only for instances in which the measurement alternative is applied. An insurance entity subject to the guidance in Topic 944, Financial Services— Insurance, should apply a prospective transition method when applying the amendments related to equity securities without readily determinable fair values. An insurance entity should apply the selected prospective transition method consistently to the entity’s entire population of equity securities for which the measurement alternative is elected. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in Update 2016-01. For all other entities, the effective date is the same as the effective date in Update 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update 2016-01. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
ASU 2018-04, Investments – Debt Securities (Topic 320) and Regulated Operations (Topic 980) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273, ASU 2018-04 supersedes various SEC paragraphs and adds an SEC paragraph pursuant to the issuance of Staff Accounting Bulletin No. 117.
NOTE 2 – REVENUE RECOGNITION
Effective January 1, 2017, the Company adopted ASU 2014-09 Revenue from Contracts with Customers-Topic 606 and all subsequent ASUs that modified ASC 606. The implementation of the new standard had no material impact to the measurement or recognition of revenue of prior periods and did not require any cumulative effect adjustment for adoption.
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. As a result, no changes were made during the period related to these sources of revenue, which cumulatively comprise 93.4% of the total revenue of the Company.
The main types of noninterest income within the scope of the standard are as follows:
Service charges on deposit accounts – The Company has contracts with its deposit customers where fees are charged if the account balance falls below predetermined levels defined as compensating balances. These agreements can be cancelled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized on a monthly basis as the Company has an unconditional right to the fee consideration. The Company also has transaction fees related to specific transactions or activities resulting from a customer request or activity 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 – Gains and losses are recognized at the completion of the property sale when the buyer obtains control of the real estate and all of the performance obligations of the Company have been satisfied. Evidence of the buyer obtaining control of the asset include transfer of the property title, physical possession of the asset, and the buyer obtaining control of the risks and rewards related to the asset. In situations where the Company agrees to provide financing to facilitate the sale, additional analysis is performed to ensure that the contract for sale identifies the buyer and seller, the asset to be transferred, payment terms, and that the contract has a true commercial substance and that collection of amounts due from the buyer is reasonable. In situations where financing terms are not reflective of current market terms, the transaction price is discounted impacting the gain/loss and the carrying value of the asset.
The following table depicts the disaggregation of revenue derived from contracts with customers to depict the nature, amount, timing, and uncertainty of revenue and cash flows for the three months ended March 31:
Noninterest Income
Service charges on deposit accounts:
Overdraft fees
ATM banking fees
Service charges and other fees
Investment securities gains on sale, net (a)
Equity securities, unrealized gains (a)
Earnings on bank-owned life insurance (a)
Gain on sale of loans (a)
(a)
Not within scope of ASC 606.
NOTE 3 - STOCK-BASED COMPENSATION
The Company had no unvested stock options outstanding as of March 31, 2018 and 2017.
Stock option activity during the three months ended March 31 is as follows:
Weighted-
average
Exercise Price
Shares
Per Share
Outstanding, January 1, 2018
Exercised
Outstanding, March 31, 2018
Exercisable, March 31, 2018
The following table presents the activity during the three months ended March 31, 2018 related to awards of restricted stock:
Grant Date Fair
Value Per Share
Nonvested at January 1, 2018
Granted
Forfeited
Nonvested at March 31, 2018
Expected to vest at March 31, 2018
Share-based compensation expense of $55,000 and $48,000 was recognized for the three-month periods ended March 31, 2018 and 2017, respectively.
The expected remaining compensation expense that will be recognized on restricted stock totals $199,000, of which $127,000 will be recognized in 2018 and $72,000 will be recognized in 2019.
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 to average shares outstanding.
The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.
For the Three
Months Ended
Weighted-average common shares outstanding
Average treasury stock shares
Weighted-average common shares and common stock equivalents used to calculate basic earnings per share
Additional common stock equivalents (stock options and restricted stock) used to calculate diluted earnings per share
Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share
Options to purchase 18,250 shares of common stock, at prices ranging from $17.55 to $23.00, were outstanding during the three months ended March 31, 2018. Also outstanding were 14,601 shares of restricted stock. None of the outstanding options or restricted stock were anti-dilutive.
Options to purchase 27,762 shares of common stock, at prices ranging from $17.55 to $37.48, were outstanding during the three months ended March 31, 2017. Also outstanding were 15,800 shares of restricted stock. None of the outstanding options or restricted stock were anti-dilutive.
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 established a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following levels:
Level I:
Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II:
Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair valued using other financial instruments, the parameters of which can be directly observed.
Level III:
Assets and liabilities that have little to no pricing observability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
The following tables present the assets measured on a recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
March 31, 2018
Level I
Level II
Level III
Assets measured on a recurring basis:
U.S. government agency securities
Obligations of states and political subdivisions
Mortgage-backed securities in government-sponsored entities
Total debt securities
Equity securities in financial institutions
December 31, 2017
Investment Securities Available for Sale - The Company obtains fair values from an independent pricing service which represent quoted prices for similar assets, fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level II).
Equity Securities - Equity securities that are traded on a national securities exchange are valued at their last reported sales price as of the measurement date. Equity securities traded in the over-the-counter (“OTC”) markets and listed securities for which no sale was reported on that date are generally valued at their last reported “bid” price if held long, and last reported “ask” price if sold short. To the extent equity securities are actively traded and valuation adjustments are not applied, they are categorized in Level I of the fair value hierarchy. Equity securities traded on inactive markets or valued by reference to similar instruments are generally categorized in Level II of the fair value hierarchy. Equity securities are carried at fair value through net income at March 31, 2018.
Impaired Loans – The Company has measured impairment on collateral-dependent impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral-dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the following table as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the following table as it is not currently being carried at its fair value. The fair values in the following table exclude estimated selling costs of $573,000 at March 31, 2018.
Other Real Estate Owned (OREO) – OREO is carried at the lower of cost or fair value, which is measured at the date of foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan is not considered to be carried at fair value, and is therefore not included in the following table. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. The fair value of OREO is based on the appraised value of the property, which is generally unadjusted by management and is based on comparable sales for similar properties in the same geographic region as the subject property, and is included in the following table as a Level II measurement. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the loans are categorized in the following table as Level III measurement since these adjustments are considered to be unobservable inputs. Income and expenses from operations and further declines in the fair value of the collateral subsequent to foreclosure are included in net expenses from OREO.
The following tables present the assets measured on a nonrecurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Collateral-dependent impaired loans are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. A new cost basis is established at the time a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken to the property’s value subsequent to the initial measurement.
Assets measured on a non-recurring basis:
Impaired loans
The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Company uses Level III inputs to determine fair value:
Quantitative Information about Level III Fair Value Measurements
Fair Value Estimate
Appraisal of collateral (1)
Appraisal adjustments (2)
(1)
Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various level III inputs which are not identifiable, less any associated allowance.
(2)
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.
The estimated fair value of the Company’s financial instruments not recorded at fair value on a recurring basis is as follows:
Carrying
Value
Fair Value
Financial assets:
Cash and cash equivalents (1)
Bank-owned life insurance (1)
Federal Home Loan Bank stock (1)
Accrued interest receivable (1)
Financial liabilities:
Short-term borrowings (1)
Accrued interest payable (1)
(1) This financial instrument is carried at cost at March 31, 2018, which approximates the fair value of the instrument.
Federal Home Loan Bank stock
NOTE 6 – ACCUMULATED OTHER COMPREHENSIVE INCOME
The following tables present the changes in accumulated other comprehensive income by component net of tax for the three months ended March 31, 2018 and 2017, respectively:
Unrealized gains on
available-for-sale securities
Balance as of December 31, 2017
Other comprehensive (loss) before reclassification
Change in accounting principle, ASC 2016-01 (b)
Change in accounting principle, ASC 2018-02 (b)
Period change
Balance at March 31, 2018
Balance as of December 31, 2016
Other comprehensive income before reclassification
Amount reclassified from accumulated other comprehensive income
Balance at March 31, 2017
All amounts are net of tax. Amounts in parentheses indicate debits to accumulated other comprehensive income.
(b)
Reclassifications are the result of the adoption of ASUs 2016-01 and 2018-02 effective for the Company beginning January 1, 2018. The reclassifications are presented within the Consolidated Statement of Changes in Stockholders’ Equity for the affected transitional periods.
The following tables present significant amounts reclassified from or to each component of accumulated other comprehensive income:
Affected Line Item in
the Statement Where
(Dollars in thousands)
Net Income is
Details about other comprehensive income
March 31, 2017
Presented
For unrealized gains on available-for-sale securities, amounts in parentheses indicate expenses and other amounts indicate income.
NOTE 7 – INVESTMENT AND EQUITY SECURITIES
The amortized cost and fair values of investment securities are as follows:
Gross
Amortized
Unrealized
Fair
Cost
Gains
Losses
Obligations of states and political subdivisions:
Taxable
Tax-exempt
The following table presents the carrying amount of the Company’s equity investments without readily determinable fair values the annual and cumulative amount of impairment, and the annual and cumulative amount of observable price changes for orderly transactions for the identical or a similar investment of the same issuer:
Year-to-Date
Life-to-Date
Amortized cost
Impairment
Observable price changes
Carrying value
The following table presents the net gains and losses on the Company’s equity investments recognized in earnings during the three months ended March 31, 2018, and the portion of unrealized gains and losses for the period that relates to equity investments held at March 31, 2018.
Net gains recognized in equity securities during the period
Less: Net gains realized on the sale of equity securities during the period
Unrealized gains recognized in equity securities held at reporting date
The amortized cost and fair value of debt securities at March 31, 2018, 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.
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Proceeds from the sales of investment securities and the gross realized gains and losses are as follows:
For the Three Months
Proceeds from sales
Gross realized gains
Gross realized losses
(1) Prior to the acquisition of Liberty Bank, N.A., the Company had a previously held equity interest in Liberty which was re-measured at fair value on the acquisition date and resulted in a gain of $488,000, which was recorded in Equity Securities, Unrealized Gains on the consolidated Income Statement for the three months ended March 31, 2017.
Investment securities with an approximate carrying value of $61.7 million and $57.9 million at March 31, 2018 and December 31, 2017, respectively, were pledged to secure deposits and other purposes as required by law.
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
Less than Twelve Months
Twelve Months or Greater
There were 82 securities considered temporarily impaired at March 31, 2018.
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 100% of the total available-for-sale portfolio as of March 31, 2018 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government and the lack of prolonged unrealized loss positions within the obligations of state and political subdivisions security portfolio. The Company considers the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:
•
The length of time and the extent to which the fair value has been less than the amortized cost basis.
Changes in the near-term prospects of the underlying collateral of a security such as changes in default rates, loss severity given default and significant changes in prepayment assumptions;
The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and,
Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation and government actions affecting the issuer’s industry and actions taken by the issuer to deal with the present economic climate.
For the three months ended March 31, 2018 and 2017, there were no available-for-sale debt securities with an unrealized loss that suffered OTTI. Management does not believe any individual unrealized loss as of March 31, 2018 or December 31, 2017 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):
December 31,
Commercial and industrial
Real estate - construction
Real estate - mortgage:
Residential
Commercial
Consumer installment
Less: Allowance for loan and lease losses
The amounts above include deferred loan origination costs of $1.5 million at both March 31, 2018 and December 31, 2017.
The Company’s primary business activity is with customers located within its local Northeastern Ohio trade area, eastern Geauga County, and contiguous counties to the north, east, and south. The Company also serves the central Ohio market with offices in Dublin, Sunbury and Westerville, Ohio. Commercial, residential, consumer, and agricultural loans are granted. Although the Company has a diversified loan portfolio, loans outstanding to individuals and businesses are dependent upon the local economic conditions in the Company’s immediate trade area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances net of the allowance for loan and lease losses. Interest income is recognized on the accrual method. The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of interest is doubtful. Interest received on nonaccrual loans is recorded as income or applied against principal according to management’s judgment as to the collectability of such principal.
Loan origination fees and certain direct loan origination costs are 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
Real estate- construction
Loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total loans
Real estate- Mortgage
Allowance for loan and lease losses:
Ending allowance balance attributable to loans:
Total ending allowance balance
The Company’s loan portfolio is segmented to a level that allows management to monitor risk and performance. The portfolio is segmented into Commercial and Industrial (“C&I”), Real Estate Construction, Real Estate - Mortgage which is further segmented into Residential and Commercial real estate (“CRE”), and Consumer Installment Loans. The C&I loan segment consists of loans made for the purpose of financing the activities of commercial customers. The residential mortgage loan segment consists of loans made for the purpose of financing the activities of residential homeowners. The commercial mortgage loan segment consists of loans made for the purpose of financing the activities of commercial real estate owners and operators. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts. The increases in the allowance for loan loss for C&I, Residential, CRE, and Consumer Installment loan portfolios were partially offset by a decrease in the allowance for the Real Estate Construction portfolio.
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, with management primarily utilizing the fair value of collateral method. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.
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):
Impaired Loans
Unpaid
Recorded
Related
Investment
Allowance
With no related allowance recorded:
With an allowance recorded:
Total:
The tables above include troubled debt restructuring totaling $9.1 million at March 31, 2018 and $5.4 million as of December 31, 2017.
The following tables present the average balance and interest income by class, recognized on impaired loans (in thousands):
For the Three Months Ended
Average
Interest
Income
Recognized
Management uses a nine-point internal risk-rating system to monitor the credit quality of the overall loan portfolio. The first five categories are considered not criticized and are aggregated as Pass rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan-rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death, occurs to raise awareness of a possible credit event. The Company’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis with the Chief Credit Officer ultimately responsible for accurate and timely risk ratings. The Credit Department performs an annual review of all commercial relationships with loan balances of $1,000,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Company engages an external consultant to conduct loan reviews on a semiannual basis. Generally, the external consultant reviews commercial relationships greater than $250,000 and/or criticized relationships greater than $125,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.
The primary risk of commercial and industrial loans is the current economic uncertainties. C&I loans are, by nature, secured by less substantial collateral than real estate-secured loans. The primary risk of real estate construction loans is potential delays and disputes during the completion process. The primary risk of residential real estate loans is current economic uncertainties along with the slow recovery in the housing market. The primary risk of commercial real estate loans is loss of income of the owner or occupier of the property and the inability of the market to sustain rent levels. Consumer installment loans historically have experienced higher delinquency rates. Consumer installments are typically secured by less substantial collateral than other types of credits.
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
Pass
Mention
Substandard
Doubtful
The increase in the amount classified as special mention for commercial and industrial loans for the three-month period ended March 31, 2018 is due to a large relationship of $5.8 million being reclassified as a troubled debt restructuring (TDR).
Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due.
Nonperforming assets include nonaccrual loans, TDRs, loans 90 days or more past due, EMORECO assets, other real estate owned, and repossessed assets. A loan is classified as nonaccrual when, in the opinion of management, there are serious doubts about collectability of interest and principal. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of principal and interest is doubtful. Payments received on nonaccrual loans are applied against the principal balance.
The following tables present the classes of the loan portfolio summarized by the aging categories of performing loans (in thousands):
30-59 Days
60-89 Days
90 Days+
Current
Past Due
The following tables present the classes of the loan portfolio summarized by nonaccrual loans (in thousands):
90+ Days Past
Nonaccrual
Interest income that would have been recorded had these loans not been placed on nonaccrual status was $369,000 for the three months ended March 31, 2018 and $437,000 for the year ended December 31, 2017.
An allowance for loan and lease losses (“ALLL”) is maintained to absorb losses from the loan portfolio. The ALLL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of nonperforming loans.
The Company’s methodology for determining the ALLL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statements on the Allowance for Loan and Lease Losses and other bank regulatory guidance. The total of the two components represents the Company’s ALLL. Management also performs impairment analyses on TDRs, which may result in specific reserves.
Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.
The classes described above, which are based on the purpose code assigned to each loan, provide the starting point for the ALLL analysis. Management tracks the historical net charge-off activity at the purpose code level. 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/or geographic standpoint.
Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALLL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALLL.
The following tables summarize the primary segments of the loan portfolio (in thousands):
and industrial
Real estate-
construction
residential
mortgage
commercial
Consumer
installment
ALLL balance at December 31, 2017
Charge-offs
Recoveries
Provision
ALLL balance at March 31, 2018
Real estate- residential mortgage
Real estate- commercial mortgage
ALLL balance at December 31, 2016
ALLL balance at March 31, 2017
The negative provision allocated to real estate construction loans in the amount of $238,000 for the three-month period ended March 31, 2018 is due to the historical loss rate for the real estate construction pool changing to -0.127% from 0.775% for this time period in the prior year.
The negative provision allocated to residential real estate loans in the amount of $234,000 for the three-month period ended March 31, 2017 is due to the payoff of a large residential credit during that period.
The following tables summarize troubled debt restructurings (in thousands):
Number of Contracts
Pre-Modification
Post-Modification
Term
Residential real estate
There were no subsequent defaults of troubled debt restructurings for the three months ended March 31, 2018. One residential real estate contract with a recorded investment of $33,000 had subsequently defaulted for the three-month period ended March 31, 2017.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides further detail to the financial condition and results of operations of the Company. The MD&A should be read in conjunction with the notes and financial statements presented in this report.
The information contained or incorporated by reference in this current report on Form 10-Q contain 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 viral infrastructure. All forward-looking statements included in this current 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 March 31, 2018 quarter at $1.1 billion, an increase of $428,000 from December 31, 2017. For the same time period, cash and cash equivalents decreased $6.6 million, or 16.6% while net loans increased $8.8 million, or 1.0%. Total liabilities increased $139,000, while stockholders’ equity increased $289,000, or 0.2%.
Cash and cash equivalents. Cash and cash equivalents decreased $6.6 million or 16.6% to $33.3 million at March 31, 2018 from $39.9 million at December 31, 2017. Deposits from customers into savings and checking accounts, loan and securities repayments and proceeds from borrowed funds typically increase these accounts. Decreases result from customer withdrawals, new loan originations, purchases of investment securities and repayments of borrowed funds.
Investment securities. Investment securities available for sale on March 31, 2018 totaled $91.3 million, a decrease of $4.0 million or 4.2% from $95.3 million at December 31, 2017. A portion of this decrease is the classification of equity securities in the amount of $643,000 on the Consolidated Balance Sheet at March 31, 2018. During this period the Company recorded repayments, calls, and maturities of $1.4 million. There were no securities purchases or sales during this period. The Company recorded $18,000 in equity securities, unrealized gains as of March 31, 2018 on the Company’s consolidated statement of income and consolidated statement of cash flows. This gain is the result of a re-measurement of fair value of the equity securities held during this three-month period.
Loans receivable. The loans receivable category consists primarily of single-family mortgage loans used to purchase or refinance personal residences located within the Company’s market area, commercial and industrial loans and commercial real estate loans used to finance properties that are used in the borrowers’ businesses or to finance investor-owned rental properties, and to a lesser extent, construction and consumer loans. Net loans receivable increased $8.8 million or 1.0% to $924.8 million as of March 31, 2018 from $916.0 million at December 31, 2017 due to strategic growth goals. Included in the total increase for loans receivable were increases in the commercial real estate and construction portfolios or $10.8 million, or 2.5%, and $1.7 million, or 3.6%, respectively. Also included in the total increase to loans receivable were decreases in the commercial and industrial, residential, and consumer installment portfolios of $1.5 million, or 1.5%, $1.3 million, or 0.4%, and $490,000 or 2.6%, respectively.
The Company’s Mortgage Banking operation generates loans for sale to FHLMC. Loans held for sale on March 31, 2018 totaled $937,000, an increase of $474,000, or 102.4%, from December 31, 2017. This increase is the result of greater funded loans being held in the warehouse at quarter end.
Student Lending. Through its merger with Liberty Bank, N.A., on January 12, 2017, MBC acquired Liberty’s private student loan business. These loans provided qualified borrowers with the ability to finance the costs associated with obtaining a degree and to refinance their existing student loans. Pursuant to loan origination agreements with student loan originating and servicing companies, MBC made student loans to qualified students and sold those loans, without recourse and with servicing released, into the secondary market. Gains on the sales of these loans as well as interest income earned while held by MBC are included in the Consolidated Statement of Income. The lending program changed near the end of 2017, requiring the Company to expand to “in-school” lending and extending the Company’s carrying period, both of which increased the risk profile. The Company therefore has ceased the origination of new student loans.
Allowance for Loan and Lease Losses and Asset Quality. The allowance for loan and lease losses increased $361,000 or 5.0% to $7.6 million at March 31, 2018 from $7.2 million at December 31, 2017. For the three months ended March 31, 2018, net loan recoveries totaled $151,000, or 0.06% of average loans, compared to net charge-offs of $43,000, or 0.02%, for the same period in 2017. To maintain the allowance for loan and lease losses, the Company recorded a provision for loan loss of $210,000 in the three-month period ending March 31, 2018.
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 March 31, 2018. Based on the variables involved and management’s judgments about uncertain outcomes, the determination of the allowance for loan and lease losses is considered a critical accounting policy.
Nonperforming assets. Nonperforming assets includes nonaccrual loans, troubled debt restructurings (TDRs), loans 90 days or more past due, EMORECO assets, other real estate, and repossessed assets. Real estate owned is written down to fair value at its initial recording and continually monitored for changes in fair value. A loan is classified as nonaccrual when, in the opinion of management, there are serious doubts about collectability of interest and principal. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of principal and interest is doubtful. Payments received on nonaccrual loans are applied against principal until doubt about collectability ceases. TDRs are those loans which the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. The Company has 47 TDRs accruing interest with a balance of $10.6 million as of March 31, 2018. A TDR that yields market interest rate at the time of restructuring and is in compliance with its modified terms is no longer reported as TDR in calendar years after the year in which the restructuring took place. To be in compliance with its modified terms, a loan that is a TDR must not be in nonaccrual status and must be current or less than 30 days past due on its contractual principal and interest payments under the modified repayment terms. Nonperforming loans secured by real estate totaled $11.9 million as of March 31, 2018, an increase of $1.8 million from $10.1 million at December 31, 2017.
Asset Quality History
3/31/2018
12/31/2017
9/30/2017
6/30/2017
3/31/2017
Nonperforming loans
Nonperforming assets
Allowance for loan and lease losses
Ratios
Nonperforming loans to total loans
Nonperforming assets to total assets
Allowance for loan and lease losses to total loans
Allowance for loan and lease losses to nonperforming loans
A major factor in determining the appropriateness of the allowance for loan and lease losses is the type of collateral which secures the loans. Of the total nonperforming loans at March 31, 2018, 66.7% were secured by real estate. Although this does not insure against all losses, the real estate typically provides for at least partial recovery, even in a distressed-sale and declining-value environment. The Company’s objective is to minimize the future loss exposure of the Company.
The allowance for loan and lease losses to total loans ratio increased from 0.78% as of December 31, 2017 to 0.81% as of March 31, 2018. This increase is primarily due to the increase in net recoveries, along with an increase in nonperforming loans (classified loans).
Deposits. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which are a significant source of funds, totaling $944.6 million or 96.2% of the Company’s total funding sources at March 31, 2018. Total deposits increased $66.4 million or 7.6% at March 31, 2018 from $878.2 million at December 31, 2017. The total increase in deposits is primarily related to increases in time, savings, interest-bearing demand, and noninterest-bearing demand deposits of $39.5 million or 16.3%, $13.3 million or 6.4%, $12.7 million or 15.1%, and $1.8 million or 0.9%, respectively. These increases were partially offset by a decrease in money market deposits of $918,000 or 0.6%, at March 31, 2018.
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, federal funds purchased, and repurchase agreements. Short-term borrowings decreased $56.0 million, or 75.0%, to $18.7 million as of March 31, 2018. Other borrowings decreased $10.0 million, or 34.5%, to $19.0 million as of March 31, 2018 from $29.1 million as of December 31, 2017. This decrease is due to the reduction of FHLB borrowings during the three-month period ending March 31, 2018, which resulted from increases in funds from deposit accounts, which allowed the company to repay a significant portion of the outstanding short-term debt.
Stockholders’ equity. Stockholders’ equity increased $289,000, or 0.2%, to $120.2 million at March 31, 2018 from $119.9 million at December 31, 2017. This growth was the result of increases in retained earnings and common stock of $1.5 million and $257,000, respectively. The change in retained earnings is due to the year-to-date net income offset by dividends paid and the change in common stock is due to regular stock grants and dividend reinvestment and purchase plan distributions. The increase in stockholders’ equity at March 31, 2018 is partially offset by a decrease in accumulated other comprehensive income (“AOCI”) of $1.5 million due to fair value adjustments of available-for-sale securities, and the adoption of accounting standard updates made effective for periods beginning after December 15, 2017, which resulted in a net reclassification of $46,000 between retained earnings and AOCI.
RESULTS OF OPERATIONS
General. Net income for the three months ended March 31, 2018, was $2.6 million, a $505,000, or 24.0% increase from the amount earned during the same period in 2017. Diluted earnings per share for the quarter increased to $0.80, compared to $0.78 from the same period in 2017.
The Company’s annualized return on average assets (ROA) and return on average equity (ROE) for the quarter were 0.94% and 8.73%, respectively, compared with 0.84% and 8.73% for the same period in 2017.
Net interest income. Net interest income, the primary source of revenue for the Company, is determined by the Company’s interest rate spread, which is defined as the difference between income on earning assets and the cost of funds supporting those assets, and the relative amounts of interest-earning assets and interest-bearing liabilities. Management periodically adjusts the mix of assets and liabilities, as well as the rates earned or paid on those assets and liabilities in order to manage and improve net interest income. The level of interest rates and changes in the amount and composition of interest-earning assets and liabilities affect the Company’s net interest income. Historically from an interest rate risk perspective, it has been management’s goal to maintain a balance between steady net interest income growth and the risks associated with interest rate fluctuations.
Net interest income for the three months ended March 31, 2018 totaled $9.9 million, an increase of 13.1% from that reported in the comparable period of 2017. The net interest margin was 3.82% for the first quarter of 2018, down from the 3.84% reported for the same quarter of 2017.
Interest and dividend income. Interest and dividend income increased $1.7 million, or 17.1%, for the three months ended March 31, 2018, compared to the same period in the prior year. This is attributable to an increase in interest and fees on loans of $1.9 million, partially offset by a decrease in interest earned on investment securities of $161,000.
Interest and fees earned on loans receivable increased $1.9 million, or 20.4%, for the three months ended March 31, 2018, compared to the same period in the prior year. This is attributable to an increase in average loan balances of $131,000, accompanied by a 17 basis point increase in the average yield to 4.82%.
Net interest earned on securities decreased by $161,000 for the three months ended March 31, 2018 when compared to the same period in the prior year. The average balance of investment securities decreased $17.7 million, or 15.9%, while the 3.61% yield on the investment portfolio decreased by 70 basis points, from 4.31%, for the same period in the prior year. The decrease in yield is mostly due to the decrease in corporate tax rates which decreased the tax equivalent adjustments used to calculate the yield on tax-exempt securities.
Interest expense. Interest expense increased $596,000, or 41.3%, for the three months ended March 31, 2018, compared to the same period in the prior year. The increase is attributable to increases in the average balances of savings deposits, certificates of deposits, and interest-bearing demand deposits of $36.2 million or 20.2%, $25.9 million or 11.5%, and $4.1 million or 5.0%, respectively. This increase was accompanied by increases in costs of 52, 37, and 25 basis points for the average balances of borrowings, money market deposits, and certificates of deposit, respectively.
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 $210,000 was recorded for the quarter ended March 31, 2018, an increase of $45,000, or 27.3% from the quarter ended March 31, 2017. Nonperforming loans were $17.8 million, or 1.9% of total loans at March 31, 2018 compared with $12.1 million, or 1.4% at March 31, 2017. For the three months ended March 31, 2018, net loan recoveries totaled $151,000, or 0.06% of average loans, compared to net charge-offs of $43,000, or 0.02%, for the first quarter of 2017.
Noninterest income. Noninterest income decreased $725,000 for the three months ended March 31, 2018 over the comparable 2017 period. This decrease was largely the result of decreases in net investment security gains on sale of $488,000 and gains on sales of loans of $230,000. The decrease in net investment securities gains on sale is due to the Company having liquidated its investment in Liberty stock during its acquisition in the first quarter of 2017. The decrease in gains of sales of loans is largely due to the Company ceasing the origination of student lending as of December 31, 2017.
Noninterest expense. Noninterest expense of $7.3 million for the first quarter 2018 was 1.1%, or $78,000 more than the first quarter of 2017. Salaries and employee benefits, and data processing costs increased $283,000 or 7.7%, and $157,000 or 49.1%, respectively. These increases were partially offset by a decrease in merger expenses of $387,000. The salary increase is mostly due to annual pay adjustments. Data processing costs are higher due to additional ongoing services provided.
Provision for income taxes. The Company recognized $528,000 in income tax expense, which reflected an effective tax rate of 16.9% for the three months ended March 31, 2018, as compared to $736,000 with an effective tax rate of 26.0% for the comparable 2017 period. The decrease in the provision is directly correlated to the decrease in corporate tax rates applied to the increase in net income before taxes. The decrease in the effective tax rate is also due to the decrease in corporate tax rates as compared to the prior year.
Reclassification. Certain comparative figures have been reclassified to conform to the current year presentation.
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 (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 March 31,
Balance
Yield/Cost
Interest-earning assets:
Loans receivable
Investment securities (3)
Interest-bearing deposits with other banks
Total interest-earning assets
Noninterest-earning assets
Total assets
Interest-bearing liabilities:
Interest-bearing demand deposits
Money market deposits
Savings deposits
Certificates of deposit
Borrowings
Total interest-bearing liabilities
Noninterest-bearing liabilities
Stockholders' equity
Total liabilities and stockholders' equity
Net interest income
Interest rate spread (1)
Net interest margin (2)
Ratio of average interest-earning assets to average interest-bearing liabilities
(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 were $140 and $328 for the three months ended March 31, 2018 and 2017, respectively.
Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense, between the three-month periods ended March 31, 2018 and 2017, 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.
2018 versus 2017
Increase (decrease) due to
Volume
Rate
Investment securities
LIQUIDITY
Management's objective in managing liquidity is maintaining the ability to continue meeting the cash flow needs of banking customers, such as borrowings or deposit withdrawals, as well as the Company’s own financial commitments. The principal sources of liquidity are net income, loan payments, maturing and principal reductions on securities and sales of securities available for sale, federal funds sold and cash and deposits with banks. Along with its liquid assets, the Company has additional sources of liquidity available to ensure that adequate funds are available as needed. These include, but are not limited to, the purchase of federal funds, and the ability to borrow funds under line of credit agreements with correspondent banks and a borrowing agreement with the Federal Home Loan Bank of Cincinnati and the adjustment of interest rates to obtain depositors. Management believes the Company has the capital adequacy, profitability and reputation to meet the current and projected needs of its customers.
For the three months ended March 31, 2018, the adjustments to reconcile net income to net cash from operating activities consisted mainly of depreciation and amortization of premises and equipment, the provision for loan losses, net amortization of securities and net changes in other assets and liabilities. For a more detailed illustration of sources and uses of cash, refer to the Condensed Consolidated Statements of Cash Flows.
INFLATION
Substantially all of the Company's assets and liabilities relate to banking activities and are monetary in nature. The consolidated financial statements and related financial data are presented in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). GAAP currently requires the Company to measure the financial position and results of operations in terms of historical dollars, with the exception of securities available for sale, impaired loans and other real estate loans that are measured at fair value. Changes in the value of money due to rising inflation can cause purchasing power loss.
Management's opinion is that movements in interest rates affect the financial condition and results of operations to a greater degree than changes in the rate of inflation. It should be noted that interest rates and inflation do affect each other, but do not always move in correlation with each other. The Company's ability to match the interest sensitivity of its financial assets to the interest sensitivity of its liabilities in its asset/liability management may tend to minimize the effect of changes in interest rates on the Company's performance.
REGULATORY MATTERS
The Company is subject to the regulatory requirements of the Federal Reserve System as a bank holding company. The bank subsidiary is subject to regulations of the Federal Deposit Insurance Corporation (“FDIC”) and the 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 capital conservation buffer began on January 1, 2016 at 0.625% and increases ratably on each subsequent January 1 until it reaches 2.50% 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 March 31, 2018. The following table indicates the capital ratios for Middlefield Bank and Company at March 31, 2018 and December 31, 2017.
As of March 31, 2018
Tier 1 Risk
Total Risk
Leverage
The Middlefield Banking Company
Adequately capitalized ratio
Adequately capitalized ratio plus fully phased-in capital conservation buffer
Well-capitalized ratio (Bank only)
As of December 31, 2017
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 enables the Company to more accurately evaluate and manage the exposure of interest rate fluctuations on net interest income, the yield curve, various loan and mortgage-backed security prepayments, and deposit decay assumptions.
Earnings simulation modeling and assumptions about the timing and volatility of cash flows are critical in net portfolio equity valuation analysis. Particularly important are the assumptions driving mortgage prepayments and expected attrition of the core deposit portfolios. These assumptions are based on the Company’s historical experience and industry standards and are applied consistently across all rate risk measures.
The Company has established the following guidelines for assessing interest rate risk:
Net interest income simulation (“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 March 31, 2018 and December 31, 2017 remained constant. The impact of the market rate movements was developed by simulating the effects of rates changing gradually over a one-year period from the March 31, 2018 and December 31, 2017 levels for net interest income and portfolio equity. The impact of market rate movements was developed by simulating the effects of an immediate and permanent change in rates at March 31, 2018 and December 31, 2017 for portfolio equity:
Change in Rates
% Change in NII
% Change in EVE
+200bp
)%
%
-100bp
CRITICAL ACCOUNTING ESTIMATES
The Company’s critical accounting estimates involving the more significant judgments and assumptions used in the preparation of the consolidated financial statements as of March 31, 2018, have remained unchanged from December 31, 2017.
Item 4. Controls and Procedures
Controls and Procedures Disclosure
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Corporation in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in internal control or in other factors that could significantly affect the Company’s internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
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
Legal Proceedings
None
Item 1a.
There are no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Please refer to that section for disclosures regarding the risks and uncertainties related to the Company’s business.
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults by the Company on its Senior Securities
Mine Safety Disclosures
N/A
Other information
Exhibits
Exhibit list for Middlefield Banc Corp.’s Form 10-Q Quarterly Report for the Period Ended March 31, 2018
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
3.2
Regulations of Middlefield Banc Corp.
Incorporated by reference to Exhibit 3.2 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001
Specimen stock certificate
Incorporated by reference to Exhibit 4 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001
4.1
Amended and Restated Trust Agreement, dated as of December 21, 2006, between Middlefield Banc Corp., as Depositor, Wilmington Trust Company, as Property trustee, Wilmington Trust Company, as Delaware Trustee, and Administrative Trustees
Incorporated by reference to Exhibit 4.1 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006
4.2
Junior Subordinated Indenture, dated as of December 21, 2006, between Middlefield Banc Corp. and Wilmington Trust Company
Incorporated by reference to Exhibit 4.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006
4.3
Guarantee Agreement, dated as of December 21, 2006, between Middlefield Banc Corp. and Wilmington Trust Company
Incorporated by reference to Exhibit 4.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006
10.1.0*
2017 Omnibus Equity Plan
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
10.1.1*
2007 Omnibus Equity Plan
Incorporated by reference to Middlefield Banc Corp.’s definitive proxy statement for the 2008 Annual Meeting of Shareholders, Appendix A, filed on April 7, 2008
10.2*
Severance Agreement between Middlefield Banc Corp. and Thomas G. Caldwell, dated January 7, 2008
Incorporated by reference to Exhibit 10.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008
10.3*
Severance Agreement between Middlefield Banc Corp. and James R. Heslop, II, dated January 7, 2008
Incorporated by reference to Exhibit 10.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008
10.4
Federal Home Loan Bank of Cincinnati Agreement for Advances and Security Agreement dated September 14, 2000
Incorporated by reference to Exhibit 10.4 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001
10.4.1*
Severance Agreement between Middlefield Banc Corp. and Teresa M. Hetrick, dated January 7, 2008
Incorporated by reference to Exhibit 10.4.1 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008
10.4.2
[reserved]
10.4.3*
Severance Agreement between Middlefield Banc Corp. and Donald L. Stacy, dated January 7, 2008
Incorporated by reference to Exhibit 10.4.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008
10.4.4*
Severance Agreement between Middlefield Banc Corp. and Alfred F. Thompson Jr., dated January 7, 2008
Incorporated by reference to Exhibit 10.4.4 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008
10.5
10.6*
Amended Director Retirement Agreement with Richard T. Coyne
Incorporated by reference to Exhibit 10.6 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008
10.7*
Amended Director Retirement Agreement with Frances H. Frank
Incorporated by reference to Exhibit 10.7 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008
10.8*
10.9*
10.10*
Director Retirement Agreement with Donald D. Hunter
Incorporated by reference to Exhibit 10.10 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2001, filed on March 28, 2002
10.11*
Director Retirement Agreement with Martin S. Paul
Incorporated by reference to Exhibit 10.11 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2001, filed on March 28, 2002
10.12*
10.13*
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
10.15*
DBO Agreement with Jay P. Giles
Incorporated by reference to Exhibit 10.15 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.16*
DBO Agreement with Alfred F. Thompson Jr.
Incorporated by reference to Exhibit 10.16 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.17*
DBO Agreement with Teresa M. Hetrick
Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.18 *
Executive Deferred Compensation Agreement with Jay P. Giles
Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2011, filed on March 20, 2012
10.19
10.20*
DBO Agreement with James R. Heslop, II
Incorporated by reference to Exhibit 10.20 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.21*
DBO Agreement with Thomas G. Caldwell
Incorporated by reference to Exhibit 10.21 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004
10.22*
Annual Incentive Plan
Incorporated by reference to Exhibit 10.22 of Middlefield Banc Corp.’s Form 8-K Current Report filed on June 12, 2012
10.22.1*
Annual Incentive Plan 2017 Award Summary
Incorporated by reference to Middlefield Banc Corp.’s Form 8-K current Report filed on March 14, 2017
10.23*
Amended Executive Deferred Compensation Agreement with Thomas G. Caldwell
Incorporated by reference to Exhibit 10.23 of Middlefield Banc Corp.’s Form 8-K Current Report filed on May 9, 2008
10.24*
Amended Executive Deferred Compensation Agreement with James R. Heslop, II
Incorporated by reference to Exhibit 10.24 of Middlefield Banc Corp.’s Form 8-K Current Report filed on May 9, 2008
10.25*
Amended Executive Deferred Compensation Agreement with Donald L. Stacy
Incorporated by reference to Exhibit 10.25 of Middlefield Banc Corp.’s Form 8-K Current Report filed on May 9, 2008
10.26*
10.27
10.28
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
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
31.1
Rule 13a-14(a) certification of Chief Executive Officer
filed herewith
31.2
Rule 13a-14(a) certification of Chief Financial Officer
32
Rule 13a-14(b) certification
99.1
Form of Indemnification Agreement with directors of Middlefield Banc Corp. and with executive officers of Middlefield Banc Corp. and The Middlefield Banking Company
Incorporated by reference to Exhibit 99.1 of Middlefield Banc Corp.’s registration statement on Form 10, Amendment No. 1, filed on June 14, 2001
101.INS**
XBRL Instance
furnished herewith
101.SCH**
XBRL Taxonomy Extension Schema
101.CAL**
XBRL Taxonomy Extension Calculation
101.DEF**
XBRL Taxonomy Extension Definition
101.LAB**
XBRL Taxonomy Extension Labels
101.PRE**
XBRL Taxonomy Extension Presentation
* management contract or compensatory plan or arrangement
** 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.
Date: May 9, 2018
By:
/s/ Thomas G. Caldwell