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Form 10-Q MIDDLEFIELD BANC CORP For: Jun 30

August 8, 2022 4:33 PM EDT

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0000836147 Middlefield Banc Corp. false --12-31 Q2 2022 0 0 10,000,000 10,000,000 7,347,526 7,330,548 5,810,351 5,888,737 1,537,175 1,441,811 63,214 0.17 131,577 0.16 95,364 0.34 181,045 0.32 0 32.5 76.6 51.3 36.6 0 0 0 0 0 0 8 0 0 0 0 Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal. Not within scope of ASC 606 Recognized within noninterest expense All amounts are net of tax. Amounts in parentheses indicate debits to AOCI. Transfers between hierarchy levels are based on the availability of sufficient observable inputs to meet Level II versus Level II criteria. The level designation of each financial instrument is reassessed at the end of each period. 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended June 30, 2022

or

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

 

For the transition period from ___________ to ___________

 

Commission File Number  001-36613

 mbclogosm.jpg

Middlefield Banc Corp.

(Exact Name of Registrant as Specified in its Charter)

 

Ohio 34-1585111
State or Other Jurisdiction of  I.R.S. Employer Identification No.
Incorporation or Organization  
   
15985 East High Street, Middlefield, Ohio 44062-0035
Address of Principal Executive Offices Zip Code

 

 440-632-1666 
Registrant’s Telephone Number, Including Area Code

  

 

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

 

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

 

Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, Without Par ValueMBCN

The NASDAQ Stock Market, LLC

(NASDAQ Capital Market)

  

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒    No ☐

 

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

 

Large accelerated filer ☐Accelerated filer ☐
Non-accelerated filer ☒Smaller reporting company 
Emerging growth company  

    

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

 

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

 

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

Outstanding at August 5, 2022:  5,801,639

 

 

 

 

MIDDLEFIELD BANC CORP.

 
 

INDEX

 

Part I – Financial Information  
       
  Item 1.  Financial Statements (unaudited)  
       
    Consolidated Balance Sheet as of June 30, 2022 and December 31, 2021 3
       
    Consolidated Statement of Income for the Three and Six Months ended June 30, 2022 and 2021 4
       
    Consolidated Statement of Comprehensive Income for the Three and Six Months ended June 30, 2022 and 2021 5
       
    Consolidated Statement of Changes in Stockholders' Equity for the Three and Six Months ended June 30, 2022 and 2021 6
       
    Consolidated Statement of Cash Flows for the Six Months ended June 30, 2022 and 2021 8
       
    Notes to Unaudited Consolidated Financial Statements 10
       
  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

33

       
  Item 3. Quantitative and Qualitative Disclosures about Market Risk 47
       
  Item 4. Controls and Procedures 48
   
Part II – Other Information  
   
  Item 1. Legal Proceedings 49
       
  Item 1a. Risk Factors 49
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 49
       
  Item 3. Defaults by the Company on its Senior Securities 49
       
  Item 4. Mine Safety Disclosures 49
       
  Item 5. Other Information  49
       
  Item 6. Exhibits and Reports on Form 8-K 50
   
Signatures  55
   
Exhibit 31.1  
   
Exhibit 31.2   
   
Exhibit 32  

 

2

 

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET

(Dollar amounts in thousands, except share data)

(Unaudited)

 

  

June 30,

  

December 31,

 
  

2022

  

2021

 
         

ASSETS

        

Cash and due from banks

 $60,114  $97,172 

Federal funds sold

  19,039   22,322 

Cash and cash equivalents

  79,153   119,494 

Equity securities, at fair value

  779   818 

Investment securities available for sale, at fair value

  171,958   170,199 

Loans held for sale

  -   1,051 

Loans:

        

Commercial real estate:

        

Owner occupied

  120,771   111,470 

Non-owner occupied

  288,334   283,618 

Multifamily

  29,152   31,189 

Residential real estate

  246,453   240,089 

Commercial and industrial

  137,398   148,812 

Home equity lines of credit

  111,730   104,355 

Construction and other

  35,988   54,148 

Consumer installment

  8,171   8,010 

Total loans

  977,997   981,691 

Less: allowance for loan and lease losses

  14,550   14,342 

Net loans

  963,447   967,349 

Premises and equipment, net

  17,030   17,272 

Goodwill

  15,071   15,071 

Core deposit intangibles

  1,249   1,403 

Bank-owned life insurance

  17,274   17,060 

Other real estate owned

  6,792   6,992 

Accrued interest receivable and other assets

  20,624   14,297 
         

TOTAL ASSETS

 $1,293,377  $1,331,006 
         

LIABILITIES

        

Deposits:

        

Noninterest-bearing demand

 $379,872  $334,171 

Interest-bearing demand

  154,788   196,308 

Money market

  185,494   177,281 

Savings

  252,179   260,125 

Time

  174,833   198,725 

Total deposits

  1,147,166   1,166,610 

Other borrowings

  12,910   12,901 

Accrued interest payable and other liabilities

  5,081   6,160 

TOTAL LIABILITIES

  1,165,157   1,185,671 
         

STOCKHOLDERS' EQUITY

        

Common stock, no par value; 10,000,000 shares authorized, 7,347,526 and 7,330,548 shares issued; 5,810,351 and 5,888,737 shares outstanding

  87,562   87,131 

Retained earnings

  89,900   83,971 

Accumulated other comprehensive (loss) income

  (17,591)  3,462 

Treasury stock, at cost; 1,537,175 and 1,441,811 shares

  (31,651)  (29,229)

TOTAL STOCKHOLDERS' EQUITY

  128,220   145,335 
         

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $1,293,377  $1,331,006 

 

See accompanying notes to unaudited consolidated financial statements.

 

3

 

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF INCOME

(Dollar amounts in thousands, except per share data)

(Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2022

   

2021

   

2022

   

2021

 

INTEREST AND DIVIDEND INCOME

                               

Interest and fees on loans

  $ 11,268     $ 11,885     $ 22,253     $ 24,052  

Interest-earning deposits in other institutions

    74       12       98       30  

Federal funds sold

    46       1       49       1  

Investment securities:

                               

Taxable interest

    442       410       885       780  

Tax-exempt interest

    955       602       1,739       1,160  

Dividends on stock

    33       26       57       55  

Total interest and dividend income

    12,818       12,936       25,081       26,078  
                                 

INTEREST EXPENSE

                               

Deposits

    709       1,010       1,435       2,215  

Other borrowings

    81       71       150       146  

Total interest expense

    790       1,081       1,585       2,361  
                                 

NET INTEREST INCOME

    12,028       11,855       23,496       23,717  
                                 

Provision for loan losses

    -       200       -       900  
                                 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

    12,028       11,655       23,496       22,817  
                                 

NONINTEREST INCOME

                               

Service charges on deposit accounts

    956       856       1,870       1,643  

(Loss) gain on equity securities

    (72 )     40       (39 )     121  

Earnings on bank-owned life insurance

    108       106       214       332  

Gain on sale of loans

    18       221       21       813  

Revenue from investment services

    153       212       294       339  

Other income

    220       197       426       602  

Total noninterest income

    1,383       1,632       2,786       3,850  
                                 

NONINTEREST EXPENSE

                               

Salaries and employee benefits

    3,785       4,321       8,171       8,575  

Occupancy expense

    583       517       1,088       1,081  

Equipment expense

    274       313       589       670  

Data processing and information technology costs

    822       759       1,665       1,602  

Ohio state franchise tax

    292       286       585       572  

Federal deposit insurance expense

    90       150       140       294  

Professional fees

    383       323       838       742  

Net loss on other real estate owned

    206       22       214       68  

Advertising expense

    229       221       457       442  

Software amortization expense

    40       74       88       154  

Core deposit intangible amortization

    77       80       154       160  

Merger-related costs

    579       -       579       -  

Other expense

    1,175       828       2,233       1,851  

Total noninterest expense

    8,535       7,894       16,801       16,211  
                                 

Income before income taxes

    4,876       5,393       9,481       10,456  

Income taxes

    787       968       1,559       1,864  
                                 

NET INCOME

  $ 4,089     $ 4,425     $ 7,922     $ 8,592  
                                 

EARNINGS PER SHARE

                               

Basic

  $ 0.70     $ 0.70     $ 1.35     $ 1.36  

Diluted

  $ 0.70     $ 0.70     $ 1.35     $ 1.35  

 

See accompanying notes to unaudited consolidated financial statements.

 

4

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME

(Dollar amounts in thousands)

(Unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2022

   

2021

   

2022

   

2021

 
                                 

Net income

  $ 4,089     $ 4,425     $ 7,922     $ 8,592  
                                 

Other comprehensive (loss) income :

                               

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

    (13,819 )     1,235       (26,650 )     (495 )

Tax effect

    2,902       (259 )     5,597       104  
                                 

Total other comprehensive (loss) income

    (10,917 )     976       (21,053 )     (391 )
                                 

Comprehensive (loss) income

  $ (6,828 )   $ 5,401     $ (13,131 )   $ 8,201  

 

See accompanying notes to unaudited consolidated financial statements.

 

5

 

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

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

(Unaudited)

 

              

Accumulated

         
              

Other

      

Total

 
  

Common Stock

  

Retained

  

Comprehensive

  

Treasury

  

Stockholders'

 
  

Shares

  

Amount

  

Earnings

  

Loss

  

Stock

  

Equity

 
                         

Balance, March 31, 2022

  7,347,526  $87,562  $86,804  $(6,674) $(30,048) $137,644 
                         

Net income

          4,089           4,089 

Other comprehensive loss

            (10,917)     (10,917)

Treasury shares acquired (63,214)

                  (1,603)  (1,603)

Cash dividends ($0.17 per share)

          (993)          (993)
                         

Balance, June 30, 2022

  7,347,526  $87,562  $89,900  $(17,591) $(31,651) $128,220 

 

              

Accumulated

         
              

Other

      

Total

 
  

Common Stock

  

Retained

  

Comprehensive

  

Treasury

  

Stockholders'

 
  

Shares

  

Amount

  

Earnings

  

Income

  

Stock

  

Equity

 
                         

Balance, March 31, 2021

  7,323,487  $87,073  $72,729  $2,917  $(18,049) $144,670 
                         

Net income

          4,425           4,425 

Other comprehensive income

            976      976 

Stock-based compensation, net

  2,431   58               58 

Treasury shares acquired (131,577)

                  (3,081)  (3,081)

Cash dividends ($0.16 per share)

          (1,004)          (1,004)
                         

Balance, June 30, 2021

  7,325,918  $87,131  $76,150  $3,893  $(21,130) $146,044 

 

(continued on following page)

See accompanying notes to unaudited consolidated financial statements.

 

6

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

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

(Unaudited, continued from previous page)

 

              

Accumulated

         
              

Other

      

Total

 
  

Common Stock

  

Retained

  

Comprehensive

  

Treasury

  

Stockholders'

 
  

Shares

  

Amount

  

Earnings

  

Loss

  

Stock

  

Equity

 
                         

Balance, December 31, 2021

  7,330,548  $87,131  $83,971  $3,462  $(29,229) $145,335 
                         

Net income

          7,922           7,922 

Other comprehensive loss

            (21,053)     (21,053)

Stock-based compensation, net

  16,978   431               431 

Treasury shares acquired (95,364)

                  (2,422)  (2,422)

Cash dividends ($0.34 per share)

          (1,993)          (1,993)
                         

Balance, June 30, 2022

  7,347,526  $87,562  $89,900  $(17,591) $(31,651) $128,220 

 

              

Accumulated

         
              

Other

      

Total

 
  

Common Stock

  

Retained

  

Comprehensive

  

Treasury

  

Stockholders'

 
  

Shares

  

Amount

  

Earnings

  

Income

  

Stock

  

Equity

 
                         

Balance, December 31, 2020

  7,308,685  $86,886  $69,578  $4,284  $(16,938) $143,810 
                         

Net income

          8,592           8,592 

Other comprehensive income

            (391)     (391)

Stock options exercised

  10,650   94            94 

Stock-based compensation, net

  6,583   151               151 

Treasury shares acquired (181,045)

                  (4,192)  (4,192)

Cash dividends ($0.32 per share)

          (2,020)          (2,020)
                         

Balance, June 30, 2021

  7,325,918  $87,131  $76,150  $3,893  $(21,130) $146,044 

 

See accompanying notes to unaudited consolidated financial statements.

 

7

 

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

 

   

Six Months Ended

 
   

June 30,

 
   

2022

   

2021

 

OPERATING ACTIVITIES

               

Net income

  $ 7,922     $ 8,592  

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

               

Provision for loan losses

    -       900  

Loss (gain) on equity securities

    39       (121 )

Depreciation and amortization of premises and equipment, net

    651       723  

Software amortization expense

    88       154  

Financing lease amortization expense

    70       157  

Amortization of premium and discount on investment securities, net

    321       221  

Accretion of deferred loan fees, net

    (1,551 )     (2,327 )

Amortization of core deposit intangibles

    154       160  

Stock-based compensation income, net

    (44 )     (21 )

Origination of loans held for sale

    (1,118 )     (21,476 )

Proceeds from sale of loans

    1,406       22,377  

Gain on sale of loans

    (21 )     (813 )

Earnings on bank-owned life insurance

    (214 )     (332 )

Deferred income tax

    (310 )     162  

Loss (gain) on other real estate owned

    -       28  

Other real estate owned writedowns

    200       -  

Decrease (increase) in accrued interest receivable

    163       844  

Decrease in accrued interest payable

    (11 )     (236 )

Other, net

    (1,264 )     (2,519 )

Net cash provided by operating activities

    6,481       6,473  
                 

INVESTING ACTIVITIES

               

Investment securities available for sale:

               

Proceeds from repayments and maturities

    3,310       8,436  

Purchases

    (32,040 )     (45,642 )

Decrease in loans, net

    6,237       49,895  

Proceeds from the sale of other real estate owned

    -       332  

Proceeds from bank-owned life insurance

    -       424  

Purchase of premises and equipment

    (340 )     (160 )

Redemption of restricted stock

    -       401  

Net cash (used in) provided by investing activities

    (22,833 )     13,686  
                 

FINANCING ACTIVITIES

               

Net decrease in deposits

    (19,444 )     (29,915 )

Repayment of other borrowings

    (130 )     (4,074 )

Stock options exercised

    -       94  

Repurchase of treasury shares

    (2,422 )     (4,192 )

Cash dividends

    (1,993 )     (2,020 )

Net cash used in by financing activities

    (23,989 )     (40,107 )
                 

Decrease in cash and cash equivalents

    (40,341 )     (19,948 )
                 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

    119,494       112,417  
                 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $ 79,153     $ 92,469  

 

See accompanying notes to unaudited consolidated financial statements.

 

8

 

   

Six Months Ended

 
   

June 30,

 
   

2022

   

2021

 

SUPPLEMENTAL INFORMATION

               

Cash paid during the year for:

               

Interest on deposits and borrowings

  $ 1,596     $ 2,529  

Income taxes

    1,852       2,854  
                 

Noncash investing transactions:

               

Transfers from loans held for sale to loans held for investment

    784        

Transfers from loans to other real estate owned

  $ -     $ 63  

Finance lease assets added to premises and equipment

    (139 )     (67 )

Noncash financing transactions:

               

Finance lease liabilities added to other borrowings funds

  $ 139     $ 67  

 

See accompanying notes to unaudited consolidated financial statements.

 

9

 

 

MIDDLEFIELD BANC CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 1 - BASIS OF PRESENTATION

 

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

 

In the first quarter of 2022, MBC established a wholly owned subsidiary named Middlefield Insurance Services (MIS), headquartered in Middlefield, Ohio. This operating subsidiary exists to offer retail and business customers a variety of insurance services, including home, renters, automobile, pet, identity theft, travel, and professional liability insurance. At June 30, 2022, MIS’s assets consist of a cash account, a prepaid asset, and an accounts receivable. All significant inter-company items have been eliminated between MBC and this subsidiary.

 

The unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements.  The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2021.  The interim consolidated financial statements include all adjustments (consisting of only normal recurring items) that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented.  The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year.  

 

In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from those estimates.

 

Recently Issued Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be affected by the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. With certain exceptions, the transition to the new requirements will be through a cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. This Update is effective for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We expect to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. Management will continue to monitor model output throughout the deferral period.

 

Current Expected Credit Loss (CECL) Adoption The Company continues to monitor the opportunity to early adopt ASC Topic 326, which replaces the current incurred loss approach for measuring credit losses with an expected loss model. CECL applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance-sheet credit exposures, which include, but are not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. Expected results of adoption are challenging to forecast due to the evolving macroeconomic landscape. Early adoption of CECL is unlikely.

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Update is effective for smaller reporting companies and all other entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.

 

10

 

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. For entities that have not yet adopted ASU 2016-13 as of November 26, 2019, the effective dates for ASU 2019-11 are the same as the effective dates and transition requirements in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-11 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

 

In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Company’s financial statements.

 

In March 2022, the FASB issued ASU 2022-02, Financial InstrumentsCredit Losses (Topic 326) - Troubled Debt Restructurings (TDR) and Vintage Disclosures to update the TDR guidance and required vintage disclosures in ASC 326, based on implementation issues raised by stakeholders. The amendments in this Update eliminate the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance in paragraphs 310-20-35-9 through 35-11 to determine whether a modification results in a new loan or a continuation of an existing loan. For public business entities, the amendments in this Update require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost. The amendments in this ASU are effective for all entities upon adoption of ASU 2016-13.

 

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. This guidance is effective for public business entities for fiscal years including interim periods within those fiscal years beginning after December 15. 2023. Early adoption ls permitted. The Company has assessed ASU 2022-03 and does not expect it to have a material impact on its accounting and disclosures.

 

Reclassification of Comparative Amounts

 

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

 

11
 

 

 

NOTE 2 REVENUE RECOGNITION

 

Following ASC Topic 606, Revenue from Contracts with Customers (Topic 606), management determined that the primary sources of revenue, which emanate from interest income on loans and investments, along with noninterest revenue resulting from investment security gains, gains on the sale of loans, and BOLI income, are not within the scope of ASC 606. These revenue sources cumulatively comprise 90.0% of the total revenue of the Company.

 

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

 

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

 

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

 

Revenue from investment services – The Company earns investment services revenue through its servicing partnership with LPL Financial. The performance obligation to investment management customers is satisfied over time, and therefore, revenue is recognized over time.  The Company generally receives trailing investment services revenue in arrears and recognizes the revenue when the monthly statement is received.

 

Miscellaneous Fee income – Fees earned on other services, such as ATM surcharge fees, money order fees, and check fees, are recognized at the time of the event or the applicable billing cycle.

 

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

 

  

For the Three Months Ended June 30,

  

For the Six Months Ended June 30,

 

Noninterest Income

 

2022

  

2021

  

2022

  

2021

 

(Dollar amounts in thousands)

                
                 

Service charges on deposit accounts:

                

Overdraft fees

 $223  $163  $424  $331 

ATM banking fees

  359   360   668   672 

Service charges and other fees

  374   333   778   640 

(Loss) gain on equity securities (a)

  (72)  40   (39)  121 

Earnings on bank-owned life insurance (a)

  108   106   214   332 

Gain on sale of loans (a)

  18   221   21   813 

Revenue from investment services

  153   212   294   339 

Miscellaneous Fee income

  76   63   139   125 

Other income

  144   134   287   477 

Total noninterest income

 $1,383  $1,632  $2,786  $3,850 
                 

Net loss on other real estate owned

 $206  $22  $214  $68 

 

(a) Not within scope of ASC 606

 

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NOTE 3 - STOCK-BASED COMPENSATION

 

The Company had no nonvested stock options outstanding as of June 30, 2022 and 2021.

 

There was no stock option activity during the three or six months ended June 30, 2022.

 

The following table presents the activity during the six months ended June 30, 2022, related to awards of restricted stock:

 

      

Weighted-

 
      

average

 
      

Grant Date Fair

 
  

Units

  

Value Per Unit

 
         

Nonvested at January 1, 2022

  76,933  $23.01 

Granted

  25,414   24.80 

Vested

  (25,263)  20.95 

Forfeited

  (13,438)  - 

Nonvested at June 30, 2022

  63,646  $24.34 
         

Expected to vest as of June 30, 2022

  52,068  $24.19 

 

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

 

Share-based compensation (recovery) expense of ($162,000) and $97,000 was recognized for the three-month periods ended June 30, 2022, and 2021, respectively. Share-based compensation (recovery) expense of ($44,000) and $97,000 was recognized for the six-month periods ended June 30, 2022, and 2021, respectively. Expense recovery is the result of a decrease in the market valuation of the plans. Vesting of shares under the plan is contingent on a combination of service period and a market condition tied to the total shareholder return on the Company’s stock. A change in market conditions leads to adjustments to the probability of the market condition achievement, which results in changes in the liability and the compensation expense. Since the shares of restricted stock are historically paid out at the vesting date in a combination of shares and cash, the Company has recorded a liability related to this plan which totals $340,000 and $594,000 on June 30, 2022, and 2021, respectively. When the shares vest, the amount distributed in shares is transferred to common stock and the remainder is distributed in cash.

 

Total unrecognized stock compensation cost related to nonvested share-based compensation on restricted stock as of June 30, 2022 totals $543,000, of which $147,000 is estimated for the rest of 2022, $250,000 for 2023, $129,000 for 2024, and $17,000 for 2025.

 

13
 

 

 

NOTE 4 - EARNINGS PER SHARE

 

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

 

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

 

  

For the Three

  

For the Six

 
  

Months Ended

  

Months Ended

 
  

June 30,

  

June 30,

 
  

2022

  

2021

  

2022

  

2021

 
                 

Weighted-average common shares issued

  7,347,526   7,324,475   7,342,930   7,320,989 
                 

Average treasury stock shares

  (1,496,104)  (1,027,404)  (1,477,783)  (989,633)
                 

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

  5,851,422   6,297,071   5,865,147   6,331,356 
                 

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

  8,676   15,159   8,676   16,989 
                 

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

  5,860,098   6,312,230   5,873,823   6,348,345 

 

 

Outstanding on June 30, 2022, were 63,646 shares of restricted stock, 54,970 shares of which were anti-dilutive. There were no options to purchase shares of common stock outstanding as of June 30, 2022.

 

Outstanding at June 30, 2021 were 77,933 shares of restricted stock, 62,774 shares of which were anti-dilutive. There were no options to purchase shares of common stock outstanding as of June 30, 2021.

 

When shares recognized as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognized as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury share reserve. The reserve for the Company’s treasury shares comprises the cost of the Company’s shares held by the Company. As of June 30, 2022, the Company held 1,537,175 of the Company’s shares, which is an increase of 95,364 from the 1,441,811 shares held as of December 31, 2021.

 

 

NOTE 5 - FAIR VALUE MEASUREMENTS

 

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

 

Level I:

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

 

Level II:

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

 

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Level III:

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

 

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

 

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

 

      

June 30, 2022

     

(Dollar amounts in thousands)

 

Level I

  

Level II

  

Level III

  

Total

 

Assets measured on a recurring basis:

                

Subordinated debt

 $-  $21,478  $9,830  $31,308 

Obligations of states and political subdivisions

  -   132,308   -   132,308 

Mortgage-backed securities in government-sponsored entities

  -   8,342   -   8,342 

Total debt securities

  -   162,128   9,830   171,958 

Equity securities in financial institutions

  779   -   -   779 

Total

 $779  $162,128  $9,830  $172,737 

 

      

December 31, 2021

     

(Dollar amounts in thousands)

 

Level I

  

Level II

  

Level III

  

Total

 

Assets measured on a recurring basis:

                

Subordinated debt

 $-  $20,337  $12,200  $32,537 

Obligations of states and political subdivisions

  -   127,345   -   127,345 

Mortgage-backed securities in government-sponsored entities

  -   10,317   -   10,317 

Total debt securities

  -   157,999   12,200   170,199 

Equity securities in financial institutions

  818   -   -   818 

Total

 $818  $157,999  $12,200  $171,017 

 

Investment Securities Available for Sale - An independent pricing service provides the Company fair values which represent quoted prices for similar assets, fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level II). Level III securities are assets whose fair value cannot be determined by using observable measures. The inputs to the valuation methodology of these securities are unobservable and significant to the fair value measurement. Currently, this category includes certain subordinated debt investments that are valued based on the discounted cash flow approach assuming a yield curve of similarly structured instruments.

 

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of specific financial instruments could result in a different estimate of fair value at the reporting date. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective period-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments following the respective reporting dates may be different from the amounts reported at each period-end.

 

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

 

15

 

The following table presents the fair value reconciliation of Level 3 assets measured at fair value on a recurring basis.

 

(Dollar amounts in thousands)

    
  

Subordinated debt

 

Balance as of January 1, 2022

 $12,200 

Transfers out of Level III (1)

  (2,250)

Net unrealized holding gain on available-for-sale investment securities

  (120)

Balance as of June 30, 2022

 $9,830 

 

 

(1)

Transfers between hierarchy levels are based on the availability of sufficient observable inputs to meet Level II versus Level II criteria. The level designation of each financial instrument is reassessed at the end of each period.

 

The following tables present the assets measured on a non-recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Collateral-dependent impaired loans are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. A new cost basis is established at the time a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken to the property’s value after the initial measurement.

 

      

June 30, 2022

     

(Dollar amounts in thousands)

 

Level I

  

Level II

  

Level III

  

Total

 

Assets measured on a non-recurring basis:

                

Impaired loans

 $-  $-  $1,106  $1,106 

Other real estate owned

  -   -   6,792   6,792 

 

      

December 31, 2021

     

(Dollar amounts in thousands)

 

Level I

  

Level II

  

Level III

  

Total

 

Assets measured on a non-recurring basis:

                

Impaired loans

 $-  $-  $4,162  $4,162 

 

Impaired Loans – The Company has measured impairment on collateral-dependent impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property, which are also included in the net realizable value. If the fair value of the collateral-dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses, or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the above table as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the above table as it is not currently being carried at its fair value. The fair values in the above table exclude estimated selling costs of $376,000 and $901,000 as of June 30, 2022, and December 31, 2021, respectively.

 

Other Real Estate Owned (OREO) – OREO is carried at the lower of cost or fair value, which is measured at the date of foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan is not considered to be carried at fair value and is therefore not included in the above table. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. The fair value of OREO is based on the appraised value of the property, which is generally unadjusted by management and is based on comparable sales for similar properties in the same geographic region as the subject property and is included in the above table as a Level II measurement. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the loans are categorized in the above table as a Level III measurement since these adjustments are considered to be unobservable inputs. Income and expenses from operations and further declines in the fair value of the collateral after foreclosure are included in net expenses from OREO.

 

16

 

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

 

  

Quantitative Information about Level III Fair Value Measurements

 
(Dollar amounts in thousands) 

Fair Value Estimate

  Valuation Techniques Unobservable Input 

Range (Weighted

Average)

 

June 30, 2022

            

Impaired loans

 $1,106 

Appraisal of collateral (1)

Appraisal adjustments (2)

  32.5%to76.6%(51.3%) 
             

Other real estate owned

 $6,792 

Appraisal of collateral (1)

Appraisal adjustments (2)

    14.2% 

 

  

Quantitative Information about Level III Fair Value Measurements

 
(Dollar amounts in thousands)  

Fair Value Estimate

  Valuation Techniques Unobservable Input  Range (Weighted Average)  

December 31, 2021

            

Impaired loans

 $4,162 

Appraisal of collateral (1)

Appraisal adjustments (2)

 25.0%to72.2%(36.6%) 

 

 

(1)

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

 

(2)

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

 

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

 

  

June 30, 2022

 
  

Carrying

              

Total

 
  

Value

  

Level I

  

Level II

  

Level III

  

Fair Value

 
  

(Dollar amounts in thousands)

 

Financial assets:

                    

Loans held for sale

  -   -   -   -   - 

Net loans

 $963,447 &