10-Q 1 c19124e10vq.htm FORM 10-Q Form 10_q
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20552
FORM 10-Q
     
þ   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
Commission File Number 000-32561
(MBC LOGO)
Middlefield Banc Corp.
(Exact name of registrant as specified in its charter)
     
Ohio
(State or other jurisdiction of incorporation
or organization)
  34-1585111
(IRS Employer Identification No.)
15985 East High Street, Middlefield, Ohio 44062-9263
(Address of principal executive offices)
(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 þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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 þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Small reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ
State the number of shares outstanding of each of the issuer’s classes of common equity as of the latest practicle date:
Class: Common Stock, without par value
Outstanding at August 11, 2011: 1,653,660
 
 

 

 


 

MIDDLEFIELD BANC CORP.
INDEX
         
    Page  
    Number  
 
       
       
 
       
       
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    7  
 
       
    21  
 
       
    31  
 
       
    32  
 
       
       
 
       
    33  
 
       
    33  
 
       
    33  
 
       
    33  
 
       
    33  
 
       
    33  
 
       
    34  
 
       
    37  
 
       
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32
 Exhibit 99
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

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MIDDLEFIELD BANC CORP.
CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands)
                 
    (Unaudited)        
    June 30,     December 31,  
    2011     2010  
 
               
ASSETS
               
Cash and due from banks
  $ 15,540     $ 10,473  
Federal funds sold
    19,364       20,162  
 
           
Cash and cash equivalents
    34,904       30,635  
Investment securities available for sale
    193,821       201,772  
Loans
    385,339       372,498  
Less allowance for loan losses
    7,027       6,221  
 
           
Net loans
    378,312       366,277  
Premises and equipment
    7,939       8,179  
Goodwill
    4,559       4,559  
Bank-owned life insurance
    8,118       7,979  
Accrued interest and other assets
    11,921       12,796  
 
           
 
               
TOTAL ASSETS
  $ 639,574     $ 632,197  
 
           
 
               
LIABILITIES
               
Deposits:
               
Noninterest-bearing demand
  $ 58,219     $ 53,391  
Interest-bearing demand
    55,315       48,869  
Money market
    74,482       71,105  
Savings
    160,141       146,993  
Time
    221,588       244,893  
 
           
Total deposits
    569,745       565,251  
Short-term borrowings
    6,787       7,632  
Other borrowings
    18,694       19,321  
Accrued interest and other liabilities
    2,045       1,971  
 
           
TOTAL LIABILITIES
    597,271       594,175  
 
           
 
               
STOCKHOLDERS’ EQUITY
               
Common stock, no par value; 10,000,000 shares authorized, 1,843,190 and 1,780,553 shares issued
    29,485       28,429  
Retained earnings
    16,712       15,840  
Accumulated other comprehensive income
    2,840       487  
Treasury stock, at cost; 189,530 shares
    (6,734 )     (6,734 )
 
           
TOTAL STOCKHOLDERS’ EQUITY
    42,303       38,022  
 
           
 
               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 639,574     $ 632,197  
 
           
See accompanying notes to the unaudited consolidated financial statements.

 

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MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF INCOME
(Dollar amounts in thousands, except per share data)
(Unaudited)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
INTEREST INCOME
                               
Interest and fees on loans
  $ 5,399     $ 5,299     $ 10,700     $ 10,396  
Interest-bearing deposits in other institutions
    2       3       4       7  
Federal funds sold
    4       12       13       23  
Investment securities:
                               
Taxable interest
    1,289       1,339       2,612       2,542  
Tax-exempt interest
    702       647       1,400       1,239  
Dividends on stock
    25       32       51       49  
 
                       
Total interest income
    7,421       7,332       14,780       14,256  
 
                       
 
                               
INTEREST EXPENSE
                               
Deposits
    2,004       2,373       4,041       4,858  
Short term borrowings
    59       62       118       120  
Other borrowings
    104       183       213       373  
Trust preferred securities
    137       128       273       264  
 
                       
Total interest expense
    2,304       2,746       4,645       5,615  
 
                       
 
                               
NET INTEREST INCOME
    5,117       4,586       10,135       8,641  
 
                               
Provision for loan losses
    700       690       1,565       1,129  
 
                       
 
                               
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    4,417       3,896       8,570       7,512  
 
                       
 
                               
NONINTEREST INCOME
                               
Service charges on deposit accounts
    416       433       844       848  
Investment securities gains (losses), net
    (37 )     18       (22 )     27  
Earnings on bank-owned life insurance
    66       65       139       132  
Other income
    149       169       332       287  
 
                       
Total noninterest income
    594       685       1,293       1,294  
 
                       
 
                               
NONINTEREST EXPENSE
                               
Salaries and employee benefits
    1,944       1,713       3,634       3,224  
Occupancy expense
    223       217       495       493  
Equipment expense
    155       204       313       402  
Data processing costs
    173       172       353       415  
Ohio state franchise tax
    97       134       225       270  
Federal deposit insurance expense
    272       190       497       392  
Professional fees
    185       188       396       380  
Losses on other real estate owned
    323       175       303       214  
Other expense
    920       835       1,781       1,596  
 
                       
Total noninterest expense
    4,292       3,828       7,997       7,386  
 
                       
 
                               
Income before income taxes
    719       753       1,866       1,420  
Income taxes (benefit)
    (1 )     38       144       60  
 
                       
 
                               
NET INCOME
  $ 720     $ 715     $ 1,722     $ 1,360  
 
                       
 
                               
EARNINGS PER SHARE
                               
Basic
  $ 0.44     $ 0.46     $ 1.05     $ 0.87  
Diluted
    0.44       0.45       1.05       0.87  
 
                               
DIVIDENDS DECLARED PER SHARE
  $ 0.26     $ 0.26     $ 0.52     $ 0.52  
See accompanying notes to the unaudited consolidated financial statements.

 

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MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollar amounts in thousands, except dividend per share amount)
(Unaudited)
                                                 
                    Accumulated                      
                    Other             Total        
    Common     Retained     Comprehensive     Treasury     Stockholders’     Comprehensive  
    Stock     Earnings     Income     Stock     Equity     Income  
 
                                               
Balance, December 31, 2010
  $ 28,429     $ 15,840     $ 487     $ (6,734 )   $ 38,022          
 
                                               
Net income
            1,722                       1,722     $ 1,722  
Other comprehensive income:
                                               
Unrealized gain on available for sale securities net of taxes of $1,212, net of reclassification adjustment
                    2,353               2,353       2,353  
 
                                             
Comprehensive income
                                          $ 4,075  
 
                                             
Stock-based compensation expense
    59                               59          
Common stock issuance (44,750 shares)
    716                               716          
Dividend reinvestment and purchase plan (15,487 shares)
    281                               281          
Cash dividends ($0.52 per share)
            (850 )                     (850 )        
 
                                   
 
                                               
Balance, June 30, 2011
  $ 29,485     $ 16,712     $ 2,840     $ (6,734 )   $ 42,303          
 
                                     
See accompanying notes to the unaudited consolidated financial statements.

 

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MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
                 
    Six Months Ended  
    June 30,  
    2011     2010  
OPERATING ACTIVITIES
               
Net income
  $ 1,722     $ 1,360  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    1,565       1,129  
Investment securities (gains) losses, net
    22       (26 )
Depreciation and amortization
    425       381  
Amortization of premium and discount on investment securities
    151       (104 )
Amortization of deferred loan fees, net
    (80 )     (18 )
Earnings on bank-owned life insurance
    (139 )     (132 )
Deferred income taxes
    (329 )     (403 )
Stock based compensation expense
    59        
Losses on other real estate owned
    303       214  
Increase (decrease) in accrued interest receivable
    118       (27 )
Increase (decrease) in accrued interest payable
    (35 )     27  
Decrease in prepaid federal deposit insurance
    423       363  
Other, net
    (715 )     (1,046 )
 
           
Net cash provided by operating activities
    3,490       1,718  
 
           
 
               
INVESTING ACTIVITIES
               
Investment securities available for sale:
               
Proceeds from repayments and maturities
    21,260       15,067  
Proceeds from sale of securities
    10,072       5,140  
Purchases
    (19,989 )     (59,185 )
Increase in loans, net
    (14,080 )     (11,855 )
Proceeds from the sale of other real estate owned
    414       540  
Purchase of premises and equipment
    (66 )     (269 )
 
           
Net cash used for investing activities
    (2,389 )     (50,562 )
 
           
 
               
FINANCING ACTIVITIES
               
Net increase in deposits
    4,494       45,990  
Increase (decrease) in short-term borrowings, net
    (845 )     401  
Repayment of other borrowings
    (627 )     (825 )
Common stock issuance
    716        
Proceeds from dividend reinvestment & purchase plan
    281       282  
Cash dividends
    (850 )     (816 )
 
           
Net cash provided by financing activities
    3,169       45,032  
 
           
 
               
Increase (decrease) in cash and cash equivalents
    4,270       (3,812 )
 
               
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    30,635       41,153  
 
           
 
               
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 34,904     $ 37,341  
 
           
 
               
SUPPLEMENTAL INFORMATION
               
Cash paid during the year for:
               
Interest on deposits and borrowings
  $ 4,681     $ 5,588  
Income taxes
    515       750  
 
               
Non-cash investing transactions:
               
Transfers from loans to other real estate owned
  $ 560     $ 476  
See accompanying notes to the unaudited consolidated financial statements.

 

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MIDDLEFIELD BANC CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — BASIS OF PRESENTATION
The Consolidated Financial Statements of Middlefield Banc Corp. (“Company”) include its two bank subsidiaries The Middlefield Banking Company (“MB”) and Emerald Bank (“EB”) and a non-bank asset resolution subsidiary EMORECO, Inc. All significant inter-company items have been eliminated.
The accompanying 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, 2010, 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 (GAAP). The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included with Middlefield’s Form 10-K (File No. 000-32561). The results of Middlefield’s operations for any interim period are not necessarily indicative of the results of Middlefield’s operations for any other interim period or for a full fiscal year.
Recent Accounting Pronouncements
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.
In April 2010, the FASB issued ASU 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan is a Part of a Pool That is Accounted for as a Single Asset — a consensus of the FASB Emerging Issues Task Force. ASU 2010-18 clarifies the treatment for a modified loan that was acquired as part of a pool of assets. Refinancing or restructuring the loan does not make it eligible for removal from the pool, the FASB said. The amendment will be effective for loans that are part of an asset pool and are modified during financial reporting periods that end July 15, 2010 or later and is not expected to have a significant impact on the Company’s financial statements.
In July 2010, FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The amendments in ASU 2010-20 encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. The Company is currently evaluating the impact the adoption of this guidance will have on the Company’s financial position or results of operations.
In September, 2010, the FASB issued ASU 2010-25, Plan Accounting — Defined Contribution Pension Plans. The amendments in this ASU require that participant loans be classified as notes receivable from participants, which are segregated from plan investments and measured at their unpaid principal balance plus any accrued but unpaid interest. The amendments in this update are effective for fiscal years ending after December 15, 2010 and are not expected to have a significant impact on the Company’s financial statements.
In October, 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This ASU addresses the diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral, The amendments are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2011 and are not expected to have a significant impact on the Company’s financial statements.

 

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In December, 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating an impairment may exist. The qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this Update are effective for fiscal year, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities may early adopt the amendments using the effective date for public entities. This ASU is not expected to have a significant impact on the Company’s financial statements.
In January 2011, the FASB issued ASU 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this Update temporarily delay the effective date of the disclosures about troubled debt restructurings in Update 2010-20, enabling public-entity creditors to provide those disclosures after the FASB clarifies the guidance for determining what constitutes a troubled debt restructuring. The deferral in this Update will result in more consistent disclosures about troubled debt restructurings. This amendment does not defer the effective date of the other disclosure requirements in Update 2010-20. In the proposed Update for determining what constitutes a troubled debt restructuring, the FASB proposed that the clarifications would be effective for interim and annual periods ending after June 15, 2011. For the new disclosures about troubled debt restructurings in Update 2010-20, those clarifications would be applied retrospectively to the beginning of the fiscal year in which the proposal is adopted. The adoption of this guidance in not expected to have a significant impact on the Company’s financial statements.
In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this Update provide additional guidance or clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this Update are effective for the first interim or annual reporting period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. This ASU is not expected to have a significant impact on the Company’s financial statements.
In April 2011, the FASB issued ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements. The main objective in developing this Update is to improve the accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this Update apply to all entities, both public and nonpublic. The amendments affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The guidance in this Update is effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.
In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities is not permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. The amendments in this Update improve the comparability, clarity, consistency, and transparency of financial reporting and increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. All entities that report items of comprehensive income, in any period presented, will be affected by the changes in this Update. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The amendments in this Update should be applied retrospectively, and early adoption is permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

 

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NOTE 2 — STOCK-BASED COMPENSATION
The Company has no unrecognized stock-based compensation costs or unvested stock options outstanding as of June 30, 2011.
Stock option activity during the six months ended June 30, 2011 and 2010 is as follows:
                                 
            Weighted-             Weighted-  
            average             average  
            Exercise             Exercise  
    2011     Price     2010     Price  
 
                               
Outstanding, January 1
    89,077     $ 27.87       99,219     $ 26.85  
Granted
    9,000       17.55              
Exercised
                       
Forfeited
    (7,549 )     29.22              
 
                           
 
                               
Outstanding, June 30
    90,528     $ 26.73       99,219     $ 26.85  
 
                           
NOTE 3 — EARNINGS PER SHARE
The Company provides dual presentation of Basic and Diluted earnings per share. Basic earnings per share utilizes net income as reported as the numerator and the actual average shares outstanding as the denominator. Diluted earnings per share includes any dilutive effects of options, warrants, and convertible securities.
There are no convertible securities that would affect the denominator in calculating basic and diluted earnings per share. The following tables set forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.
                                 
    For the Three     For the Six  
    Months Ended     Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Weighted average common shares outstanding
    1,837,301       1,760,382       1,824,431       1,757,698  
 
                               
Average treasury stock shares
    (189,530 )     (189,530 )     (189,530 )     (189,530 )
 
                       
 
                               
Weighted average common shares and common stock equivalents used to calculate basic earnings per share
    1,647,771       1,570,852       1,634,901       1,568,168  
 
                               
Additional common stock equivalents (stock options) used to calculate diluted earnings per share
    149       1,232       75       1,574  
 
                       
 
                               
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share
    1,647,920       1,572,084       1,634,976       1,569,742  
 
                       
Options to purchase 9,000 shares of common stock were granted on May 9, 2011 at a strike price of $17.55 per share. The average share price for the period was $18.07 rendering the newly granted shared dilutive to earnings per share. The remaining options to purchase 81,528 shares of common stock at prices ranging from $22.33 to $40.24 were outstanding during the three and six months ended June 30, 2011 but were not included in the computation of diluted earnings per share as they were anti-dilutive due to the strike price being greater than the average market price for the six months ended June 30, 2011. Total options to purchase shares of common stock were 90,528 at prices ranging from $17.55 to $40.24 for the six months ended June 30, 2011. For the six months ended June 30, 2010, there were 89,077 options to purchase shares of common stock at prices ranging from $22.33 to $40.24 but were not included in the computation of diluted earnings per share.

 

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NOTE 4 — COMPREHENSIVE INCOME
The components of comprehensive income consist exclusively of unrealized gains and losses on available for sale securities. For the six months ended June 30, 2011, this activity is shown under the heading Comprehensive Income as presented in the Consolidated Statement of Changes in Stockholders’ Equity (Unaudited).
The following shows the components and activity of comprehensive income during the periods ended June 30, 2011 and 2010 (net of the income tax effect):
                                 
    For the Three Months     For the Six Months  
    Ended June 30,     Ended June 30,  
(Dollar amounts in thousands)   2011     2010     2011     2010  
 
                               
Unrealized holding gains arising during the period on securities held
  $ 2,532     $ 1,401     $ 2,368     $ 2,093  
 
                               
Reclassification adjustment for (gains) losses included in net income, net of income taxes
    25       (12 )     15       (18 )
 
                       
 
                               
Net change in unrealized gains during the period
    2,527       1,389       2,353       2,075  
Unrealized holding gains, beginning of period
    0       1,248       487       562  
 
                       
 
                               
Unrealized holding gains, end of period
  $ 2,527     $ 2,637     $ 2,840     $ 2,637  
 
                       
 
                               
Net income
  $ 720     $ 715     $ 1,722     $ 1,360  
Other comprehensive income, net of tax:
                               
Unrealized holding gains arising during the period
    2,527       1,389       2,353       2,075  
 
                       
 
                               
Comprehensive income
  $ 3,247     $ 2,104     $ 4,075     $ 3,435  
 
                       
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 three 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 observe ability 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.

 

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The following tables present the assets measured on a recurring basis on the consolidated statements of financial condition at their fair value as of June 30, 2011 and December 31, 2010 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
                                 
            June 30, 2011        
(Dollar amounts in thousands)   Level I     Level II     Level III     Total  
 
                               
Assets Measured on a Recurring Basis:
                               
U.S. government agency securities
  $     $ 27,239     $     $ 27,239  
Obligations of states and political subdivisions
          80,850             80,850  
Mortgage-backed securities in government — sponsored entities
            70,521               70,521  
Private-label mortgage-backed securities
          14,457             14,457  
 
                       
Total debt securities
          193,067             193,067  
Equity securities in financial institutions
    754                   754  
 
                       
Total
  $ 754     $ 193,067     $     $ 193,821  
 
                       
                                 
            December 31, 2010        
    Level I     Level II     Level III     Total  
 
                               
Assets Measured on a Recurring Basis:
                               
U.S. government agency securities
  $       32,603             32,603  
Obligations of states and political subdivisions
          76,880             76,880  
Mortgage-backed securities in government — sponsored entities
            74,043               74,043  
Private-label mortgage-backed securities
          17,326             17,326  
 
                       
Total debt securities
          200,852             200,852  
Equity securities in financial institutions
    920                   920  
 
                       
Total
  $ 920       200,852             201,772  
 
                       
Financial instruments are considered Level III when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. In addition to these unobservable inputs, the valuation models for Level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Level III financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. The Company has no securities considered to be Level III as of June 30, 2011 and December 31, 2010.
The Company uses prices compiled by third party vendors due to the recent stabilization in the markets along with improvements in third party pricing methodology that have narrowed the variances between third party vendor prices and actual market prices.
The following tables present the assets measured on a nonrecurring basis on the consolidated balance sheet at their fair value as of June 30, 2011 and December 31, 2010, by level within the fair value hierarchy. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loan include: quoted market prices for identical assets classified as Level I inputs; observable inputs, employed by certified appraisers, for similar assets classified as Level II inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs.

 

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            June 30, 2011        
(Dollar amounts in thousands)   Level I     Level II     Level III     Total  
 
                               
Assets Measured on a non-recurring Basis:
                               
Impaired loans
  $     $ 3,855       6,067     $ 9,922  
Other real estate owned
          2,145             2,145  
                                 
            December 31, 2010        
    Level I     Level II     Level III     Total  
 
                               
Assets Measured on a non-recurring Basis:
                               
Impaired loans
  $     $ 4,312     $ 2,758     $ 7,070  
Other real estate owned
          2,302             2,302  
The estimated fair value of the Company’s financial instruments is as follows:
                                 
    June 30, 2011     December 31, 2010  
    Carrying     Fair     Carrying     Fair  
(Dollar amounts in thousands)   Value     Value     Value     Value  
 
                               
Financial assets:
                               
Cash and cash equivalents
  $ 34,904     $ 34,904     $ 30,635     $ 30,635  
Investment securities Available for sale
    193,821       193,821       201,772       201,772  
Net loans
    378,312       353,573       366,277       347,599  
Bank-owned life insurance
    8,118       8,118       7,979       7,979  
Federal Home Loan Bank stock
    1,887       1,887       1,887       1,887  
Accrued interest receivable
    2,141       2,141       2,259       2,259  
 
                               
Financial liabilities:
                               
Deposits
  $ 569,745     $ 575,277     $ 565,251     $ 570,471  
Short-term borrowings
    6,787       6,787       7,632       7,632  
Other borrowings
    18,694       20,237       19,321       19,801  
Accrued interest payable
    755       755       790       790  
Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling. Since many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.
As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.

 

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The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions:
Cash and Cash Equivalents, Federal Home Loan Bank Stock, Accrued Interest Receivable, Accrued Interest Payable, and Short-Term Borrowings
The fair value is equal to the current carrying value.
Bank-Owned Life Insurance
The fair value is equal to the cash surrender value of the life insurance policies.
Investment Securities Available for Sale
The fair value of investment securities is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. Fair value for certain private-label collateralized mortgage obligations were determined utilizing discounted cash flow models, due to the absence of a current market to provide reliable market quotes for the instruments.
Loans
The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value.
Deposits and Other Borrowed Funds
The fair values of certificates of deposit and other borrowed funds are based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities. Demand, savings, and money market deposits are valued at the amount payable on demand as of year-end.
Commitments to Extend Credit
These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure.
NOTE 6 — INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and fair values of securities available for sale are as follows:
                                 
    June 30, 2011  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
(Dollar amounts in thousands)   Cost     Gains     Losses     Value  
 
                               
U.S. government agency securities
  $ 27,107     $ 224     $ (92 )   $ 27,239  
Obligations of states and political subdivisions:
                               
Taxable
    7,893       256             8,149  
Tax-exempt
    70,726       2,102       (127 )     72,701  
Mortgage-backed securities in government sponsored entities
    68,915       1,788       (182 )     70,521  
Private-label mortgage-backed securities
    13,971       764       (278 )     14,457  
 
                       
Total debt securities
    188,612       5,134       (679 )     193,067  
Equity securities in financial institutions
    907             (153 )     754  
 
                       
Total
  $ 189,519     $ 5,134     $ (832 )   $ 193,821  
 
                       

 

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    December 31, 2010  
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Fair  
    Cost     Gains     Losses     Value  
 
                               
U.S. government agency securities
  $ 33,332     $ 111     $ (840 )   $ 32,603  
Obligations of states and political subdivisions:
                               
Taxable
    7,371       80       (34 )     7,417  
Tax-exempt
    69,363       1,058       (958 )     69,463  
Mortgage-backed securities in government sponsored entities
    73,390       2,270       (654 )     74,043  
Private-label mortgage-backed securities
    16,636       55       (328 )     17,326  
 
                       
Total debt securities
    200,092       3,574       (2,814 )     200,852  
Equity securities in financial institutions
    944       80       (104 )     920  
 
                       
Total
  $ 201,036     $ 3,654     $ (2,918 )   $ 201,772  
 
                       
The amortized cost and fair value of debt securities at June 30, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
                 
    Amortized     Fair  
(Dollar amounts in thousands)   Cost     Value  
 
               
Due in one year or less
  $ 1,125     $ 1,137  
Due after one year through five years
    5,915       6,239  
Due after five years through ten years
    18,974       19,820  
Due after ten years
    162,598       165,871  
 
           
 
               
Total
  $ 188,612     $ 193,067  
 
           
Proceeds from sales of investment securities available for sale were $10.1 and $1.2 million during the quarters ended June 30, 2011 and June 30, 2010, respectively. Gross losses realized were $37,000 and gross gains realized were $18,000 for the quarters ended June 30, 2011 and June 30, 2010, respectively.
Proceeds from sales of investment securities available for sale were $10.1 and $5.1 million during the six-months ended June 30, 2011 and June 30, 2010, respectively. Gross losses realized were $22,000 and gross gains realized were $27,000 for the six months ended June 30, 2011 and June 30, 2010, respectively.
Investment securities with an approximate carrying value of $55,809,000 and $49,999,000 at June 30, 2011 and 2010, respectively, were pledged to secure deposits and other purposes as required by law.

 

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The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.
                                                 
    June 30, 2011  
    Less than Twelve Months     Twelve Months or Greater     Total  
            Gross             Gross             Gross  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
(Dollar amounts in thousands)   Value     Losses     Value     Losses     Value     Losses  
 
                                               
U.S. government agency securities
  $ 12,908     $ (92 )   $     $     $ 12,908     $ (92 )
Obligations of states and political subdivisions
    6,173       (85 )     448       (42 )     6,621       (127 )
Mortgage-backed securities in government sponsored entities
    16,963       (182 )                 16,963       (182 )
Private-label mortgage-backed securities
    2,179       (51 )     2,002       (227 )     4,181       (278 )
Equity securities in financial institutions
    174       (85 )     580       (68 )     754       (153 )
 
                                   
Total
  $ 38,397     $ (495 )   $ 3,030     $ (337 )   $ 41,427     $ (832 )
 
                                   
                                                 
    December 31, 2010  
    Less than Twelve Months     Twelve Months or Greater     Total  
            Gross             Gross             Gross  
    Fair     Unrealized     Fair     Unrealized     Fair     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
 
                                               
U.S. government agency securities
  $ 24,406     $ (840 )   $     $     $ 24,406     $ (840 )
Obligations of states and political subdivisions
    35,846       (940 )     439       (52 )     36,285       (992 )
Mortgage-backed securities in government sponsored entities
    27,792       (654 )                 27,792       (654 )
Private-label mortgage-backed securities
    510       (11 )     2,480       (317 )     2,990       (328 )
Equity securities in financial institutions
                590       (104 )     590       (104 )
 
                                   
Total
  $ 88,554     $ (2,445 )   $ 3,509     $ (473 )   $ 92,063     $ (2,918 )
 
                                   
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) pursuant to FASB ASC Topic 320 “Investments — Debt and Equity Securities. A security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The accounting literature requires the Company to assess whether the unrealized loss is other-than-temporary. Prior to the adoption of FSP FAS 115-2 which was subsequently incorporated into FASB ASC Topic 320 “Investments — Debt and Equity Securities, unrealized losses that were determined to be temporary were recorded, net of tax, in other comprehensive income for available for sale securities, whereas unrealized losses related to held-to-maturity securities determined to be temporary were not recognized. Regardless of whether the security was classified as available for sale or held to maturity, unrealized losses that were determined to be other-than-temporary were recorded to earnings. An unrealized loss was considered other-than-temporary if (i) it was probable that the holder would not collect all amounts due according to the contractual terms of the security, or (ii) the fair value was below the amortized cost of the security for a prolonged period of time and the Company did not have the positive intent and ability to hold the security until recovery or maturity.
OTTI losses are recognized in earnings if the Company’s intent is 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 component 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.

 

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Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises, and state and political subdivisions accounted for more than 92% of the total available-for-sale portfolio as of June 30, 2011 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government and the lack of significant unrealized loss positions within the obligations of state and political subdivisions security portfolio. The Company’s assessment was concentrated mainly on private-label collateralized mortgage obligations of approximately $14.5 million for which the Company evaluates credit losses on a quarterly basis. The gross unrealized gain position related to these private-label collateralized mortgage obligations amounted to $764,000 and the gross unrealized loss position was $278,000 on June 30, 2011. The Company considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:
   
The length of time and the extent to which the fair value has been less than the amortized cost basis.
 
   
Changes in the near term prospects of the underlying collateral of a security such as changes in default rates, loss severity given default and significant changes in prepayment assumptions;
 
   
The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and
 
   
Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation and government actions affecting the issuer’s industry and actions taken by the issuer to deal with the present economic climate.
For the six months ended June 30, 2011, there were no available-for-sale debt securities with an unrealized loss that suffered OTTI.
NOTE 7 — LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES
Major classifications of net loans are summarized as follows (in thousands):
                 
    June 30,     December 31,  
    2011     2010  
 
               
Commercial and industrial
  $ 58,665     $ 57,501  
Real estate — construction
    19,952       15,845  
Real estate — mortgage:
               
Residential
    209,115       209,863  
Commercial
    92,851       84,304  
Consumer installment
    4,756       4,985  
 
           
 
    385,339       372,498  
Less allowance for loan losses
    (7,027 )     (6,221 )
 
           
 
               
Net loans
  $ 378,312     $ 366,277  
 
           
The Company’s primary business activity is with customers located within its local 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 and Westerville, Ohio. Commercial, residential, consumer, and agricultural loans are granted. Although the Company has a diversified loan portfolio at June 30, 2011 and 2010, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.

 

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The following tables summarize the primary segments of the loan portfolio as of June 30, 2011 and December 31, 2010 (in thousands):
                                                 
    Commercial     Real estate-     Real Estate- Mortgage     Consumer        
June 30, 2011   and industrial     construction     Residential     Commercial     installment     Total  
 
                                               
Total loans
  $ 58,665     $ 19,952     $ 209,115     $ 92,851     $ 4,756     $ 385,339  
 
                                   
 
                                               
Individually evaluated for impairment
  $ 5,284     $ 1,154     $ 5,962     $ 5,335     $     $ 17,735  
Collectively evaluated for impairment
    53,381       18,798       203,153       87,516       4,756       367,604  
                                                 
    Commercial     Real estate-     Real estate- Mortgage     Consumer        
December 31, 2010   and industrial     construction     Residential     Commercial     installment     Total  
 
                                               
Total loans
  $ 57,501     $ 15,845     $ 209,863     $ 84,304     $ 4,985     $ 372,498  
 
                                   
 
                                               
Individually evaluated for impairment
  $ 5,477     $ 1,299     $ 4,329     $ 6,266     $ 17     $ 17,388  
Collectively evaluated for impairment
    52,024       14,546       205,534       78,038       4,968       355,110  
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, 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 loan made for the purpose of financing the activities of residential homeowners. The commercial mortgage loan segment consists of loans made for the purposed 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.
Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $150,000 and if the loan either is in nonaccrual status, or is risk rated Special Mention or Substandard and is greater than 90 days past due. 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.
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 three 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.

 

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The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of June 30, 2011 and 2010 (in thousands):
                                         
                    Impaired Loans        
                    with No        
    Impaired Loans with     Specific        
    Specific Allowance     Allowance     Total Impaired Loans  
                                    Unpaid  
    Recorded     Related     Recorded     Recorded     Principal  
    Investment     Allowance     Investment     Investment     Balance  
June 30, 2011
                                       
Commercial and industrial
  $ 1,622     $ 474     $ 3,725     $ 5,347     $ 5,677  
Real estate — construction
                614       614       614  
Real estate — mortgage:
                                       
Residential
    566       201             566       569  
Commercial
    2,965       591       1,351       4,316       4,328  
 
                             
Total impaired loans
  $ 5,153     $ 1,266     $ 5,690     $ 10,843     $ 11,188  
 
                             
 
                                       
December 31, 2010
                                       
Commercial and industrial
  $ 655     $ 203     $ 1,874     $ 2,529     $ 2,540  
Real estate — construction
                618       618       614  
Real estate — mortgage:
                                       
Residential
    594       221             594       594  
Commercial
    1,879       188       1,441       3,320       3,314  
 
                             
Total impaired loans
  $ 3,128     $ 612     $ 3,933     $ 7,681     $ 7,062  
 
                             
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. The Credit Department performs an annual review of all commercial relationships $200,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Company has an experienced Loan Review Department that continually reviews and assesses loans within the portfolio. The Company engages an external consultant to conduct loan reviews on a semi-annual 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.

 

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The following table presents 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 as of June 30, 2011 (in thousands):
                                         
            Special                     Total  
    Pass     Mention     Substandard     Doubtful     Loans  
June 30, 2011
                                       
 
                                       
Commercial and industrial
  $ 53,065     $ 896     $ 4,480     $ 224     $ 58,665  
Real estate — construction
    19,020             932             19,952  
Real estate — mortgage:
                                       
Residential
    191,730       1,866       15,519             209,115  
Commercial
    85,056       332       7,463             92,851  
Consumer installment
    4,736       9       11             4,756  
 
                             
Total
  $ 353,607     $ 3,103     $ 28,405     $ 224     $ 385,339  
 
                             
                                         
            Special                     Total  
    Pass     Mention     Substandard     Doubtful     Loans  
December 31, 2010
                                       
 
                                       
Commercial and industrial
  $ 52,008     $ 903     $ 4,366     $ 224     $ 57,501  
Real estate — construction
    14,481             1,364             15,845  
Real estate — mortgage:
                                       
Residential
    192,823       1,601       15,439             209,863  
Commercial
    76,979       353       6,972             84,304  
Consumer installment
    4,937       11       37             4,985  
 
                             
Total
  $ 341,228     $ 2,868     $ 28,178     $ 224     $ 372,498  
 
                             
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. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of June 30, 2011 (in thousands):
                                                         
            Still Accruing              
            30-59 Days     60-89 Days     90 Days+     Total     Non-     Total  
    Current     Past Due     Past Due     Past Due     Past Due     Accrual     Loans  
June 30, 2011
                                                       
 
                                                       
Commercial and industrial
  $ 54,305     $ 1,156     $ 157     $     $ 1,313     $ 3,047     $ 58,665  
Real estate — construction
    19,312                               640       19,952  
Real estate — mortgage:
                                                       
Residential
    192,887       3,928       1,032       116       5,076       11,152       209,115  
Commercial
    88,097       427       11             438       4,316       92,851  
Consumer installment
    4,682       74                   74             4,756  
 
                                         
Total
  $ 359,283     $ 5,585     $ 1,200     $ 116     $ 6,901     $ 19,155     $ 385,339  
 
                                         

 

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            Still Accruing              
            30-59 Days     60-89 Days     90 Days+     Total     Non-     Total  
    Current     Past Due     Past Due     Past Due     Past Due     Accrual     Loans  
December 31, 2010
                                                       
 
                                                       
Commercial and industrial
  $ 53,712     $ 473     $ 776     $     $ 1,249     $ 2,540     $ 57,501  
Real estate — construction
    15,197                               648       15,845  
Real estate — mortgage:
                                                       
Residential
    193,647       2,950       1,580             4,530       11,686       209,863  
Commercial
    78,361       1,607       824             2,431       3,513       84,304  
Consumer installment
    4,841       120       12             132       12       4,985  
 
                                         
Total
  $ 345,757     $ 5,150     $ 3,192     $     $ 8,342     $ 18,399     $ 372,498  
 
                                         
An allowance for loan losses (“ALL”) is maintained to absorb losses from the loan portfolio. The ALL 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 non-performing loans.
The Company’s methodology for determining the ALL 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 ALL.
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 ALL analysis. Management tracks the historical net charge-off activity at the purpose code level. A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters. Consumer and Commercial pools currently utilize a rolling 8 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 non-accrual 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 ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL.
The following table summarizes the primary segments of the loan portfolio as of June 30, 2011 (in thousands):
                                                 
                    Real estate-     Real estate-                
    Commercial     Real estate-     residential     commercial     Consumer          
    and industrial     construction     mortgage     mortgage     installment     Total  
ALL balance at December 31, 2010
    962     $ 188     $ 3,434     $ 1,543       94     $ 6,221  
Charge-offs
    (273 )     (6 )     (510 )     (10 )     (10 )     (809 )
Recoveries
    26             3             21       50  
Provision
    242       47       864       388       24       1,565  
 
                                   
ALL balance at June 30, 2011
  $ 957     $ 229     $ 3,791     $ 1,921       129     $ 7,027  
 
                                   

 

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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.
CHANGES IN FINANCIAL CONDITION
General. The Company’s total assets ended the June 30, 2011 quarter at $639.6 million, an increase of $7.4 million or 1.2% from December 31, 2010. Investment securities available for sale decreased $8.0 million and net loans increased $12.0 million. The increase in total assets reflected a corresponding increase in total liabilities of $3.1 million or .5% and an increase in stockholders’ equity of $4.3 million or 11.3%. The increase in total liabilities was the result of deposit growth of $4.5 million or .8%. This was partially offset by decreases to other borrowings and short term borrowings of $627,000 and $845,000, respectively. The increase in stockholders’ equity was largely the result of an increase in accumulated other comprehensive income of $2.4 million. Retained earnings and common stock also increased by $872,000, and $1.1 million, respectively.
Cash on hand and due from banks. Cash on hand and due from banks and Federal funds sold represent cash and cash equivalents. Cash and cash equivalents increased $4.3 million or 13.9% to $34.9 million at June 30, 2011 from $30.6 million at December 31, 2010. Deposits from customers into savings and checking accounts, loan and security repayments and proceeds from borrowed funds typically increase these accounts. Decreases result from customer withdrawals, new loan originations, security purchases and repayments of borrowed funds.
Investment securities. Investment securities available for sale ended the June 30, 2011 quarter at $193.8 million, a decrease of $8.0 million or 3.9% from $201.8 million at December 31, 2010. The Company experienced repayments and maturities of $21.3 million and sales of securities totaling $10.1 million during the six months ended June 30, 2011. Offsetting sales, calls, repayments, and maturities, the Company recorded purchases of available for sale securities of $20.0 million, consisting of purchases of mortgage-backed securities, municipal and U. S. government bonds. In addition, the securities portfolio increased approximately $3.6 million due to an increase in the fair value. These fair value adjustments represent temporary fluctuations resulting from changes in market rates in relation to average yields in the available for sale portfolio. If securities are held to their respective maturity dates, no fair value gain or loss is realized.
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 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 commercial and consumer loans. Net loans receivable increased $12.0 million or 3.3% to $378.3 million as of June 30, 2011 from $366.3 million at December 31, 2010. Included in this amount was an increase in the commercial real estate mortgage segment of $8.5 million or 10.1% as well as the real estate construction loan portfolio of $4.1 million or 25.9% during the six months ended June 30, 2011. The Company’s lending philosophy centers around the growth of the commercial loan portfolio. The Company has taken a proactive approach in servicing the needs of both new and current clients. These relationships generally offer more attractive returns than residential loans and also offer opportunities for attracting larger balance deposit relationships. However, the shift in loan portfolio mix from residential real estate to commercial oriented loans may increase credit risk.
Allowance for Loan Losses and Asset Quality. In the first half of 2011, the combination of sustained weakness in commercial real estate values and a recessionary economy continued to have an adverse impact on the financial condition of commercial borrowers. These factors resulted in the Company downgrading loan quality ratings of several commercial loans. The distressed commercial real estate market also caused certain existing impaired commercial real estate loans to become under-collateralized, resulting in the loans being charged down to the estimated net realizable value of the underlying collateral.
The Company increased the allowance for loan losses to $7.0 million, or 1.8% of total loans, at June 30, 2011, compared to $6.2 million, or 1.7%, at December 31, 2010. The increase in the allowance for loan losses was necessitated by loan downgrades and an increase to specific reserves for impaired commercial real estate loans as discussed above, coupled with the impact of charge-offs remaining at an elevated level. For the quarter-ended June 30, 2011 net loan charge-offs totaled $358,000, or 0.09% of average loans, compared to $135,000, or 0.04%, for the second quarter of 2010. Year-to-date net loan charge-offs totaled $759,000, or .20%, of average loans, compared to $232,000, or .06% for the same period in the prior year. To maintain the adequacy of the allowance for loan losses, the Company recorded a second quarter provision for loan losses of $700,000, versus $690,000 for the second quarter of 2010.
Management analyzes the adequacy of the allowance for loan 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 losses is a material estimate that is particularly susceptible to significant changes in the near term. Such evaluation, which includes a review of all loans for which full collectability may not be reasonably assured, considers among other matters, 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 losses. Future additions to the allowance for loan losses will be dependent on these factors. Additionally, the Company utilizes an outside party to conduct an independent review of commercial and commercial real estate loans. The Company uses the results of this review to help determine the effectiveness of the existing policies and procedures, and to provide an independent assessment of the allowance for loan losses allocated to these types of loans. Management believes that the allowance for loan losses was appropriately stated at June 30, 2011. Based on the variables involved and the fact that management must make judgments about outcomes that are uncertain, the determination of the allowance for loan losses is considered a critical accounting policy.

 

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Non-performing assets. Non-performing assets includes non-accrual loans, troubled debt restructurings (TDR), loans 90 days or more past due, assets purchased by EMORECO from EB, other real estate, and repossessed assets. A loan is classified as non-accrual 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 interest is doubtful. Payments received on nonaccrual loans are recorded as income or applied against principal according to management’s judgment as to the collectability of principal.
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 20 TDRs with a total balance of $3.2 million as of June 30, 2011 compared to 13 TDRs totaling $1.6 million as of December 31, 2010. Non-performing loans amounted to $22.5 million or 5.8% and $20.0 million or 5.5% of total loans at June 30, 2011 and December 31, 2010, respectively. Non-performing loans secured by real estate totaled $19.0 million as of June 30, 2011, up $2.8 million from $16.2 million at December 31, 2010. The depressed state of the economy and heightened unemployment have contributed to this level, as well as the decline in the housing market across our geographic footprint that continue to suppress home prices and maintain elevated inventories of houses for sale. Real estate owned is written down to fair value at its initial recording and continually monitored.
Nonperforming Assets and Allowance for Loan Losses. The following table indicates asset quality data over the past five quarters.
Asset Quality History
(Dollar amounts in thousands)
                                         
(Dollar amounts in thousands)   6/30/2011     3/31/2011     12/31/2010     9/30/2010     6/30/2010  
 
                                       
Nonperforming loans
  $ 22,469     $ 22,014     $ 19,986     $ 20,983     $ 20,053  
Real estate owned
    2,145       2,248       2,302       2,016       1,886  
 
                                       
Nonperforming assets
    24,614       24,262       22,288       22,999       21,939  
 
                                       
Allowance for loan losses
    7,027       6,685       6,221       5,971       5,834  
 
                                       
Ratios
                                       
Nonperforming loans to total loans
    5.83 %     5.85 %     5.37 %     5.75 %     5.50 %
Nonperforming assets to total assets
    3.85 %     3.82 %     3.53 %     3.61 %     3.61 %
Allowance for loan losses to total loans
    1.82 %     1.78 %     1.67 %     1.63 %     1.60 %
Allowance for loan losses to nonperforming loans
    31.27 %     30.37 %     31.13 %     28.46 %     29.09 %
A major factor in determining the appropriateness of the allowance for loan losses is the type of collateral which secures the loans. Of the total nonperforming loans at June 30, 2011, 84.4% were secured by real estate. Although this does not insure against all losses, the real estate provides substantial recovery, even in a distressed-sale and declining-value environment. In response to the poor economic conditions which have eroded the performance of the Company’s loan portfolio, additional resources have been allocated to the loan workout process. The Company’s objective is to work with the borrower to minimize the burden of the debt service and to minimize the future loss exposure to the Company.
Deposits. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which are a significant source of funds equaling 95.7% of the Company’s total funding sources at June 30, 2011. Total deposits increased $4.5 million or .8% to $569.7 million at June 30, 2011 from $565.3 million at December 31, 2010. The increase in deposits is primarily related to the growth of interest-bearing demand, non-interest bearing demand, and savings accounts of $6.4 million or 13.2%, $4.8 million or 9.0% and $13.1 million or 8.9%, respectively, at June 30, 2011. These increases were largely offset by a decline in certificates of deposit accounts of $23.3 million or 9.5%, during the six months ended June 30, 2011. This decline is the result of a migration of customers from maturing to non-maturing deposits.

 

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Borrowed funds. The Company utilizes short and long-term borrowings as another source of funding used for asset growth and liquidity needs. These borrowings primarily include Federal Home Loan Bank of Cincinnati (FHLB) advances, junior subordinated debt, short-term borrowings from other banks and repurchase agreements. Short-term borrowings decreased $845,000 or 11.1% to $6.8 million as of June 30, 2011. Other borrowings, representing advances from the FHLB, declined $627,000 for the first half of the year. The decline in FHLB advances was the result of scheduled principal payments.
Stockholders’ equity. Stockholders’ equity increased $4.3 million or 11.3% to $42.3 million at June 30, 2011 from $38.0 million at December 31, 2010. This increase was the result of increases in accumulated other comprehensive income, common stock, and retained earnings of $2.4 million, $1.1 million, and $872,000, respectively. The increase in accumulated other comprehensive income is due to increases in the fair value of the Company’s securities available for sale portfolio, of $2.4 million. The increase in common stock was largely the result of issuing 44,750 shares through a private placement of the Company’s stock at a price of $16.00 per share along with 15,487 shares issued within the Company’s dividend reinvestment plan at a price of $18.16 since December 31, 2010.
RESULTS OF OPERATIONS
General. Net income for the second quarter of 2011 totaled $720,000, a $5,000, or .7% increase from the $715,000 earned during the second quarter of 2010. Net income for the six months ended June 30, 2011, was $1.7 million, a $362,000, or 26.6% increase from the $1.4 million earned during the same period in 2010. Diluted earnings per share for the second quarter of 2011 was $.44 compared to $.45 in 2010. Diluted earnings per share for the first half of 2011 was $1.05 compared to $0.87 for the same period in 2010.
The Company’s annualized return on average assets (ROA) and return on average equity (ROE) for the second quarter of 2011 were 0.45% and 7.22%, respectively, compared with 0.47% and 7.48% for the second quarter of 2010. For the first six months of 2011, the Company’s annualized ROA was 0.55% compared to 0.46% in 2010, while the ROE was 8.89% compared to 7.27% for the same period of 2010.
The Company’s earnings for the three and six months ended were positively impacted by a decrease in deposit and other borrowings interest expense. This was partially offset by increases in the provision for loan losses and non-interest expense.
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 totaled $5.1 million for the second quarter of 2011, an increase of 11.6% from the $4.6 million reported for the comparable period of 2010. The net interest margin of 3.64% for the second quarter of 2011 showed improvement over the 3.49% reported for the same quarter of 2010. The increase in the net interest margin is primarily attributable to the reduced cost of interest-bearing liabilities by $442,000 compared to the same period in 2010.
Net interest income increased $1.5 million, or 17.3%, to $10.1 million, for the six months ended June 30, 2011 compared to the same period in the prior year. The net interest margin of 3.66% for the first half of 2011, showed improvement over the 3.39% reported for the same period of 2010. The increase in the net interest margin is primarily attributable to the reduced cost of interest-bearing liabilities by $970,000 compared to the same period in 2010.
Interest income. Interest income increased $89,000, or 1.2%, for the three months ended June 30, 2011, compared to the same period in the prior year. This increase can be attributed to an increase in interest earned on loans receivable of $100,000 for the quarter.
Interest income increased $524,000, or 3.7%, for the six months ended June 30, 2011, compared to the same period in the prior year. This increase can be attributed to an increase in interest earned on loans receivable of $304,000 along with a $231,000 increase in interest earned on investment securities for the quarter.
Interest earned on loans receivable increased $100,000, or 1.9%, for the three months ended June 30, 2011, compared to the same period in the prior year. This increase was attributable to a $19.6 million or a 5.4% increase in the average balance of loans receivable from June 30, 2010. This increase was partially offset by a decline in the yield on the total loan portfolio of 20 basis points to 5.68% for the three months ended June 30, 2011 from 5.88% for the same period in the prior year.

 

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Interest earned on loans receivable increased $304,000, or 2.9%, for the six months ended June 30, 2011, compared to the same period in the prior year. This increase was attributable to a $18.6 million or 5.2% increase in the average balance of loans receivable from June 30, 2010.
Interest earned on securities increased $5,000, or .3%, for the three months ended June 30, 2011, compared to the same period in the prior year. This increase was primarily the result of an increase in the average balance of the securities portfolio of $16.8 million, or 9.7%, to $190.1 million at June 30, 2011 from $173.3 million for the same period in the prior year. The increase of interest earned on investment securities was almost entirely offset by a decrease in the yield on the average investments to 4.96% for the three months ended June 30, 2011 from 5.37% for the same period in the prior year.
Interest earned on securities increased $231,000, or 6.1%, for the six months ended June 30, 2011, compared to the same period in the prior year. This increase was primarily the result of an increase in the average balance of the securities portfolio of $30.0 million, or 18.4%, to $192.5 million at June 30, 2011 from $162.6 million for the same period in the prior year. Interest income on investment securities was adversely affected by a decrease in the portfolio yield. The total investment securities portfolio yield of 4.96% for the six months ended June 30, 2011 decreased by 52 basis points from 5.48% for the same period in the prior year.
Interest expense. Interest expense decreased $442,000, or 16.1%, for the three months ended June 30, 2011, compared to the same period in the prior year. The decline in interest expense can be attributed to decreases in interest incurred on deposits and borrowings of $369,000 and $79,000, respectively. This reduction in interest cost was mainly due to the decline of 44 basis points in the rate paid on interest-bearing liabilities when comparing the two quarters.
Interest expense decreased $970,000, or 17.3%, for the six months ended June 30, 2011, compared to the same period in the prior year. This decline in interest expense can be attributed to decreases in interest incurred on deposits and other borrowings of $817,000 and $160,000, respectively. This reduction in interest cost was mainly due to the 51 basis point decline in the rate paid on interest-bearing liabilities when comparing the two quarters.
Interest incurred on deposits, the largest component of the Company’s interest-bearing liabilities, decreased $369,000, or 15.5%, for the three months ended June 30, 2011, compared to the same period in the prior year. Interest expense was positively affected by a reduction in the cost of interest-bearing deposits to 1.56% from 2.15% for the quarters ended June 30, 2011 and 2010, respectively. The reduced cost was partially offset by the average balance of interest-bearing deposits which increased by $34.1 million, or 7.1%, to $515.1 million for the three months ended June 30, 2011, compared to $481.0 million for the same period in the prior year. The Company diligently monitors the interest rates on its products as well as the rates being offered by its competition and utilizing rate surveys to keep its total interest expense costs down.
Interest incurred on deposits declined $817,000, or 16.8%, for the six months ended June 30, 2011, compared to the same period in the prior year. This decrease was attributed to a decline in average rate paid on deposits of 66 basis points for the six months ended June 30, 2011 from 2.25% for the same period in the prior year. The improvement in interest cost was partially offset by an increase in the average balance of interest-bearing deposits of $41.6 million, or 8.8%, to $512.5 million for the six months ended June 30, 2011, compared to $470.8 million for the same period in the prior year. This increase is reflected in the quarterly rate volume report presented below depicting the cost decrease associated with interest-bearing liabilities. The Company diligently monitors the interest rates on its products as well as the rates being offered by its competition and utilizing rate surveys to minimize total interest expense.
Interest incurred on borrowed funds, declined by $73,000, for the three months ended June 30, 2011, compared with the same period in the prior year. The change was driven by a reduction of $79,000 in interest paid on FHLB advances when compared to June 30, 2010.
Interest incurred on borrowed funds, declined by $153,000, for the six months ended June 30, 2011, compared with the same period in the prior year. The change was driven by reduction of $160,000 in interest paid on FHLB advances when compared to June 30, 2010.
Provision for loan losses. The provision for loan losses represents the charge to income necessary to adjust the allowance for loan 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 $700,000 was recorded for the quarter ended June 30, 2011 compared to $690,000 for the quarter ended June 30, 2010. The year-to-date provision for loan losses increased $436,000 or 38.6% compared to the first half of 2010. The provision for loan losses was higher for the current quarter due to increases in net charge-offs, increases in nonperforming and delinquent loans and the current distressed state of the economy. Nonperforming loans were $22.5 million, or 5.8% of total loans at June 30, 2011 compared with $20.1 million, or 5.5% at June 30, 2010. Net charge-offs were $358,000 for the quarter ended June 30, 2011 compared with $135,000 for the quarter ended June 30, 2010. Total loans were $385.3 million at June 30, 2011 compared with $372.5 million at June 30, 2010.
Non-interest income. Non-interest income decreased $91,000, or 13.3%, and $1,000, or .1%, for the three and six months ended June 30, 2011, respectively, compared to the same periods of 2010. This decrease was the result of diminished revenue from investment security gains and service charges on deposit accounts.

 

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Non-interest expense. Non-interest expense of $4.3 million for the second quarter of 2011 was 12.1%, or $464,000, higher than the second quarter of 2010.
Non-interest expense of $8.0 million for the first half of 2011 was 8.3%, or $611,000, higher than the first half of 2010. The increase in salaries and employee benefits of $410,000 is primarily attributable to the sustained growth of the Company and a 34.7% increase in employee health insurance premiums from the same period in 2010. FDIC premiums continue to increase and are $105,000 higher than they were for the same period last year. The loss on the sale of other real estate owned is $303,000 compared to $214,000 in the comparable 2010 period. Included in this total is the Company’s non-bank asset resolution subsidiary EMORECO which had $257,000 in other real estate owned-related losses as of June 30, 2011, and $278,000 for the same period in 2010.
Provision for income taxes. The Company recognized $144,000 in income tax expense, which reflected an effective tax rate of 7.7% for the six months ended June 30, 2011, as compared to $60,000 with an effective tax rate of 4.2% for the comparable 2010 period. The increase in the tax provision can be attributed to an increase in income before taxes of $446,000 or 31.4% when compared to the same period in the prior year.
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 June 30, 2011, have remained unchanged from December 31, 2010.
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 non-accrual loans and exclude the allowance for loan losses, and interest income includes accretion of net deferred loan fees. Interest and 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 34%. Yields and rates have been calculated on an annualized basis utilizing monthly interest amounts.

 

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    For the Three Months Ended June 30,  
    2011     2010  
    Average             Average     Average             Average  
(Dollars in thousands)   Balance     Interest     Yield/Cost     Balance     Interest     Yield/Cost  
 
                                               
Interest-earning assets:
                                               
Loans receivable
  $ 381,312     $ 5,399       5.68 %   $ 361,708     $ 5,299       5.88 %
Investment securities (3)
    190,083       1,991       4.96 %     173,264       1,986       5.37 %
Interest-bearing deposits with other banks
    31,990       31       0.39 %     30,178       47       0.62 %
 
                                   
Total interest-earning assets
    603,385       7,421       5.17 %     565,150       7,332       5.44 %
 
                                           
Noninterest-earning assets
    37,302                       38,750                  
Total assets
  $ 640,687                     $ 603,900                  
 
                                           
Interest-bearing liabilities:
                                               
Interest-bearing demand deposits
  $ 55,822       95       0.68 %   $ 41,067       100       0.98 %
Money market deposits
    74,245       186       1.00 %     65,017       229       1.41 %
Savings deposits
    158,403       360       0.91 %     126,228       395       1.25 %
Certificates of deposit
    226,649       1,363       2.41 %     248,704       1,649       2.66 %
Borrowings
    25,697       300       4.68 %     32,163       373       4.65 %
 
                                   
Total interest-bearing liabilities
    540,816       2,304       1.71 %     513,179       2,746       2.15 %
 
                                           
Noninterest-bearing liabilities
                                               
Other liabilities
    59,889                       52,389                  
Stockholders’ equity
    39,982                       38,332                  
Total liabilities and stockholders’ equity
  $ 640,687                     $ 603,900                  
 
                                           
Net interest income
          $ 5,117                     $ 4,586          
 
                                           
Interest rate spread (1)
                    3.46 %                     3.29 %
Net yield on interest-earning assets (2)
                    3.64 %                     3.49 %
Ratio of average interest-earning assets to average interest-bearing liabilities
                    111.57 %                     110.13 %
 
     
(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 interest income for tax-exempt securities was $416 and $333 for 2011 and 2010, respectively.
Analysis of Changes in Net Interest Income. The following tables analyzes the changes in interest income and interest expense, between the three month periods ended June 30, 2011 and 2010, 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. Changes in interest income on securities reflects the changes in interest income on a fully tax-equivalent basis.

 

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    2011 versus 2010  
    Increase (decrease) due to  
(Dollars in thousands)   Volume     Rate     Total  
 
                       
Interest-earning assets:
                       
Loans receivable
  $ 287     $ (187 )   $ 100  
Investment securities
    225       (220 )     5  
Interest-bearing deposits with other banks
    3       (19 )     (16 )
 
                 
Total interest-earning assets
    515       (426 )     89  
 
                 
 
                       
Interest-bearing liabilities:
                       
Interest-bearing demand deposits
    36       (41 )     (5 )
Money market deposits
    32       (75 )     (43 )
Savings deposits
    101       (136 )     (35 )
Certificates of deposit
    (146 )     (140 )     (286 )
Borrowings
    (75 )     2       (73 )
 
                 
Total interest-bearing liabilities
    (52 )     (390 )     (442 )
 
                 
 
                       
Net interest income
  $ 567     $ (36 )   $ 531  
 
                 

 

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    For the Six Months Ended June 30,  
    2011     2010  
    Average             Average     Average             Average  
(Dollars in thousands)   Balance     Interest     Yield/Cost     Balance     Interest     Yield/Cost  
 
                                               
Interest-earning assets:
                                               
Loans receivable
  $ 377,604     $ 10,700       5.71 %   $ 358,989     $ 10,396       5.84 %
Investment securities (3)
    192,547       4,012       4.96 %     162,595       3,781       5.48 %
Interest-bearing deposits with other banks
    28,041       68       0.49 %     30,100       79       0.53 %
 
                                   
Total interest-earning assets
    598,192       14,780       5.23 %     551,684       14,256       5.44 %
 
                                           
Noninterest-earning assets
    37,330                       38,448                  
Total assets
  $ 635,522                     $ 590,132                  
 
                                           
Interest-bearing liabilities:
                                               
Interest-bearing demand deposits
  $ 52,873       175       0.67 %   $ 39,977       195       0.98 %
Money market deposits
    73,077       364       1.00 %     62,767       508       1.63 %
Savings deposits
    154,718       697       0.91 %     119,946       822       1.38 %
Certificates of deposit
    231,789       2,805       2.44 %     248,134       3,333       2.71 %
Borrowings
    26,240       604       4.64 %     32,245       757       4.73 %
 
                                   
Total interest-bearing liabilities
    538,697       4,645       1.74 %     503,069       5,615       2.25 %
 
                                           
Noninterest-bearing liabilities
                                               
Other liabilities
    57,773                       49,364                  
Stockholders’ equity
    39,052                       37,699                  
Total liabilities and stockholders’ equity
  $ 635,522                     $ 590,132                  
 
                                           
Net interest income
          $ 10,135                     $ 8,641          
 
                                           
Interest rate spread (1)
                    3.49 %                     3.19 %
Net interest margin (2)
                    3.66 %                     3.39 %
Ratio of average interest-earning assets to average interest-bearing liabilities
                    111.04 %                     109.66 %
 
     
(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 interest income for tax-exempt securities was $721 and $638 for 2011 and 2010, respectively.
Analysis of Changes in Net Interest Income. The following tables analyzes the changes in interest income and interest expense, between the six month periods ended June 30, 2011 and 2010, 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. Changes in interest income on securities reflects the changes in interest income on a fully tax-equivalent basis.

 

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    2011 versus 2010  
    Increase (decrease) due to  
(Dollars in thousands)   Volume     Rate     Total  
 
                       
Interest-earning assets:
                       
Loans receivable
  $ 539     $ (235 )   $ 304  
Investment securities
    814       (583 )     231  
Interest-bearing deposits with other banks
    (5 )     (6 )     (11 )
 
                 
Total interest-earning assets
    1,348       (824 )     524  
 
                 
 
                       
Interest-bearing liabilities:
                       
Interest-bearing demand deposits
    63       (83 )     (20 )
Money market deposits
    83       (227 )     (144 )
Savings deposits
    238       (363 )     (125 )
Certificates of deposit
    (220 )     (308 )     (528 )
Borrowings
    (141 )     (12 )     (153 )
 
                 
Total interest-bearing liabilities
    23       (993 )     (970 )
 
                 
 
                       
Net interest income
  $ 1,325     $ 169     $ 1,494  
 
                 
LIQUIDITY
Management’s objective in managing liquidity is maintaining the ability to continue meeting the cash flow needs of its customers, such as borrowings or deposit withdrawals, as well as its 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 FHLB and the adjustment of interest rates to obtain depositors. Management believes that it has the capital adequacy, profitability and reputation to meet the current and projected needs of its customers.
For the six months ended June 30, 2011, 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 GAAP, which 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.

 

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REGULATORY MATTERS
The Company is subject to the regulatory requirements of The Federal Reserve System as a multi-bank holding company. The affiliate banks are subject to regulations of the Federal Deposit Insurance Corporation (FDIC) and the State of Ohio, Division of Financial Institutions.
Effective February 11, 2010, the Board of Directors of the Company’s subsidiary, EB, entered into a Memorandum of Understanding (“MOU”) with the FDIC and the Ohio Division of Financial Institutions as a result of the joint examination by the FDIC and the Ohio Division of Financial Institutions completed in the fourth quarter of 2009. The MOU sets forth certain actions required to be taken by management of EB to rectify unsatisfactory conditions identified by the federal and state banking regulators that relate to EB’s concentration of credit for non-owner occupied 1 — 4 family residential mortgage loans. The MOU requires EB to reduce delinquent and classified loans and enhance credit administration for non-owner occupied residential real estate; to develop specific plans for the reduction of borrower indebtedness on classified and delinquent credits; to correct violations of laws and regulations listed in the joint examination report; to implement an earnings improvement plan; to maintain specified capital discussed below; to submit to the FDIC and the Ohio Division of Financial Institutions for review and comment a revised methodology for calculating and determining the adequacy of the allowance for loan losses; and to provide 30 days’ advance notification of proposed dividend payments.
Compliance with the terms of the MOU is a high priority for the Company. In anticipation of the requirements that would be imposed by the MOU executed February 11, 2010, management devoted significant resources to the preceding matters during the fiscal year ended December 31, 2010, and intends to continue to do so during 2011. Specific actions taken included the evaluation and reorganization of lending and credit administration personnel, retention of collection and workout personnel, and the sale of $4.6 million of nonperforming assets to a sister, nonbank-asset resolution subsidiary established late in the fourth quarter of 2009. In 2009 and 2010, the Company invested $1.75 million in EB in the form of capital infusions to maintain Tier I capital at the level expected by the FDIC and the Ohio Division of Financial Institutions. In April 2011 the Company invested an additional $500,000 in EB in the form of capital infusion in order to maintain Tier I capital at the level expected by the FDIC and the Ohio Division of Financial Institutions.
The MOU requires that EB submit plans and report to the Ohio Division of Financial Institutions and the FDIC regarding EB’s loan portfolio and profit plan, among other matters. The MOU also requires that the Bank maintain its Tier I Leverage Capital ratio at not less than 9 percent.
The following table sets forth the capital requirements for EB under the FDIC regulations and EB’s capital ratios at June 30, 2011 and December 31, 2010:
FDIC Regulations
                                 
    Adequately     Well             December 31,  
Capital Ratio   Capitalized     Capitalized     June 30, 2011     2010  
 
                               
Tier I Leverage Capital
    4.00 %     5.00 %(1)     9.38 %     9.45 %
Risk-Based Capital:
                               
Tier I
    4.00       6.00       13.43       13.26  
Total
    8.00       10.00       14.73       14.55  
     
(1)  
9 percent required by the MOU.
REGULATORY CAPITAL REQUIREMENTS
The Company is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the company’s operations.
The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion and plans for capital restoration are required.

 

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The following table sets forth the Company’s and its subsidiaries’ actual capital ratios at June 30, 2011:
                                                 
    Middlefield Banc Corp.     The Middlefield Banking Co.     Emerald Bank  
    June 30,     June 30,     June 30,  
    2011     2011     2011  
    Amount     Ratio     Amount     Ratio     Amount     Ratio  
                    (in thousands)                  
Total Capital
                                               
(to Risk-weighted Assets)
                                               
 
                                               
Actual
  $ 47,041       11.52 %   $ 40,092       11.15 %   $ 7,165       14.73 %
For Capital Adequacy Purposes
    32,659       8.00       28,754       8.00       3,892       8.00  
To Be Well Capitalized
    40,824       10.00       35,942       10.00       4,865       10.00  
 
                                               
Tier I Capital
                                               
(to Risk-weighted Assets)
                                               
 
                                               
Actual
  $ 41,915       10.27 %   $ 35,599       9.90 %   $ 6,533       13.43 %
For Capital Adequacy Purposes
    16,330       4.00       14,377       4.00       1,946       4.00  
To Be Well Capitalized
    24,495       6.00       21,565       5.00       2,919       6.00  
 
                                               
Tier I Capital
                                               
(to Average Assets)
                                               
 
                                               
Actual
  $ 41,915       6.74 %   $ 35,599       6.47 %   $ 6,533       9.38 %
For Capital Adequacy Purposes
    24,888       4.00       22,001       4.00       2,785       4.00  
To Be Well Capitalized
    31,110       5.00       27,502       5.00       3,481       5.00  
Both MBC and the Company are implementing plans to reduce substandard assets and to maintain regulatory capital at elevated levels. The goal of the elevated capital levels is to account for the ongoing economic stress in the markets in which the Company and its subsidiary banks operate and to account for the growth that has already occurred in substandard and other nonperforming assets. MBC has also hired additional staff to enhance the ongoing monitoring and management of the credit portfolio generally as well as nonperforming assets in particular. In addition, in January of 2011, the Company’s board established a goal to achieve by December 31, 2011, and to maintain indefinitely thereafter Tier I leverage capital of 7.25 percent and total risk-based capital of 12 percent, both at the level of the Company and at MBC. The parent company board also affirmed the goal of restraining growth at the level of the subsidiary banks to promote achievement of these elevated capital level targets. The Company’s Tier I leverage capital was 6.74 percent as of June 30, 2011, with total risk-based capital of 11.52 percent. MBC’s Tier I leverage capital was 6.47 percent as of June 30, 2011, with total risk-based capital of 11.52 percent. No assurance can be given at capital enhancement and capital maintenance measures taken already or that are being taken will enable the Company and MBC to achieve their 7.25 percent Tier I leverage capital ratio and 12 percent total risk-based capital ratio goals as of year-end 2011, along with EB’s minimum 9 percent Tier I leverage capital requirement. Additional measures to achieve the capital goals could potentially be necessary, such as a reduction of dividends, but the Company is optimistic that the Company, MBC, and EB will achieve their capital goals based on the capital enhancement and maintenance measures taken already and being taken in 2011.
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 repricing and maturity of interest-earning assets and the repricing or maturity of its 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 strong asset/liability management in order to insulate the Company from material losses as a result of prolonged increases in interest rates. As a result of this policy, the Company emphasizes a larger, more diversified portfolio of residential mortgage loans in the form of mortgage-backed securities. Mortgage-backed securities generally increase the quality of the Company’s assets by virtue of the insurance or guarantees that back them, are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Company.

 

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The Company’s Board of Directors has established an Asset and Liability Management Committee consisting of four outside directors, the President and Chief Executive Officer, Executive/Vice President/ Chief Operating Officer, Senior Vice President/Chief Financial Officer and Senior Vice President/Commercial Lending. This committee, which meets quarterly, generally monitors various asset and liability management policies and strategies, which were implemented by the Company over the past few years. These strategies have included: (i) an emphasis on the investment in adjustable-rate and shorter duration mortgage-backed securities; (ii) an emphasis on the origination of single-family residential adjustable-rate mortgages (ARMs), residential construction loans and commercial real estate loans, which generally have adjustable or floating interest rates and/or shorter maturities than traditional single-family residential loans, and consumer loans, which generally have shorter terms and higher interest rates than mortgage loans; (iii) increase the duration of the liability base of the Company by extending the maturities of savings deposits, borrowed funds and repurchase agreements.
The Company has established the following guidelines for assessing interest rate risk:
Net interest income simulation. Given a 200 basis point parallel and gradual increase or decrease in market interest rates, net interest income may not change by more than 10% for a one-year period.
Portfolio equity simulation. Portfolio equity is the net present value of the Company’s existing assets and liabilities. Given a 200 basis point immediate and permanent increase or decrease in market interest rates, portfolio equity may not correspondingly decrease or increase by more than 20% of stockholders’ equity.
The following table presents the simulated impact of a 200 basis point upward and a 200 basis point downward shift of market interest rates on net interest income and the change in portfolio equity. This analysis was done assuming that the interest-earning asset and interest-bearing liability levels at June 30, 2011 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 June 30, 2011 levels for net interest income. The impact of market rate movements was developed by simulating the effects of an immediate and permanent change in rates at June 30, 2011 for portfolio equity:
                 
    Increase     Decrease  
    200 Basis Points     200 Basis Points  
 
               
Net interest income — increase (decrease)
    0.63 %     2.95 %
 
               
Portfolio equity — increase (decrease)
    (15.30 )%     (10.25 )%
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-14(e) and 15d-14(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 its 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.

 

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Changes in Internal Control over Financial Reporting
   
There have not been any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1.  
Legal Proceedings
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, 2010. Please refer to that section for disclosures regarding the risks and uncertainties related to the Company’s business.
Item 2.  
Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3.  
Defaults by the Company on its senior securities
None
Item 4.  
Reserved
Item 5.  
Other information
None

 

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Item 6.  
Exhibits
Exhibit list for Middlefield Banc Corp.’s Form 10-Q Quarterly Report for the Period Ended June 30, 2011
             
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
       
 
   
  4.0    
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 *  
1999 Stock Option Plan of Middlefield Banc Corp.
  Incorporated by reference to Exhibit 10.1 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001
       
 
   
  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
       
 
   
  10.4.0 *  
Severance Agreement between Middlefield Banc Corp. and Jay P. Giles, dated January 7, 2008
  Incorporated by reference to Exhibit 10.4 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008
       
 
   
  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 *  
Severance Agreement between Middlefield Banc Corp. and Jack L. Lester, dated January 7, 2008
  Incorporated by reference to Exhibit 10.4.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008
       
 
   
  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

 

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exhibit        
number   description   location
  10.5    
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
       
 
   
  10.6 *  
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 *  
Amended Director Retirement Agreement with Thomas C. Halstead
  Incorporated by reference to Exhibit 10.8 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008
       
 
   
  10.9 *  
Director Retirement Agreement with George F. Hasman
  Incorporated by reference to Exhibit 10.9 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2001, filed on March 28, 2002
       
 
   
  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 *  
Amended Director Retirement Agreement with Donald E. Villers
  Incorporated by reference to Exhibit 10.12 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008
       
 
   
  10.13 *  
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
       
 
   
  10.14 *  
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
       
 
   
  10.15 *  
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
       
 
   
  10.16 *  
Reserved
   
       
 
   
  10.17 *  
DBO Agreement with Theresa 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 *  
DBO Agreement with Jack L. Lester
  Incorporated by reference to Exhibit 10.19 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

 

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exhibit        
number   description   location
  10.19 *  
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
       
 
   
  10.20 *  
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
       
 
   
  10.21 *  
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
       
 
   
  10.22 *  
Annual Incentive Plan Summary
  Incorporated by reference to the summary description of the annual incentive plan included as Exhibit 10.22 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 16, 2005
       
 
   
  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
       
 
   
  31.1    
Rule 13a-14(a) certification of Chief Executive Officer
  filed herewith
       
 
   
  31.2    
Rule 13a-14(a) certification of Chief Financial Officer
  filed herewith
       
 
   
  32    
Rule 13a-14(b) certification
  filed herewith
       
 
   
  99    
Report of independent registered public accounting firm
  filed herewith
     
*  
management contract or compensatory plan or arrangement

 

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(MBC LOGO)
 
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned and hereunto duly authorized.
         
  MIDDLEFIELD BANC CORP.
 
 
Date: August 11, 2011  By:   /s/ Thomas G. Caldwell    
    Thomas G. Caldwell   
    President and Chief Executive Officer   
     
Date: August 11, 2011  By:   /s/ Donald L. Stacy    
    Donald L. Stacy   
    Principal Financial and Accounting Officer   

 

37