2017 Annual Report
CLEVELAND
MENTOR
CHARDON
ASHTABULA
ORWELL
NEWBURY
MIDDLEFIELD
GEAUGA
CORTLAND
MANTUA
GARRETTSVILLE
TRUMBULL
PORTAGE
DELAWARE
SUNBURY
DUBLIN
WESTERVILLE
FRANKLIN
COLUMBUS
TABLE OF CONTENTS
Statistical Summary ................................................................. 1
Decade of Progress .................................................................. 2
Letter to Our Shareholders ........................................................ 4
Letter from the Chairman ......................................................... 7
Middlefield Banc Corp. Board of Directors ..................................... 8
The Middlefield Banking Company Officers .................................... 9
The Middlefield Banking Company Staff & Branch Locations ..............11
Core Values .........................................................................16
Form 10-K ....................................................... Following Page 16
Shareholder Information .......................................Inside Back Cover
CORTLANDGARRETTSVILLENEWBURYSOLONTWINSBURGBEACHWOODORWELLCHARDONDUBLINWESTERVILLEMANTUACOLUMBUSPORTAGETRUMBULLGEAUGAASHTABULAFRANKLINDELAWAREMIDDLEFIELDLAKEMENTORSUNBURYCORTLANDGARRETTSVILLENEWBURYSOLONTWINSBURGBEACHWOODORWELLCHARDONDUBLINWESTERVILLEMANTUACOLUMBUSPORTAGETRUMBULLGEAUGAASHTABULAFRANKLINDELAWAREMIDDLEFIELDLAKEMENTORSUNBURY STATISTICAL SUMMARY
$
9
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4
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$
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8
$
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1
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0
$
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1
’13
’14
’15
’16
’17
’13
’14
’15
’16
’17
’13
’14
’15
’16
’17
Net Income
(in thousands)
Total Assets
(in thousands)
Book Value Per Share
$
1
1
9
,
8
6
3
$
7
6
,
9
6
0
$
6
3
,
8
6
7
$
6
2
,
3
0
4
$
5
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4
7
3
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1
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0
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0
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0
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8
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%
’13
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’17
Equity Capital
(in thousands)
$
3
.
4
8
$
3
.
5
2
$
3
.
4
1
$
3
.
0
4
$
3
.
1
2
Net Loans Outstanding
(in thousands)
Return on Average Assets
$
1
.
0
4
$
1
.
0
4
$
1
.
0
7
$
1
.
0
8
$
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1
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%
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0
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%
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3
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%
8
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%
’13
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’17
Basic Earnings Per Share
Dividends Per Share
Return on Average Equity
|1|
8000
7000
6000
5000
4000
3000
2000
1000
0
80000
70000
60000
50000
40000
30000
20000
10000
0
2.60
2.08
1.56
1.04
0.52
0.00
700000
612500
525000
437500
350000
262500
175000
87500
0
420000
367500
315000
262500
210000
157500
105000
52500
0
1.129998
0.941665
0.753332
0.564999
0.376666
0.188333
0.000000
28.99998
24.16665
19.33332
14.49999
9.66666
4.83333
0.00000
0.90
0.72
0.54
0.36
0.18
0.00
10.99998
9.16665
7.33332
5.49999
3.66666
1.83333
0.00000
2017 ANNUAL REPORT DECADE OF PROGRESS
(Dollar amounts in thousands, except per share data)
2008
2009
2010
Interest Income
Interest Expense
Net Interest Income
Provision for Loan Loss
Net Interest Income After Provision for Loan Losses
Noninterest Income, Including Security Gains/Losses
Noninterest Expense
Income Before Income Taxes
Income Taxes
Net Income
Total Assets
Deposits
Equity Capital
Loans Outstanding, Net
Allowance for Loan Losses
Net Charge-offs
Full Time Employees (Average Equivalents)
Number of Offices
Earnings Per Share
Dividends Per Share
Book Value Per Share
Dividend Payout Ratio
Cash Dividends Paid
Return on Average Assets
Return on Average Equity
$ 26,038
$ 26,051
$ 29,094
14,058
11,980
608
11,372
2,226
10,596
3,002
387
11,783
14,268
2,578
11,690
2,668
12,650
1,708
(73)
10,945
18,149
3,580
14,569
2,623
14,763
2,429
(88)
$ 2,615
$ 1,781
$ 2,517
$467,847
$558,658
$632,197
394,819
35,059
318,019
3,557
351
101
10
487,106
36,707
348,660
4,937
1,198
106
10
565,251
38,022
366,277
6,221
2,296
108
10
$ 1.72
$ 1.15
$ 1.60
1.03
22.83
1.04
23.46
1.04
23.90
60.25%
90.28%
65.04%
$ 1,575
$ 1,608
$ 1,637
0.58%
7.91%
0.36%
4.90%
0.41%
6.44%
|2|
MIDDLEFIELD BANC CORP. 2011
2012
2013
2014
2015
2016
2017
$ 29,727
$ 28,746
$ 28,178
$ 27,874
$ 28,595
$ 29,994
$ 43,995
8,652
21,075
3,085
17,990
2,237
15,501
4,726
596
6,447
22,299
2,168
20,131
3,451
15,639
7,943
1,662
5,250
22,928
196
22,732
3,145
16,870
9,007
1,979
4,070
23,804
370
23,434
3,588
17,850
9,172
1,992
3,820
24,775
315
24,460
4,044
20,077
8,427
1,562
4,190
25,804
570
25,234
3,959
20,872
8,321
1,905
6,647
37,348
1,045
36,303
4,859
27,485
13,677
4,222
$ 4,130
$ 6,281
$ 7,028
$ 7,180
$ 6,865
$ 6,416
$ 9,455
$654,551
$670,288
$647,090
$677,531
$735,139
$787,821
$1,106,336
580,962
47,253
395,061
6,819
2,487
113
10
593,335
55,437
400,654
7,779
1,208
120
10
568,836
53,473
428,679
7,046
929
125
10
586,112
63,867
463,738
6,846
570
139
10
624,447
62,304
527,325
6,385
776
143
10
629,934
76,960
602,542
6,598
357
139
11
878,194
119,863
916,023
7,190
453
190
14
$ 2.45
$ 3.29
$ 3.48
$ 3.52
$ 3.41
$ 3.04
$ 3.12
1.04
26.81
1.04
27.83
1.04
26.31
1.04
31.12
1.07
33.19
1.08
34.14
1.08
37.25
42.71%
31.87%
29.84%
29.54% 30.90%
36.13%
35.52%
$ 1,764
$ 2,002
$ 2,048
$ 2,121
$ 2,153
$ 2,318
$ 3,358
0.65%
10.24%
0.95%
11.98%
1.06%
13.17%
1.07%
12.17%
0.97%
10.62%
0.85%
9.33%
0.88%
8.52%
|3|
2017 ANNUAL REPORT
LETTER TO OUR SHAREHOLDERS
related expenses and the write down in our deferred-tax
asset that occurred in December as a result of the Tax Cuts
and Jobs Act.
People
Any organization is only as good as its corporate culture
and people. In this regard, I am grateful for the company’s
190 associates, who do an outstanding job on a daily basis
representing Middlefield’s core values. Our values are
defined by our desire to profitably serve our communities
through the company’s dedication to quality, safety and
soundness, while maximizing value for our shareholders.
For our customers, we strive to provide superior financial
products and responsive personalized service, while
promoting economic growth within our local communities.
The culture of the company starts with our leadership
team who have been with the Bank on average nearly 15
years, with an average of nearly 30 years within the Ohio
banking industry. As the company’s profile grows and
we expand our geographic footprint, we continue to add
proven, experienced, and motivated lenders and managers
to execute our strategic plan.
Our growth in new markets demonstrates that our
community-oriented culture and talented associates are
expanding our market share and providing significant
growth opportunities. The loan production office (LPO)
we opened in Mentor, Ohio late in 2015 now has $35.6
million in loans. We recently hired a second loan officer
to help serve the Mentor LPO’s growing customer base.
In addition, Middlefield’s Sunbury location, our third
branch in Central Ohio, that was opened in late 2016,
became profitable during the 2017 fourth quarter, within
12 months of opening, and ahead of schedule.
Products/Services
Middlefield continues to expand its offerings and develop
new products and services that help customers address their
financial needs. Through the Liberty merger, Middlefield
acquired an established SBA platform, and in March 2017,
the U.S. Small Business Administration granted the Bank
Preferred Lender status under the SBA’s Preferred Lender
Thomas G. Caldwell
President and Chief Executive Officer
To Our Shareholders and Friends:
Three years ago, Middlefield’s management team and
board of directors created a strategy to take advantage
of significant opportunities that we saw in our Northeast
and Central Ohio markets. To execute our plan, we made
strategic investments in people, products, services, and
resources, building a platform to support a larger and
more dynamic organization.
The successful merger with Liberty Bank N.A. accelerated
our growth plan by expanding our footprint to compelling
and nearby communities and enhancing our leadership
team with experienced managers who share Middlefield’s
community banking values. As we look to the future, the
management team and board are extremely excited about
the opportunities in front of our Bank.
Our record 2017 financial results reflect the success of our
growth-oriented strategy, the platform we have created,
and the integration of the Liberty merger. I am pleased
to report that Middlefield Banc Corp. ended 2017 with
assets over $1.1 billion for the first time in our history. In
addition, net income was a record $9.5 million and would
have been even higher had it not been for one-time merger
|4|
MIDDLEFIELD BANC CORP.
Program. This positions Middlefield to make the final
credit decisions for SBA 7(a) loans, thereby streamlining
the procedures necessary to provide financing to the small
business community.
Liberty also had an established student loan portfolio and
lending program, which provided qualified borrowers
nationwide with the ability to refinance their existing
student loans. Middlefield sold these originated loans to a
third party without recourse and with servicing released,
into the secondary market. This program generated $0.5
million of noninterest income during 2017. Unfortunately,
Middlefield’s partner decided to change the requirements
and duration of the program, which Middlefield’s
management team felt increased the risk profile, and in
late 2017 we stopped originating new student loans.
Middlefield’s
secondary mortgage program, which
started in the second-half of 2014, generated $0.4 million
of noninterest income during 2017. There are good
market opportunities for this program and we believe
we can improve our performance. During 2017 we went
through a thorough review of our mortgage offerings and
created a new action plan to increase the contribution
of our secondary mortgage platform. As we enter 2018,
we believe we are better positioned to generate higher
noninterest income from a more robust and responsive
secondary loan program.
Noninterest income at the end of 2017 represented $4.9
million, compared to net interest income of $37.3 million.
As we enhance our operations and expand our platform,
we will continue to look at new ways to drive noninterest
income. In addition to the investments we have recently
made to improve our secondary mortgage program, we
are looking at initiatives to grow our financial services.
With more than 31,000 personal customer accounts, we
have a meaningful opportunity to deepen relationships
with our customer.
Resources/Platform/Infrastructure
Converting Liberty’s core banking system to Middlefield’s
IT infrastructure was a large undertaking and required
a significant amount of planning and focus. In February
2017, we successfully transferred all Liberty Bank loan
and deposit accounts to Middlefield’s system.
Overall, the Liberty merger was in line with our initial
expectations at the time the agreement was announced.
Liberty quickly contributed to 2017’s financial results
and, I am pleased to announce, was accretive to earnings.
The success of the merger and the experience we gained
identifying, completing and integrating Liberty makes us
confident in our approach and ability to accelerate growth
through acquisitions.
During 2017, we continued to focus on enhancing our
online banking capabilities and growing our mobile
offerings, while providing a safe and secure infrastructure
for customers. Middlefield’s larger size provides the
company with the ability to better allocate and absorb
the necessary expenses required to offer customers
convenient, modern, and safe methods of interacting with
the Bank. As consumer requirements change in today’s
rapidly evolving digital world, Middlefield will continue
to adapt and provide customers with state-of-the-art
banking resources.
While larger financial institutions focus on closing
locations, we believe a physical market presence allows
the company to best serve its communities and offers
customers multiple channels to interact with the Bank.
With the success of our Sunbury location, we will open
our 15th branch, and fourth location in Central Ohio,
during 2018. The new branch will be in Powell in
Delaware County, which is the fastest growing county in
the State. We are excited to begin providing Middlefield’s
community-oriented financial services to customers in
this market.
Middlefield’s presence in Central Ohio continues to grow
and, at the end of 2017, loans in Central Ohio increased
35% while our deposit base grew 25%. With a strong
economic base, low unemployment, and compelling
growth characteristics, we are optimistic in the long-term
opportunities within this expanding market.
Middlefield continues to enjoy a strong market share
within its core Northeastern Ohio markets. The addition
of Liberty Bank’s Beachwood, Solon, and Twinsburg
offices creates significant opportunities for Middlefield to
expand its business to customers in Cuyahoga and Summit
|5|
2017 ANNUAL REPORT
LETTER TO OUR SHAREHOLDERS Continued
Conclusion
Throughout 2017 we enhanced our organization and
expanded our platform to support continued growth. Our
core Northeast Ohio and growing Central Ohio markets
both offer significant expansion opportunities, and we
believe we are well positioned to increase Middlefield’s
market share throughout our footprint. We remain
committed to providing our communities with a customer-
centric, community-oriented banking approach, and
believe our 2017 results demonstrate how Middlefield’s
values resonate throughout our markets. As we look to the
new year, we are optimistic 2018 will be another year of
solid performance for your company.
On behalf of everyone at the Middlefield Banc Corp., I
appreciate your continued support. We look forward to
reporting on our progress throughout 2018 as we sincerely
appreciate the dedication of our associates, the loyalty of
our customers and the commitment and interest of our
shareholders. Thank you.
Sincerely,
Thomas G. Caldwell
President and Chief Executive Officer
Counties. Similar to Franklin and Delaware Counties in
Central Ohio, large regional and semi-regional financial
institutions control a significant amount of the market
share in Cuyahoga and Summit Counties. As a result, we
believe our focus as a relationship-based, and community-
oriented
institution, provides a differentiated value
proposition to customers in these markets and provides
the company with growth opportunities in these very
large and competitive markets.
Financial Results
Middlefield’s record financial results for 2017 demonstrate
the company is well positioned for continued growth. Net
income for 2017 increased to a record $9.5 million, despite
the impact of one-time merger related expenses, and the
write down in the company’s deferred tax asset. The 47.4%
year-over-year improvement in net income was primarily a
result of a 44.7% increase in net interest income, which was
driven by a stable net interest margin and a 51.6% percent
increase in total loans.
Total loans at December 31, 2017, were a record $923.2
million and benefitted from the contribution of Liberty and
strong organic growth. The quality of the loan portfolio
remains strong and, as of the end of 2017, nonperforming
assets declined to 1.23% from 1.65% last year. The Bank’s
total assets were $1.1 billion at December 31, 2017,
compared with $787.8 million for the same period last year.
For 2017, earnings per diluted share were $3.10, compared
with last year’s earnings of $3.03 per diluted share. The
number of shares outstanding increased to 3.2 million shares
at December 31, 2017, from 2.3 million at December 31,
2016. This increase resulted from the Liberty merger and
a 400,000 share stock offering that was completed in May.
On June 26th, Middlefield was added to the small-cap
Russell 2000® Index. Inclusion in this broad-market
index helps enhance Middlefield’s daily liquidity, while
further increasing the Company’s exposure to the financial
community.
|6|
MIDDLEFIELD BANC CORP. LETTER FROM THE CHAIRMAN
Additional highlights of the year included strong loan
growth in both our Northeast and Central Ohio markets,
the addition of Middlefield Banc Corp. to the Russell
3000 index, and the announcement of the construction of
our 15th branch in the community of Powell, Ohio. Upon
the opening of our Powell office, our presence in Central
Ohio will have grown to four full-service banking offices.
industry
is continuing to experience
The banking
optimism due to the announcement of a reduced corporate
tax rate and discussion as to lessening regulatory burden
on the industry, especially in the area of community
banks. The industry continues to consolidate. Technology
plays an important role in our ability to grow and we must
embrace technology in new ways so that we can remain
competitive. These new developments are exciting but
introduce new risks to the community banking world.
We have positioned ourselves to continue to grow with
investments in our people and infrastructure. In 2018,
our primary goals are to continue to enhance shareholder
value through building on our operational and financial
strengths, to complete a successful branch opening in
Powell, and to remain a strong and safe community bank
that exceeds our customers’ expectations.
I am proud to be part of this organization. We have created
a strong management team which has demonstrated
teamwork, tenacity and dedication. I am immensely
appreciative of the efforts of all of our employees who
make a difference in such extraordinary ways every
day. This effort is what differentiates Middlefield Banc
Corp. from our competitors and is the foundation of our
continued success. Surround yourself with great people
and you can do great things. Middlefield Banc Corp. is
continuing to do just that!
On behalf of the Middlefield Banc Corp. Board of Directors
and our employees, we thank you for your continued support.
Sincerely,
Carolyn J. Turk
Chairman, Board of Directors
|7|
Carolyn J. Turk, C.P.A.
Chairman, Board of Directors
Chairman’s Letter to the Shareholders
2017 was a year of tremendous progress for Middlefield Banc
Corp. as we delivered on several of our strategic initiatives.
As of year-end 2017, Middlefield Banc Corp. assets
exceeded $ 1.1 billion. Net income for the year increased
to $ 9.5 million and resulted in earnings per share of $
3.10. These financial results were due to the Company’s
focus on the successful execution of our strategic plan.
Our most significant accomplishment for 2017 was
the successful completion of the Liberty Bank, N.A.
transaction. The integration and conversion was a
monumental task that was completed in early 2017
without any business interruptions to our customers.
This achievement was a testament to the teamwork and
dedication of our employees. This transaction not only
made us a larger organization but also provided a platform
to further accelerate our performance.
A second accomplishment was the completion of a
$16,000,000 private placement of 400,000 shares to
accredited investors. The net proceeds of the offering
provided financial support for our growth initiatives.
2017 ANNUAL REPORT MIDDLEFIELD BANC CORP. BOARD OF DIRECTORS
Carolyn J. Turk, C.P.A. – 2004
Chairman, Board of Directors
Middlefield Banc Corp.
The Middlefield Banking Company
Controller
Molded Fiber Glass Companies
Thomas G. Caldwell – 1997
President and Chief Executive Officer
Middlefield Banc Corp.
The Middlefield Banking Company
James R. Heslop, II – 2001
Executive Vice President
Chief Operating Officer
Middlefield Banc Corp.
The Middlefield Banking Company
James J. McCaskey – 2004
President
McCaskey Landscape and Design,
LLC
William J. Skidmore – 2007
Northeast Ohio Senior
District Manager
Waste Management
of Ohio, Inc.
Kenneth E. Jones – 2008
Retired Financial Executive
Robert W. Toth – 2009
Retired: Gold Key Processing, Ltd
Eric W. Hummel – 2011
President
Hummel Construction
Darryl E. Mast – 2013
Retired: Hattie Larlham Care
Group and Hattie Larlham
Foundation
Clayton W. Rose, III, C.P.A. –
2014
Executive Principal
Rea & Associates, Inc.
Thomas Bevan – 2017
Chief Executive Officer
Bevan & Associates, Inc.
William A. Valerian – 2017
Retired: Chairman, President
and Chief Executive Officer
Liberty Bank N.A.
Central Ohio Region Advisory Board
Jeffrey A. Gongwer
George J. Kontogiannis, AIA
Timothy C. Long
Michael J. Moran
|8|
MIDDLEFIELD BANC CORP. THE MIDDLEFIELD BANKING COMPANY OFFICERS
Thomas G. Caldwell – 1986
President and Chief Executive Officer
James R. Heslop, II – 1996
Executive Vice President
Chief Operating Officer
Donald L. Stacy – 1999
Executive Vice President
Chief Financial Officer
Charles O. Moore – 2016
President, Central Ohio Region
Teresa M. Hetrick – 1996
Executive Vice President
Operations/Administration
Eric P. Hollinger – 2013
Executive Vice President
Senior Lender
Jay W. Valerian – 2004
Senior Vice President
Residential Lending
Matthew E. Bellin – 2006
Senior Vice President
Commercial Lending Team Leader
Adam T. Cook – 2006
Senior Vice President
Loan Administration
Felicia M. Hough – 2009
Senior Vice President
Regional Branch Administration
Courtney M. Erminio – 2010
Senior Vice President
Risk Officer
Richard R. Parkin – 2011
Vice President
Commercial Lender
Craig E. Reay – 2011
Senior Vice President
Credit Administration
Robert J. Dawson – 2015
Senior Vice President
Commercial Lender
J Todd Price – 2016
Senior Vice President
Commercial Lending Team Leader
Shalini Singhal – 2016
Senior Vice President
Chief Information Officer
Daniel B. Plant – 2014
Vice President
Mortgage Lending
Bradford L. Guess – 2015
Vice President
Commercial Lender
Carole L. Shaull – 2015
Vice President
Human Resources Administrator
John Solich – 2015
Vice President
Commercial Lender
Michael C. Ranttila – 2017
Senior Vice President
Finance
Robert Naegele – 2017
Vice President
Commercial Lender
Kathleen M. Johnson – 1971
Vice President
Chief Accounting Officer
Ashley Rispinto – 2017
Vice President
Commercial Lender
Alfred F. Thompson, Jr. – 1996
Vice President
Credit Administration
Karen D. Branham – 1983
Assistant Vice President
Bookkeeping Manager
David Kucera – 2004
Vice President
Controller
Laura E. Neale – 2010
Vice President
Commercial Lender
Thomas R. Neikirk – 1994
Assistant Vice President
Commercial Lender
Kathleen M. Vanek – 1998
Assistant Vice President
Mantua Branch Manager
|9|
Central Ohio Region Advisory Board
Jeffrey A. Gongwer
George J. Kontogiannis, AIA
Timothy C. Long
Michael J. Moran
2017 ANNUAL REPORT THE MIDDLEFIELD BANKING COMPANY OFFICERS Continued
Marlin J. Moschell – 2000
Assistant Vice President
Orwell Lending Officer
Rachel Gordon – 2015
Assistant Vice President
Financial Reporting Manager
Kevin J. Mitchell – 2007
Assistant Vice President
Lender II
Jean M. Carter – 2009
Assistant Vice President
Chardon Branch Manager
Dale L. Moore – 2009
Assistant Vice President
Project Coordinator
James C. Foster – 2011
Assistant Vice President
Orwell Branch Manager
Warren R. Cox, II – 2016
Assistant Vice President
Sunbury Branch Manager
Thomas W. Parker – 2016
Assistant Vice President
Commercial Lender
Lisa A. Sanborn - 2000
Banking Officer
Electronic Banking Specialist
Brett A. Richey – 2010
Banking Officer
Special Assets Manager
Stephen J. Lebold – 2012
Assistant Vice President
Westerville Branch Manager
Lisabeth A. Muldowney – 2012
Banking Officer
Garrettsville Branch Manager
Lori A. Graham – 2013
Assistant Vice President
Compliance/CRA Officer
April L. Wetzel – 2013
Assistant Vice President
Loan Administration
Linda M. Zak – 2014
Assistant Vice President
Mortgage Loan Operations
Michelle L. Bahleda – 2014
Banking Officer
Lender
Kristie Bond – 2014
Banking Officer
BSA/Security Officer
Christopher N. Pratt – 2014
Banking Officer
Support Center Specialist
|10|
MIDDLEFIELD BANC CORP. THE MIDDLEFIELD BANKING COMPANY STAFF & BRANCH LOCATIONS
Main Office Walk up ATM
15985 East High Street, P.O. Box 35
Middlefield, Ohio 44062
440.632.1666 • fax: 440.632.1700
Staff:
Mary Gerbasi – 2010 – Branch Manager
Linda Chandler – 2007 – Teller
Denise Smith – 2009 – Head Teller
Victoria Poole – 2015 – Customer Service Representative
Brenda Reiter – 2015 – Teller
Heather Lemr – 2016 – Customer Service Representative
Anita Russell – 2016 – Teller
Alyssa Seydler – 2016 – Teller
Samantha Beneke – 2017 – Teller
Financial Services:
Thomas Hart – 2004 – Financial Consultant
Stacey Albright – 2011 – Financial Consultant Assistant
Lending Department:
Jane Armstrong – 1998 – Lender
Michael Morrison – 2010 – Special Assets Manager
Kay Eckman – 2016 – Commercial Loan Administrator
Paul Weeks – 2016 – Commercial Loan Administrator
West Branch Drive up ATM
15545 West High Street, P.O. Box 35
Middlefield, Ohio 44062
440.632.8113 • fax: 440.632.9781
Staff:
Loretta Ricci – 2016 – Branch Manager
Patti Russo – 1982 – CSR/ Licensed Annuity Specialist
Brenda Varner– 2008 – Teller
Heather Eiermann – 2011 – Teller
Nancy McCullough – 2011 – Head Teller
Heather Koon – 2016 – Teller*
Gary Black – 2017 – Teller
Alicia Gardner-Perry – 2017 – Teller*
Julie Sly – 2017 – Teller
Information Technology:
Derreck Haynes – 2011 – APP Support/Training Specialist
Juliann Kish – 2012 – IS Support/Marketing Assistant
John Wilt – 2013 – Network Administrator
Darryl Alexander – 2017 – Network Engineer
Robert Kurta – 2017 – Senior Network Engineer
Eric Watts – 2017 – IT Service Desk Specialist
|11|
* denotes part time
2017 ANNUAL REPORT
Garrettsville Branch Drive up ATM
8058 State Street
Garrettsville, Ohio 44231
330.527.2121 • fax: 330.527.4210
Staff:
Vickie Moss – 1998 – Teller
Colleen Steele – 1998 – Head Teller/Teller Trainer
Dawn Semich – 2005 – CSR/ Licensed Annuity Specialist
LynnRae Derthick – 2006 – Teller
Sydney Handshue – 2016 – Teller
Jessica Lucanski – 2016 – Teller
Katie Smallwood – 2017 – Teller
Orwell Branch Drive up ATM
30 South Maple Street, P.O. Box 66
Orwell, Ohio 44076
440.437.7200 • fax: 440.437.1111
Staff:
Rachel Reese – 2005 – Customer Service Representative
Lisa Pelczar – 2012 – Teller
Shelene Darling – 2016 – Teller
Shirley Rafferty – 2016 – Head Teller
Sheri Nellis – 2017 – Teller*
Cortland Branch Drive up ATM
3450 Niles-Cortland Road
Cortland, Ohio 44410
330.637.3208 • fax: 330.637.3207
Staff:
Bonnie Davis – 2013 – Branch Manager
Lisa Swango – 2006 – CSR/Licensed Annuity Specialist
Jill Donko – 2013 – Head Teller
Cindy Hynst – 2013 – Teller
Michelle DeMichael – 2015 – Teller
Mantua Branch Walk up ATM
10519 Main Street, P.O. Box 648
Mantua, Ohio 44255
330.274.0881 • fax: 330.274.0883
Staff:
Alyssa Boxler – 2012 – Teller*
Natalie Graham – 2017 – Teller
Christina Piotrowski – 2017 – CSR/Teller
|12|
* denotes part time
MIDDLEFIELD BANC CORP. Newbury Branch Drive up ATM
11110 Kinsman Road, Suite 1, P.O. Box 208
Newbury, Ohio 44065
440.564.7000 • fax: 440.564.7004
Staff:
Kathy Shanholtzer – 2007 – Branch Manager
Helen Milburn – 2008 – Teller
Nicole Lange – 2012 – Customer Service Representative
Julie Smith – 2016 – Teller
Harley Adler – 2017 – Teller
Chardon Branch Drive up ATM
348 Center Street, P.O. Box 1078
Chardon, Ohio 44024
440.286.1222 • fax: 440.286.1111
Staff:
Dottie Brown – 2006 – Head Teller
Frances Bozeglav – 2014 – Teller
Tiffany Ward – 2016 – Consumer Lender/Deposit Specialist
Rosemarie Cuthbert – 2017 – Teller*
Jennifer Pazicni – 2017 – Teller
Dublin Branch Drive up ATM
6215 Perimeter Drive
Dublin, Ohio 43017
614.793.4631 • fax: 614.793.8922
Staff:
Colleen Pirrmann – 2011 – Branch Manager
Tyler Henkle – 2015 – Commercial Lender
Lori Jones – 2015 – Head Teller
Jessica Jacobs – 2016 – Teller
Ashley Reik – 2016 – Float Teller
Amanda Stricko – 2016 – Credit Analyst
Rebecca Saxton – 2017 – Commercial Loan
Administrative Assistant
Westerville Branch Drive up ATM
17 North State Street
Westerville, Ohio 43081
614.890.7832 • fax: 614.890.4633
Staff:
Tammy Downing – 2016 – Teller*
Elizabeth Flowers – 2016 – Head Teller
Rachel Raines – 2016 – Teller
|13|
* denotes part time
2017 ANNUAL REPORT
Sunbury Branch Drive up ATM
492 West Cherry Street
P.O. Box 987
Sunbury, Ohio 43074
740.913.0632 • fax: 614.392.5680
Staff:
Jason Nelson – 2011 – Branch Manager Trainee
Courtney Allen – 2017 – Teller
Beachwood Branch Drive up ATM
25201 Chagrin Boulevard, Suite 120
Beachwood, Ohio 44122
216.359.5580 • fax: 216.359.5581
Staff:
Myranda Nash – 2013 – Customer Service Representative
Jennifer Evans – 2015 – Customer Service Representative
Synester Jeter – 2017 – Teller
Lending Department:
Brandon Bucknell – 2015 – Commercial Lender
Thomas Burke – 2015 – Portfolio Manager
Steven Fleyshman – 2015 – Credit Analyst
Kaitlynn Schill – 2017 – Credit Analyst
Solon Branch Drive up ATM
6134 Kruse Drive
Solon, Ohio 44139
440.542.3789 • fax: 216.359.5582
Staff:
Dora Rankin – 2017 – Branch Manager
Lindsey Fitzgibbons – 2017 – Teller
Dolores Langhorn – 2017 – Customer Service Representative
Jacob Zaletel – 2017 – Teller*
Twinsburg Branch Drive up ATM
2351 Edison Boulevard, P.O. Box560
Twinsburg, Ohio 44087-0560
330.425.3033 • fax: 330.963.6399
Staff:
Larry Maniche – 2017 – Branch Manager
Cindy Jacobs – 2004 – Customer Service Representative
Courtney Warren – 2017 – Customer Service Representative
|14|
* denotes part time
MIDDLEFIELD BANC CORP. Bookkeeping:
Karen Westover – 1983 – Bookkeeper
Pamela Malcuit – 1989 – Bookkeeper
Donna Williams – 1990 – Bookkeeper
Tara Morgan – 1997 – Bookkeeper
Bonnie Hofstetter – 1998 – Courier*
Robert Lapsansky - 2005 – Courier*
Marcia Dziczkowski – 2008 – Courier*
Melissa Mathews – 2009 – Bookkeeper
Tracy Weaver – 2016 – Bookkeeper
Sheri Wedge – 2016 – Bookkeeper
Marvin Loving – 2017 – Courier*
Nicole Marchio – 2017 – Bookkeeper
Human Resources:
Debbie Farrow – 2017 – Human Resources Generalist
Michelle Hocevar – 2017 – Payroll/HR Administrator*
Loan Administration:
Helen Stowe – 1985 – Loan Data Specialist
Diana Koller – 1998 – Loan Documentation Specialist
Carolyn Fackler – 2001 – Consumer Loan Processor
Sue Trumbull – 2005 – Bank Card Representative
Darleen Beaver – 2007 – Loan Documentation Specialist*
J. Thomas Browne – 2010 – Credit Analyst
Carmella Honkala – 2010 – Consumer Loan Processor
Candice Bowers – 2014 – Loan Data Specialist
Deanne Drenik – 2014 – Commercial Loan Processor
Christine Iannetta – 2014 – Loan Data Specialist
Sandra Miller – 2014 – Credit Analyst
Linda Chopic – 2017 – Commercial Loan Processor
528 Administrative Offices
15200 Madison Road, P.O. Box 35
Middlefield, Ohio 44062
888.801.1666
Mortgage Lending:
Bethany Rowland – 2008 – Residential Loan Processor
Darla Stefaniak – 2009 – Residential Loan Closer
Sonya Green – 2013 – Quality Control Underwriter
Jenni Underwood – 2013 – Residential Loan Closer
Maryann Damante – 2014 – Residential Loan Processor
Mary Faloon – 2017 – Underwriter
Debra Scribbens – 2017 – Mortgage Loan Underwriter
Wendi Sloan – 2017 – Residential Loan Processor
Operations:
Rachel Dean – 1985 – Regional Teller Supervisor
Kristina Stephens – 2006 – IRA/HSA Administrator
David Harth – 2008 – Facility Manager
Patricia Rohrbaugh – 2012 – Support Center Representative
Marie Casserlie – 2013 – Float Teller
Heather Avery – 2014 – Support Center Representative
Jamie Brinkerhoff – 2015 – Electronic Bank Representative
Erna Leagan-Mabel – 2015 – Float Teller
Mirsadies Yon – 2015 – Support Center Representative
Jamie Genovese – 2016 – Support Center Representative
Frances Atwara – 2017 – Staff Accountant
Nikeeta Brazell – 2017 – Float Teller
Ellen Lindic – 2017 – Float Teller
Sara McGinley – 2017 – Electronic Banking Representative
Miriam Mog – 2017 – Support Center Representative
Katherine Trudick – 2017 – Float Teller
Risk:
Lauren Harth – 1995 – BSA/Security Assistant*
Melissa Gay – 2008 – Risk Management Assistant
Kimberly Utterback – 2014 – Compliance Assistant
Lake County Loan Production Office
8373 Mentor Avenue
Mentor, Ohio 44060
440.632.8140
|15|
* denotes part time
2017 ANNUAL REPORT
OUR CORE VALUES
Customer Service:
We will treat all customers in a manner that is both
personal and caring. We will show genuine concern and
respect for them as individuals.
Honesty and Integrity:
It is imperative that our customers trust us to do
business in an ethical manner. We will always honor our
commitments, keep our promises, and do the right thing.
Efficiency:
In order to be successful and to remain competitive, we
must keep our costs at a reasonable level, strive to improve
productivity, and continue to become more efficient in the
way we conduct our business.
Team Focus:
Believing that our people are key to our success, we are
dedicated to a well-educated and highly skilled workforce.
We are one team sharing one focus.
Community Commitment:
Actively participating and investing in our communities is
at the foundation of our organization. It is important to
provide leadership within our communities and to offer
our time, talent, and dollars.
Proactive Approach:
In order to be responsive to our customers’ needs, we
approach banking in a proactive, flexible, and positive
manner. We strive to be creative in solutions to problems,
recognizing them as improvement opportunities.
Shareholder Commitment:
Our shareholders have expressed their belief in us and it is
our duty to be responsible stewards of their investments.
Prudent and fiscally responsible management will provide
both short-term and long-term value to our shareholders.
|16|
MIDDLEFIELD BANC CORP. UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________ .
Commission file number 001-36613
Middlefield Banc Corp.
(Exact Name of Registrant as Specified in its Charter)
Ohio
State or Other Jurisdiction of Incorporation or Organization
15985 East High Street, Middlefield, Ohio
Address of Principal Executive Offices
34-1585111
I.R.S. Employer Identification No.
44062-0035
Zip Code
440-632-1666
Registrant’s Telephone Number, Including Area Code
Securities Registered Pursuant To Section 12(B) Of The Act:
Title of Each Class
Common Stock, Without Par Value
Name of Each Exchange on Which Registered
The NASDAQ Stock Market, LLC
(NASDAQ Capital Market)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No X
Securities registered pursuant to Section 12(g) of the Act: None
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under
those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes X No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be
contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Emerging growth company ☐
Accelerated filer X
Smaller reporting company X
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No X
The aggregate market value on June 30, 2017 of common stock held by non-affiliates of the registrant was approximately $151.2 million, based on the closing price
of $50.40 per share of common stock as reported on the NASDAQ Capital Market. As of March 7, 2018, there were 3,605,906 shares of common stock issued and
outstanding.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No ☐
Documents Incorporated by Reference Portions of the registrant’s definitive proxy statements for the 2018 Annual Meeting of Shareholders are incorporated by
reference in Part III of this report. Portions of the Annual Report to Shareholders for the year ended December 31, 2017 are incorporated by reference into Part I and
Part II of this report.
MIDDLEFIELD BANC CORP.
YEAR ENDED DECEMBER 31, 2017
INDEX TO FORM 10-K
Part I
Page
Business .......................................................................................................................................................
Item 1.
1
Item 1A. Risk Factors ................................................................................................................................................. 21
Item 1B. Unresolved Staff Comments ........................................................................................................................ 27
Properties ..................................................................................................................................................... 28
Item 2.
Legal Proceedings........................................................................................................................................ 29
Item 3.
Mine Safety Disclosures .............................................................................................................................. 29
Item 4.
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity
Securities ..................................................................................................................................................... 29
Selected Financial Data ............................................................................................................................... 29
Item 6.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ...................... 29
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ...................................................................... 29
Item 8.
Financial Statements and Supplementary Data ............................................................................................ 29
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...................... 29
Item 9.
Item 9A. Controls and Procedures .............................................................................................................................. 30
Item 9B. Other Information ........................................................................................................................................ 30
Part III
Item 10. Directors, Executive Officers, and Corporate Governance .......................................................................... 30
Executive Compensation ............................................................................................................................. 30
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .... 30
Item 12.
Certain Relationships and Related Transactions, and Director Independence ............................................. 30
Item 13.
Principal Accountant Fees and Services ...................................................................................................... 30
Item 14.
Part IV
Item 15.
Item 16.
Exhibits and Financial Statement Schedules ............................................................................................... 31
Form 10-K Summary ................................................................................................................................... 35
SIGNATURES
i
Part I
Item 1 — Business
Middlefield Banc Corp. Incorporated in 1988 under the Ohio General Corporation Law, Middlefield Banc Corp.
(“Company”) is a bank holding company registered under the Bank Holding Company Act of 1956. The Company’s
subsidiaries are:
1. The Middlefield Banking Company (“MBC”, or the “Bank”), an Ohio-chartered commercial bank that began operations
in 1901. MBC engages in a general commercial banking business in northeastern and central Ohio. The principal executive
office is located at 15985 East High Street, Middlefield, Ohio 44062-0035, and the telephone number is (440) 632-1666.
2. EMORECO Inc., an Ohio asset resolution corporation headquartered in Middlefield, Ohio. EMORECO exists to resolve
and dispose of troubled assets. The principal executive office is located at 15985 East High Street, Middlefield, Ohio 44062-
0035.
The Middlefield Banking Company MBC was chartered under Ohio law in 1901. MBC offers customers a broad range of
banking services including checking, savings, negotiable order of withdrawal (“NOW”) accounts, money market accounts,
time certificates of deposit, commercial loans, real estate loans, a variety of consumer loans, safe deposit facilities, and
travelers’ checks. MBC offers online banking and bill payment services to individuals and online cash management services
to business customers through its website at www.middlefieldbank.bank.
On January 12, 2017, the Company completed its acquisition of Liberty Bank, N.A. ("Liberty"), pursuant to a previously
announced definitive merger agreement. Under the terms of the merger agreement, Liberty shareholders received $37.96 in
cash or 1.1934 shares of the Company’s common stock in exchange for each share of Liberty common stock they owned
immediately prior to the merger. The Company issued 544,610 shares of its common stock in the merger and the aggregate
merger consideration was approximately $42.2 million. Upon closing, Liberty was merged into MBC, and its three full-
service bank offices, in Twinsburg in northern Summit County, and in Beachwood and Solon in eastern Cuyahoga County,
became offices of MBC. The systems integration of Liberty into MBC was completed in February, 2017.
Engaged in general commercial banking in northeastern and central Ohio, MBC offers these services principally to small and
medium-sized businesses, professionals, small business owners, and retail customers. MBC has developed a marketing
program to attract and retain consumer accounts and to match banking services and facilities with the needs of customers.
MBC’s loan products include operational and working capital loans, loans to finance capital purchases, term business loans,
residential construction loans, selected guaranteed or subsidized loan programs for small businesses, professional loans,
residential and mortgage loans, and consumer installment loans to make home improvements and to purchase automobiles,
boats, and other personal expenditures. Although the bank makes agricultural loans, the amount of agricultural loans in the
bank’s loan portfolio is not significant.
EMORECO Organized in 2009 as an Ohio corporation under the name EMORECO, Inc. and wholly owned by the Company,
the purpose of the asset resolution subsidiary is to maintain, manage, and dispose of nonperforming loans and other real estate
owned (“OREO”) acquired by the subsidiary bank as the result of borrower default on real estate-secured loans. At December
31, 2017, EMORECO’s assets consist of one cash account and prepaid income tax. According to Federal law governing bank
holding companies, real estate must be disposed of within two years of acquisition, although limited extensions may be
granted by the Federal Reserve Bank. A holding company subsidiary has limited real estate investment powers. EMORECO
may only manage and maintain property and may not improve or develop property without advance approval of the Federal
Reserve Bank.
Explanatory Note The registrant met the “accelerated filer” requirements as of the end of its 2017 fiscal year pursuant to
Rule 12b-2 of the Securities Exchange Act of 1934, as amended. However, pursuant to Rule 12b-2 and SEC Release No. 33-
8876, the registrant (as a smaller reporting company transitioning to a larger reporting company based on its public float as
of June 30, 2017) is not required to satisfy the larger reporting company requirements until its first quarterly report on Form
10-Q for the 2018 fiscal year thus remains eligible to check the “Smaller Reporting Company” box on the cover of this Form
10-K.
Market Area MBC’s market area in northeastern Ohio consists principally of Cuyahoga, Geauga, Portage, Lake, Summit,
Trumbull, and Ashtabula Counties. Benefitting from the area’s proximity to Cleveland and Warren, population and income
1
levels have maintained steady growth over the years. MBC’s three central Ohio branches are located in Dublin, Sunbury and
Westerville in Franklin County, north of Columbus, Ohio.
MBC received approval in December 2017 for a new branch location in Powell, Oho. Powell is located in Delaware County
immediately north of Franklin County, the county with the largest population in Ohio. The Company intends to open the
Powell branch in the second quarter of 2018. Based upon U.S. Census Bureau data compiled for 2012 through 2016,
Delaware, Geauga and Lake counties are the first, third and seventh highest ranked counties, respectively, among Ohio’s 88
counties based upon median family income. Powell and Dublin are the fourth and fifth highest ranked cities, respectively, in
Ohio based upon median family income and MBC’s offices in Beachwood and Solon, in Cuyahoga County, are located in
three of the top twenty highest ranked cities in Ohio based upon median family income.
MCB’s footprint is home to 3.8 million people, or roughly one third of the Ohio population. The economy of MBC’s northeast
markets is centered around manufacturing and agriculture, and includes a large Amish population. Geauga County is the
center of the 4th largest Amish population in the world. Columbus is the state capital and largest city in Ohio. The Bank’s
product offering is geared toward traditional banking business delivered to both consumers and businesses located in its
footprint of Northeast Ohio and the Columbus metro area. MBC’s current strategy is aimed at using a strong deposit
relationship in the more rural markets of Northeast Ohio to fund loan growth and build scale in its newer metro markets of
Cleveland/Akron and Columbus. According to the 2010 Decennial Census and the census estimate between 2010 and 2016
from the Delaware County Regional Planning Commission, Delaware County is the fastest growing suburban county in Ohio.
Forward-looking Statements This document contains forward-looking statements (as defined in the Private Securities
Litigation Reform Act of 1995) about the Company and subsidiaries. Information incorporated in this document by reference,
future filings by the Company on Form 10-Q and Form 8-K, and future oral and written statements by the Company and its
management may also contain forward-looking statements. Forward-looking statements include statements about anticipated
operating and financial performance, such as loan originations, operating efficiencies, loan sales, charge-offs and loan loss
provisions, growth opportunities, interest rates, and deposit growth. Words such as “may,” “could,” “should,” “would,”
“believe,” “anticipate,” “estimate,” “expect,” “intend,” “project,” “plan,” and similar expressions are intended to identify
these forward-looking statements.
Forward-looking statements are necessarily subject to many risks and uncertainties. A number of things could cause actual
results to differ materially from those indicated by the forward-looking statements. These include the factors we discuss
immediately below, those addressed under the caption “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” other factors discussed elsewhere in this document or identified in our filings with the Securities and
Exchange Commission, and those presented elsewhere by our management from time to time. Many of the risks and
uncertainties are beyond our control. The following factors could cause our operating and financial performance to differ
materially from the plans, objectives, assumptions, expectations, estimates, and intentions expressed in forward-looking
statements:
• the strength of the United States economy in general and the strength of the local economies in which we conduct our
operations; general economic conditions, either nationally or regionally, may be less favorable than we expect, resulting in a
deterioration in the credit quality of our loan assets, among other things
• the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal
Reserve Board
• inflation, interest rate, market, and monetary fluctuations
• the development and acceptance of new products and services of the Company and subsidiaries and the perceived overall
value of these products and services by customers, including the features, pricing, and quality compared to competitors’
products and services
• the willingness of customers to substitute our products and services for those of competitors
• the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities, and
insurance)
• changes in consumer spending and saving habits
2
Forward-looking statements are based on our beliefs, plans, objectives, goals, assumptions, expectations, estimates, and
intentions as of the date the statements are made. Investors should exercise caution because the Company cannot give any
assurance that its beliefs, plans, objectives, goals, assumptions, expectations, estimates, and intentions will be realized. The
Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future
events, the receipt of new information, or otherwise.
Lending — Loan Portfolio Composition and Activity. The Bank makes residential and commercial mortgage, home equity,
secured and unsecured consumer installment, commercial and industrial, and real estate construction loans for owner-
occupied and rental properties. The Bank’s Credit Policy aspires to a loan composition mix consisting of approximately 40%
to 50% consumer purpose transactions including residential real estate loans, home equity loans and other consumer loans.
The Policy is also designed to provide for 35% to 40% of total loans as business purpose commercial loans and business and
consumer credit card accounts of up to 5% of total loans.
Although Ohio law imposes no material restrictions on the types of loans the Bank may make, real estate-based lending has
historically been the Banks’s primary focus. For prudential reasons, we avoid lending on the security of real estate located
outside our market area. Ohio law does restrict the amount of loans an Ohio-chartered bank may make, generally limiting
credit to any single borrower to less than 15% of capital. An additional margin of 10% of capital is allowed for loans fully
secured by readily marketable collateral. This 15% legal lending limit has not been a material restriction on lending. We can
accommodate loan volumes exceeding the legal lending limit by selling loan participations to other banks. As of
December 31, 2017, MBC’s 15%-of-capital limit on loans to a single borrower was approximately $16.2 million.
The Bank offers specialized loans for business and commercial customers, including equipment and inventory financing, real
estate construction loans and Small Business Administration loans for qualified businesses. A substantial portion of the
Bank’s commercial loans are designated as real estate loans for regulatory reporting purposes because they are secured by
mortgages on real property. Loans of that type may be made for purposes of financing commercial activities, such as accounts
receivable, equipment purchases and leasing, but they are secured by real estate to provide the Bank with an extra measure
of security. Although these loans might be secured in whole or in part by real estate, they are treated in the discussions to
follow as commercial and industrial loans. The Bank’s consumer installment loans include secured and unsecured loans to
individual borrowers for a variety of purposes, including personal, home improvements, revolving credit lines, autos, boats,
and recreational vehicles.
The following table shows on a consolidated basis the composition of the loan portfolio in dollar amounts and in percentages
along with a reconciliation to loans receivable, net.
Loan Portfolio Composition at December 31,
2017
2016
2015
2014
2013
(Dollars in thousands)
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Type of loan:
Commercial and
industrial
Real estate –
construction
Real estate - mortgage:
Residential
Commercial
Consumer installment
Total loans
Less:
Allowance for loan
and lease losses
$ 101,346 10.98% $ 60,630
9.95% $ 42,536
7.97% $ 34,928
7.42% $ 54,498 12.51%
47,017
5.09 23,709
3.89 22,137
4.15 30,296
6.44 25,601
5.88
318,157 34.46 270,830 44.46 232,478 43.56 210,096 44.65 210,310 48.27
437,947 47.44 249,490 40.96 231,701 43.41 190,685 40.52 141,171 32.40
0.94
18,746
0.91
0.74
2.03
0.97
4,145
4,858
4,481
4,579
923,213 100.00% 609,140 100.00% 533,710 100.00% 470,584 100.00% 435,725 100.00%
7,190
6,598
6,385
6,846
7,046
Net loans
$ 916,023
$ 602,542
$ 527,325
$ 463,738
$ 428,679
3
The following table presents consolidated maturity information for the loan portfolio. The table does not include prepayments
or scheduled principal repayments. All loans are shown as maturing based on contractual maturities.
Loan Portfolio Maturity at December 31, 2017
(Dollars in thousands)
Amount due:
In one year or less
After one year through five years
After five years
Commercial
and
Industrial
Real Estate -
Real Estate - Mortgage
Construction Commercial
Total
$
24,393 $
39,687
37,266
1,709 $
11,953
33,355
12,655 $
65,502
359,790
38,757
117,142
430,411
Total amount due
$
101,346 $
47,017 $
437,947 $
586,310
Loans due on demand and overdrafts are included in the amount due in one year or less. The Company has no loans without
a stated schedule of repayment or a stated maturity.
The following table shows on a consolidated basis the dollar amount of all loans due after December 31, 2017 that have pre-
determined interest rates and the dollar amount of all loans due after December 31, 2017 that have floating or adjustable rates.
(Dollars in thousands)
Commercial and industrial
Real estate – construction
Real estate - mortgage:
Commercial
Fixed
Rate
Adjustable
Rate
Total
$
56,279 $
8,873
45,067 $
38,144
101,346
47,017
139,149
298,798
437,947
$
204,301 $
382,009 $
586,310
Residential Mortgage Loans A significant portion of the Bank’s lending consists of origination of conventional loans secured
by 1-4 family real estate located in Franklin, Geauga, Portage, Trumbull, Summit, Cuyahoga, and Ashtabula Counties.
Residential mortgage loans approximated $318.2 million or 34.5% of the Bank’s total loan portfolio at December 31, 2017.
The Bank makes loans of up to 80% of the value of the real estate and improvements securing a loan (“LTV” ratio) on 1-4
family real estate. The Bank generally does not lend in excess of the lower of 80% of the appraised value or sales price of the
property. The Bank offers residential real estate loans with terms of up to 30 years.
Approximately 63.9% of the portfolio of conventional mortgage loans secured by 1-4 family real estate at December 31,
2017 is adjustable rate. Generally, the Bank originates fixed-rate, single-family mortgage loans in conformity with Freddie
Mac guidelines, so are saleable to Freddie Mac. These loans are sold with servicing rights retained, and are sold in furtherance
of the Bank’s goal of better matching the maturities and interest rate sensitivity of its assets and liabilities. The Bank generally
retains responsibility for collecting and remitting loan payments, inspecting the properties, making certain insurance and tax
payments on behalf of borrowers and otherwise servicing the loans it sells and receives a fee for performing these services.
Sales of loans also provide funds for additional lending and other purposes.
The Bank’s home equity credit policy generally allows for a loan of up to 85% of a property’s appraised value, less the
principal balance of the outstanding first mortgage loan. The Bank’s home equity loans generally have terms of 20 years.
At December 31, 2017, residential mortgage loans of approximately $4.0 million were over 90 days delinquent or non-
accruing on that date, representing 1.3% of the residential mortgage loan portfolio. At December 31, 2016, residential
mortgage loans of approximately $4.0 million were over 90 days delinquent or non-accruing on that date, representing 1.5%
of the residential mortgage loan portfolio.
4
Commercial and Industrial Loans and Commercial Real Estate Loans
The Bank’s commercial loan services include:
•
•
•
•
accounts receivable, inventory and
working capital loans
renewable operating lines of credit
loans to finance capital equipment
term business loans
•
•
•
•
short-term notes
selected guaranteed or subsidized loan programs
for small businesses
loans to professionals
commercial real estate loans
Commercial real estate loans include commercial properties occupied by the proprietor of the business conducted on the
premises, and income-producing or farm properties. Although the Bank makes agricultural loans, it currently does not have
a significant amount of agricultural loans. The primary risks of commercial real estate loans are loss of income of the owner
or occupier of the property and the inability of the market to sustain rent levels. Although commercial and commercial real
estate loans generally bear more risk than single-family residential mortgage loans, they tend to be higher yielding, have
shorter terms and provide for interest-rate adjustments. Accordingly, commercial and commercial real estate loans enhance
a lender’s interest rate risk management and, in management’s opinion, promote more rapid asset and income growth than a
loan portfolio composed strictly of residential real estate mortgage loans.
Although a risk of nonpayment exists for all loans, certain specific risks are associated with various kinds of loans. One of
the primary risks associated with commercial loans is the possibility that the commercial borrower will not generate income
sufficient to repay the loan. The Bank’s Credit Policy provides that commercial loan applications must be supported by
documentation indicating cash flow sufficient for the borrower to service the proposed loan. Financial statements or tax
returns for at least three years must be submitted, and annual reviews are required for business purpose relationships of
$1,000,000 or more. Ongoing financial information is generally required for any commercial credit where the exposure is
$250,000 or more.
The fair value of collateral for collateralized commercial loans must exceed the Bank’s exposure. For this purpose fair value
is determined by independent appraisal or by the loan officer’s estimate employing guidelines established by the Credit
Policy. Loans not secured by real estate generally have terms of five years or fewer, unless guaranteed by the U.S. Small
Business Administration or other governmental agency, and term loans secured by collateral having a useful life exceeding
five years may have longer terms. The Bank’s Credit Policy allows for terms of up to 15 years for loans secured by
commercial real estate, and one year for business lines of credit. The maximum LTV ratio for commercial real estate loans
is 80% of the appraised value or cost, whichever is less.
Real estate is commonly a material component of collateral for the Bank’s loans, including commercial loans. Although the
expected source of repayment is generally the operations of the borrower’s business or personal income, real estate collateral
provides an additional measure of security. Risks associated with loans secured by real estate include fluctuating land values,
changing local economic conditions, changes in tax policies, and a concentration of loans within a limited geographic area.
At December 31, 2017 commercial and commercial real estate loans totaled $539.3 million, or 58.4% of the Bank’s total loan
portfolio. At December 31, 2017, commercial and commercial real estate loans of approximately $4.4 million were over
90 days delinquent or non-accruing on that date, and represented 0.8% of the commercial and commercial real estate loan
portfolios. At December 31, 2016, commercial and commercial real estate loans totaled $310.1 million, or 50.9% of the
Bank’s total loan portfolio. At December 31, 2016, commercial and commercial real estate loans of approximately $1.9
million were over 90 days delinquent or non-accruing on that date, and represented 0.6% of the commercial and commercial
real estate loan portfolios.
Real Estate Construction
The Bank originates several different types of loans that it categorizes as construction loans, including:
•
•
•
•
residential construction loans to borrowers who will occupy the premises upon completion of construction,
residential construction loans to builders,
commercial construction loans, and
real estate acquisition and development loans.
5
Because of the complex nature of construction lending, these loans are generally recognized as having a higher degree of risk
than other forms of real estate lending. The Bank’s fixed-rate and adjustable-rate construction loans do not provide for the
same interest rate terms on the construction loan and on the permanent mortgage loan that follows completion of the
construction phase of the loan. It is the norm for the Bank to make residential construction loans without an existing written
commitment for permanent financing. The Bank’s Credit Policy provides that the Bank may make construction loans with
terms of up to one year, with a maximum LTV ratio for residential construction of 80%. The Bank also offers residential
construction-to-permanent loans that have a twelve-month construction period followed by 30 years of permanent financing.
At December 31, 2017, real estate construction loans totaled $47.0 million, or 5.1% of the Bank’s total loan portfolio. There
were no real estate construction loans 90 days delinquent or non-accruing on that date. At December 31, 2016, real estate
construction loans totaled $23.7 million, or 3.9% of the Bank’s total loan portfolio. There were no real estate construction
loans 90 days delinquent or non-accruing on that date.
Consumer Installment Loans The Bank’s consumer installment loans include secured and unsecured loans to individual
borrowers for a variety of purposes, including personal, home improvement, revolving credit lines, autos, boats, and
recreational vehicles. The Bank does not currently do any indirect lending. Unsecured consumer loans carry significantly
higher interest rates than secured loans. The Bank maintains a higher loan loss allowance for consumer loans, while
maintaining strict credit guidelines when considering consumer loan applications.
According to the Bank’s Credit Policy, consumer loans secured by collateral other than real estate generally may have terms
of up to five years, and unsecured consumer loans may have terms up to three years. Real estate security generally is required
for consumer loans having terms exceeding five years.
At December 31, 2017, the Bank had approximately $18.7 million in its consumer installment loan portfolio, representing
2.0% of total loans. At December 31, 2016, the Bank had approximately $4.5 million in its consumer installment loan
portfolio, representing 0.7% of total loans.
Loan Solicitation and Processing Loan originations are developed from a number of sources, including continuing business
with depositors, other borrowers and real estate builders, solicitations by Bank personnel and walk-in customers.
When a loan request is made, the Bank reviews the application, credit bureau reports, property appraisals or evaluations,
financial information, verifications of income, and other documentation concerning the creditworthiness of the borrower, as
applicable to each loan type. The Bank’s underwriting guidelines are set by senior management and approved by the Board
of Directors. The Credit Policy specifies each individual officer’s loan approval authority. Loans exceeding an individual
officer’s approval authority are submitted to an Officer’s Loan Committee, which has authority to approve loans up to
$2,000,000. The Board of Directors’ Loan Committee acts as an approval authority for exposures over $2,000,000 and up to
$5,000,000. Loans exceeding $5,000,000 require approval from the full Board of Directors.
Income from Lending Activities The Bank earns interest and fee income from its lending activities. Net of origination costs,
loan origination fees are amortized over the life of a loan. The Bank also receives loan fees related to existing loans, including
late charges. Income from loan origination and commitment fees and discounts varies with the volume and type of loans and
commitments made and with competitive and economic conditions. Note 1 to the Consolidated Financial Statements included
herein contains a discussion of the manner in which loan fees and income are recognized for financial reporting purposes.
Mortgage Banking Activity The Bank originates conventional loans secured by first lien mortgages on one-to-four family
residential properties located within its market area for either portfolio or sale into the secondary market. During the year
ended December 31, 2017, the Bank recorded gains of $291,000 on the sale of $10.0 million in loans receivable originated
for sale. During the year ended December 31, 2016, the Bank recorded gains of $419,000 on the sale of $19.7 million in loans
receivable originated for sale. The sold loans were sold on a servicing retained basis to Freddie Mac.
In addition to interest earned on loans and income recognized on the sale of loans, the Bank receives fees for servicing loans
that it has sold. Because the Bank has data processing capacity that will allow it to expand its portfolio of serviced loans
without incurring significant incremental expenses, the Bank intends in the future to augment its portfolio of loans serviced
by continuing to originate and sell such fixed-rate single-family residential mortgage loans to Freddie Mac while retaining
servicing.
Income from these activities will vary from period to period with the volume and type of loans originated and sold, which in
turn is dependent on prevailing mortgage interest rates and their effect on the demand for loans in the Bank’s market area.
6
Student Lending Through its merger with Liberty, MBC acquired a private student loan book of business. These loans
provided qualified borrowers with the ability to finance the costs associated with obtaining a degree and to refinance their
existing student loans. Pursuant to loan origination agreements with student loan originating and servicing companies, MBC
made student loans to qualified students and sold those loans, without recourse and with servicing released, into the secondary
market. Gains on the sales of these loans as well as interest income earned while held by MBC are included in the
Consolidated Statement of Income. During the year ended December 31, 2017, the Company originated $365.7 million in
student loans. During the year ended December 31, 2016, Liberty originated $259.0 million in student loans. Near the end
of 2017, the program’s requirements and duration changed, which increased the risk profile. The Company therefore has
ceased the origination of new student loans.
Nonperforming Loans Late charges on residential mortgages and consumer loans are assessed if a payment is not received
by the due date plus a grace period. When an advanced stage of delinquency appears on a single-family loan and if repayment
cannot be expected within a reasonable time or a repayment agreement is not entered into, a required notice of foreclosure or
repossession proceedings may be prepared by the Bank’s attorney and delivered to the borrower so that foreclosure
proceedings may be initiated promptly, if necessary. The Bank also collects late charges on commercial loans.
When the Bank acquires real estate through foreclosure, voluntary deed, or similar means, the real estate is classified as
OREO until it is sold. When property is acquired in this manner, it is recorded at the lower of cost (the unpaid principal
balance at the date of acquisition) or fair value, less anticipated cost to sell. Any subsequent write-down is charged to expense.
All costs incurred from the date of acquisition to maintain the property are expensed. OREO is appraised during the
foreclosure process, before acquisition when possible. Losses are recognized for the amount by which the book value of the
related mortgage loan exceeds the estimated net realizable value of the property.
The Bank undertakes regular review of the loan portfolio to assess its risks, particularly the risks associated with the
commercial loan portfolio.
Classified Assets FDIC regulations governing classification of assets require nonmember commercial banks — including the
Bank — to classify their own assets and to establish appropriate general and specific allowances for losses, subject to FDIC
review. The regulations are designed to encourage management to evaluate assets on a case-by-case basis, discouraging
automatic classifications. Under this classification system, problem assets of insured institutions are classified as
“substandard,” “doubtful,” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized
by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets
classified as “doubtful” have all the weaknesses inherent in those classified substandard, with the added characteristic that
the weaknesses make collection of principal in full — on the basis of currently existing facts, conditions, and values — highly
questionable and improbable. Assets classified as “loss” are those considered uncollectible and of such little value that their
continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not expose the Bank
to risk sufficient to warrant classification in one of the above categories, but that possess some weakness, are required to be
designated “special mention” by management.
When an FDIC insured institution classifies assets as either “substandard” or “doubtful,” it may establish allowances for loan
losses in an amount deemed prudent by management. When an insured institution classifies assets as “loss,” it is required
either to establish an allowance for losses equal to 100% of that portion of the assets so classified or to charge off that amount.
An Ohio nonmember bank’s determination about classification of its assets and the amount of its allowances is subject to
review by the FDIC and the Ohio Division of Financial Institutions (the “ODFI”), which may order the establishment of
additional loss allowances. Management also employs an independent third party to semi-annually review and validate the
internal loan review process and loan classifications.
7
As of December 31, 2017, 2016, 2015, 2014, and 2013 consolidated classified loans were as follows:
Classified Loans at December 31,
2017
2016
2015
2014
2013
(Dollars in
thousands)
Amount
Percent of
total loans Amount
Percent
of total
loans Amount
Percent
of total
loans Amount
Percent
of total
loans Amount
Percent
of total
loans
Classified loans:
Special mention
Substandard
Doubtful
$ 11,829
13,625
-
1.28% $ 5,657
1.48% 11,777
-
0.00%
0.93% $ 5,297
1.93% 15,586
130
0.00%
0.99% $ 4,987 1.06% $ 4,685
2.92% 16,211 3.44% 19,328
43
0.02%
627 0.13%
1.08%
4.44%
0.01%
Total
amount
due
$ 25,454
2.76% $ 17,434
2.86% $ 21,013
3.93% $ 21,825 4.63% $ 24,056
5.53%
Other than those disclosed in the preceding table, the Bank does not believe there are any loans classified for regulatory
purposes as loss, doubtful, substandard, special mention or otherwise, which will result in losses or have a material impact
on future operations, liquidity or capital reserves. We are not aware of any other information that causes us to have serious
doubts as to the ability of borrowers in general to comply with repayment terms.
Investments Investment securities provide a return on residual funds after lending activities. Investments may be in federal
funds sold, corporate securities, U.S. Government and agency obligations, state and local government obligations and
government-guaranteed mortgage-backed securities. The Bank generally does not invest in securities that are rated less than
investment grade by a nationally recognized statistical rating organization. Ohio law prescribes the kinds of investments an
Ohio-chartered bank may make. Permitted investments include local, state, and federal government securities, mortgage-
backed securities, and securities of federal government agencies. An Ohio-chartered bank also may invest up to 10% of its
assets in corporate debt and equity securities, or a higher percentage in certain circumstances. Ohio law also limits to 15% of
capital the amount an Ohio-chartered bank may invest in the securities of any one issuer, other than local, state, and federal
government and federal government agency issuers and mortgage-backed securities issuers. These provisions have not been
a material constraint upon the Bank’s investment activities.
All securities-related activity is reported to the Bank’s board of directors. General changes in investment strategy are required
to be reviewed and approved by the board. Senior management can purchase and sell securities in accordance with the Bank’s
stated investment policy.
Management determines the appropriate classification of securities at the time of purchase. At this time the Bank has no
securities that are classified as held to maturity. Securities to be held for indefinite periods and not intended to be held to
maturity or on a long-term basis are classified as available for sale. Available-for-sale securities are reflected on the balance
sheet at their fair value.
8
The following table exhibits the consolidated amortized cost and fair value of the Bank’s investment portfolio:
Investment Portfolio Amortized Cost and Fair Value at December 31,
2016
2015
2017
(Dollars in thousands)
Amortized
cost
Fair value
Amortized
cost
Fair value
Amortized
cost
Fair value
Available for Sale:
U.S. Government agency
securities
Obligations of states and political
subdivisions:
Taxable
Tax-exempt
Mortgage-backed securities in
$
8,664 $
8,719 $
10,158 $
10,236 $
21,655 $
21,629
504
65,408
512
66,917
1,615
78,327
1,740
79,483
1,989
91,940
2,123
95,167
government- sponsored entities
18,640
18,510
20,128
20,069
24,480
24,524
Private-label mortgage-backed
securities
Equity securities in financial
institutions
-
-
1,579
1,709
2,079
2,263
415
625
750
1,139
750
814
Total Investment Securities
$
93,631 $
95,283 $ 112,557 $
114,376 $ 142,893 $
146,520
The contractual maturity of investment debt securities is as follows:
One year or less
More than one to
five years
More than five to ten
years
More than ten years Total investment securities
December 31, 2017
Amortized
cost
Average
yield
Amortized
cost
Average
yield
Amortized
cost
Average
yield
Amortized
cost
Average
yield
Amortized
cost
Average
yield
Fair
value
(Dollars in
thousands)
U.S.
$
government
agency
securities
Obligations of
states and
political
subdivisions:
Taxable
Tax-exempt
-
- $
2,000
1.38% $
-
- $
6,664
3.23% $
8,664
2.80% $ 8,719
-
-
-
-
504
4.85%
-
-
504
4.85%
512
**
2,340
4.35%
7,718
3.38%
6,122
3.44%
49,228
3.11%
65,408
3.22% 66,917
Mortgage-
backed
securities in
government-
sponsored
entities
-
-
-
-
4,366
1.87%
14,274
2.56%
18,640
2.40% 18,510
Total
** Tax equivalent yield
2,340
$
4.35% $
9,718
2.97% $
10,992
2.88% $
70,166
3.01% $
93,216
3.03% $ 94,658
9
Expected maturities of investment securities could differ from contractual maturities because the borrower, or issuer, could
have the right to call or prepay obligations with or without call or prepayment penalties.
As of December 31, 2017, the Bank also held 35,892 shares of $100 par value Federal Home Loan Bank of Cincinnati stock,
which is a restricted security. FHLB stock represents an equity interest in the FHLB, but it does not have a readily
determinable market value. The stock can be sold at its par value only, and only to the FHLB or to another member institution.
Member institutions are required to maintain a minimum stock investment in the FHLB, based on total assets, total mortgages,
and total mortgage-backed securities. The Bank’s minimum investment in FHLB stock at December 31, 2016 was $3.6
million.
Sources of Funds — Deposit Accounts Deposit accounts are a major source of funds for the Bank. The Bank offers a number
of deposit products to attract both commercial and regular consumer checking and savings customers, including regular and
money market savings accounts, NOW accounts, and a variety of fixed-maturity, fixed-rate certificates with maturities
ranging from 3 to 60 months. These accounts earn interest at rates established by management based on competitive market
factors and management’s desire to increase certain types or maturities of deposit liabilities. The Bank also provides travelers’
checks, official checks, money orders, ATM services, and IRA accounts.
The following table shows on a consolidated basis the amount of time deposits of $100,000 or more as of December 31,
2017, including certificates of deposit, by time remaining until maturity.
(Dollar amounts in thousands)
Amount
Percent of Total
Within three months
Beyond three but within six months
Beyond six but within twelve months
Beyond one year
Total
$
$
16,338
16,213
23,212
76,731
12.33%
12.24%
17.52%
57.91%
132,494
100.00%
Borrowings Deposits and repayment of loan principal are the Bank’s primary sources of funds for lending activities and other
general business purposes. However, when the supply of funds cannot satisfy the demand for loans or general business
purposes, the Bank can obtain funds from the FHLB of Cincinnati. Interest and principal are payable monthly, and the line
of credit is secured by a pledge collateral agreement. At December 31, 2017, MBC had $90.8 million of FHLB borrowings
outstanding. The Company’s subsidiary bank also has access to credit through the Federal Reserve Bank of Cleveland and
other funding sources.
The outstanding balances and related information about short-term borrowings as of December 31, 2017 and 2016, which
includes securities sold under agreements to repurchase, lines of credit with other banks and Federal Funds purchased are
summarized on a consolidated basis as follows:
(Dollar amounts in thousands)
2017
2016
Balance at year-end
Average balance outstanding
Maximum month-end balance
Weighted-average rate at year-end
Weighted-average rate during the year
Personnel
$
$
74,707
63,910
114,025
1.36%
1.18%
68,359
37,130
68,359
0.61%
0.89%
As of December 31, 2017, the Bank had 190 full-time equivalent employees. None of the employees are represented by a
collective bargaining group.
Supervision and Regulation
The following discussion of bank supervision and regulation is qualified in its entirety by reference to the statutory and
regulatory provisions discussed. Changes in applicable law or in the policies of various regulatory authorities could materially
affect the business and prospects of the Company.
10
The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956. As such, the
Company is subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System,
acting primarily through the Federal Reserve Bank of Cleveland. The Company is required to file annual reports and other
information with the Federal Reserve. The bank subsidiary is an Ohio-chartered commercial bank. As a state-chartered,
nonmember bank, the bank is primarily regulated by the FDIC and by the Ohio Division of Financial Institutions.
The Company and The Middlefield Banking Company are subject to federal banking laws, and the Company is also subject
to Ohio bank law. These federal and state laws are intended to protect depositors, not stockholders. Federal and state laws
applicable to holding companies and their financial institution subsidiaries regulate the range of permissible business
activities, investments, reserves against deposits, capital levels, lending activities and practices, the nature and amount of
collateral for loans, establishment of branches, mergers, dividends, and a variety of other important matters. The Bank is
subject to detailed, complex, and sometimes overlapping federal and state statutes and regulations affecting routine banking
operations. These statutes and regulations include but are not limited to state usury and consumer credit laws, the Truth-in-
Lending Act and Regulation Z, the Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Truth
in Savings Act, and the Community Reinvestment Act. The Bank must comply with Federal Reserve Board regulations
requiring depository institutions to maintain reserves against their transaction accounts (principally NOW and regular
checking accounts). Because required reserves are commonly maintained in the form of vault cash or in a noninterest-bearing
account (or pass-through account) at a Federal Reserve Bank, the effect of the reserve requirement is to reduce an institution’s
earning assets.
The Federal Reserve Board and the FDIC have extensive authority to prevent and to remedy unsafe and unsound practices
and violations of applicable laws and regulations by institutions and holding companies. The agencies may assess civil money
penalties, issue cease-and-desist or removal orders, seek injunctions, and publicly disclose those actions. In addition, the
Ohio Division of Financial Institutions possesses enforcement powers to address violations of Ohio banking law by Ohio-
chartered banks.
Regulation of Bank Holding Companies — Bank and Bank Holding Company Acquisitions The Bank Holding Company
Act requires every bank holding company to obtain approval of the Federal Reserve before:
•
•
•
directly or indirectly acquiring ownership or control of any voting shares of another bank or bank holding company,
if after the acquisition the acquiring company would own or control more than 5% of the shares of the other bank or
bank holding company (unless the acquiring company already owns or controls a majority of the shares),
acquiring all or substantially all of the assets of another bank, or
merging or consolidating with another bank holding company.
The Federal Reserve will not approve an acquisition, merger, or consolidation that would have a substantially anticompetitive
result, unless the anticompetitive effects of the proposed transaction are clearly outweighed by a greater public interest in
satisfying the convenience and needs of the community to be served. The Federal Reserve also considers capital adequacy
and other financial and managerial factors in its review of acquisitions and mergers.
Additionally, the Bank Holding Company Act, the Change in Bank Control Act and the Federal Reserve Board’s
Regulation Y require advance approval of the Federal Reserve to acquire “control” of a bank holding company. Control is
conclusively presumed to exist if an individual or company acquires 25% or more of a class of voting securities of the bank
holding company. If the holding company has securities registered under Section 12 of the Securities Exchange Act of 1934,
as the Company does, or if no other person owns a greater percentage of the class of voting securities, control is presumed to
exist if a person acquires 10% or more, but less than 25%, of any class of voting securities. Approval of the Ohio Division of
Financial Institutions is also necessary to acquire control of an Ohio-chartered bank.
Nonbanking Activities With some exceptions, the Bank Holding Company Act generally prohibits a bank holding company
from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company that
is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions
involve nonbank activities that, by statute or by Federal Reserve Board regulation or order, are held to be closely related to
the business of banking or of managing or controlling banks. In making its determination that a particular activity is closely
related to the business of banking, the Federal Reserve considers whether the performance of the activities by a bank holding
company can be expected to produce benefits to the public — such as greater convenience, increased competition, or gains
in efficiency in resources — that will outweigh the risks of possible adverse effects such as decreased or unfair competition,
conflicts of interest, or unsound banking practices. Some of the activities determined by Federal Reserve Board regulation to
11
be closely related to the business of banking are: making or servicing loans or leases; engaging in insurance and discount
brokerage activities; owning thrift institutions; performing data processing services; acting as a fiduciary or investment or
financial advisor; and making investments in corporations or projects designed primarily to promote community welfare.
Financial Holding Companies On November 12, 1999 the Gramm-Leach-Bliley Act became law, repealing much of the 1933
Glass-Steagall Act’s separation of the commercial and investment banking industries. The Gramm-Leach-Bliley Act expands
the range of nonbanking activities a bank holding company may engage in, while preserving existing authority for bank
holding companies to engage in activities that are closely related to banking. The legislation creates a new category of holding
company called a “financial holding company.” Financial holding companies may engage in any activity that is:
•
•
financial in nature or incidental to that financial activity, or
complementary to a financial activity and that does not pose a substantial risk to the safety and soundness of
depository institutions or the financial system generally.
Activities that are financial in nature include:
•
•
•
acting as principal, agent, or broker for insurance,
underwriting, dealing in, or making a market in securities, and
providing financial and investment advice.
The Federal Reserve Board and the Secretary of the Treasury have authority to decide that other activities are also financial
in nature or incidental to financial activity, taking into account, among others, changes in technology, changes in the banking
marketplace, and competition for banking services. The Company is engaged solely in activities that were permissible for a
bank holding company before enactment of the Gramm-Leach-Bliley Act. Federal Reserve Board rules require that all of the
depository institution subsidiaries of a financial holding company be and remain well capitalized and well managed. If all
depository institution subsidiaries of a financial holding company do not remain well capitalized and well managed, the
financial holding company must enter into an agreement acceptable to the Federal Reserve Board, undertaking to comply
with all capital and management requirements within 180 days. In the meantime the financial holding company may not use
its expanded authority to engage in nonbanking activities without Federal Reserve Board approval and the Federal Reserve
may impose other limitations on the holding company’s or affiliates’ activities. If a financial holding company fails to restore
the well-capitalized and well-managed status of a depository institution subsidiary, the Federal Reserve may order divestiture
of the subsidiary.
Holding Company Capital and Source of Strength The Federal Reserve considers the adequacy of a bank holding company’s
capital on essentially the same risk-adjusted basis as capital adequacy is determined by the FDIC at the bank subsidiary level.
It is also Federal Reserve Board policy that bank holding companies serve as a source of strength for their subsidiary banking
institutions.
Under Bank Holding Company Act section 5(e), the Federal Reserve Board may require a bank holding company to terminate
any activity or relinquish control of a nonbank subsidiary if the Federal Reserve Board determines that the activity or control
constitutes a serious risk to the financial safety, soundness or stability of a subsidiary bank. And with the Federal Deposit
Insurance Corporation Improvement Act of 1991’s addition of the prompt corrective action provisions to the Federal Deposit
Insurance Act, section 38(f)(2)(I) of the Federal Deposit Insurance Act now provides that a federal bank regulatory authority
may require a bank holding company to divest itself of an undercapitalized bank subsidiary if the agency determines that
divestiture will improve the bank’s financial condition and prospects.
Capital — Risk-Based Capital Requirements The Federal Reserve Board and the FDIC employ similar risk-based capital
guidelines in their examination and regulation of bank holding companies and financial institutions. If capital falls below the
minimum levels established by the guidelines, the bank holding company or bank may be denied approval to acquire or
establish additional banks or nonbank businesses or to open new facilities. Failure to satisfy capital guidelines could subject
a banking institution to a variety of restrictions or enforcement actions by federal bank regulatory authorities, including the
termination of deposit insurance by the FDIC and a prohibition on the acceptance of brokered deposits.
A bank’s capital hedges its risk exposure, absorbing losses that can be predicted as well as losses that cannot be predicted.
According to the Federal Financial Institutions Examination Council’s explanation of the capital component of the Uniform
Financial Institutions Rating System, commonly known as the “CAMELS” rating system, a rating system employed by the
Federal bank regulatory agencies, a financial institution must “maintain capital commensurate with the nature and extent of
risks to the institution and the ability of management to identify, measure, monitor, and control these risks. The effect of
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credit, market, and other risks on the institution’s financial condition should be considered when evaluating the adequacy of
capital.” Under Basel III, the Company and the Bank are required to maintain a minimum common equity Tier 1 capital ratio
of 4.5%, a Tier 1 capital ratio of 6%, a total capital ratio of 8%, and a Tier 1 leverage ratio of 4%. Basel III also established
a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely
of common equity Tier 1 capital with phased-in effectiveness that began in January 2016 at 0.625% of risk-weighted assets
and increases by that amount each year until fully implemented in January 2019. The capital conservation buffer is designed
to absorb losses during periods of economic stress. Banking institutions with a common equity Tier 1 ratio to risk-weighted
assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases and
compensation based on the amount of the shortfall. These ratios are absolute minimums. In practice, banks are expected to
operate with more than the absolute minimum capital. The FDIC may establish greater minimum capital requirements for
specific institutions.
The FDIC also employs a market risk component in its calculation of capital requirements for nonmember banks. The market
risk component could require additional capital for general or specific market risk of trading portfolios of debt and equity
securities and other investments or assets. The FDIC’s evaluation of an institution’s capital adequacy takes account of a
variety of other factors as well, including interest rate risks to which the institution is subject, the level and quality of an
institution’s earnings, loan and investment portfolio characteristics and risks, risks arising from the conduct of nontraditional
activities, and a variety of other factors.
Accordingly, the FDIC’s final supervisory judgment concerning an institution’s capital adequacy could differ significantly
from the conclusions that might be derived from the absolute level of an institution’s risk-based capital ratios. Therefore,
institutions generally are expected to maintain risk-based capital ratios that exceed the minimum ratios discussed above. This
is particularly true for institutions contemplating significant expansion plans and institutions that are subject to high or
inordinate levels of risk. Moreover, although the FDIC does not impose explicit capital requirements on holding companies
of institutions regulated by the FDIC, the FDIC can take account of the degree of leverage and risks at the holding company
level. If the FDIC determines that the holding company (or another affiliate of the institution regulated by the FDIC) has an
excessive degree of leverage or is subject to inordinate risks, the FDIC may require the subsidiary institution(s) to maintain
additional capital or the FDIC may impose limitations on the subsidiary institution’s ability to support its weaker affiliates or
holding company.
The banking agencies have also established a minimum leverage ratio of 4%, which represents Tier 1 capital as a percentage
of total assets, less intangibles. However, for bank holding companies and financial institutions seeking to expand and for all
but the most highly rated banks and bank holding companies, the banking agencies expect an additional cushion of at least
100 to 200 basis points. At December 31, 2017, the Company was in compliance with all regulatory capital requirements.
Prompt Corrective Action. To resolve the problems of undercapitalized institutions and to prevent a recurrence of the banking
crisis of the 1980s and early 1990s, the Federal Deposit Insurance Corporation Improvement Act of 1991 established a system
known as “prompt corrective action.” Under the prompt corrective action provisions and implementing regulations, every
institution is classified into one of five categories, depending on its total capital ratio, its Tier 1 capital ratio, its common
equity Tier 1 risk-based capital ratio, its leverage ratio, and subjective factors. The categories are “well capitalized,”
“adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” To be
considered well capitalized for purposes of the prompt corrective action rules, a bank must maintain total risk-based capital
of 10.0% or greater, Tier 1 risk-based capital of 8.0% or greater, common equity Tier 1 capital of 6.5% or greater, and
leverage capital of 5.0% or greater. An institution with a capital level that might qualify for well capitalized or adequately
capitalized status may nevertheless be treated as though it were in the next lower capital category if its primary federal
banking supervisory authority determines that an unsafe or unsound condition or practice warrants that treatment.
A financial institution’s operations can be significantly affected by its capital classification under the prompt corrective action
rules. For example, an institution that is not well capitalized generally is prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rate in its market without advance regulatory approval, which
can have an adverse effect on the bank’s liquidity. At each successively lower capital category, an insured depository
institution is subject to additional restrictions. Undercapitalized institutions are required to take specified actions to increase
their capital or otherwise decrease the risks to the federal deposit insurance funds. A bank holding company must guarantee
that a subsidiary bank that adopts a capital restoration plan will satisfy its plan obligations. Any capital loans made by a bank
holding company to a subsidiary bank are subordinated to the claims of depositors in the bank and to certain other
indebtedness of the subsidiary bank. If bankruptcy of a bank holding company occurs, any commitment by the bank holding
company to a Federal banking regulatory agency to maintain the capital of a subsidiary bank would be assumed by the
bankruptcy trustee and would be entitled to priority of payment. Bank regulatory agencies generally are required to appoint
a receiver or conservator shortly after an institution becomes critically undercapitalized.
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The following table illustrates the capital and prompt corrective action guidelines applicable to the Company and its
subsidiary.
The Middlefield Banking Company
Middlefield Banc Corp.
Adequately capitalized ratio
Adequately capitalized ratio plus fully phased-in capital
conservation buffer
Well-capitalized ratio (Bank only)
As of December 31, 2017
Common
Equity Tier
1
Tier 1 Risk
Based
Total Risk
Based
10.88%
11.64%
6.00%
8.50%
8.00%
10.88%
10.79%
4.50%
7.00%
6.50%
11.64%
12.41%
8.00%
10.50%
10.00%
Leverage
9.47%
10.20%
4.00%
4.00%
5.00%
New Capital Rules On July 9, 2013, the federal bank regulatory agencies issued a final rule that revised their risk-based
capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were
reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The final rule applies
to all depository institutions, top-tier bank holding companies with total consolidated assets of $1 billion or more and top-
tier savings and loan holding companies.
The rule established a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increased the
minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets), increased the minimum
leverage ratio to 4% for all institutions, and assigned a higher risk weight (150%) to exposures that are more than 90 days
past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development
or construction of real property.
The rule also included changes in what constitutes regulatory capital. In the first quarter of 2015 the Company permanently
opted out of the inclusion of accumulated other comprehensive income in its capital calculation in an effort to reduce the
impact of market volatility on its regulatory capital levels.
The new capital requirements also include changes in the risk weights of assets to better reflect credit risk and other risk
exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition,
development and construction loans and nonresidential mortgage loans that are 90 day past due or otherwise on nonaccrual
status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one
year or less that is not unconditionally cancellable; a 250% risk weight (up from 100%) for mortgage servicing and deferred
tax assets that are not deducted from capital; and increased risk-weights (from 0% to up to 600%) for equity exposures.
Finally, the rule limits capital distributions and certain discretionary bonus payments if the banking organization does not
hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition
to the amount necessary to meet its minimum risk-based capital requirements.
The final rule became effective for the bank on January 1, 2015. The phase in of the capital conservation buffer requirement
began on January 1, 2016 at 0.625% of risk-weighted assets and increases each year until fully implemented at 2.5% on
January 1, 2019.
Limits on Dividends and Other Payments The Company’s ability to obtain funds for the payment of dividends and for
other cash requirements depends on the amount of dividends that may be paid to it by the bank. Ohio bank law and FDIC
policy are consistent, providing that banks generally may rely solely on current earnings for the payment of dividends. Under
Ohio Revised Code section 1107.15(B) a dividend may be declared from surplus, meaning additional paid-in capital, with
the approval of (x) the Ohio Superintendent of Financial Institutions and (y) the holders of two thirds of the bank’s outstanding
shares. Superintendent approval is also necessary for payment of a dividend if the total of all cash dividends in a year exceeds
the sum of (x) net income for the year and (y) retained net income for the two preceding years. Relying on 12 U.S.C. 1818(b),
the FDIC may restrict a bank’s ability to pay a dividend if the FDIC has reasonable cause to believe that the dividend would
constitute an unsafe and unsound practice. A bank’s ability to pay dividends may be affected also by the FDIC’s capital
maintenance requirements and prompt corrective action rules. A bank may not pay a dividend if the bank is undercapitalized
or if payment would cause the bank to become undercapitalized.
A 1985 policy statement of the Federal Reserve Board declares that a bank holding company should not pay cash dividends
on common stock unless the organization’s net income for the past year is sufficient to fully fund the dividends and the
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prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality, and overall
financial condition. Until the second anniversary of the January 12, 2017 merger of Liberty into The Middlefield Banking
Company, The Middlefield Banking Company cannot pay a dividend to Middlefield Banc Corp. without advance approval
of the Ohio Division of Financial Institutions.
The Dodd-Frank Act The Dodd-Frank Wall Street Reform and Consumer Protection Act (“DFA”) became law on July 21,
2010. The DFA includes corporate governance and executive compensation reforms, new registration requirements for hedge
fund and private equity fund advisers, increased regulation of over-the-counter derivatives and asset-backed securities, and
new rules for credit rating agencies. The DFA includes these provisions:
•
•
•
•
•
•
•
•
•
Title X established an independent Federal regulatory body within the Federal Reserve System. Dedicated
exclusively to consumer protection and known as the Consumer Financial Protection Bureau (the “CFPB”),
this regulatory body has responsibility for most consumer protection laws, with rulemaking, supervisory,
examination, and enforcement authority.
section 171 restricted the amount of trust preferred securities that may be considered Tier 1 capital. For
depository institution holding companies with total assets of less than $15 billion, trust preferred securities
issued before May 19, 2010 continue to be included in Tier 1 capital, but future issuances of trust preferred
securities are no longer eligible for treatment as Tier 1 capital.
under section 334 the FDIC’s minimum reserve ratio is to be increased from 1.15% to 1.35%, with the goal
of attaining that 1.35% level by September 30, 2020; however, financial institutions with assets of less than
$10 billion are exempt from the cost of the increase. The DFA also removes the upper limit on the designated
reserve ratio, which was formerly capped at 1.5%, removing the upper limit on the size of the insurance
fund as a consequence. The DFA gives the FDIC much greater discretion to manage its insurance fund
reserves, including where to set the insurance fund’s designated reserve ratio.
the deposit insurance cover limit was increased to $250,000 by section 335.
section 627 repealed the longstanding prohibition against financial institutions paying interest on checking
accounts.
section 331 changed the way deposit insurance premiums are calculated by the FDIC as well. That is, deposit
insurance premiums are calculated based upon an institution’s so-called assessment base. Until the DFA
became law, the assessment base consisted of an institution’s deposit liabilities. Section 331, however,
makes clear that the assessment base shall now be the difference between total assets and tangible equity.
In other words, the assessment base takes account of all liabilities, not merely deposit liabilities.
the Office of the Comptroller of the Currency’s ability to preempt state consumer protection laws is
constrained by section 1044, and because of section 1042 state attorneys general have greater authority to
enforce state consumer protection laws against national banks and their operating subsidiaries.
section 604 requires the Federal bank regulatory agencies to take into account the risks to the stability of
the U.S. banking or financial system associated with approval of an application for acquisition of a bank,
for acquisition of a nonbank company, or for a bank merger transaction.
section 619 implements the so-called “Volcker rule,” prohibiting a banking entity from engaging in
proprietary trading or from sponsoring or investing in a hedge fund or private equity fund.
The CFPB, which has rulemaking, supervisory, and enforcement powers under specific federal consumer financial protection
laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit
Reporting Act, Fair Debt Collection Act, and Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act. In
addition to giving the CFPB responsibility for these specific statutes, the DFA grants to the CFPB broad authority to prohibit
the offering by banks of consumer financial products or engaging in acts or practices that the CFPB considers to be unfair,
deceptive, or abusive. The CFPB has examination and primary enforcement authority over depository institutions with $10
billion or more in assets, not smaller institutions. However, smaller institutions are subject to CFPB rules. In addition, the
standards established by the CFPB for large institutions have applied in practice to smaller institutions as well. The DFA
does not prevent states from adopting consumer protection laws and standards that are more stringent than those adopted at
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the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and
federal laws and regulations.
Implementing section 1411 of the DFA, in 2013 the CFPB amended Regulation Z under the Truth in Lending Act, adding a
rule that mortgage lenders must make a reasonable and good faith determination that a consumer being granted mortgage
credit has the ability to repay the loan according to its terms. Under this new rule, referred to as the “ability-to-repay” rule,
mortgage lenders may determine the consumer’s ability to repay in one of two ways. The first alternative involves assessment
of eight underwriting factors, including the loan applicant’s current or reasonably expected income or assets, current
employment status, monthly payment for the credit applied for, monthly payment on any simultaneous loan being made to
the applicant, monthly payment for mortgage-related obligations, current debt obligations, alimony, and child support,
monthly debt-to-income ratio or residual income, and credit history. The second alternative involves origination of a so-
called “qualified mortgage,” meaning a mortgage with terms that are consistent with minimum standards established by the
CFPB, which currently include a maximum 43% debt-to-income ratio for the borrower (although the 43% minimum debt-to-
income ratio does not apply if the loan is eligible to be purchased, insured, or guaranteed by FNMA, FHLMC, HUD, or the
VA). In general terms, a qualified mortgage is one with a term of 30 years or less, with substantially equal regular periodic
payments (although adjustable-rate mortgages can be qualified mortgages), with total points and fees of 3% of the loan
amount or less, and without negative amortization or interest-only payments or balloon payments.
A lender originating a qualified mortgage is protected against a legal claim that the lender failed to comply with the ability-
to-repay rule. A mortgage with an interest rate exceeding the prime rate by 1.5 percentage points or more (3.5 percentage
points for subordinate-lien loans such as home equity loans) is referred to in the CFPB rule as a higher-priced mortgage loan.
The lender making a subprime qualified mortgage has less protection under the ability-to-repay rule than a lender making a
prime qualified mortgage. A lender originating a mortgage that is not a qualified mortgage is exposed to a potential claim
that the lender did not comply with the ability-to-repay rules, which could require the lender to pay damages to the borrower,
including but not necessarily limited to the sum of all finance charges and fees paid by the borrower (a lender originating a
subprime qualified mortgage bears this risk to a degree as well). The borrower’s claim also could impair the lender’s ability
to enforce the loan terms or foreclose on the real estate collateral. Compliance with the ability-to-repay rules has increased
community banks’ compliance costs, including our own.
In addition to ability to repay, the DFA imposes a risk-retention requirement on mortgage lenders selling loans into the
secondary mortgage market. With some exceptions a mortgage lender selling a loan into the secondary mortgage market must
retain ownership of at least 5% of the loan, the assumption being that if mortgage lenders remain exposed to credit risk they
will not knowingly make loans that fail to satisfy ordinary and reasonable standards of creditworthiness. A qualified mortgage
for purposes of the ability-to-repay rule is also exempt from the risk-retention requirement, allowing a mortgage lender to
sell 100% of a qualified mortgage rather than only 95%.
The existing and future rulemakings issued under the Dodd-Frank Act have resulted, and may continue to result, in a
significant cost of compliance. The changes resulting from the Dodd-Frank Act may impact the profitability of our business
activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage
requirements or otherwise materially and adversely affect us.
In an Executive Order signed on February 3, 2017, the President of the United States directed the Secretary of the Treasury,
in consultation with federal financial regulators, to assess the rules promulgated under the Dodd-Frank Act since 2010 with
a view to producing a plan to revise them as necessary. As such, the new U.S. presidential administration and Congress could
lead to increased regulatory uncertainty for our industry and for us. It is unknown at this time to what extent new legislation
will be passed into law, what pending or new regulatory proposals will be adopted, or if existing legislation or regulations
will be repealed. It is also unknown what the effect of such passage, adoption or repeal would have, either positively or
negatively, on our industry or on us. If legislation or regulations are implemented or repealed, it may be time-consuming and
expensive for us to alter our internal operations in order to comply with such changes.
Sarbanes-Oxley Act of 2002 The goals of the Sarbanes-Oxley Act enacted in 2002 are to increase corporate responsibility,
to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect
investors by improving the accuracy and reliability of corporate disclosures made under the securities laws. The changes are
intended to allow shareholders to monitor the performance of companies and directors more easily and efficiently.
The Sarbanes-Oxley Act generally applies to all companies that file periodic reports with the SEC under the Securities
Exchange Act of 1934. The Act has an impact on a wide variety of corporate governance and disclosure issues, including the
composition of audit committees, certification of financial statements by the chief executive officer and the chief financial
officer, forfeiture of bonuses and profits made by directors and senior officers in the 12-month period covered by restated
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financial statements, a prohibition on insider trading during pension plan black-out periods, disclosure of off-balance sheet
transactions, a prohibition on personal loans to directors and officers (excluding FDIC-insured financial institutions),
expedited filing requirements for stock transaction reports by officers and directors, the formation of a public accounting
oversight board, auditor independence, and various increased criminal penalties for violations of securities laws.
Deposit Insurance The Deposit Insurance fund of the FDIC insures deposits at insured depository institutions such as the
Bank. Deposit accounts in the Bank are insured by the FDIC generally up to a maximum of $250,000 based upon the
ownership rights and capacities in which deposit accounts are maintained at the Bank. The premium that banks pay for deposit
insurance is based upon a risk classification system established by the FDIC. Banks with higher levels of capital and a low
degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or a higher degree of
supervisory concern.
The FDIC is able to assess higher rates to institutions with a significant reliance on secured liabilities or a significant reliance
on brokered deposits but, for well-managed and well-capitalized institutions, only when accompanied by rapid asset growth.
Assessments are based on the average consolidated total assets less tangible equity capital of a financial institution.
Assessment rates range from 2.5 to 9 basis points on the broader assessment base for banks in the lowest risk category (“well
capitalized” and CAMELS I or II) and up to 30 to 45 basis points for banks in the highest risk category.
Effective July 1, 2016, the FDIC changed the way established small banks are assessed for deposit insurance. The FDIC has
eliminated the risk categories for banks, such as the Bank, that have been FDIC insured for at least five years and have less
than $10 billion in total assets, and assessments are now based on financial measures and supervisory ratings derived from
statistical modeling estimating the probability of failure within three years. In conjunction with the Deposit Insurance Fund
reserve ratio achieving 1.15%, the assessment range (inclusive of possible adjustments) for established small banks with
CAMELS I or II ratings has been reduced to 1.5 to 16 basis points and the maximum assessment rate for established small
banks with CAMELS III through V ratings is 30 basis points.
The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the
operating expenses and results of operations of the Bank. Management cannot predict what assessment rates will be in the
future.
Interstate Banking and Branching Section 613 of the DFA amends the interstate branching provisions of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994. The expanded de novo branching authority of the DFA authorizes
a state or national bank to open a de novo branch in another state if the law of the state where the branch is to be located
would permit a state bank chartered by that state to open the branch. Section 607 of the DFA also increases the approval
threshold for interstate bank acquisitions, providing that a bank holding company must be well capitalized and well managed
as a condition to approval of an interstate bank acquisition, rather than being merely adequately capitalized and adequately
managed, and that an acquiring bank must be and remain well capitalized and well managed as a condition to approval of an
interstate bank merger.
Transactions with Affiliates Although The Middlefield Banking Company is not a member bank of the Federal Reserve
System, it is required by the Federal Deposit Insurance Act to comply with section 23A and section 23B of the Federal
Reserve Act — pertaining to transactions with affiliates — as if it were a member bank. These statutes are intended to protect
banks from abuse in financial transactions with affiliates, preventing FDIC-insured deposits from being diverted to support
the activities of unregulated entities engaged in nonbanking businesses. An affiliate of a bank includes any company or entity
that controls or is under common control with the bank. Generally, section 23A and section 23B of the Federal Reserve Act:
•
•
•
•
limit the extent to which a bank or its subsidiaries may lend to or engage in various other kinds of transactions with
any one affiliate to an amount equal to 10% of the institution’s capital and surplus, limiting the aggregate of covered
transactions with all affiliates to 20% of capital and surplus,
impose restrictions on investments by a subsidiary bank in the stock or securities of its holding company,
require that affiliate transactions be on terms substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate, and
impost strict collateral requirements on loans or extensions or credit by a bank to an affiliate
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The Bank’s authority to extend credit to insiders — meaning executive officers, directors and greater than 10% stockholders
— or to entities those persons control, is subject to section 22(g) and section 22(h) of the Federal Reserve Act and
Regulation O of the Federal Reserve Board. Among other things, these laws require insider loans to be made on terms
substantially similar to those offered to unaffiliated individuals, place limits on the amount of loans a bank may make to
insiders based in part on the bank’s capital position, and require that specified approval procedures be followed. Loans to an
individual insider may not exceed the legal limit on loans to any one borrower, which in general terms is 15% of capital but
can be higher in some circumstances. And the aggregate of all loans to all insiders may not exceed the Bank’s unimpaired
capital and surplus. Insider loans exceeding the greater of 5% of capital or $25,000 must be approved in advance by a majority
of the board, with any “interested” director not participating in the voting. Lastly, loans to executive officers are subject to
special limitations. Executive officers may borrow in unlimited amounts to finance their children’s education or to finance
the purchase or improvement of their residence, and they may borrow no more than $100,000 for most other purposes. Loans
to executive officers exceeding $100,000 may be allowed if the loan is fully secured by government securities or a segregated
deposit account. A violation of these restrictions could result in the assessment of substantial civil monetary penalties, the
imposition of a cease-and-desist order or other regulatory sanctions.
Banking agency guidance for commercial real estate lending In December 2006 the FDIC and other Federal banking
agencies issued final guidance on sound risk management practices for concentrations in commercial real estate lending,
including acquisition and development lending, construction lending, and other land loans, which experience has shown can
be particularly high-risk lending.
The commercial real estate risk management guidance does not impose rigid limits on commercial real estate lending but
does create a much sharper supervisory focus on the risk management practices of banks with concentrations in commercial
real estate lending. According to the guidance, an institution that has experienced rapid growth in commercial real estate
lending, has notable exposure to a specific type of commercial real estate, or is approaching or exceeds the following
supervisory criteria may be identified for further supervisory analysis of the level and nature of its commercial real estate
concentration risk:
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-
total reported loans for construction, land development, and other land represent 100% or more of the institution’s
total capital, or
total commercial real estate loans represent 300% or more of the institution’s total capital and the outstanding balance
of the institution’s commercial real estate loan portfolio has increased by 50% or more during the prior 36 months.
These measures are intended merely to enable the banking agencies to identify institutions that could have an excessive
commercial real estate lending concentration, potentially requiring close supervision to ensure that the institutions have sound
risk management practices in place. Conversely, these measures do not imply that banks are authorized by the December
2006 guidance to accumulate a commercial real estate lending concentration up to the 100% and 300% thresholds.
Community Reinvestment Act Under the Community Reinvestment Act of 1977 and implementing regulations of the
banking agencies, a financial institution has a continuing and affirmative obligation — consistent with safe and sound
operation — to address the credit needs of its entire community, including low- and moderate-income neighborhoods. The
CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s
discretion to develop the types of products and services it believes are best suited to its particular community. The CRA
requires that bank regulatory agencies conduct regular CRA examinations and provide written evaluations of institutions’
CRA performance. The CRA also requires that an institution’s CRA performance rating be made public. CRA performance
evaluations are based on a four-tiered rating system: Outstanding, Satisfactory, Needs to Improve and Substantial
Noncompliance.
Although CRA examinations occur on a regular basis, CRA performance evaluations have been used principally in the
evaluation of regulatory applications submitted by an institution. CRA performance evaluations are considered in evaluating
applications for such things as mergers, acquisitions, and applications to open branches.
MBC’s CRA performance evaluation dated March 6, 2017 states that MBC’s CRA rating is “Satisfactory.”
Federal Home Loan Bank The Federal Home Loan Bank serves as a credit source for their members. As a member of the
FHLB of Cincinnati, MBC is required to maintain an investment in the capital stock of the FHLB of Cincinnati in an amount
calculated by reference to the FHLB member bank’s amount of loans, and or “advances,” from the FHLB.
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Each FHLB is required to establish standards of community investment or service that its members must maintain for
continued access to long-term advances from the FHLB. The standards take into account a member’s performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
Cybersecurity Recent statements by federal regulators regarding cybersecurity indicate that financial institutions should
design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes
also address the risk posed by compromised client credentials, including security measures to reliably authenticate clients
accessing Internet-based services of the financial institution. Financial institution management is also expected to maintain
sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s
operations after a cyber-attack involving destructive malware. A financial institution is expected to develop appropriate
processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data
if the institution or its critical service providers fall victim to this type of cyber-attack. If the Bank fails to observe regulatory
guidance regarding appropriate cybersecurity safeguards we could be subject to various regulatory sanctions, including
financial penalties.
In the ordinary course of business, the Bank relies on electronic communications and information systems to conduct its
operations and to store sensitive data. The Bank employs an in-depth, layered, defensive approach that incorporates security
processes and technology to manage and maintain cybersecurity controls. The Bank employs a variety of preventative and
detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected
advanced persistent threats. Notwithstanding the strength of the Bank’s defensive measures, the threat from cyber-attacks is
severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures.
While to date we have not experienced a significant compromise, significant data loss or any material financial losses related
to cybersecurity attacks, our systems and those of our clients and third-party service providers are under constant threat and
it is possible that we could experience a significant event in the future. Risks and exposures related to cybersecurity attacks
are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats,
as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services
by the Bank and its clients.
Anti-money laundering and anti-terrorism legislation The Bank Secrecy Act of 1970 requires financial institutions to
maintain records and report transactions to prevent the financial institutions from being used to hide money derived from
criminal activity and tax evasion. The Bank Secrecy Act establishes (a) record keeping requirements to assist government
enforcement agencies with tracing financial transactions and flow of funds, (b) reporting requirements for Suspicious Activity
Reports and Currency Transaction Reports to assist government enforcement agencies with detecting patterns of criminal
activity, (c) enforcement provisions authorizing criminal and civil penalties for illegal activities and violations of the Bank
Secrecy Act and its implementing regulations, and (d) safe harbor provisions that protect financial institutions from civil
liability for their cooperative efforts.
The Treasury’s Office of Foreign Asset Control administers and enforces economic and trade sanctions against targeted
foreign countries, entities, and individuals based on U.S. foreign policy and national security goals. As a result, financial
institutions must scrutinize transactions to ensure that they do not represent obligations of or ownership interests in entities
owned or controlled by sanctioned targets.
Signed into law on October 26, 2001, the USA PATRIOT Act of 2001 is omnibus legislation enhancing the powers of
domestic law enforcement organizations to resist the international terrorist threat to United States security. Title III of the
legislation, the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, most directly affects
the financial services industry, enhancing the Federal government’s ability to fight money laundering through monitoring of
currency transactions and suspicious financial activities. The USA PATRIOT Act has significant implications for depository
institutions and other businesses involved in the transfer of money:
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a financial institution must establish due diligence policies, procedures, and controls reasonably designed to detect
and report money laundering through correspondent accounts and private banking accounts,
no bank may establish, maintain, administer, or manage a correspondent account in the United States for a foreign
shell bank,
financial institutions must abide by Treasury Department regulations encouraging financial institutions, their
regulatory authorities, and law enforcement authorities to share information about individuals, entities, and
organizations engaged in or suspected of engaging in terrorist acts or money laundering activities,
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financial institutions must follow Treasury Department regulations setting forth minimum standards regarding
customer identification. These regulations require financial institutions to implement reasonable procedures for
verifying the identity of any person seeking to open an account, maintain records of the information used to verify
the person’s identity, and consult lists of known or suspected terrorists and terrorist organizations provided to the
financial institution by government agencies,
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every financial institution must establish anti-money laundering programs, including the development of internal
policies and procedures, designation of a compliance officer, employee training, and an independent audit function.
Consumer protection laws and regulations. The Middlefield Banking Company is subject to regular examination by the
FDIC to ensure compliance with statutes and regulations applicable to the bank’s business, including consumer protection
statutes and implementing regulations, some of which are discussed below. Violations of any of these laws may result in
fines, reimbursements, and other related penalties.
Equal Credit Opportunity Act. The Equal Credit Opportunity Act generally prohibits discrimination in any credit transaction,
whether for consumer or business purposes, on the basis of race, color, religion, national origin, sex, marital status, age
(except in limited circumstances), receipt of income from public assistance programs, or good faith exercise of any rights
under the Consumer Credit Protection Act.
Truth in Lending Act. The Truth in Lending Act is designed to ensure that credit terms are disclosed in a meaningful way so
that consumers may compare credit terms more readily and knowledgeably. As a result of the Truth in Lending Act, all
creditors must use the same credit terminology to express rates and payments, including the annual percentage rate, the
finance charge, the amount financed, the total of payments and the payment schedule, among other things.
Fair Housing Act. The Fair Housing Act makes it unlawful for a residential mortgage lender to discriminate against any
person because of race, color, religion, national origin, sex, handicap, or familial status. A number of lending practices have
been held by the courts to be illegal under the Fair Housing Act, including some practices that are not specifically mentioned
in the Fair Housing Act.
Home Mortgage Disclosure Act. The Home Mortgage Disclosure Act arose out of public concern over credit shortages in
certain urban neighborhoods. The Home Mortgage Disclosure Act requires financial institutions to collect data that enable
regulatory agencies to determine whether the financial institutions are serving the housing credit needs of the neighborhoods
and communities in which they are located. The Home Mortgage Disclosure Act also requires the collection and disclosure
of data about applicant and borrower characteristics as a way to identify possible discriminatory lending patterns. The vast
amount of information that financial institutions collect and disclose concerning applicants and borrowers receives attention
not only from state and Federal banking supervisory authorities but also from community-oriented organizations and the
general public.
Real Estate Settlement Procedures Act. The Real Estate Settlement Procedures Act requires that lenders provide borrowers
with disclosures regarding the nature and cost of real estate settlements. The Real Estate Settlement Procedures Act also
prohibits abusive practices that increase borrowers’ costs, such as kickbacks and fee-splitting without providing settlement
services.
Privacy. Under the Gramm-Leach-Bliley Act, all financial institutions are required to establish policies and procedures to
restrict the sharing of non-public customer data with non-affiliated parties and to protect customer data from unauthorized
access. In addition, the Fair Credit Reporting Act of 1971 includes many provisions concerning national credit reporting
standards and permits consumers to opt out of information-sharing for marketing purposes among affiliated companies.
State Banking Regulation As an Ohio-chartered bank, The Middlefield Banking Company is subject to regular examination
by the Ohio Division of Financial Institutions. State banking regulation affects the internal organization of the bank as well
as its savings, lending, investment, and other activities. State banking regulation may contain limitations on an institution’s
activities that are in addition to limitations imposed under federal banking law. The Ohio Division of Financial Institutions
may initiate supervisory measures or formal enforcement actions, and if the grounds provided by law exist it may take
possession and control of an Ohio-chartered bank.
Monetary Policy The earnings of financial institutions are affected by the policies of regulatory authorities, including
monetary policy of the Federal Reserve Board. An important function of the Federal Reserve System is regulation of
aggregate national credit and money supply. The Federal Reserve Board accomplishes these goals with measures such as
open market transactions in securities, establishment of the discount rate on bank borrowings, and changes in reserve
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requirements against bank deposits. These methods are used in varying combinations to influence overall growth and
distribution of financial institutions’ loans, investments and deposits, and they also affect interest rates charged on loans or
paid on deposits. Monetary policy is influenced by many factors, including inflation, unemployment, short-term and long-
term changes in the international trade balance, and fiscal policies of the United States government. Federal Reserve Board
monetary policy has had a significant effect on the operating results of financial institutions in the past, and it can be expected
to influence operating results in the future.
Item 1A — Risk Factors
Risks Related to the Company’s Business
We are exposed to interest-rate risk. With the record low interest rates that have prevailed for many years, the interest-rate
risk that exists for most or all financial institutions arises out of interest rates that increase more than anticipated or that
increase more quickly than expected. If interest rates change more abruptly than we have simulated or if the increase is greater
than we have simulated, this could have an adverse effect on our net interest income and equity value.
The Company operates in a highly competitive industry and market area. The Company faces significant competition both
in making loans and in attracting deposits. Competition is based on interest rates and other credit and service charges, the
quality of services rendered, the convenience of banking facilities, the range and type of products offered and, in the case of
loans to larger commercial borrowers, lending limits, among other factors. Competition for loans comes principally from
commercial banks, savings banks, savings and loan associations, credit unions, mortgage banking companies, insurance
companies, and other financial service companies. The Company’s most direct competition for deposits has historically come
from commercial banks, savings banks, and savings and loan associations. Technology has also lowered barriers to entry and
made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and
automatic payment systems. Larger competitors may be able to achieve economies of scale and, as a result, offer a broader
range of products and services. The Company’s ability to compete successfully depends on a number of factors, including,
among other things:
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the ability to develop, maintain, and build long-term customer relationships based on top quality service, high ethical
standards, and safe, sound assets;
the ability to expand the Company’s market position;
the scope, relevance, and pricing of products and services offered to meet customer needs and demands;
the rate at which the Company introduces new products and services relative to its competitors;
customer satisfaction with the Company’s level of service; and
industry and general economic trends
Failure to perform in any of these areas could significantly weaken the Company’s competitive position, which could
adversely affect growth and profitability.
The Company may not be able to attract and retain skilled people. The Company’s success depends, in large part, on its
ability to attract and retain key people. Competition for the best people can be intense and the Company may not be able to
hire people or to retain them. The unexpected loss of the services of key personnel of the Company could have a material
adverse impact on the Company’s business because of their skills, knowledge of the Company’s market, years of industry
experience, and the difficulty of promptly finding qualified replacement personnel. The Company has non-competition
agreements with senior officers and key personnel.
The Company does not have the financial and other resources that larger competitors have; this could affect its ability to
compete for large commercial loan originations and its ability to offer products and services competitors provide to
customers. The northeastern Ohio and central Ohio markets in which the Company operates have high concentrations of
financial institutions. Many of the financial institutions operating in our markets are branches of significantly larger
institutions headquartered in Cleveland or in other major metropolitan areas, with significantly greater financial resources
and higher lending limits. In addition, many of these institutions offer services that the Company does not or cannot provide.
For example, the larger competitors’ greater resources offer advantages such as the ability to price services at lower, more
attractive levels, and the ability to provide larger credit facilities. The Company accommodates loan volumes in excess of its
lending limits from time to time through the sale of loan participations to other banks.
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The business of banking is changing rapidly with changes in technology, which poses financial and technological
challenges to small and mid-sized institutions. With frequent introductions of new technology-driven products and services,
the banking industry is undergoing rapid technological changes. In addition to enhancing customer service, the effective use
of technology increases efficiency and enables financial institutions to reduce costs. Financial institutions’ success is
increasingly dependent upon use of technology to provide products and services that satisfy customer demands and to create
additional operating efficiencies. Many of the Company’s competitors have substantially greater resources to invest in
technological improvements, which could enable them to perform various banking functions at lower costs than the Company,
or to provide products and services that the Company is not able to economically provide. The Company cannot assure you
that we will be able to develop and implement new technology-driven products or services or that the Company will be
successful in marketing these products or services to customers. Because of the demand for technology-driven products,
banks increasingly rely on unaffiliated vendors to provide data processing services and other core banking functions. The use
of technology-related products, services, delivery channels, and processes exposes banks to various risks, particularly
transaction, strategic, reputation, and compliance risk. The Company cannot assure you that we will be able to successfully
manage the risks associated with our dependence on technology.
The banking industry is heavily regulated; the compliance burden to the industry is considerable; the principal beneficiary
of federal and state regulation is the public at large and depositors, not stockholders. The Company and its subsidiaries are
and will remain subject to extensive state and federal government supervision and regulation. This supervision and regulation
affects many aspects of the banking business, including permissible activities, lending, investments, payment of dividends,
the geographic locations in which our services can be offered, and numerous other matters. State and federal supervision and
regulation are intended principally to protect depositors, the public, and the deposit insurance fund administered by the FDIC.
Protection of stockholders is not a goal of banking regulation.
The burdens of federal and state banking regulation place banks in general at a competitive disadvantage compared to less
regulated competitors. Applicable statutes, regulations, agency and court interpretations, and agency enforcement policies
have undergone significant changes, and could change significantly again. Federal and state banking agencies also require
banks and bank holding companies to maintain adequate capital. Failure to maintain adequate capital or to comply with
applicable laws, regulations, and supervisory agreements could subject a bank or bank holding company to federal or state
enforcement actions, including termination of deposit insurance, imposition of fines and civil penalties, and, in the most
severe cases, appointment of a conservator or receiver for a depositary institution. Changes in applicable laws and regulatory
policies could adversely affect the banking industry generally or the Company in particular. The Company gives you no
assurance that we will be able to adapt successfully to industry changes caused by governmental actions.
Success in the banking industry requires disciplined management of lending risks. There are many risks in the business of
lending, including risks associated with the duration over which loans may be repaid, risks resulting from changes in
economic conditions, risks inherent in dealing with individual borrowers, and risks resulting from changes in the value of
loan collateral. We attempt to mitigate this risk by a thorough review of the creditworthiness of loan customers. Nevertheless,
there is risk that our credit evaluations will prove to be inaccurate due to changed circumstances or otherwise.
The Company’s allowance for loan and lease losses may be insufficient. A critical resource for maintaining the safety and
soundness of banks so that they can fulfill their basic function of financial intermediation, the allowance for possible loan
losses is a reserve established through a provision for possible loan losses charged to expense that represents management’s
best estimate of probable losses that have been incurred within the existing portfolio of loans. Current accounting standards
for loan loss provisioning are based on the so-called “incurred loss” model. Under this model, a bank can reserve against a
loan loss through a provision to the loan loss reserve only if that loss has been “incurred,” which means a loss that is probable
and can be reasonably estimated. To meet that standard, banks have to document why a loss is probable and reasonably
estimable, and the easiest way to do that is to refer to historical loss rates and the bank’s own prior loss experience with the
type of asset in question. Banks are not limited to using historical experience in deciding the appropriate level of the loan
loss reserve. In making these determinations, management can use judgment that takes into account other factors, such as
changes in underwriting standards and changes in the economic environment that would have an impact on loan losses.
The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan
loss experience; current loan portfolio quality; present economic, political, and regulatory conditions; and unidentified losses
inherent in the current loan portfolio. The determination of the appropriate level of the allowance for possible loan losses
inherently involves a high degree of subjectivity and requires management to make significant estimates of current credit
risks, all of which may undergo material changes. Continuing deterioration in economic conditions affecting borrowers, new
information regarding existing loans, identification of additional problem loans and other factors, both within and outside of
the Company’s control, may require an increase in the allowance for possible loan losses. In addition, bank regulatory
agencies periodically review the allowance for loan and lease losses and may require an increase in the provision for possible
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loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition,
if charge-offs in future periods exceed the allowance for possible loan losses, the Company will need additional provisions
to increase the allowance for possible loan losses. Any increases in the allowance for possible loan losses will result in a
decrease in net income and, possibly, capital, and may have a material adverse effect on the Company’s financial condition
and results of operations.
A new accounting standard may require us to increase our allowance for loan and lease losses and may have a material
adverse effect on our financial condition and results of operations. The Financial Accounting Standards Board (“FASB”)
has adopted a new accounting standard that will be effective for the Bank for our first fiscal year after December 15, 2020.
This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic
estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses.
This will change the current method of providing allowances for loan losses that are probable, which may require us to
increase our allowance for loan and lease losses, and to greatly increase the types of data we will need to collect and review
to determine the appropriate level of the allowance for loan and lease losses Any change in the allowance for loan and lease
losses at the time of adoption will be an adjustment to retained earnings and would change the Bank’s capital levels. Any
increase in our allowance for loan and lease losses or expenses incurred to determine the appropriate level of the allowance
for loan and lease losses may have a material adverse effect on our financial condition and results of operations.
Our allowance for loan losses may prove to be insufficient to absorb the probable, incurred losses in our loan portfolio.
Lending money is a substantial part of our business. However, every loan we make carries a risk of non-payment. This risk
is affected by, among other things: the cash flow of the borrower and/or the project being financed; in the case of a
collateralized loan, the changes and uncertainties as to the future value of the collateral, the credit history of a particular
borrower, changes in economic and industry conditions, and the duration of the loan.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the
United States (“GAAP”) requires management to make significant estimates that affect the financial statements. One of our
most critical estimates is the level of the allowance for loan losses. Due to the inherent nature of these estimates, we cannot
provide absolute assurance that we will not be required to charge earnings for significant unexpected loan losses.
We maintain an allowance for loan losses that we believe is a reasonable estimate of the probable, incurred losses within the
loan portfolio. We make various assumptions and judgments about the collectability of our loan portfolio, including the
creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of
loans. Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance
for loan losses by considering general market conditions, the credit quality of the loan portfolio, the collateral supporting the
loans and the performance of customers relative to their financial obligations with us. The amount of future losses is
susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond
our control, and these losses may exceed current estimates. We cannot fully predict the amount or timing of losses or whether
the loan loss allowance will be adequate in the future. If our assumptions prove to be incorrect, our allowance for loan losses
may not be sufficient to cover the probable, incurred losses in our loan portfolio, resulting in additions to the allowance for
loan losses. Excessive loan losses and significant additions to our allowance for loan losses could have a material adverse
impact on our financial condition and results of operations.
Material breaches in security of bank systems may have a significant effect on the Company’s business. We collect, process
and store sensitive consumer data by utilizing computer systems and telecommunications networks operated by both banks
and third party service providers. We have security, backup and recovery systems in place, as well as a business continuity
plan to ensure systems will not be inoperable. We also have security to prevent unauthorized access to the system. In addition,
we require third party service providers to maintain similar controls. However, we cannot be certain that these measures will
be successful. A security breach in the system and loss of confidential information could result in losing customers’
confidence and thus the loss of their business as well as additional significant costs for privacy monitoring activities.
Our necessary dependence upon automated systems to record and process transaction volumes poses the risk that technical
system flaws or employee errors, tampering or manipulation of those systems will result in losses and may be difficult to
detect. We may also be subject to disruptions of the operating systems arising from events that are beyond our control (for
example, computer viruses or electrical or telecommunications outages). We are further exposed to the risk that the third
party service providers may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or
operational errors). These disruptions may interfere with service to customers and result in a financial loss or liability.
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Changing interest rates have a direct and immediate impact on financial institutions. The risk of nonpayment of loans —
or credit risk — is not the only lending risk. Lenders are subject also to interest rate risk. Fluctuating rates of interest prevailing
in the market affect a bank’s net interest income, which is the difference between interest earned from loans and investments,
on one hand, and interest paid on deposits and borrowings, on the other. Changes in the general level of interest rates can
affect our net interest income by affecting the difference between the weighted-average yield earned on our interest-earning
assets and the weighted-average rate paid on our interest-bearing liabilities, or interest rate spread, and the average life of our
interest-earning assets and interest-bearing liabilities. Changes in interest rates also can affect (i) our ability to originate loans,
(ii) the value of our interest-earning assets, and our ability to realize gains from the sale of such assets, (iii) our ability to
obtain and retain deposits in competition with other available investment alternatives, and (iv) the ability of our borrowers to
repay adjustable or variable rate loans. Interest rates are highly sensitive to many factors, including governmental monetary
policies, domestic and international economic and political conditions, and other factors beyond our control. Although the
Company believes that the estimated maturities of our interest-earning assets currently are well balanced in relation to the
estimated maturities of our interest-bearing liabilities (which involves various estimates as to how changes in the general
level of interest rates will impact these assets and liabilities), there can be no assurance that our profitability would not be
adversely affected during any period of changes in interest rates.
A prolonged economic downturn in our market area would adversely affect our loan portfolio and our growth prospects.
Our lending market area is concentrated in northeastern and central Ohio, particularly Franklin, Geauga, Portage, Trumbull,
Ashtabula, Summit, and Cuyahoga Counties. A very significant percentage of our loan portfolio is secured by real estate
collateral, primarily residential mortgage loans. Commercial and industrial loans to small and medium-sized businesses also
represent a significant percentage of our loan portfolio. The asset quality of our loan portfolio is largely dependent upon the
area’s economy and real estate markets. A prolonged economic downturn would likely lead to deterioration of the credit
quality of our loan portfolio and reduce our level of customer deposits, which in turn would hurt our business. Borrowers
may be less likely to repay their loans as scheduled or at all. Moreover, the value of real estate or other collateral that may
secure our loans could be adversely affected. Unlike many larger institutions, we are not able to spread the risks of
unfavorable local economic conditions across a large number of diversified economies and geographic locations. A prolonged
economic downturn could, therefore, result in losses that could materially and adversely affect our business.
Changes in accounting standards could materially impact our consolidated financial statements. Our accounting policies
and methods are fundamental to how the Company records and reports its financial condition and results of operations. The
accounting standard setters, including the Financial Accounting Standards Board, the SEC, and other regulatory bodies, from
time to time may change the financial accounting and reporting standards that govern the preparation of our consolidated
financial statements. These changes can be hard to predict and can materially impact how we record and report our financial
condition and results of operations. In some cases, the Company could be required to apply a new or revised standard
retroactively, resulting in changes to previously reported financial results, or a cumulative charge to retained earnings.
Management may be required to make difficult, subjective, or complex judgments about matters that are uncertain. Materially
different amounts could be reported under different conditions or using different assumptions.
Regulatory requirements affecting our loans secured by commercial real estate could limit our ability to leverage our
capital and adversely affect our growth and profitability. Rising commercial real estate lending concentrations may expose
institutions like the Bank to unanticipated earnings and capital volatility in the event of adverse changes in the commercial
real estate market. In addition, institutions that are exposed to significant commercial real estate concentration risk may be
subject to increased regulatory scrutiny. The federal banking agencies have issued guidance for institutions that are deemed
to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for
identifying institutions with a potential commercial real estate concentration risk, institutions that have (i) total reported loans
for construction, land development, and other land which represent 100% or more of an institution’s total risk-based capital;
or (ii) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the
outstanding balance of the institution's commercial real estate loan portfolio has increased 50% or more during the prior 36
months are encouraged to identify and monitor credit concentrations and enhance risk management systems. As of December
31, 2017, our loans for construction, land development, and other land represent only [46] % of our total risk-based capital.
At December 31, 2017, the Bank’s non-owner occupied commercial real estate concentration was [373] % of the Bank’s
capital and the Bank’s commercial real estate loan portfolio has increased by approximately [178] % during the prior 36
months. The Bank has determined that its CRE portfolio concentration levels require enhanced monitoring under the
regulatory guidance. Management has implemented and continues to maintain heightened portfolio monitoring and reporting,
and enhanced underwriting criteria with respect to its commercial real estate portfolio. Nevertheless, our level of commercial
real estate lending could limit our growth or require us to obtain additional capital, lead to increased regulatory scrutiny, and
could have a material adverse effect on our business, financial condition and results of operations.
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Our net-loan-to-deposit-ratio is higher than our peer group and may affect our future profitability and growth. At
December 31, 2017, the ratio of our net loans to our total deposits exceeded 100%. FDIC-insured, low-cost deposits are a
stable and desirable source of funding for banks. If we have insufficient core deposits to fund our loan growth, we may be
required to rely more heavily on nondeposit sources of funds. The availability and cost of nondeposit funding are more
sensitive to changing economic or financial conditions. Our need to rely on noncore funding sources to support future growth
may reduce our net interest margin and have an adverse effect on our profitability.
Changes in Tax Laws Could Have an Adverse Effect on Us, Our Industry, Our Customers, The Value of Collateral
Securing Our Loans and Demand for Our Loans. Federal tax reform legislation enacted by Congress in December 2017
contains a number of provisions that could have an impact on the banking industry, borrowers and the market for single-
family residential and multifamily residential real estate. Among the changes are: a lower cap on the amount of mortgage
interest that a borrower may deduct on single-family residential mortgages; the lower mortgage interest cap will be spread
among all of the borrower’s residential mortgages, which may result in elimination or lowering of the mortgage interest
deduction on a second home; limitations on deductibility of business interest expense; limitations on the deductibility of state
and local income and property taxes. Such changes could have an adverse effect on the market for and valuation of single-
family residential properties and multifamily residential properties, and on the demand for such loans in the future. If home
ownership or multifamily residential property ownership become less attractive, demand for our loans could decrease. The
value of the properties securing loans in our portfolio may be adversely impacted as a result of the changing economics of
home ownership and multifamily residential ownership, which could require an increase in our provision for loan losses,
which would reduce our profitability and could materially adversely affect our business, financial condition and results of
operations.
We Are Dependent on Our Management Team and Key Employees, and If We Are Not Able to Retain Them, Our Business
Operations Could Be Materially Adversely Affected. Our success depends, in large part, on our management team and key
employees. Our management team has significant industry experience. Our future success also depends on our continuing
ability to attract, develop, motivate and retain key employees. Qualified individuals are in high demand, and we may incur
significant costs to attract and retain them. Because the market for qualified individuals is highly competitive, we may not be
able to attract and retain qualified officers or candidates. The loss of any of our management team or our key employees
could materially adversely affect our ability to execute our business strategy, and we may not be able to find adequate
replacements on a timely basis, or at all. We cannot ensure that we will be able to retain the services of any members of our
management team or other key employees. Though we have change-in-control agreements in place with certain members of
our management team they may still elect to leave at any time. Failure to attract and retain a qualified management team and
qualified key employees could have a material adverse effect on our business, financial condition and results of operations.
Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services or
fail to comply with banking regulations. We depend to a significant extent on a number of relationships with third-party
service providers. Specifically, we receive core systems processing, essential web hosting and other internet systems, deposit
processing and other processing services from third-party service providers. If these third-party service providers experience
difficulties or terminate their services and we are unable to replace them with other service providers, our operations could
be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results
of operations could be adversely affected, perhaps materially. Even if we are able to replace them, it may be at a higher cost
to us, which could adversely affect our business, financial condition and results of operations.
We have a continuing need for technological change, and we may not have the resources to effectively implement new
technology or we may experience operational challenges when implementing new technology. The financial services
industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and
services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial
institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by
using technology to provide products and services that will satisfy customer demands for convenience as well as to create
additional efficiencies in our operations as we continue to grow and expand our market area. We may experience operational
challenges as we implement these new technology enhancements, or seek to implement them across all of our offices and
business units, which could result in us not fully realizing the anticipated benefits from such new technology or require us to
incur significant costs to remedy any such challenges in a timely manner.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering
statutes and regulations. The Bank Secrecy Act of 1970, the Uniting and Strengthening America by Providing Appropriate
Tools to Intercept and Obstruct Terrorism Act of 2001, or the USA Patriot Act or Patriot Act, and other laws and regulations
require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and
to file reports such as suspicious activity reports and currency transaction reports. We are required to comply with these and
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other anti-money laundering requirements. Our federal and state banking regulators, the Financial Crimes Enforcement
Network, or FinCEN, and other government agencies are authorized to impose significant civil money penalties for violations
of anti-money laundering requirements. We are also subject to increased scrutiny of compliance with the regulations issued
and enforced by the Office of Foreign Assets Control, or OFAC. If our program is deemed deficient, we could be subject to
liability, including fines, civil money penalties and other regulatory actions, which may include restrictions on our business
operations and our ability to pay dividends, restrictions on mergers and acquisitions activity, restrictions on expansion, and
restrictions on entering new business lines. Failure to maintain and implement adequate programs to combat money
laundering and terrorist financing could also have significant reputational consequences for us. Any of these circumstances
could have a material adverse effect on our business, financial condition or results of operations.
There are risks with respect to future expansion and acquisitions or mergers. The Company may seek in the future to
acquire other financial institutions or parts of those institutions. The Company may also expand into new markets or lines of
business or offer new products or services. These activities would involve a number of risks, including:
• the time and expense associated with identifying and evaluating potential acquisitions and merger partners;
• using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with
respect to the target institution or assets;
• diluting our existing shareholders in an acquisition;
• the time and expense associated with evaluating new markets for expansion, hiring experienced local management,
and opening new offices;
• taking a significant amount of time negotiating a transaction or working on expansion plans, resulting in
management’s attention being diverted from the operation of our existing business; and
• the time and expense associated with integrating the operations and personnel of the combined businesses, creating
an adverse short-term effect on our results of operations.
There is also a risk that any expansion effort will not be successful.
Government regulation could restrict our ability to pay cash dividends. Dividends from the bank are the only significant
source of cash for the Company. Statutory and regulatory limits could prevent the bank from paying dividends or transferring
funds to the Company. As of December 31, 2017, MBC could have declared dividends of approximately $5.1 million in the
aggregate to the Company, assuming the ODFI did not object. The Company cannot assure you that subsidiary bank
profitability will continue to allow dividends to the Company, and the Company therefore cannot assure you that the Company
will be able to continue paying regular, quarterly cash dividends. Until January 20, 2019, MBC cannot pay dividends to the
Company unless MBC first obtains approval of the ODFI.
We may need to raise additional capital in the future, and such capital may not be available when needed or at all. We
may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our
commitments and business needs, particularly if our asset quality or earnings were to deteriorate significantly. Our ability to
raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which
are outside of our control, and our financial condition. Economic conditions and the loss of confidence in financial institutions
may increase our cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings,
repurchase agreements and borrowings from the discount window of the Federal Reserve.
We cannot assure that such capital will be available on acceptable terms or at all. Any occurrence that may limit our access
to the capital markets, such as a decline in the confidence of debt purchasers, depositors of counterparties participating in the
capital markets, or a downgrade of the Company’s debt ratings, may adversely affect our capital costs and our ability to raise
capital and, in turn, our liquidity. Moreover, if we need to raise capital in the future, we may have to do so when many other
financial institutions are also seeking to raise capital and would have to compete with those institutions for investors. An
inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on our business,
financial condition and results of operations.
The value of our goodwill and core deposit intangible assets may decline in the future. As of December 31, 2017, we had
$17.8 million of goodwill and core deposit intangible assets. A significant decline in our expected future cash flows, a
significant adverse change in the business climate, slower growth rates or a significant and sustained decline in the price of
26
the Company’s common stock may necessitate taking charges in the future related to the impairment of our goodwill and
core deposit intangible assets. If we were to conclude that a future write-down of goodwill and core deposit intangible assets
is necessary, we would record the appropriate charge, which could have a material adverse effect on our business, financial
condition and results of operations.
Risks Associated with the Company’s Common Stock
A limited trading market exists for our common shares which could lead to price volatility. Your ability to sell our common
shares depends upon the existence of an active trading market for our common shares. While our stock is quoted on the
NASDAQ Capital Market, there is low trading volume in our common stock. As a result, you may be unable to sell or
purchase our common shares at the volume, price and time you desire. The limited trading market for our common shares
may cause fluctuations in the market value of our common shares to be exaggerated, leading to price volatility in excess of
that which would occur in a more active trading market. In addition, even if a more active market of our common stock
develops, we cannot assure you that such a market will continue.
Factors that may affect the volatility of our stock include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our actual or anticipated operating and financial results, including how those results vary from the expectations of
management, securities analysts and investors
changes in financial estimates or publication of research reports and recommendations by financial analysts or
actions taken by rating agencies with respect to other financial institution
failure to declare dividends on our common stock from time to time
reports in the press or investment community generally or relating to our reputation or the financial services industry
developments in our business or operations or in the financial sector generally
any future offerings by us of our common stock
legislative or regulatory changes affecting our industry generally or our business and operations specifically
the operating and stock price performance of companies that investors consider to be comparable to us
announcements of strategic developments, acquisitions, restructurings, dispositions, financings and other material
events by us or our competitors
expectations of (or actual) equity dilution, including the actual or expected dilution to various financial measures,
including earnings per share, that may be caused by this offering
actions by our current shareholders, including future sales of common shares by existing shareholders, including our
directors and executive officers
proposed or final regulatory changes or developments
anticipated or pending regulatory investigations, proceedings, or litigation that may involve or affect us
other changes in U.S. or global financial markets, global economies and general market conditions, such as interest
or foreign exchange rates, stock, commodity, credit or asset valuations or volatility
Item 1B — Unresolved Staff Comments
Not applicable
27
Item 2 — Properties
The Bank’s offices are:
Location
Main Office:
15985 East High Street
Middlefield, Ohio
Branches :
West Branch
15545 West High Street
Middlefield, Ohio
Garrettsville Branch
8058 State Street
Garrettsville, Ohio
Mantua Branch
10519 South Main Street
Mantua, Ohio
Chardon Branch
348 Center Street
Chardon, Ohio
Orwell Branch
30 South Maple Street
Orwell, Ohio
Newbury Branch
11110 Kinsman Road
Newbury, Ohio
Cortland Branch
3450 Niles Cortland Road
Cortland, Ohio
Dublin Branch
6215 Perimeter Drive
Dublin, Ohio
Westerville Branch
17 North State Street
Westerville, Ohio
Administrative Offices:
15200 Madison Road Suite 108
Middlefield, Ohio
Mentor Loan Production Office
8353 Mentor Avenue
Mentor, Ohio
Sunbury Branch
492 West Cherry Street
Sunbury, Ohio
Beachwood Branch
25201 Chagrin Blvd.
Beachwood, Ohio
Solon Branch
6134 Kruse Drive
Solon, Ohio
Twinsburg Branch
2351 Edison Blvd
Twinsburg, Ohio
Powell Branch
10628 Sawmill Parkway
Powell, Ohio
County
Owned/Leased
Other Information
Geauga
Owned
Geauga
Owned
Portage
Owned
Portage
Leased
three-year lease renewed in November 2016, with option to renew for four
additional consecutive three-year terms
Geauga
Owned
Ashtabula
Owned
Geauga
Leased
ten-year lease dated December 2006, with option to renew for four additional
consecutive five-year terms; lease renewed in December 2016 for five years
Trumbull
Owned
Franklin
Leased
fifteen-year lease dated February 2004, extended to expire September 2021, with
one option to renew for an additional three-year period
Franklin
Owned
Geauga
Owned
Lake
Leased
one-year lease dated September 2015, revised December 2017, with option to
renew for two additional terms of one year each
Delaware
Leased
five-year lease dated July 2016, with the option to renew for two additional five-
year terms
Cuyahoga
Leased
ten-year lease dated June 2005, extended for a period of 10 years commencing on
July 1, 2015, with option to renew for two consecutive periods of five years each
Cuyahoga
Leased
twelve-year lease dated June 2008, with the option to renew for four additional
five-year terms, first option exercised July 26, 2016, lease expiring July 31, 2025
Summit
Owned
Delaware
Owned
We intend to open the Powell Branch in the second quarter of 2018
28
At December 31, 2017 the net book value of the Bank’s investment in premises and equipment totaled $11.9 million.
Item 3 — Legal Proceedings
From time to time the Company and the subsidiary bank are involved in various legal proceedings that are incidental to its
business. In the opinion of management, no current legal proceedings are material to the financial condition of the Company
or the subsidiary bank, either individually or in the aggregate.
Item 4 — Mine Safety Disclosures
Not applicable
Part II
Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Information relating to the market for Middlefield’s common equity and related shareholder matters appears under “Market
Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters” in the Company’s 2017 Annual
Report to Shareholders and is incorporated herein by reference. Information relating to dividend restrictions for Registrant’s
common stock appears under “Supervision and Regulation.”
Item 6 — Selected Financial Data
Not applicable.
Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
The above-captioned information appears under the heading “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in the Company’s 2017 Annual Report to Shareholders and is incorporated herein by reference.
Item 7A — Quantitative and Qualitative Disclosures about Market Risk
The above-captioned information appears under the heading “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” under the section “Interest Rate Sensitivity Simulation Analysis” in the Company’s 2017 Annual
Report to Shareholders and is incorporated herein by reference.
Item 8 — Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Company and its subsidiaries, together with the report thereon by S.R.
Snodgrass, P.C. appear in the Company’s 2017 Annual Report to Shareholders and are incorporated herein by reference.
Item 9 — Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
29
Item 9A – Controls and Procedures
(a)
Disclosure Controls and Procedures
The Company’s management, including the Company’s principal executive officer and principal financial
officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such
term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial
officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls
and procedures were effective for the purpose of ensuring that the information required to be disclosed in
the reports that the Company files or submits under the Exchange Act with the Securities and Exchange
Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s
management, including its principal executive and principal financial officers, as appropriate to allow timely
decisions regarding required disclosure.
(b)
Internal Controls Over Financial Reporting
Management’s annual report on internal control over financial reporting and the attestation report of the
independent registered public accounting firm are incorporated herein by reference to Item 8 - the
Company’s audited Consolidated Financial Statements in this Annual Report on Form 10-K.
(c)
Changes to Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the period ended
December 31, 2017 that have materially affected, or are reasonable likely to materially affect, the
Company’s internal control over financial reporting.
Item 9B — Other Information
None
Part III
Item 10 — Directors, Executive Officers, and Corporate Governance
Incorporated by reference to the definitive proxy statement for the 2018 annual meeting of shareholders, which will be filed
with the Securities and Exchange Commission not later than 120 days after December 31, 2017.
Item 11 — Executive Compensation
Incorporated by reference to the definitive proxy statement for the 2018 annual meeting of shareholders, which will be filed
with the Securities and Exchange Commission not later than 120 days after December 31, 2017.
Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated by reference to the definitive proxy statement for the 2018 annual meeting of shareholders, which will be filed
with the Securities and Exchange Commission not later than 120 days after December 31, 2017.
Item 13 — Certain Relationships and Related Transactions, and Director Independence
Incorporated by reference to the definitive proxy statement for the 2018 annual meeting of shareholders, which will be filed
with the Securities and Exchange Commission not later than 120 days after December 31, 2017.
Item 14 — Principal Accountant Fees and Services
Incorporated by reference to the definitive proxy statement for the 2018 annual meeting of shareholders, which will be filed
with the Securities and Exchange Commission not later than 120 days after December 31, 2017.
30
Part IV
Item 15 — Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
Index to Consolidated Financial Statements :
Consolidated Financial Statements as of December 31, 2017 and 2016 and for each of the three years in the period ended
December 31, 2017:
Report of Independent Registered Public Accounting firm
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Comprehensive Income
Consolidated Statement of Changes in Stockholders’ Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not applicable or the required information is shown
elsewhere in the document in the Financial Statements or Notes thereto, or in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
(a)(3) Exhibits
See the list of exhibits below
31
4.1
4.2
4.3
(b) Exhibits Required by Item 601 of Regulation S-K
exhibit
number
Description
3.1
Second Amended and Restated Articles of Incorporation
of Middlefield Banc Corp., as amended
3.2
Regulations of Middlefield Banc Corp.
4.0
Specimen stock certificate
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
location
Incorporated by reference to Exhibit 3.1 of
Middlefield Banc Corp.’s Annual Report on
the Fiscal Year Ended
Form 10-K for
December 31, 2005, filed on March 29, 2006
Incorporated by reference to Exhibit 3.2 of
Middlefield Banc Corp.’s registration statement
on Form 10 filed on April 17, 2001
Incorporated by reference to Exhibit 4 of
Middlefield Banc Corp.’s registration statement
on Form 10 filed on April 17, 2001
Incorporated by reference to Exhibit 4.1 of
Middlefield Banc Corp.’s Form 8-K Current
Report filed on December 27, 2006
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
Guarantee Agreement, dated as of December 21, 2006,
between Middlefield Banc Corp. and Wilmington Trust
Company
Incorporated by reference to Exhibit 4.3 of
Middlefield Banc Corp.’s Form 8-K Current
Report filed on December 27, 2006
10.1.0*
2017 Omnibus Equity Plan
10.1.1*
2007 Omnibus Equity Plan
10.2*
Severance Agreement between Middlefield Banc Corp.
and Thomas G. Caldwell, dated January 7, 2008
10.3*
Severance Agreement between Middlefield Banc Corp.
and James R. Heslop, II, dated January 7, 2008
Incorporated by reference to Middlefield Banc
Corp.’s definitive proxy statement for the 2017
Annual Meeting of Shareholders, Appendix A,
filed on April 4, 2017
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
Incorporated by reference to Exhibit 10.2 of
Middlefield Banc Corp.’s Form 8-K Current
Report filed on January 9, 2008
Incorporated by reference to Exhibit 10.3 of
Middlefield Banc Corp.’s Form 8-K Current
Report filed on January 9, 2008
10.4
Federal Home Loan Bank of Cincinnati Agreement for
Advances and Security Agreement dated September 14,
2000
Incorporated by reference to Exhibit 10.4 of
Middlefield Banc Corp.’s registration statement
on Form 10 filed on April 17, 2001
10.4.1*
Severance Agreement between Middlefield Banc Corp.
and Teresa M. Hetrick, dated January 7, 2008
Incorporated by reference to Exhibit 10.4.1 of
Middlefield Banc Corp.’s Form 8-K Current
Report filed on January 9, 2008
10.4.2
[reserved]
32
10.4.3*
Severance Agreement between Middlefield Banc Corp.
and Donald L. Stacy, dated January 7, 2008
10.4.4*
Severance Agreement between Middlefield Banc Corp.
and Alfred F. Thompson Jr., dated January 7, 2008
10.5
10.6*
10.7*
10.8*
10.9*
[reserved]
Amended Director Retirement Agreement with Richard
T. Coyne
Amended Director Retirement Agreement with Frances
H. Frank
[reserved]
[reserved]
10.10*
Director Retirement Agreement with Donald D. Hunter
10.11*
Director Retirement Agreement with Martin S. Paul
10.12*
Amended Director Retirement Agreement with Donald
E. Villers
10.13*
Executive Survivor Income Agreement (aka DBO
agreement [death benefit only]) with Donald L. Stacy
10.14*
DBO Agreement with Jay P. Giles
10.15*
DBO Agreement with Alfred F. Thompson Jr.
10.16
[reserved]
10.17*
DBO Agreement with Teresa M. Hetrick
Incorporated by reference to Exhibit 10.4.3 of
Middlefield Banc Corp.’s Form 8-K Current
Report filed on January 9, 2008
Incorporated by reference to Exhibit 10.4.4 of
Middlefield Banc Corp.’s Form 8-K Current
Report filed on January 9, 2008
Incorporated by reference to Exhibit 10.6 of
Middlefield Banc Corp.’s Form 8-K Current
Report filed on January 9, 2008
Incorporated by reference to Exhibit 10.7 of
Middlefield Banc Corp.’s Form 8-K Current
Report filed on January 9, 2008
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
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
Incorporated by reference to Exhibit 10.12 of
Middlefield Banc Corp.’s Form 8-K Current
Report filed on January 9, 2008
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
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
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
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
33
10.18 *
Executive Deferred Compensation Agreement with Jay
P. Giles
Incorporated by reference to Exhibit 10.18 of
Middlefield Banc Corp.’s Annual Report on
Form 10-K for the Year Ended December 31,
2011, filed on March 20, 2012
10.19
[reserved]
10.20*
DBO Agreement with James R. Heslop, II
10.21*
DBO Agreement with Thomas G. Caldwell
10.22*
Annual Incentive Plan
10.22.1*
Annual Incentive Plan 2017 Award Summary
10.23*
Amended
Deferred
Executive
Agreement with Thomas G. Caldwell
Compensation
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
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
Incorporated by reference to Exhibit 10.22 of
Middlefield Banc Corp.’s Form 8-K Current
Report filed on June 12, 2012
Incorporated by reference to Middlefield Banc
Corp.’s Form 8-K current Report filed on
March 14, 2017
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
Agreement with James R. Heslop, II
Deferred
Compensation
Incorporated by reference to Exhibit 10.24 of
Middlefield Banc Corp.’s Form 8-K Current
Report filed on May 9, 2008
10.25*
Amended
Executive
Deferred
Compensation
Agreement with Donald L. Stacy
Incorporated by reference to Exhibit 10.25 of
Middlefield Banc Corp.’s Form 8-K Current
Report filed on May 9, 2008
10.26*
[reserved]
10.27
10.28
[reserved]
[reserved]
10.29*
Form of conditional stock award under the 2007
Omnibus Equity Plan
10.29.1
Form of conditional stock award under the 2017
Omnibus Equity Plan
Incorporated by reference to Exhibit 10.29 of
Middlefield Banc Corp.’s Form 8-K Current
Report filed on March 4, 2016
Incorporated by reference to Exhibit 10.29 of
Middlefield Banc Corp.’s Form 8-K Current
Report filed on July 24, 2017
13
21
23
Portions of Annual Report to Shareholders for the year
ended December 31, 2017 incorporated by reference
into this Form 10-K
filed herewith
Subsidiaries of Middlefield Banc Corp.
filed herewith
Consent of S.R. Snodgrass, P.C., independent auditors
filed herewith
of Middlefield Banc Corp.
34
31.1
31.2
32
99.1
Rule 13a-14(a) certification of Chief Executive Officer
filed herewith
Rule 13a-14(a) certification of Chief Financial Officer
filed herewith
Rule 13a-14(b) certification
filed herewith
Form of Indemnification Agreement with directors of
Middlefield Banc Corp. and with executive officers of
Middlefield Banc Corp. and The Middlefield Banking
Company
Incorporated by reference to Exhibit 99.1 of
Middlefield Banc Corp.’s registration statement
on Form 10, Amendment No. 1, filed on June 14,
2001
101.INS** XBRL Instance
furnished herewith
101.SCH** XBRL Taxonomy Extension Schema
furnished herewith
101.CAL** XBRL Taxonomy Extension Calculation
furnished herewith
101.DEF** XBRL Taxonomy Extension Definition
furnished herewith
101.LAB** XBRL Taxonomy Extension Labels
furnished herewith
101.PRE** XBRL Taxonomy Extension Presentation
furnished herewith
* management contract or compensatory plan or arrangement
** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11
or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange
Act of 1934, as amended, and otherwise is not subject to liability under these sections.
Item 16 – Form 10-K Summary
None.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Middlefield Banc Corp.
By: /s/ Thomas G. Caldwell
Thomas G. Caldwell
President and Chief Executive Officer
Date: March 7, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Thomas G. Caldwell
Thomas G. Caldwell
President, Chief Executive Officer, and Director
/s/ Donald L. Stacy
Donald L. Stacy, Treasurer and Chief Financial Officer
(Principal accounting and financial officer)
/s/ Carolyn J. Turk
Carolyn J. Turk, Chairman of the Board
/s/ Eric W. Hummel
Eric W. Hummel, Director
/s/ James R. Heslop, II
James R. Heslop, II, Executive Vice President,
Chief Operating Officer, and Director
/s/ Kenneth E. Jones
Kenneth E. Jones, Director
/s/ James J. McCaskey
James J. McCaskey, Director
/s/ William J. Skidmore
William J. Skidmore, Director
/s/ Robert W. Toth
Robert W. Toth, Director
/s/ Clayton W. Rose, III
Clayton W. Rose, III, Director
/s/ Darryl E. Mast
Darryl E. Mast, Director
/s/ Thomas W. Bevan
Thomas W. Bevan, Director
/s/ William A. Valerian
William A. Valerian, Director
36
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
March 7, 2018
Exhibit 13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Middlefield Banc Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Middlefield Banc Corp. and subsidiaries (the
“Company”) as of December 31, 2017 and 2016; the related consolidated statements of income, comprehensive
income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31,
2017; and the related notes to the consolidated financial statements (collectively, the financial statements). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2017, conformity with accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission in 2013, and our report dated March 7, 2018, expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks.
37
Basis for Opinion (Continued)
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 1986.
/s/S.R. Snodgrass, P.C.
Cranberry Township, Pennsylvania
March 7, 2018
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Middlefield Banc Corp.
Opinion on Internal Control over Financial Reporting
We have audited Middlefield Banc Corp. and subsidiaries’ (the “Company”) internal control over financial reporting
as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based
on criteria established in Internal Control — Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2017 and 2016, and the related
consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2017, of the Company and our report dated March 7, 2018,
expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
39
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/S.R. Snodgrass, P.C.
Cranberry Township, Pennsylvania
March 7, 2018
40
MIDDLEFIELD BANC CORP.
CONSOLIDATED BALANCE SHEET
(Dollar amounts in thousands, except shares)
ASSETS
Cash and due from banks
Federal funds sold
Cash and cash equivalents
Investment securities available for sale, at fair value
Loans held for sale
Loans
Less allowance for loan and lease losses
Net loans
Premises and equipment, net
Goodwill
Core deposit intangibles
Bank-owned life insurance
Other real estate owned
Accrued interest receivable and other assets
$
December 31,
2017
2016
39,886 $
-
39,886
95,283
463
923,213
7,190
916,023
11,853
15,071
2,749
15,652
212
9,144
31,395
1,100
32,495
114,376
634
609,140
6,598
602,542
11,203
4,559
36
13,540
934
7,502
TOTAL ASSETS
$
1,106,336 $
787,821
LIABILITIES
Deposits:
Noninterest-bearing demand
Interest-bearing demand
Money market
Savings
Time
Total deposits
Short-term borrowings
Other borrowings
Accrued interest payable and other liabilities
TOTAL LIABILITIES
STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized, 3,603,881 and
2,640,418 shares issued; 3,217,716 and 2,254,253 shares outstanding
Retained earnings
Accumulated other comprehensive income
Treasury stock, at cost; 386,165 shares
TOTAL STOCKHOLDERS' EQUITY
$
192,438 $
83,990
150,277
208,502
242,987
878,194
74,707
29,065
4,507
986,473
84,859
47,431
1,091
(13,518 )
119,863
133,630
59,560
74,940
172,370
189,434
629,934
68,359
9,437
3,131
710,861
47,943
41,334
1,201
(13,518)
76,960
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
1,106,336 $
787,821
See accompanying notes to the consolidated financial statements.
41
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF INCOME
(Dollar amounts in thousands, except per share data)
INTEREST AND DIVIDEND INCOME
Interest and fees on loans
Interest-bearing deposits in other institutions
Federal funds sold
Investment securities:
Taxable interest
Tax-exempt interest
Dividends on stock
Total interest and dividend income
INTEREST EXPENSE
Deposits
Short-term borrowings
Other borrowings
Total interest expense
NET INTEREST INCOME
Provision for loan losses
$
Year Ended December 31,
2017
2016
2015
40,235 $
328
15
762
2,406
249
43,995
5,350
753
544
6,647
25,798 $
53
20
1,106
2,913
104
29,994
3,618
322
250
4,190
23,824
33
13
1,467
3,160
98
28,595
3,426
194
200
3,820
37,348
25,804
24,775
1,045
570
315
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
36,303
25,234
24,460
NONINTEREST INCOME
Service charges on deposit accounts
Investment securities gains, net
Earnings on bank-owned life insurance
Gain on sale of loans
Other income
Total noninterest income
NONINTEREST EXPENSE
Salaries and employee benefits
Occupancy expense
Equipment expense
Data processing costs
Ohio state franchise tax
Federal deposit insurance expense
Professional fees
Net loss (gain) on other real estate owned
Advertising expense
Core deposit intangible amortization
Merger expense
Other expense
Total noninterest expense
Income before income taxes
Income taxes
NET INCOME
EARNINGS PER SHARE
Basic
Diluted
DIVIDENDS DECLARED PER SHARE
See accompanying notes to the consolidated financial statements.
42
1,875
886
431
826
841
4,859
13,758
1,846
1,050
1,792
744
533
1,752
30
821
374
1,060
3,725
27,485
13,677
4,222
1,940
303
403
419
894
3,959
10,249
1,252
991
1,335
632
438
1,441
(119 )
734
40
-
3,879
20,872
8,321
1,905
$
$
$
9,455 $
6,416 $
3.12 $
3.10
1.08 $
3.04 $
3.03
1.08 $
1,874
323
624
329
894
4,044
9,751
1,253
944
1,071
300
472
1,247
563
721
40
-
3,715
20,077
8,427
1,562
6,865
3.41
3.39
1.07
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
Year Ended December 31,
2016
2017
2015
Net income
$
9,455 $
6,416 $
6,865
Other comprehensive loss:
Net unrealized holding gain (loss) on available- for-sale
investment securities
Tax effect
Reclassification adjustment for investment securities gains
included in net income
Tax effect
Total other comprehensive loss
719
(244)
(1,505 )
511
(886)
301
(303 )
103
(110)
(1,194 )
91
(31 )
(323 )
110
(153 )
Comprehensive income
$
9,345 $
5,222 $
6,712
See accompanying notes to the consolidated financial statements.
43
Balance, December 31, 2014
Net income
Other comprehensive loss
Purchase of treasury stock
(196,635 shares)
Dividend reinvestment and
purchase plan
Stock options exercised
Stock-based compensation
expense
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in thousands, except shares and dividend per share amount)
Accumulated
Other
Total
Common Stock
Shares
2,242,025 $
Amount
35,529 $
Retained Comprehensive Treasury Stockholders'
Earnings Income (Loss)
2,548 $
32,524 $
(6,734) $
63,867
Equity
Stock
6,865
(153)
6,865
(153)
(6,784)
(6,784)
20,393
400
651
(7)
585
18
651
(7)
18
(2,153)
Cash dividends ($1.07 per share)
(2,153)
Balance, December 31, 2015
2,263,403 $
36,191 $
37,236 $
2,395 $
(13,518) $
62,304
Net income
Other comprehensive loss
Common stock issuance, net of
issuance cost ($697)
Dividend reinvestment and
purchase plan
Stock options exercised
Stock-based compensation
expense
360,815
11,210
15,300
-
519
(6)
900
29
6,416
(1,194)
Cash dividends ($1.08 per share)
(2,318)
6,416
(1,194)
11,210
519
(6)
29
(2,318)
Balance, December 31, 2016
2,640,418 $
47,943 $
41,334 $
1,201 $
(13,518) $
76,960
9,455
(110)
Net income
Other comprehensive loss
Common stock issued in business
combination
544,610
20,995
Other common stock issuance, net
of offering cost ($760)
Dividend reinvestment and
purchase plan
Stock options exercised
Stock-based compensation
expense
399,008
15,164
11,721
7,301
540
184
823
33
Cash dividends ($1.08 per share)
(3,358)
9,455
(110)
20,995
15,164
540
184
33
(3,358)
Balance, December 31, 2017
3,603,881 $
84,859 $
47,431 $
1,091 $
(13,518) $
119,863
See accompanying notes to the consolidated financial statements.
44
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses
Investment securities gains, net
Depreciation and amortization of premises and equipment, net
Amortization of premium and discount on investment securities, net
Accretion of deferred loan fees, net
Amortization of core deposit intangibles
Stock-based compensation expense
Origination of loans held for sale
Proceeds from sale of loans
Gain on sale of loans
Origination of student loans held for sale
Proceeds from sale of student loans
Gain on sale of student loans
Earnings on bank-owned life insurance
Deferred income taxes
Net (gain) loss on other real estate owned
Increase in accrued interest receivable
Increase in accrued interest payable
Other, net
Net cash provided by operating activities
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from repayments and maturities
Proceeds from sale of securities
Purchases
Increase in loans, net
Proceeds from the sale of other real estate owned
Purchase of bank-owned life insurance
Purchase of premises and equipment
Purchase of restricted stock
Redemption of restricted stock
Proceeds from bank-owned life insurance
Acquisition, net of cash paid
Net cash used in investing activities
FINANCING ACTIVITIES
Net increase in deposits
Increase in short-term borrowings, net
Repayment of other borrowings
Proceeds from other borrowings
Proceeds from common stock issued
Stock options exercised
Proceeds from dividend reinvestment and purchase plan
Purchase of treasury stock
Cash dividends
Net cash provided by financing activities
2017
Year Ended December 31,
2016
2015
$
9,455 $
6,416 $
6,865
1,045
(886)
1,291
451
(451)
374
33
(10,020)
10,482
(291)
(365,674)
372,162
(535)
(431)
293
30
(422)
136
(3,122)
13,920
14,899
6,474
(3,080)
(119,866)
2,196
-
(1,201)
(899)
795
-
5,431
(95,251)
50,216
6,348
(10,372)
30,000
15,164
184
540
-
(3,358)
88,722
570
(303 )
1,026
119
(245 )
40
29
(19,736 )
20,628
(419 )
-
-
-
(403 )
(93 )
(119 )
(39 )
-
330
7,801
23,201
9,063
(1,744 )
(76,199 )
1,607
-
(2,166 )
(317 )
-
575
-
(45,980 )
5,487
32,534
(502 )
-
11,210
(6 )
519
-
(2,318 )
46,924
315
(323 )
973
669
(603 )
40
18
(17,889 )
17,549
(329 )
-
-
-
(624 )
558
563
(292 )
80
(388 )
7,182
13,497
15,686
(21,946 )
(63,937 )
1,762
(4,000 )
(507 )
-
-
-
-
(59,445 )
38,335
21,017
(685 )
-
-
(7 )
651
(6,784 )
(2,153 )
50,374
Increase (decrease) in cash and cash equivalents
7,391
8,745
(1,889 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
32,495
23,750
25,639
CASH AND CASH EQUIVALENTS AT END OF YEAR
$
39,886 $
32,495 $
23,750
See accompanying notes to the consolidated financial statements.
45
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings
Income taxes
Noncash investing transactions:
Loans to facilitate the sale of other real estate owned
Transfers from loans to other real estate owned
Life insurance proceeds not yet received from insurance
company
Common stock issued in business acquisition
Acquisition of Liberty
Noncash assets acquired
Loans
Loans held for sale
Premises and equipment, net
Accrued interest receivable
Bank-owned life insurance
Core deposit intangible
Other assets
Goodwill
Total noncash assets acquired
Liabilities assumed
Time deposits
Deposits other than time deposits
Accrued interest payable
Deferred taxes
Other liabilities
Total liabilities assumed
Liberty stock acquired in business combination
Net noncash assets acquired
Cash and cash equivalents acquired, net
See accompanying notes to the consolidated financial statements.
$
$
$
$
$
6,511 $
5,705
4,190 $
1,335
3,740
800
- $
1,179
-
20,995
195,388 $
5,953
325
440
1,681
3,087
997
10,512
218,383
(30,744)
(167,300)
(47)
(906)
(2,754)
(201,751)
(1,068)
15,564 $
5,431 $
63 $
720
-
-
-
638
575
-
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- $
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
46
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting and reporting policies applied in the presentation of the accompanying financial
statements follows:
Nature of Operations and Basis of Presentation
Middlefield Banc Corp. (the “Company”) is an Ohio corporation organized to become the holding company of The
Middlefield Banking Company (“MBC”). MBC is a state-chartered bank located in Ohio. On October 23, 2009, the Company
established an asset resolution subsidiary named EMORECO, Inc. The Company and its subsidiaries derive substantially all
of their income from banking and bank-related services, which includes interest earnings on residential real estate,
commercial mortgage, commercial and consumer financings as well as interest earnings on investment securities and deposit
services to its customers through fourteen full-service locations. The Company is supervised by the Board of Governors of
the Federal Reserve System, while MBC is subject to regulation and supervision by the Federal Deposit Insurance
Corporation and the Ohio Division of Financial Institutions.
The consolidated financial statements of the Company include its wholly owned subsidiaries, MBC and EMORECO, Inc.
Significant intercompany items have been eliminated in preparing the consolidated financial statements.
On January 12, 2017, the Company completed its acquisition of Liberty, pursuant to a previously announced definitive merger
agreement. Under the terms of the merger agreement, Liberty shareholders received $37.96 in cash or 1.1934 shares of the
Company’s common stock in exchange for each share of Liberty common stock they owned immediately prior to the merger.
The Company issued 544,610 shares of its common stock in the merger and the aggregate merger consideration was
approximately $42.2 million. Upon closing, Liberty was merged into MBC, and its three full-service bank offices, in
Twinsburg in northern Summit County and in Beachwood and Solon in eastern Cuyahoga County, became offices of MBC.
The systems integration of Liberty into MBC was completed in February, 2017.
The financial statements have been prepared in conformity with U.S. Generally Accepted Accounting Principles. In preparing
the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from those
estimates.
Investment Securities
Investment securities are classified at the time of purchase, based on management’s intention and ability, as securities held
to maturity or securities available for sale. Debt securities acquired with the intent and ability to hold to maturity are stated
at cost adjusted for amortization of premium and accretion of discount, which are computed using a level yield method and
recognized as adjustments of interest income. Certain other debt securities have been classified as available for sale to serve
principally as a source of liquidity. Unrealized holding gains and losses for available-for-sale securities are reported as a
separate component of stockholders’ equity, net of tax, until realized. Realized security gains and losses are computed using
the specific identification method. Interest and dividends on investment securities are recognized as income when earned.
Securities are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such
an evaluation to determine whether a decline in their value is other than temporary. For debt securities, management considers
whether the present value of cash flows expected to be collected are less than the security’s amortized cost basis (the
difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the
Bank’s intent to sell the security or whether it is more likely than not that the Bank would be required to sell the security
before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline
in value is determined to be other than temporary, if the Bank does not intend to sell the security, and it is more likely than
not that it will not be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings
is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined
as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire
difference between fair value and amortized cost is charged to earnings. For equity securities where the fair value has been
significantly below cost for one year, the Bank’s policy is to recognize an impairment loss unless sufficient evidence is
available that the decline is not other than temporary and a recovery period can be predicted.
47
Restricted Stock
Common stock of the Federal Home Loan Bank (“FHLB”) represents ownership in an institution that is wholly owned by
other financial institutions. This equity security is accounted for at cost and classified with other assets. The FHLB of
Cincinnati has reported profits for 2017 and 2016, remains in compliance with regulatory capital and liquidity requirements,
and continues to pay dividends on the stock and make redemptions at the par value. With consideration given to these factors,
management concluded that the stock was not impaired at December 31, 2017 or 2016.
Mortgage Banking Activities
Mortgage loans originated and intended for sale in the secondary market are carried at fair value. The Bank sells the loans on
a servicing retained basis. Servicing rights are initially recorded at fair value with the income statement effect recorded in
gains on sales of loans. The Bank measures servicing assets using the amortization method. Fair value is based on market
prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that
calculates the present value of estimated future net servicing income. Loan servicing rights are amortized in proportion to
and over the period of estimated net future servicing revenue. The expected period of the estimated net servicing income is
based in part on the expected prepayment of the underlying mortgages. The unamortized balance of mortgage servicing rights
is included in accrued interest and other assets on the Consolidated Balance Sheet.
Mortgage servicing rights are periodically evaluated for impairment. Impairment represents the excess of amortized cost over
its estimated fair value. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics,
such as interest rate and original time to maturity. Any impairment is reported as a valuation allowance for an individual
tranche. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a
reduction of the allowance will be recorded as an increase to income.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of
outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is netted against
loan servicing fee income. Late fees and ancillary fees related to loan servicing are not material. The Bank is servicing loans
for others in the amount of $50.4 million and $39.9 million at December 31, 2017 and 2016, respectively.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are
reported at their outstanding unpaid principal balances net of the allowance for loan and lease losses. Interest income is
recognized as income when earned on the accrual method. The accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of
interest is doubtful. Interest received on nonaccrual loans is recorded as income or applied against principal according to
management’s judgment as to the collectability of such principal.
Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized as an
adjustment of the related loan’s yield. Management is amortizing these amounts over the contractual life of the related loans.
Allowance for Loan and Lease Losses
The allowance for loan and lease losses represents the amount which management estimates is adequate to provide for
probable loan losses inherent in the loan portfolio. The allowance method is used in providing for loan losses. Accordingly,
all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan and lease losses is
established through a provision for loan losses which is charged to operations. The provision is based on management’s
periodic evaluation of the adequacy of the allowance for loan and lease losses, which encompasses the overall risk
characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on
borrowers, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan and lease
losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to
significant change in the near term.
A loan is considered impaired when it is probable the borrower will not repay the loan according to the original contractual
terms of the loan agreement. Management has determined that first mortgage loans on one-to-four family properties and all
consumer loans represent large groups of smaller-balance homogeneous loans that are to be collectively evaluated. Loans
that experience insignificant payment delays, which are defined as 90 days or less, generally are not classified as impaired.
A loan is not impaired during a period of delay in payment if the Company expects to collect all amounts due, including
48
interest accrued, at the contractual interest rate for the period of delay. All loans identified as impaired are evaluated
independently by management. The Company estimates credit losses on impaired loans based on the present value of
expected cash flows or the fair value of the underlying collateral if the loan repayment is expected to come from the sale or
operation of such collateral. Impaired loans, or portions thereof, are charged off when it is determined a realized loss has
occurred. Until such time, an allowance for loan and lease losses is maintained for estimated losses. Cash receipts on impaired
loans are applied first to accrued interest receivable unless otherwise required by the loan terms, except when an impaired
loan is also a nonaccrual loan, in which case the portion of the payment related to interest is used to reduce principal.
Mortgage loans secured by one-to-four family properties and all consumer loans are large groups of smaller-balance
homogeneous loans and are measured for impairment collectively. Management determines the significance of payment
delays on a case-by-case basis, taking into consideration all circumstances concerning the loan, the creditworthiness and
payment history of the borrower, the length of the payment delay, and the amount of shortfall in relation to the principal and
interest owed.
Loans Acquired
Loans acquired including loans that have evidence of deterioration of credit quality since origination and for which it is
probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, are initially
recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. Loans
are evaluated individually to determine if there is evidence of deterioration of credit quality since origination. The difference
between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is
recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest
and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” are not
recognized as a yield adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent
to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining estimated
life. Decreases in expected cash flows are recognized immediately as impairment. Any valuation allowances on these
impaired loans reflect only losses incurred after acquisition.
For purchased loans acquired that are not deemed impaired at acquisition, credit discounts representing the principal losses
expected over the life of the loan are a component of the initial fair value. Loans are aggregated and accounted for as a pool
of loans if the loans being aggregated have common risk characteristics. Subsequent to the purchase date, the methods utilized
to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company
records a provision for loan losses only when the required allowance exceeds any remaining credit discounts. The remaining
differences between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest
income over the life of the loans.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost net of accumulated depreciation. Depreciation is computed
on the straight-line method over the estimated useful lives of the assets, which range from 3 to 20 years for furniture, fixtures,
and equipment and 3 to 40 years for buildings and leasehold improvements. Expenditures for maintenance and repairs are
charged against income as incurred. Costs of major additions and improvements are capitalized.
Goodwill
The Company accounts for goodwill using a three-step process for testing the impairment of goodwill on at least an annual
basis. This approach could cause more volatility in the Company’s reported net income because impairment losses, if any,
could occur irregularly and in varying amounts. No impairment of goodwill was recognized in any of the periods presented.
Intangible Assets
Intangible assets include core deposit intangibles, which are a measure of the value of consumer demand and savings deposits
acquired in business combinations accounted for as purchases. The core deposit intangibles are being amortized to their
estimated residual values over their expected useful lives, commonly of ten years. The recoverability of the carrying value of
intangible assets is evaluated on an ongoing basis, and permanent declines in value, if any, are charged to expense.
49
Bank-Owned Life Insurance (“BOLI”)
The Company owns insurance on the lives of a certain group of key employees. The policies were purchased to help offset
the increase in the costs of various fringe benefit plans including healthcare. The cash surrender value of these policies is
included as an asset on the Consolidated Balance Sheet and any increases in the cash surrender value are recorded as
noninterest income on the Consolidated Statement of Income. In the event of the death of an insured individual under these
policies, the Company would receive a death benefit, which would be recorded as noninterest income.
Other Real Estate Owned
Real estate properties acquired through foreclosure are initially recorded at fair value at the date of foreclosure, establishing
a new cost basis. After foreclosure, management periodically performs valuations and the real estate is carried at the lower
of cost or fair value less estimated cost to sell. Revenue and expenses from operations of the properties, gains or losses on
sales and additions to the valuation allowance are included in operating results.
Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return. Deferred tax assets and liabilities are reflected
at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
Earnings Per Share
The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated
utilizing net income as reported in the numerator and average shares outstanding in the denominator. The computation of
diluted earnings per share differs in that the dilutive effects of any stock options, warrants, and convertible securities are
adjusted in the denominator.
Stock-Based Compensation
The Company accounts for stock compensation based on the grant date fair value of all share-based payment awards that are
expected to vest, including employee share options to be recognized as employee compensation expense over the requisite
service period.
Compensation cost is recognized for restricted stock units issued to employees based on the fair value of these awards at the
date of grant. The market price of the Company’s common shares at the date of grant is used to estimate the fair value of
restricted stock units and stock awards. Compensation cost is recognized over the required service period, generally defined
as the vesting period, and is recorded in "Salaries" expense. (See Note 14-Employee Benefits)
Cash Flow Information
The Company has defined cash and cash equivalents as those amounts included in the Consolidated Balance Sheet captions
as “Cash and due from banks” and “Federal funds sold” with original maturities of less than 90 days.
Advertising Costs
Advertising costs are expensed as incurred.
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.
Recent Accounting Pronouncements:
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard).
The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
50
In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands
disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after
December 15, 2016, including interim periods within that reporting period. Since the guidance does not apply to revenue
associated with financial instruments, including loan receivables and investment securities, we do not expect the adoption of
the new standard, or any of the amendments, to result in a material change from our current accounting for revenue because
the majority of the Company's revenue is not within the scope of Topic 606. However, we do expect that the standard will
result in new disclosure requirements, which are currently being evaluated.
In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606). The amendments in
this Update defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit
entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning
after December 15, 2017, including interim reporting periods within that reporting period. All other entities should apply the
guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods
within annual reporting periods beginning after December 15, 2019. The Company is evaluating the effect of adopting this
new accounting Update.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets
and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a
liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset
for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not
an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may
elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in
this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all
other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim
periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the
earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an
interim or annual reporting period. The Company is currently assessing the practical expedients it may elect at adoption, but
does not anticipate the amendments will have a significant impact on the financial statements. Based on the Company’s
preliminary analysis of its current portfolio, the impact to the Company’s balance sheet is estimated to result in less than a 1
percent increase in assets and liabilities. The Company also anticipates additional disclosures to be provided at adoption.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on
Financial Instruments, which changes the impairment model for most financial assets. This Update is intended to improve
financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial
institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost
should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from
the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that
are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement
of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses
that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December
15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain
exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings
as of the beginning of the first reporting period in which the guidance is adopted. Management is currently evaluating the
impact of the adoption of this guidance on the Company's consolidated financial statements. Management will oversee the
implementation of CECL and is currently in the process of implementing a software solution to assist in the adoption of this
ASU. Management plans to run the current incurred loss model and the CECL model concurrently for 12 months prior to the
adoption of this guidance on January 1, 2020.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a
Business, which provides a more robust framework to use in determining when a set of assets and activities (collectively
referred to as a “set”) is a business. The screen requires that when substantially all of the fair value of the gross assets acquired
(or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business.
This screen reduces the number of transactions that need to be further evaluated. Public business entities should apply the
amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those
periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim
periods within annual periods beginning after December 15, 2019. The amendments in this Update should be applied
prospectively on or after the effective date. This Update is not expected to have a significant impact on the Company’s
financial statements.
51
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. A public business entity that is a U.S. Securities and Exchange Commission (SEC)
filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years
beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this
Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2020. All other
entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or
any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. This Update is not expected to have
a significant impact on the Company’s financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The
amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically,
the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting
change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the
amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019,
and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption
in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of
the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a
modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the
period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting
principle. This Update is not expected to have a significant impact on the Company’s financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718), which affects any entity
that changes the terms or conditions of a share-based payment award. This Update amends the definition of modification by
qualifying that modification accounting does not apply to changes to outstanding share-based payment awards that do not
affect the total fair value, vesting requirements, or equity/liability classification of the awards. The amendments in this
Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after
December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for
reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for
which financial statements have not yet been made available for issuance. The amendments in this Update should be applied
prospectively to an award modified on or after the adoption date. The Company is currently evaluating the impact the adoption
of the standard will have on the Company’s financial position or results of operations.
In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220), which
allows for optional reclassification of stranded tax effects related to the Tax Cuts and Jobs Act of 2017 (TCJA). When elected,
this Update requires all stranded tax effects related to the TCJA to be reclassified (i.e., including other income tax effects not
specifically related to the change in rates). Entities electing to reclassify stranded tax effects related to the TCJA are required
to disclose that the election was made, including a description of the other income tax effects, if any, related to the TCJA that
were reclassified. Entities not electing to reclassify stranded tax effects related to the TCJA are required to disclose, in the
period of adoption, that the election was not made. In addition, all entities are required to disclose their accounting policy for
releasing income tax effects from accumulated other comprehensive income (i.e., including those income tax effects not
related to the TCJA). This Update requires certain additional transitional disclosures. Application is allowed at the beginning
of the period of adoption (annual or interim) or retrospectively and is effective for all entities for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2018. All entities, including public entities, that have not yet
issued their financial statements may early adopt the standard. The Company is currently evaluating the impact the adoption
of the standard will have on the Company’s financial position or results of operations.
52
2. EARNINGS PER SHARE
There are no convertible securities that would affect the numerator in calculating basic and diluted earnings per share;
therefore, net income as presented on the Consolidated Statement of Income will be used as the numerator. 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 year ended December 31:
Weighted-average common shares outstanding
3,415,115
2,494,022
2,251,365
2017
2016
2015
Average treasury stock shares
(386,165)
(386,165)
(236,399)
Weighted-average common shares and common
stock equivalents used to calculate basic
earnings per share
Additional common stock equivalents (stock
options) used to calculate diluted earnings per
share
Weighted-average common shares and common
stock equivalents used to calculate diluted
earnings per share
3,028,950
2,107,857
2,014,966
23,635
11,357
9,154
3,052,585
2,119,214
2,024,120
Options to purchase 19,750 shares of common stock at prices ranging from $17.55 to $23.00 were outstanding during the
year ended December 31, 2017. Also outstanding were 14,601 shares of restricted stock units. None of the outstanding options
or RSU’s were anti-dilutive.
Options to purchase 29,324 shares of common stock at prices ranging from $17.55 to $37.48 were outstanding during the
year ended December 31, 2016. Of those options, 29,324 were considered dilutive based on the average market price
exceeding the strike price for the year ended December 31, 2016, and no options were anti-dilutive.
Options to purchase 31,949 shares of common stock at prices ranging from $17.55 to $40.24 were outstanding during the
year ended December 31, 2015. Of those options, 27,250 were considered dilutive based on the average market price
exceeding the strike price for the year ended December 31, 2015, and 4,699 options were anti-dilutive.
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost, gross gains and losses and fair values of securities available for sale are as follows:
(Dollar amounts in thousands)
U.S. government agency securities
Obligations of states and political
subdivisions:
Taxable
Tax-exempt
Mortgage-backed securities in government-
sponsored entities
Total debt securities
Equity securities in financial institutions
Total
$
December 31, 2017
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
$
8,664 $
126 $
(71) $
8,719
8
1,547
157
1,838
210
2,048 $
-
(38)
(287)
(396)
-
(396) $
512
66,917
18,510
94,658
625
95,283
504
65,408
18,640
93,216
415
93,631 $
53
(Dollar amounts in thousands)
U.S. government agency securities
Obligations of states and political
subdivisions:
Taxable
Tax-exempt
Mortgage-backed securities in government-
sponsored entities
Private-label mortgage-backed securities
Total debt securities
Equity securities in financial institutions
Total
$
December 31, 2016
Gross
Gross
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair
Value
$
10,158 $
174 $
(96) $
10,236
1,615
78,327
20,128
1,579
111,807
750
112,557 $
129
1,678
202
130
2,313
389
2,702 $
(4)
(522)
(261)
-
(883)
-
(883) $
1,740
79,483
20,069
1,709
113,237
1,139
114,376
The amortized cost and fair value of debt securities at December 31, 2017, 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.
(Dollar amounts in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Amortized
Cost
Fair
Value
$
2,340 $
9,718
10,992
70,166
2,377
9,878
11,012
71,391
Total
$
93,216 $
94,658
Investment securities with an approximate carrying value of $57.9 million and $60.3 million at December 31, 2017 and 2016,
respectively, were pledged to secure deposits and other purposes as required by law.
Proceeds from the sales of securities available for sale and the gross realized gains and losses for the years ended December
31, 2017 through 2015, are as follows (in thousands):
Proceeds from sales
Gross realized gains
Gross realized losses
$
2017
2016
2015
6,474 $
911 *
(25)
9,063 $
309
(6)
15,686
440
(117)
*Prior to the acquisition of Liberty, the Company had a previously held equity interest in Liberty which was re-measured at
fair value on the acquisition date and resulted in a gain of $488,000, which was recorded in Investment Securities Gains on
the consolidated Income Statement for the year ended December 31, 2017.
54
The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and
length of time that the individual securities have been in a continuous unrealized loss position.
December 31, 2017
Less than Twelve Months Twelve Months or Greater
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
(Dollar amounts in thousands)
U.S. government agency securities $
Obligations of states and political
subdivisions
Tax-exempt
Mortgage-backed securities in
557 $
(4) $
4,036 $
(67) $
4,593 $
(71)
1,009
(6)
2,784
(32)
3,793
(38)
government-sponsored entities
$
Total
5,698
7,264 $
(71)
(81) $
8,734
15,554 $
(216)
(315) $
14,432
22,818 $
(287)
(396)
December 31, 2016
Less than Twelve Months Twelve Months or Greater
Total
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
(Dollar amounts in thousands)
3,803 $
(47) $
1,316 $
(49) $
5,119 $
(96)
U.S. government agency securities $
Obligations of states and political
subdivisions
Taxable
Tax-exempt
502
23,554
Mortgage-backed securities in
government-sponsored entities
$
Total
9,066
36,925 $
(4)
(522)
(126)
(699) $
-
-
-
-
502
23,554
4,438
5,754 $
(135)
(184) $
13,504
42,679 $
(4)
(522)
(261)
(883)
There were 29 securities that were considered temporarily impaired at December 31, 2017.
On a quarterly basis, the Company performs an assessment to determine whether there have been any events or economic
circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment (“OTTI”). A
debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The accounting
literature requires the Company to assess whether the unrealized loss is other than temporary. For equity securities where the
fair value has been significantly below cost for one year, the Company’s policy is to recognize an impairment loss unless
sufficient evidence is available that the decline is not other than temporary and a recovery period can be predicted.
The Company has asserted that at December 31, 2017 and 2016, the declines outlined in the above table represent temporary
declines and the Company does not intend to sell and does not believe it will be required to sell these securities before
recovery of their cost basis, which may be at maturity. The Company has concluded that any impairment of its investment
securities portfolio outlined in the above table is not other than temporary and is the result of interest rate changes, sector
credit rating changes, or company-specific rating changes that are not expected to result in the non-collection of principal
and interest during the period.
55
Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises, and state and political
subdivisions accounted for 99.3% of the total available-for-sale portfolio as of December 31, 2017, 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 evaluates
credit losses on a quarterly basis. 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.
• 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.
4. LOANS AND RELATED ALLOWANCE FOR LOAN AND LEASE LOSSES
Major classifications of loans at December 31 are summarized as follows (in thousands):
Commercial and industrial
Real estate - construction
Real estate - mortgage:
Residential
Commercial
Consumer installment
Less: Allowance for loan and lease losses
$
2017
2016
101,346 $
47,017
318,157
437,947
18,746
923,213
(7,190 )
60,630
23,709
270,830
249,490
4,481
609,140
(6,598)
Net loans
$
916,023 $
602,542
The amounts above include net deferred loan origination costs of $1.5 million and $1.7 million at December 31, 2017 and
December 31, 2016, respectively.
The Company’s primary business activity is with customers located within its local Northeastern Ohio trade area, eastern
Geauga County, and contiguous counties to the north, east, and south. The Company also serves the central Ohio market with
offices in Dublin, Sunbury and Westerville, Ohio. The Northeastern Ohio trade area includes the newly acquired Liberty
locations in Beachwood, Twinsburg, and Solon, Ohio. Commercial, residential, consumer, and agricultural loans are granted.
Although the Company has a diversified loan portfolio at December 31, 2017 and 2016, loans outstanding to individuals and
businesses are dependent upon the local economic conditions in the Company’s immediate trade area.
56
The following tables summarize the primary segments of the loan portfolio and the allowance for loan and lease losses (in
thousands):
Real Estate- Mortgage
December 31, 2017
industrial
Real estate-
construction Residential Commercial
Consumer
installment
Total
Commercial
and
Loans:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total loans
$
3,627 $
44 $
2,824 $
5,610 $
4 $
12,109
97,719
$ 101,346 $
432,337
315,333
46,973
47,017 $ 318,157 $ 437,947 $
18,742
18,746 $
911,104
923,213
Commercial
and
December 31, 2016
industrial
Real estate-
construction Residential Commercial
Consumer
installment
Total
Real estate- Mortgage
Loans:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total loans
$
1,190 $
913 $
3,135 $
7,187 $
5 $
12,430
59,440
60,630 $
22,796
23,709 $
267,695
242,303
270,830 $ 249,490 $
4,476
4,481 $
596,710
609,140
$
Real Estate- Mortgage
Commercial
and
industrial
Real estate-
construction Residential Commercial
Consumer
installment Total
December 31, 2017
Allowance for loan and lease
losses:
Ending allowance balance
attributable to loans:
Individually evaluated for
impairment
$
694 $
- $
140 $
733 $
- $ 1,567
Collectively evaluated for
impairment
Total ending allowance
305
313
1,620
3,303
82 5,623
balance
$
999 $
313 $
1,760 $
4,036 $
82 $ 7,190
Real Estate- Mortgage
Commercial
and
industrial
Real estate-
construction Residential Commercial
Consumer
installment Total
December 31, 2016
Allowance for loan and lease
losses:
Ending allowance balance
attributable to loans:
Individually evaluated for
impairment
$
90 $
- $
251 $
186 $
- $
527
Collectively evaluated for
impairment
Total ending allowance
358
172
2,567
2,949
25 6,071
balance
$
448 $
172 $
2,818 $
3,135 $
25 $ 6,598
57
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 loans made for the purpose of financing the activities of residential homeowners. The commercial mortgage loan
segment consists of loans made for the purpose of financing the activities of commercial real estate owners and operators.
The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer
deposit accounts.
Management evaluates individual loans in all of the commercial segments for possible impairment based on guidance
established by the Board of Directors. Loans are considered to be impaired when, based on current information and events,
it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according
to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment
status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management
determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all
of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company
does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part
of a larger relationship that is impaired, or the loan was modified in a troubled debt restructuring.
Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the
allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one
of 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.
58
The following tables present impaired loans by class, segregated by those for which a specific allowance was required and
those for which a specific allowance was not necessary (in thousands):
With no related allowance recorded:
Commercial and industrial
Real estate - construction
Real estate - mortgage:
Residential
Commercial
Consumer installment
Total
With an allowance recorded:
Commercial and industrial
Real estate - mortgage:
Residential
Commercial
Total
Total:
Commercial and industrial
Real estate - construction
Real estate - mortgage:
Residential
Commercial
Consumer installment
Total
December 31, 2017
Impaired Loans
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
$
$
$
$
$
$
450 $
44
1,685
1,870
4
4,053 $
3,177 $
1,139
3,740
8,056 $
3,627 $
44
2,824
5,610
4
12,109 $
1,006 $
44
1,904
1,984
4
4,942 $
3,888 $
1,179
3,913
8,980 $
4,894 $
44
3,083
5,897
4
13,922 $
-
-
-
-
-
-
694
140
733
1,567
694
-
140
733
-
1,567
59
December 31, 2016
Impaired Loans
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
With no related allowance recorded:
Commercial and industrial
Real estate - construction
Real estate - mortgage:
Residential
Commercial
Total
With an allowance recorded:
Commercial and industrial
Real estate - mortgage:
Residential
Commercial
Consumer installment
Total
Total:
Commercial and industrial
Real estate - construction
Real estate - mortgage:
Residential
Commercial
Consumer installment
Total
$
$
$
$
$
$
319 $
913
2,142
2,031
5,405 $
871 $
993
5,156
5
7,025 $
1,190 $
913
3,135
7,187
5
12,430 $
318 $
909
2,140
2,027
5,394 $
868 $
991
5,147
5
7,011 $
1,186 $
909
3,131
7,174
5
12,405 $
-
-
-
-
-
90
251
186
-
527
90
-
251
186
-
527
The tables above include troubled debt restructuring totaling $5.4 million and $6.7 million as of December 31, 2017 and
2016, respectively.
The following table presents interest income by class, recognized on impaired loans (in thousands):
As of December 31, 2017 As of December 31, 2016 As of December 31, 2015
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Commercial and industrial
Real estate - construction
Real estate - mortgage:
Residential
Commercial
Consumer installment
Total
$
$
2,378 $
565
3,068
6,820
5
12,836 $
178 $
1
89
446
1
715 $
1,211 $
1,281
3,529
7,384
6
13,411 $
32 $
10
1,468 $
2,407
98
368
1
509 $
4,356
5,203
6
13,440 $
100
115
160
350
-
725
60
Troubled Debt Restructuring (TDR) describes loans on which the bank has granted concessions for reasons related to the
customer’s financial difficulties. Such concessions may include one or more of the following:
•
•
•
•
•
reduction in the interest rate to below market rates
extension of repayment requirements beyond normal terms
reduction of the principal amount owed
reduction of accrued interest due
acceptance of other assets in full or partial payment of a debt
In each case the concession is made due to deterioration in the borrower’s financial condition, and the new terms are less
stringent than those required on a new loan with similar risk. The total impact on the ALLL for 2017 and 2016 related to
TDRs was $509,000 and $436,000, respectively.
The following tables present the number of loan modifications by class, the corresponding recorded investment, and the
subsequently defaulted modifications (in thousands):
Number of Contracts
Pre-Modification Post-Modification
December 31, 2017
Troubled Debt Restructurings
Modification Other
Commercial and industrial
Residential real estate
4
5
Total
-
-
4 $
5
Term
Outstanding
Recorded
Investment
Outstanding
Recorded
Investment
127 $
256
127
256
Number of Contracts
Pre-Modification Post-Modification
December 31, 2016
Term
Troubled Debt Restructurings
Modification Other
Commercial and industrial
Residential real estate
Commercial real estate
5
4
1
Total
-
-
-
5 $
4
1
Outstanding
Recorded
Investment
Outstanding
Recorded
Investment
610 $
166
311
610
166
311
Number of Contracts
Pre-Modification Post-Modification
December 31, 2015
Troubled Debt Restructurings
Modification Other
Term
Commercial and industrial
Real estate construction
Residential real estate
Commercial real estate
6
1
5
1
Total
-
-
1
-
6 $
1
6
1
434 $
181
515
270
Outstanding
Recorded
Investment
Outstanding
Recorded
Investment
Troubled Debt Restructurings subsequently defaulted
Commercial and industrial
Real estate construction
Residential real estate
Commercial real estate
December 31, 2016
Number of
Contracts
Recorded
Investment
2 $
1
4
1
61
434
181
535
270
7
-
278
119
Troubled Debt Restructurings subsequently defaulted
Commercial and industrial
Real estate construction
December 31, 2015
Number of
Contracts
Recorded
Investment
2 $
1
14
130
There were no subsequent defaults of troubled debt restructurings for the year ended December 31, 2017.
Management uses a nine-point internal risk-rating system to monitor the credit quality of the overall loan portfolio. The first
five categories are considered not criticized and are aggregated as Pass rated. The criticized rating categories utilized by
management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently
protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a
Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation
of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans
greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the
Loss category.
To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed,
the Company has a structured loan-rating process with several layers of internal and external oversight. Generally, consumer
and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession,
or death, occurs to raise awareness of a possible credit event. The Company’s Commercial Loan Officers are responsible for
the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis with the Chief Credit
Officer ultimately responsible for accurate and timely risk ratings. The Credit Department performs an annual review of all
commercial relationships $1.0 million or greater. Confirmation of the appropriate risk grade is included in the review on an
ongoing basis. The Company engages an external consultant to conduct loan reviews on a semiannual basis. Generally, the
external consultant reviews commercial relationships greater than $250,000 and/or criticized relationships greater than
$125,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly
basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given
separate consideration in the determination of the allowance.
The following tables present the classes of the loan portfolio summarized by the aggregate Pass rating and the criticized
categories of Special Mention, Substandard, and Doubtful within the internal risk rating system (in thousands):
Commercial and industrial
Real estate - construction
Real estate - mortgage:
Residential
Commercial
Consumer installment
Total
Commercial and industrial
Real estate - construction
Real estate - mortgage:
Residential
Commercial
Consumer installment
Total
$
$
$
$
Pass
Special
Mention
Substandard
Doubtful
Total
Loans
December 31, 2017
95,621 $
46,995
312,176
424,225
18,742
897,759 $
1,942 $
-
723
9,164
-
11,829 $
3,783 $
22
5,258
4,558
4
13,625 $
Pass
Special
Mention
Substandard
Doubtful
December 31, 2016
58,539 $
23,541
264,481
240,678
4,467
591,706 $
1,428 $
24
5,921
4,390
14
11,777 $
663 $
144
428
4,422
-
5,657 $
62
- $
-
-
-
-
- $
- $
-
-
-
-
- $
101,346
47,017
318,157
437,947
18,746
923,213
Total
Loans
60,630
23,709
270,830
249,490
4,481
609,140
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 tables present the classes of the loan
portfolio summarized by the aging categories of loans and nonaccrual loans (in thousands):
Current
30-59 Days 60-89 Days 90 Days+
Past Due
Past Due
Past Due
Total
Past Due
Total
Loans
December 31, 2017
Commercial and industrial $
Real estate - construction
Real estate - mortgage:
Residential
Commercial
Consumer installment
Total
$
99,633 $
47,017
314,866
434,879
18,736
915,131 $
1,607 $
-
1,977
1,907
10
5,501 $
29 $
-
227
1
-
257 $
77 $
-
1,713 $
-
101,346
47,017
1,087
1,160
-
2,324 $
3,291
3,068
10
8,082 $
318,157
437,947
18,746
923,213
Current
30-59 Days 60-89 Days 90 Days+
Past Due
Past Due
Past Due
Total
Past Due
Total
Loans
December 31, 2016
Commercial and industrial $
Real estate - construction
Real estate - mortgage:
Residential
Commercial
Consumer installment
Total
$
60,407 $
23,709
268,041
249,081
4,465
605,703 $
17 $
-
1,909
92
-
2,018 $
2 $
-
207
-
10
219 $
204 $
-
673
317
6
1,200 $
223 $
-
60,630
23,709
2,789
409
16
3,437 $
270,830
249,490
4,481
609,140
The following tables present the classes of the loan portfolio summarized by nonaccrual loans and loans 90 days or more past
due and still accruing (in thousands):
Commercial and industrial
Real estate - construction
Real estate - mortgage:
Residential
Commercial
Consumer installment
Total
Commercial and industrial
Real estate - construction
Real estate - mortgage:
Residential
Commercial
Consumer installment
Total
December 31, 2017
90+ Days Past
Due and
Accruing
Nonaccrual
$
$
1,120 $
-
4,002
3,311
-
8,433 $
-
-
-
-
-
-
December 31, 2016
90+ Days Past
Due and
Accruing
Nonaccrual
$
$
454 $
-
4,034
1,409
6
5,903 $
-
-
-
-
-
-
63
Interest income that would have been recorded had these loans not been placed on nonaccrual status was $437,000 in 2017,
$309,000 in 2016, and $259,000 in 2015.
An allowance for loan and lease losses (“ALLL”) is maintained to absorb losses from the loan portfolio. The ALLL is based
on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of
current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss
experience, and the amount of nonperforming loans.
The Company’s methodology for determining the ALLL is based on the requirements of ASC Section 310-10-35 for loans
individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for
impairment, as well as the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other bank
regulatory guidance. The total of the two components represents the Company’s ALLL. Management also performs
impairment analysis on TDRs, which may result in specific reserves.
Loans that are collectively evaluated for impairment are analyzed, with general allowances being made as appropriate. For
general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss
amounts are modified by other qualitative factors.
The classes described above, which are based on the purpose code assigned to each loan, provide the starting point for the
ALLL analysis. Management tracks the historical net charge-off activity at the purpose code level. A historical charge-off
factor is calculated utilizing the last twelve consecutive historical quarters.
Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off
factor, because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from
historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from
internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends
in delinquency rates and nonaccrual loans; trends in volumes and terms of loans; effects of changes in lending policies;
experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type,
industry, and/or geographic standpoint.
Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make
appropriate and timely adjustments to the ALLL. When information confirms all or part of specific loans to be uncollectible,
these amounts are promptly charged off against the ALLL.
The following tables summarize the primary segments of the loan portfolio (in thousands):
Commercial
and
industrial
Real estate-
construction
Real estate-
residential
mortgage
Real estate-
commercial
mortgage
Consumer
installment
Total
ALLL balance at December 31,
2016
Charge-offs
Recoveries
Provision
$
448 $
(536)
234
853
172 $
-
34
107
2,818 $
(117)
241
(1,182)
3,135 $
(39)
111
829
25 $
(462)
81
438
6,598
(1,154)
701
1,045
ALLL balance at December 31,
2017
$
999 $
313 $
1,760 $
4,036 $
82 $
7,190
Commercial
and
industrial
Real estate-
construction
Real estate-
residential
mortgage
Real estate-
commercial
mortgage
Consumer
installment
Total
ALLL balance at December 31,
2015
Charge-offs
Recoveries
Provision
$
867 $
(237)
90
(272)
276 $
-
-
(104)
3,139 $
(414)
141
(48)
2,078 $
(70)
140
987
25 $
(22)
15
7
6,385
(743)
386
570
ALLL balance at December 31,
2016
$
448 $
172 $
2,818 $
3,135 $
25 $
6,598
64
The negative provision allocated to residential real estate loans in the amount of $1.2 million for the year ended December
31, 2017 is due to the payoff of a large residential credit during that period. The decline in the reserve allocated for residential
real estate is due to a decrease in historic losses during 2017 and consistent decreases in the ratio of nonperforming loans to
total loans in this segment over the past few years resulting in a decrease in the reserves required. The increase in the ALLL
balance for commercial real estate and commercial and industrial loans is primarily due to increases in specific reserves for
impaired loans along with growth in these segments.
5. OTHER REAL ESTATE OWNED (“OREO”)
OREO comprises foreclosed assets acquired in settlement of loans and is carried at fair value less estimated cost to sell and
is included in other real estate owned on the Consolidated Balance Sheet. As of December 31, 2017 and December 31, 2016,
there were $212,000 and $934,000, respectively, of OREO. The recorded investment of consumer mortgage loans secured
by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements
of the applicable jurisdiction totaled $1.5 million at December 31, 2017.
6. PREMISES AND EQUIPMENT
Major classifications of premises and equipment at December 31:
(Dollar amounts in thousands)
2017
2016
Land and land improvements
Building and leasehold improvements
Furniture, fixtures, and equipment
Total premises and equipment
Less accumulated depreciation and amortization
$
2,920 $
14,277
7,010
24,207
12,354
2,891
12,081
5,404
20,376
9,173
Total premises and equipment, net
$
11,853 $
11,203
Depreciation expense charged to operations was $876,000 in 2017, $735,000 in 2016, and $715,000 in 2015.
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill totaled $15.1 million and $4.6 million at the years ended December 31, 2017, and 2016. Core deposit intangible
carrying amount was $2.7 million and $36,000 for the years ended December 31, 2017, and 2016, respectively. Core deposit
accumulated amortization was $692,000 and $318,000 for the years ended December 31, 2017, and 2016.
Core deposit intangible assets are amortized to their estimated residual values over their expected useful lives, commonly of
ten years. Amortization expense totaled $374,000, $40,000, and $40,000 in 2017, 2016, and 2015, respectively. The estimated
aggregate future amortization expense for core deposit intangible assets as of December 31, 2017 is as follows:
2018
2019
2020
2021
2022
Thereafter
Total
$
$
352
341
332
321
309
1,094
2,749
65
8. OTHER ASSETS
The components of other assets at the years ended December 31:
(Dollar amounts in thousands)
2017
2016
Restricted stock
Accrued interest receivable on investment securities
Accrued interest receivable on loans
Deferred tax asset, net
Other
$
3,589 $
707
2,581
647
1,620
2,204
812
1,614
1,607
1,265
Total
$
9,144 $
7,502
9. DEPOSITS
Time deposits at December 31, 2017, mature $99.3 million, $21.5 million, $51.8 million, $41.0 million, and $29.4 million
during 2018, 2019, 2020, 2021, and 2022, respectively.
The aggregate of all time deposit accounts of $250,000 or more amounted to $39.4 million and $27.8 million at December 31,
2017 and 2016, respectively.
10. SHORT-TERM BORROWINGS
For the year ended December 31, outstanding balances and related information of short-term borrowings, which includes
securities sold under agreements to repurchase and short-term borrowings from other banks, are summarized as follows:
(Dollar amounts in thousands)
2017
2016
Balance at year-end
Average balance outstanding
Maximum month-end balance
Weighted-average rate at year-end
Weighted-average rate during the year
$
74,707 $
63,910
114,025
1.36%
1.18%
68,359
37,130
68,359
0.61%
0.89%
Average balances outstanding during the year represent daily average balances, and average interest rates represent interest
expense divided by the related average balance.
The Company maintains a $6.0 million line of credit at an adjustable rate, currently 4.75%, a $10.0 million line of credit at
an adjustable rate, currently at 4.69%, and a $4.0 million line of credit at an adjustable rate, currently 4.74%. At December
31, 2017, 2016, and 2015, outstanding borrowings under these lines were $0, $0, and $9.5 million, respectively.
The following table provides additional detail regarding collateral pledged to secure the Company’s repurchase agreements:
(Dollar amounts in thousands)
Repurchase agreements secured by:
Mortgage-backed securities in government sponsored entities
Tax-exempt obligations of states and political subdivisions
Gross amount of pledged collateral
Gross amount of recognized liabilities
Repurchase Agreements (Sweep) Accounted
for as Secured Borrowings
Overnight and Continuous
December 31, 2017 December 31, 2016
$
$
2,040 $
495
2,535
1,989 $
2,667
968
3,635
2,129
66
11. OTHER BORROWINGS
Other borrowings consist of advances from the FHLB and subordinated debt as follows:
(Dollar amounts in thousands)
Description
Fixed-rate amortizing
Junior subordinated debt
Maturity range
to
from
Weighted-
average
interest rate
Stated interest
rate range
from
to
02/01/18 10/01/28
12/21/37 12/21/37
1.24%
2.85%
1.01%
2.56%
4.47% $
3.05%
2017
20,817 $
8,248
2016
1,189
8,248
Total
$
29,065 $
9,437
The scheduled maturities of other borrowings are as follows:
(Dollar amounts in thousands)
Year Ending December 31,
2018
2019
2020
2021
2022
Beyond 2022
Amount
Weighted-
Average Rate
$
20,252
155
116
87
65
8,390
1.16%
4.04%
4.04%
4.04%
4.04%
2.79%
2.86%
Total
$
29,065
Fixed-rate amortizing advances from the FHLB require monthly principal and interest payments and an annual 20 percent
pay-down of outstanding principal. Monthly principal and interest payments are adjusted after each 20 percent pay-down.
Under the terms of a blanket agreement, FHLB borrowings are secured by certain qualifying assets of the Company which
consist principally of first mortgage loans or mortgage-backed securities. Under this credit arrangement, the Company has a
remaining borrowing capacity of approximately $192.2 million at December 31, 2017.
The Company formed a special purpose entity (“Entity”) to issue $8.0 million of floating rate, obligated mandatorily
redeemable securities, and $248,000 in common securities as part of a pooled offering. The rate adjusts quarterly, equal to
LIBOR plus 1.67%. The Entity may redeem them, in whole or in part, at face value. The Company borrowed the proceeds of
the issuance from the Entity in December 2006 in the form of an $8.3 million note payable, which is included in the other
borrowings on the Company’s Consolidated Balance Sheet.
12. OTHER LIABILITIES
The components of other liabilities are as follows at December 31:
(Dollar amounts in thousands)
Accrued interest payable
Supplemental Executive Retirement Plan
Accrued salary expense
Other
2017
2016
$
578 $
1,427
956
1,546
395
1,125
768
843
Total
$
4,507 $
3,131
67
13. INCOME TAXES
The provision for federal income taxes for the years ended December 31, consists of:
(Dollar amounts in thousands)
2017
2016
2015
Current payable
Deferred
Total provision
$
$
3,929 $
293
1,998 $
(93 )
1,004
558
4,222 $
1,905 $
1,562
The tax effects of deductible and taxable temporary differences that give rise to significant portions of the deferred tax assets
and deferred tax liabilities are as follows at December 31,:
(Dollar amounts in thousands)
2017
2016
Deferred tax assets:
Allowance for loan and lease losses
Supplemental retirement plan
Investment security basis adjustment
Nonaccrual interest income
OREO adjustments
Accrued compensation
Other
Gross deferred tax assets
Deferred tax liabilities:
Premises and equipment
Net unrealized gain on securities
FHLB stock dividends
Intangibles
Mortgage servicing rights
Deferred origination fees, net
Acquisition fair value adjustments
Other
Gross deferred tax liabilities
$
1,210 $
528
18
371
2
201
86
2,416
356
347
139
307
71
294
250
5
1,769
Net deferred tax assets
$
647 $
2,243
382
66
456
26
261
82
3,516
445
618
225
449
103
63
1
5
1,909
1,607
No valuation allowance was established at December 31, 2017 and 2016, in view of the Company’s ability to carry back to
taxes paid in previous years and certain tax strategies, coupled with the anticipated future taxable income as evidenced by
the Company's earnings potential.
68
The reconciliation between the federal statutory rate and the Company’s effective consolidated income tax rate for the years
ended December 31, is as follows:
(Dollar amounts in
thousands)
2017
% of
Pretax
Income
Amount
2016
% of
Pretax
Income
Amount
2015
% of
Pretax
Income
Amount
Provision at statutory rate $
Tax-exempt income
Nondeductible interest
expense
Nondeductible merger-
related expense
Stock-based compensation
Change in effective
corporate tax rate
Other
Actual tax expense and
4,651
(1,045)
34.0% $
(7.6)%
2,829
(1,177 )
34.0% $
(14.1)%
2,866
(1,347)
34.0%
(15.9)%
32
0.2%
32
0.4%
34
0.4%
43
(50)
401
190
0.3%
(0.4)%
2.9%
1.5%
186
-
-
35
2.2%
-%
-%
0.4%
-
-
-
9
-%
-%
-%
-%
effective rate
$
4,222
30.9% $
1,905
22.9% $
1,562
18.5%
ASC 740‐10 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized
in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by
the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the
more‐likely‐than‐not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely
of being realized upon ultimate settlement. Tax positions that previously failed to meet the more‐likely‐than‐not recognition
threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the more‐likely‐than‐not recognition threshold should be derecognized in the
first subsequent financial reporting period in which that threshold is no longer met.
On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Act”), was signed into law. The Act
includes many provisions that will affect our income tax expense, including reducing our federal tax rate from 34% to 21%
effective January 1, 2018. As a result of the rate reduction, we are required to re-measure, through income tax expense in the
period of enactment, our deferred tax assets and liabilities using the enacted rate at which we expect them to be recovered or
settled. The re-measurement of our net deferred tax asset resulted in additional 2017 income tax expense of $401,000.
Also on December 22, 2017, the U.S. Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No.
118 (“SAB 118”) to address any uncertainty or diversity of views in practice in accounting for the income tax effects of the
Act in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable
detail to complete this accounting in the reporting period that includes the enactment date. SAB 118 allows for a measurement
period not to extend beyond one year from the Act’s enactment date to complete the necessary accounting.
We recorded provisional amounts of deferred income taxes using reasonable estimates in one area where information
necessary to complete the accounting was not available, prepared, or analyzed. Our deferred tax liability for temporary
differences between the tax and financial reporting bases of fixed assets principally due to the accelerated depreciation under
the Act which allows for full expensing of qualified property purchased and placed in service after September 27, 2017. We
will complete and record the income tax effects of this provisional item during the period the necessary information becomes
available. This measurement period will not extend beyond December 22, 2018.
At December 31, 2017 and December 31, 2016, the Company had no ASC 740-10 unrecognized tax benefits. The Company
does not expect the total amount of unrecognized tax benefits to significantly increase within the next 12 months. The
Company recognizes interest and penalties on unrecognized tax benefits as a component of income tax expense.
69
The Company and the Bank are subject to U.S. federal income tax as well as an income tax in the state of Ohio, and the Bank
is subject to a capital‐based franchise tax in the state of Ohio. The Company and the Bank are no longer subject to examination
by taxing authorities for years before December 31, 2014.
14. EMPLOYEE BENEFITS
Retirement Plan
The Bank maintains section 401(k) employee savings and investment plans for all full-time employees and officers of the
Bank who are at least 21 years of age. The Bank’s contributions to the plans are discretionary, and were based on 50%
matching of voluntary contributions up to 6% of compensation for the year ended December 31, 2017. Employee
contributions are vested at all times, and MBC contributions are fully vested after six years beginning at the second year in
20% increments. Special vesting provisions are in place for legacy Liberty employees with 3 or more years of service.
Contributions for 2017, 2016, and 2015 to these plans amounted to $258,000, $156,000, and $156,000, respectively.
Supplemental Retirement Plan
Until 2001, MBC maintained a Directors’ Retirement Plan to provide postretirement payments over a ten-year period to
members of the Board of Directors who had completed five or more years of service. The plan required payment of 25% of
the final average annual board fees paid to a director in the three years preceding the director’s retirement.
The following table illustrates the components of the projected payments for the Directors’ Retirement Plan for the years
ended:
2018
2019
2020
2021
Total
Projected
Payments
$ 18,000
12,000
10,000
2,000
$ 42,000
The retirement plan is available solely for nonemployee directors of MBC, but MBC has not entered into any additional
retirement arrangements for nonemployee directors since 2001. All director participants have retired.
Executive Deferred Compensation Plan
The Company maintains an Executive Deferred Compensation Plan (the “Plan”) to provide post-retirement payments to
members of senior management. The Plan agreements are noncontributory, defined contribution arrangements that provide
supplemental retirement income benefits to several officers, with contributions made solely by the Bank. During 2017, 2016,
and 2015, the Company contributed $110,000, $99,000, and $65,000, respectively, to the Plan.
Stock Option and Restricted Stock Plan
In 2007, the Company adopted the 2007 Omnibus Equity Plan (the “2007 Plan”) for granting incentive stock options,
nonqualified stock options, and restricted stock to key officers and employees and nonemployee directors of the Company.
A total of 160,000 shares of authorized and unissued or issued common stock were reserved for issuance under the 2007
Plan, which expires ten years from the date of board approval of the plan. Although the 2007 Plan expired in 2017, there
remain outstanding 92,759 shares in equity awards granted under the 2007 Plan. The per share exercise price of an option
granted will not be less than the fair value of a share of common stock on the date the option is granted.
In 2017, the Company adopted the 2017 Omnibus Equity Plan (the “2017 Plan”) for granting incentive stock options,
nonqualified stock options, restricted stock and other equity awards to key officers and employees and nonemployee directors
of the Company. The Company’s stockholders approved the 2017 Plan at the annual meeting of the stockholders held on
May 10, 2017. A total of 224,000 shares of authorized and unissued or issued common stock are reserved for issuance under
the 2017 Plan, which expires ten years from the date of board approval of the plan. The per share exercise price of an option
70
granted will not be less than the fair value of a share of common stock on the date the option is granted. Remaining available
shares that can be issued under the Plan were 218,175 at December 31, 2017.
The following table presents share data related to the outstanding options:
Outstanding, January 1
Expired
Exercised
Outstanding, December 31
Exercisable, December 31
Weighted
Average Exercise
Price Per Share
2017
29,324 $
(1,337)
(8,237)
19,750 $
19,750 $
23.67
37.48
27.97
20.94
20.94
The total intrinsic value of outstanding in-the-money exercisable stock options was $538,000 at December 31, 2017.
The following table summarizes the characteristics of stock options at December 31, 2017:
Grant Date
Exercise
Price Per
Share
Shares
Outstanding
Contractual
Average
Life
Average
Exercise
Price Per
Share
Exercisable
Average
Exercise
Price Per
Share
Shares
November 10, 2008
May 9, 2011
$
$
23.00
17.55
12,300
7,450
19,750
0.85 $
3.35 $
23.00
17.55
12,300 $
7,450 $
19,750
23.00
17.55
No options were granted for the years ended December 31, 2017 and 2016. The Company recognizes compensation expense
in the amount of fair value of the common stock at the grant date and as an addition to stockholders’ equity.
For each of the years ended December 31, 2017, 2016, and 2015, the Company recorded no compensation cost related to
vested stock options. As of December 31, 2017, there was no unrecognized compensation cost related to unvested stock
options.
For the years ended December 31, 2017 and 2016, 8,237 and 500 options were exercised resulting in net proceeds to the
participant of $95,000 and $6,000, respectively.
During 2017, 2016, and 2015, the Compensation Committee of the Board of Directors of the Company granted awards of an
aggregate of 5,825, 5,090, and 3,905, respectively, restricted stock units (“RSUs”) to certain employees of the Bank. The
expense recognized as a result of these awards was $196,000, $123,000, and $55,000 for the years ended 2017, 2016, and
2015, respectively. The number of RSUs earned or settled will depend on certain conditions and are also subject to service
period-based vesting. The award recipient must maintain service with Middlefield Banc Corp. and affiliates until the third
anniversary of the award to satisfy the service condition. The performance condition will be satisfied if the average total
shareholder annual return on Middlefield Banc Corp. stock for the three subsequent years is at least 8.00%.
71
The following table presents the activity during 2017 related to awards of RSUs:
Nonvested at January 1, 2017
Granted
Forfeited
Nonvested at December 31, 2017
Expected to vest at December 31, 2017
15. COMMITMENTS
Weighted
Average Grant
Date Fair Value
Per Share
Units
8,995 $
5,825 $
(219) $
14,601 $
14,601 $
32.93
38.70
38.70
35.14
35.14
In the normal course of business, there are various outstanding commitments and certain contingent liabilities which are not
reflected in the accompanying consolidated financial statements. These commitments and contingent liabilities represent
financial instruments with off-balance sheet risk. The contract or notional amounts of those instruments reflect the extent of
involvement in particular types of financial instruments which were composed of the following at December 31:
(Dollar amounts in thousands)
2017
2016
Commitments to extend credit
Standby letters of credit
Total
$
$
234,023 $
1,015
161,646
1,416
235,038 $
163,062
These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in
the Consolidated Balance Sheet. The Company’s exposure to credit loss, in the event of nonperformance by the other parties
to the financial instruments, is represented by the contractual amounts as disclosed. The Company minimizes its exposure to
credit loss under these commitments by subjecting them to credit approval and review procedures and collateral requirements
as deemed necessary. Commitments generally have fixed expiration dates within one year of their origination.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to
a third party. Performance letters of credit represent conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. These instruments are issued primarily to support bid or performance-related
contracts. The coverage period for these instruments is typically a one-year period with an annual renewal option subject to
prior approval by management. Fees earned from the issuance of these letters are recognized over the coverage period. For
secured letters of credit, the collateral is typically bank deposit instruments or customer business assets.
Leasing Arrangements
The Company leases certain of its banking facilities under operating leases which contain certain renewal options. As of
December 31, 2017, approximate future minimum rental payments, including the renewal options under these leases, are as
follows (in thousands):
2018
2019
2020
2021
2022
Thereafter
Total
$
655
639
641
598
365
920
$ 3,818
The above amounts represent minimum rentals not adjusted for possible future increases due to escalation provisions and
assume that all renewal option periods will be exercised by the Company. Rent expense approximated $641,000, $285,000,
and $288,000 for the years ended December 31, 2017, 2016, and 2015, respectively.
72
16. REGULATORY RESTRICTIONS
The Company is subject to the regulatory requirements of the Federal Reserve System as a bank holding company. The bank
is subject to regulations of the Federal Deposit Insurance Corporation (“FDIC”) and the State of Ohio, Division of Financial
Institutions.
Cash Requirements
The Federal Reserve Bank of Cleveland requires the Company to maintain certain average reserve balances. As of December
31, 2017 and 2016, the Bank had required reserves of $15.8 million and $2.9 million comprising vault cash and a depository
amount held with the Federal Reserve Bank.
Loans
Federal law prevents the Company from borrowing from the Bank unless the loans are secured by specific obligations.
Further, such secured loans are limited in amount of 10% of the Bank’s common stock and capital surplus.
Dividends
MBC is subject to dividend restrictions that generally limit the amount of dividends that can be paid by an Ohio state-
chartered bank. Under the Ohio Banking Code, cash dividends may not exceed net profits as defined for that year combined
with retained net profits for the two preceding years less any required transfers to surplus. Under this formula the amount
available for payment of dividends for 2017 approximates $5.1 million plus 2018 profits retained up to the date of the dividend
declaration. As a condition to the ODFI’s approval of the merger of Liberty into MBC, until the second anniversary of the
merger, that is until January 12, 2019, MBC is required to obtain the ODFI’s advance approval for dividend payments to the
Company.
17. REGULATORY CAPITAL
The Bank and Company are subject to regulatory capital requirements administered by 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 financial statements. As of December 31, 2017, the Bank and Company have met all capital
adequacy requirements to which they are subject.
The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized,
under-capitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to
represent overall financial condition. If an institution is adequately capitalized, regulatory approval is required before the
institution may accept brokered deposits. If an institution is undercapitalized, capital distributions are limited, as is asset
growth and expansion, and plans for capital restoration are required.
The Basel III Capital Rules became effective for the Bank on January 1, 2015 and certain provisions are subject to a phase-
in period. The implementation of the capital conservation buffer began January 1, 2016 at the 0.625% level and will be phased
in over a four -year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1,
2019). The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions
with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer
(or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face
constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
73
The following tables present actual and required capital ratios as of December 31, 2017 and 2016, under the Basel III Capital
Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as
amended to reflect the changes under the Basel III Capital Rules.
As of December 31, 2017
Tier 1 Risk Common
Total Risk
Leverage
Based
The Middlefield Banking Company
Middlefield Banc Corp.
Adequately capitalized ratio
Adequately capitalized ratio plus fully phased-in capital
conservation buffer
Well-capitalized ratio (Bank only)
9.47%
10.20%
4.00%
4.00%
5.00%
Equity Tier 1
10.88%
10.79%
4.50%
10.88%
11.64%
6.00%
8.50%
8.00%
7.00%
6.50%
Based
11.64%
12.41%
8.00%
10.50%
10.00%
The Middlefield Banking Company
Middlefield Banc Corp.
Adequately capitalized ratio
Adequately capitalized ratio plus fully phased-in capital
conservation buffer
Well-capitalized ratio (Bank only)
9.29%
9.27%
4.00%
4.00%
5.00%
18. FAIR VALUE DISCLOSURE MEASUREMENTS
As of December 31, 2016
Tier 1 Risk Common
Total Risk
Leverage
Based
Equity Tier 1
13.03%
13.07%
4.50%
13.03%
13.07%
6.00%
8.50%
8.00%
7.00%
6.50%
Based
14.25%
15.75%
8.00%
10.50%
10.00%
The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized
in measuring assets and liabilities at fair value. The three broad levels defined by U.S. generally accepted accounting
principles are as follows:
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: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers
are unobservable.
This hierarchy requires the use of observable market data when available.
74
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.
December 31, 2017
(Dollar amounts in thousands)
Level I
Level II
Level III
Total
Assets measured on a recurring basis:
U.S. government agency securities
Obligations of states and political subdivisions
Mortgage-backed securities in government- sponsored
entities
Total debt securities
Equity securities in financial institutions
Total
$
$
- $
-
-
-
-
- $
8,719 $
67,429
18,510
94,658
625
95,283 $
- $
-
-
-
-
- $
8,719
67,429
18,510
94,658
625
95,283
December 31, 2016
(Dollar amounts in thousands)
Level I
Level II
Level III
Total
Assets measured on a recurring basis:
U.S. government agency securities
Obligations of states and political subdivisions
Mortgage-backed securities in government- sponsored
$
entities
Private-label mortgage-backed securities
Total debt securities
Equity securities in financial institutions
Total
$
- $
-
-
-
-
-
- $
10,236 $
81,223
20,069
1,709
113,237
1,139
114,376 $
- $
-
-
-
-
-
- $
10,236
81,223
20,069
1,709
113,237
1,139
114,376
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.
75
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. 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 and 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.
(Dollar amounts in thousands)
Level I
Level II
Level III
Total
December 31, 2017
Assets measured on a non-recurring basis:
Impaired loans
Other real estate owned
(Dollar amounts in thousands)
Assets measured on a non-recurring basis:
Impaired loans
Other real estate owned
$
$
- $
-
- $
-
3,072 $
32
3,072
32
December 31, 2016
Level I
Level II
Level III
Total
- $
-
- $
-
6,498 $
511
6,498
511
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:
(Dollar amounts in thousands)
Fair Value Estimate Valuation Techniques
Unobservable Input
Range (Weighted Average)
Quantitative Information about Level III Fair Value Measurements
December 31, 2017
$
Impaired loans
Other real estate
owned
$
3,072 Appraisal of collateral (1) Appraisal adjustments (2)
0% to 86.1%
(13.8%)
32 Appraisal of collateral (1) Appraisal adjustments (2)
0% to 10.0%
(Dollar amounts in thousands)
Fair Value Estimate Valuation Techniques
Unobservable Input
Range (Weighted Average)
Quantitative Information about Level III Fair Value Measurements
December 31, 2016
$
Impaired loans
$
Other real estate
owned
$
4,928 Discounted cash flow
1,570 Appraisal of collateral (1) Appraisal adjustment (2)
Discount rate
3.1% to 7.0% (5.1%)
0.0% to 59.7% (28.2%)
511 Appraisal of collateral (1) Appraisal adjustments (2)
0% to 10.0%
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally
include various level III inputs which are not identifiable, less any associated allowance.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated
liquidation expenses. The range and weighted average of liquidation expenses and other appraisal adjustments are
presented as a percent of the appraisal.
76
The estimated fair value of the Company’s financial instruments is as follows:
December 31, 2017
Carrying
Value
Level I
Level II
Level III
(in thousands)
Total
Fair Value
Financial assets:
Cash and cash equivalents
$
Investment securities available for sale
Loans held for sale
Net loans
Bank-owned life insurance
Federal Home Loan Bank stock
Accrued interest receivable
39,886 $
95,283
463
916,023
15,652
3,589
3,288
39,886 $
-
-
-
15,652
3,589
3,288
- $
95,283
463
-
-
-
-
- $
-
-
913,323
-
-
-
39,886
95,283
463
913,323
15,652
3,589
3,288
Financial liabilities:
Deposits
Short-term borrowings
Other borrowings
Accrued interest payable
$
878,194 $
74,707
29,065
578
635,207 $
74,707
-
578
- $
-
-
-
242,020 $
-
29,069
-
877,227
74,707
29,069
578
December 31, 2016
Carrying
Value
Level I
Level II
Level III
(in thousands)
Total
Fair Value
Financial assets:
Cash and cash equivalents
$
Investment securities available for sale
Loans held for sale
Net loans
Bank-owned life insurance
Restricted stock
Accrued interest receivable
32,495 $
114,376
634
602,542
13,540
2,204
2,426
32,495 $
-
-
-
13,540
2,204
2,426
- $
114,376
634
-
-
-
-
- $
-
-
604,447
-
-
-
32,495
114,376
634
604,447
13,540
2,204
2,426
Financial liabilities:
Deposits
Short-term borrowings
Other borrowings
Accrued interest payable
$
629,934 $
68,359
9,437
395
440,500 $
68,359
-
395
- $
-
-
-
189,871 $
-
9,512
-
630,371
68,359
9,512
395
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.
77
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.
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.
Loans Held for Sale
Loans held for sale are carried at lower of cost or fair value. The fair value of loans held for sale is based on secondary market
pricing on portfolios with similar characteristics. The changes in fair value of the assets are largely driven by changes in
interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage loan held for
sale. Within this total are student loans held for sale for which the fair value is based on readily determinable market prices,
which is a level I Price.
Net 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 borrowings 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. The contractual amounts of
unfunded commitments and letters of credit are presented in Note 15.
78
19. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents the changes in accumulated other comprehensive income by component net of tax:
(Dollars in thousands)
Balance as of December 31, 2014
Other comprehensive income before reclassification
Amount reclassified from accumulated other comprehensive income
Period change
Balance at December 31, 2015
Balance as of December 31, 2015
Other comprehensive (loss) before reclassification
Amount reclassified from accumulated other comprehensive income
Period change
Balance at December 31, 2016
Balance as of December 31, 2016
Other comprehensive income before reclassification
Amount reclassified from accumulated other comprehensive income
Period change
Balance at December 31, 2017
Unrealized gains on
available-for-sale
securities (a)
$
$
$
$
$
$
2,548
60
(213 )
(153 )
2,395
2,395
(994 )
(200 )
(1,194 )
1,201
1,201
475
(585 )
(110 )
1,091
(a) All amounts are net of tax. Amounts in parentheses indicate debits to accumulated other comprehensive income.
The following tables present significant amounts reclassified out of each component of accumulated other comprehensive
income:
(Dollars in thousands)
Details about other comprehensive income
Unrealized gains on available-for-sale securities
(Dollars in thousands)
Details about other comprehensive income
Unrealized gains on available-for-sale securities
Amount Reclassified
from Accumulated Other
Comprehensive Income
(a)
December 31, 2017
Affected Line Item in
the Statement Where
Net Income is
Presented
$
$
$
$
886
(301)
585
Investment securities gains, net
Income taxes
December 31, 2016
Affected Line Item in
the Statement Where
Net Income is
Presented
303
(103)
200
Investment securities gains, net
Income taxes
79
(Dollars in thousands)
Details about other comprehensive income
Unrealized gains on available-for-sale securities
December 31, 2015
Affected Line Item in
the Statement Where
Net Income is
Presented
$
$
Investment securities gains, net
Income taxes
323
(110)
213
(a) Amounts in parentheses indicate expenses and other amounts indicate income.
20. BUSINESS ACQUISITION
In the second quarter of 2016, the Company announced the signing of a definitive merger agreement to acquire 100% of the
outstanding equity interest of Liberty for cash and stock. Liberty was an Ohio bank that conducted its business from a main
office in Beachwood, Ohio with branches in Twinsburg and Solon, Ohio.
The transaction closed on January 12, 2017, with Liberty having been merged into Middlefield Bank, with Middlefield Bank
as the surviving entity. The acquisition established the Company’s presence in Cuyahoga and Summit Counties.
Under the terms of the merger agreement, the Company acquired all of the outstanding shares of Liberty for a total purchase
price of $42.2 million. As a result of the acquisition, the Company issued 544,610 common shares and $21.2 million in cash
to the former shareholders of Liberty. The shares were issued with a value of $38.55 per share, which was the closing price
of the Company’s stock on January 12, 2017. Prior to the acquisition the Company had a previously held equity interest in
Liberty which was re-measured at fair value on the acquisition date and resulted in a gain of $488,000, which was recorded
in the investment securities gains – net line on the Consolidated Statement of Income for the year ended December 31, 2017.
The acquired assets and assumed liabilities were measured at estimated fair values. The Company relied on the income
approach to estimate the value of the loans. The loans’ underlying characteristics (account types, remaining terms (in months),
annual interest rates or coupons, interest types, past delinquencies, timing of principal and interest payments, current market
rates, loan-to-value ratios, loss exposures and remaining balance) were considered. Various assumptions were applied
regarding credit, interest, and prepayment risks for the loans based on loan types, payment types and fixed or variable
classifications.
The Company also recorded an identifiable intangible asset representing the core deposit base of Liberty. The discounted
cash flow method was used in valuing this intangible. This method is based upon the principle of future benefits; economic
value is based on anticipated future benefits as measured by cash flows expected to occur in the future. The estimated future
cash flows are converted to a value indicator by determining the present value of the cash flows using a discount rate. The
discount rate is based upon the nature of the business, the level of risk, and the expected stability of the estimated future cash
flows. The higher the risk, the higher the discount rate, and the lower the value indicator.
Time deposit fair values were estimated using an income approach. The methodology entailed discounting the contractual
cash flows of the instruments over their remaining contractual lives at prevailing market rates. Interest and principal payments
were projected for each category of CDs over the period from the valuation date to the maturity dates. These payments
represent future cash flows to be paid to depositors until maturity. Using appropriate market interest rates for each category
of CDs, the future cash flows were discounted to their present value equivalents. The market interest rates were selected
based on peer rates in Ohio from Bankrate as of the valuation date.
80
The following table summarizes the purchase of Liberty as of January 12, 2017:
(In Thousands, Except Per Share Data)
Purchase Price Consideration in Common Stock
Middlefield Banc Corp. shares issued
Value assigned to Middlefield Banc Corp. common shares
Purchase price assigned to Liberty common shares exchanged for Middlefield Banc
$
544,610
38.55
Corp. shares
Purchase Price Consideration in Cash
Purchase price assigned to Liberty common shares exchanged for cash
Total Purchase Price
Previously held equity interest in Liberty
Net Assets Acquired:
Liberty shareholders equity
Adjustments to reflect assets acquired at fair value:
Loans
Allowance for loan loss
Loans - interest rate
Loans - general credit
Core deposit intangible
Other
Adjustments to reflect liabilities acquired at fair value:
Time deposits
Deferred taxes
Change in control
Total net assets acquired
Goodwill resulting from merger
$
30,474
3,257
578
(2,161 )
3,087
254
(141 )
(906 )
(1,718 )
$
20,995
21,173
42,168
1,068
32,724
10,512
The following condensed statement reflects the amounts recognized as of the acquisition date for each major class of asset
acquired and liability assumed, at fair value:
(In Thousands)
Total purchase price
Previously held equity interest in Liberty
Assets (liabilities) acquired:
Net assets acquired:
Cash
Loans and loans held for sale
Premises and equipment, net
Accrued interest receivable
Bank-owned life insurance
Core deposit intangible
Other assets
Time deposits
Non-time deposits
Accrued interest payable
Deferred taxes
Other liabilities
Total net assets acquired
Goodwill resulting from the Liberty merger
$
42,168
1,068
26,604
201,341
325
440
1,681
3,087
997
(30,744 )
(167,300 )
(47 )
(906 )
(2,754 )
$
32,724
10,512
Middlefield recorded goodwill and intangibles associated with the purchase of Liberty totaling $10.5 million. Goodwill is
not amortized, but is periodically evaluated for impairment. Middlefield Bank did not recognize any impairment during the
year ended December 31, 2017. Management made adjustments to goodwill subsequent to the acquisition of $575,000 due
to refinements in a purchase accounting adjustment.
Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also
periodically reassessed to determine if any amortization period adjustments are required. During the year ended December
81
31, 2017, no such adjustments were recorded. The identifiable intangible assets consist of a core deposit intangible which is
being amortized over the estimated useful life. The gross carrying amount of the core deposit intangible at December 31,
2017 was $2.7 million with $342,000 accumulated amortization as of that date.
As of December 31, 2017, the current year and estimated future amortization expense for the core deposit intangible is as
follows:
Remaining
2018
2019
2020
2021
2022
Thereafter
$
$
352
341
332
321
309
1,094
2,749
Results of operations for Liberty prior to the acquisition date are not included in the Consolidated Statement of Income for
the year ended December 31, 2017. The results of activities from the former Liberty operations that are included in the
Consolidated Statement of Income from the date of acquisition through December 31, 2017 are broken out in the following
table:
Net interest income
Noninterest income
Net income
Actual from Acquisition Date
Through December 31, 2017
(in thousands)
$
$
$
10,354
744
2,625
The table below presents unaudited pro forma information as if the acquisition of Liberty had occurred on January 1, 2016.
This has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have
been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results.
Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing
opportunities nor anticipated cost savings as a result of the integration and consolidation of the acquisition. Merger and
acquisition integration costs and amortization of fair value adjustments are included in the amounts below.
Net interest income
Noninterest income
Net income
Pro forma earnings per share:
Basic
Diluted
Pro Formas
Twelve-month period ended December 31,
2017
2016
(in thousands, except per share data)
$
$
$
$
37,646 $
4,920
8,438 $
2.79 $
2.77 $
34,817
5,485
8,692
4.12
4.10
Included in the above net income amount for the twelve months ended December 31, 2017 is $1.1 million of nonrecurring
merger expenses.
82
21. PARENT COMPANY
Following are condensed financial statements for the Company.
CONDENSED BALANCE SHEET
(Dollar amounts in thousands)
ASSETS
Cash and due from banks
Investment securities available for sale
Investment in nonbank subsidiary
Investment in subsidiary bank
Other assets
TOTAL ASSETS
LIABILITIES
Trust preferred securities
Other liabilities
TOTAL LIABILITIES
STOCKHOLDERS' EQUITY
$
$
$
December 31,
2017
2016
1,766 $
625
2,363
119,946
3,450
2,543
1,139
2,360
76,365
2,837
128,150 $
85,244
8,248 $
39
8,287
8,248
36
8,284
119,863
76,960
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
128,150 $
85,244
CONDENSED STATEMENT OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
INCOME
Dividends from subsidiary bank
Gain on sale of investment securities
Other
Total income
EXPENSES
Interest expense
Other
Total expenses
2017
Year Ended December 31,
2016
2015
$
10,425 $
488
80
10,993
460
2,091
2,551
3,400 $
-
24
3,424
366
1,856
2,222
Income before income tax benefit
8,442
1,202
Income tax benefit
(673 )
(561 )
Income before equity in undistributed net income of
subsidiaries
9,115
1,763
Equity in undistributed net income of subsidiaries
340
4,653
NET INCOME
Comprehensive Income
9,455 $
6,416 $
9,345 $
5,222 $
$
$
83
4,023
-
19
4,042
290
860
1,150
2,892
(386 )
3,278
3,587
6,865
6,712
CONDENSED STATEMENT OF CASH FLOWS
2017
Year Ended December 31,
2016
2015
9,455 $
6,416 $
6,865
(337)
(3)
33
(488)
282
8,942
(4,710)
57
29
-
(484)
1,308
(3,703 )
116
18
-
(503 )
2,793
(22,249)
-
-
-
-
15,164
184
540
(3,358)
12,530
(9,499)
-
11,210
(6)
519
(2,318)
(94)
(777)
1,214
2,543
1,329
6,363
(6,784 )
-
(7 )
651
(2,153 )
(1,930 )
863
466
1,766 $
2,543 $
1,329
20,995 $
- $
-
(Dollar amounts in thousands)
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by
$
operating activities:
Equity in undistributed net income of Middlefield
Banking Company
Equity in undistributed net loss of EMORECO
Stock-based compensation expense
Gain on sale of investment securities
Other, net
Net cash provided by operating activities
INVESTING ACTIVITIES
Acquisition, net of cash paid
FINANCING ACTIVITIES
Net (decrease) increase in short-term borrowings
Purchase of treasury stock
Proceeds from issuance of common stock
Stock options exercised
Proceeds from dividend reinvestment plan
Cash dividends
Net cash used for financing activities
Increase (decrease) in cash
CASH AT BEGINNING OF YEAR
CASH AT END OF YEAR
SUPPLEMENTAL INFORMATION
Common stock issued in business acquisition
$
$
84
22. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
(Dollar amounts in thousands)
Three Months Ended
March 31,
2017
June 30,
2017
September 30, December 31,
2017
2017
Total interest and dividend income
Total interest expense
$
10,199 $
1,442
10,902 $
1,625
11,330 $
1,818
11,564
1,762
Net interest income
Provision for loan losses
8,757
165
9,277
170
9,512
280
9,802
430
Net interest income after provision for loan losses
8,592
9,107
9,232
9,372
Total noninterest income
Total noninterest expense
Income before income taxes
Income taxes
Net income
Per share data:
Net income
Basic
Diluted
Average shares outstanding:
Basic
Diluted
1,511
7,267
2,836
736
989
6,704
3,392
885
1,441
7,297
3,376
914
918
6,217
4,073
1,687
$
2,100 $
2,507 $
2,462 $
2,386
$
0.78 $
0.78
0.84 $
0.83
0.77 $
0.76
0.73
0.73
2,679,816
2,692,015
3,000,451
3,014,140
3,212,335
3,223,753
3,215,300
3,231,791
(Dollar amounts in thousands)
Three Months Ended
March 31,
2016
June 30,
2016
September 30, December 31,
2016
2016
Total interest and dividend income
Total interest expense
$
Net interest income
Provision for loan losses
7,348 $
1,025
6,323
105
7,405 $
1,066
6,339
105
7,420 $
1,026
6,394
105
7,821
1,073
6,748
255
Net interest income after provision for loan losses
6,218
6,234
6,289
6,493
Total noninterest income
Total noninterest expense
Income before income taxes
Income taxes
Net income
Per share data:
Net income
Basic
Diluted
Average shares outstanding:
Basic
Diluted
909
5,338
1,789
302
1,173
4,915
2,492
566
977
5,662
1,604
261
900
4,957
2,436
776
$
1,487 $
1,926 $
1,343 $
1,660
$
0.79 $
0.79
0.94 $
0.94
0.60 $
0.60
0.71
0.70
1,878,177
1,886,943
2,051,137
2,059,411
2,247,587
2,256,230
2,251,412
2,264,712
85
23. RETURN ON EQUITY AND ASSETS
The ratio of net income to average shareholders’ equity and average total assets and certain other ratios are as follows for
periods ended December 31:
(Dollars in thousands)
Average total assets
Average shareholders' equity
Net income
Net income available to common shareholders
Cash dividends declared per share
Return on average total assets
Return on average shareholders' equity
$
$
$
$
$
2017
2016
2015
1,069,656 $
757,052 $
710,271
110,966 $
68,741 $
64,655
9,455 $
6,416 $
9,455 $
6,416 $
1.08 $
1.08 $
0.88 %
8.52 %
0.85 %
9.33 %
6,865
6,865
1.07
0.97%
10.62%
31.36%
9.10%
Dividend payout ratio (1)
35.52 %
36.18 %
Average shareholders' equity to average assets
10.37 %
9.08 %
(1) Cash dividends declared on common shares divided by net income available to common shareholders
86
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This information should be read in conjunction with the consolidated financial statements and accompanying notes to the
financial statements.
This Management’s Discussion and Analysis section of the Annual Report contains forward-looking statements. Forward-
looking statements are based upon a variety of estimates and assumptions. The estimates and assumptions involve judgments
about a number of things, including future economic, competitive, and financial market conditions and future business
decisions. These matters are inherently subject to significant business, economic, and competitive uncertainties, all of which
are difficult to predict and many of which are beyond the Company's control. Although the Company believes its estimates
and assumptions are reasonable, actual results could vary materially from those shown. Inclusion of forward-looking
information does not constitute a representation by the Company or any other person that the indicated results will be
achieved. Investors are cautioned not to place undue reliance on forward-looking information.
These forward-looking statements may involve significant risks and uncertainties. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results
in these forward-looking statements.
Significant Factors Affecting Financial Results
Capital maintenance is a priority. The Company’s Tier 1 leverage capital was 10.20% as of December 31, 2017, with total
risk-based capital of 12.41%. MBC’s Tier 1 leverage capital was 9.47% as of December 31, 2017, with total risk-based capital
of 11.64%. In 2017, MBC grew the balance sheet as a result of increasing loan volume and the acquisition of Liberty. We
also benefitted from strong income and stockholders’ equity experienced growth. The goal of the elevated capital levels is to
account for potential economic stress in the markets in which the Company operates and to account for the levels of
substandard and other nonperforming assets.
Longer-term prospects for growth. An increase in loan demand and the availability of high-quality lending opportunities
continues to be the driver of growth potential and depends on a broad range of economic factors in the markets in which the
Company operates, including the condition of real estate markets in northeastern Ohio and in central Ohio.
Nonperforming and classified assets held by the banking industry have decreased from previous elevated levels. Because of
uncertainty about economic sustainability and the potential for other factors to have an adverse impact on the prospects for
the banking industry, such as national and global economic and political factors, the bank regulatory agencies have insisted
that banks increase the size of the buffer that protects a bank from unknown potential adverse events and circumstances:
regulatory capital.
The total number of banks and savings associations as of the end of 2017 is less than half the number at the end of 1990.
Nevertheless, a large percentage of the institutions that remain are small, community-oriented institutions, although the share
of total banking assets that they control continues to decline. We believe a strong incentive exists for growth through industry
consolidation as a defense to pressure from competitors. We therefore believe that industry consolidation is likely to continue
and that the pace of consolidation could actually accelerate.
The trend toward consolidation would be most advantageous for financial institution organizations that have a surplus of
capital, a strategy for growth, a strong financial profile, and few if any regulatory supervisory concerns, the ingredients of
prompt regulatory approval that could be a significant competitive advantage in the market for financial institution mergers
and acquisitions. Our goal is to maintain that advantage, although we give no assurance that our efforts to do so will succeed.
We continue to commit significant resources to increase operational effectiveness in The Middlefield Banking Company.
Critical Accounting Policies
Allowance for loan and lease losses. Arriving at an appropriate level of allowance for loan and lease losses involves a high
degree of judgment. The Company’s allowance for loan and lease losses provides for probable losses based upon evaluations
of known and inherent risks in the loan portfolio.
Management uses historical information to assess the adequacy of the allowance for loan and lease losses as well as the
prevailing business environment, which is affected by changing economic conditions and various external factors and which
may impact the portfolio in ways currently unforeseen. The allowance is increased by provisions for loan losses and by
recoveries of loans previously charged-off and reduced by loans charged-off. For a full discussion of the Company’s
87
methodology of assessing the adequacy of the reserve for loan losses, refer to Note 1 of “Notes to Consolidated Financial
Statements” of this Annual Report.
Valuation of Securities. Securities are classified as held to maturity or available for sale on the date of purchase. Only those
securities classified as held to maturity are reported at amortized cost. Available-for-sale and trading securities are reported
at fair value with unrealized gains and losses included in accumulated other comprehensive income, net of related deferred
income taxes, on the Consolidated Balance Sheet. The majority of all of the Company’s securities are valued based on prices
compiled by third party vendors using observable market data. However, certain securities are less actively traded and do not
always have quoted market prices. The determination of fair value for less actively traded securities, therefore, requires
judgment, with such determination requiring benchmarking to similar instruments or analyzing default and recovery rates.
Examples include certain collateralized mortgage and debt obligations and high-yield debt securities. Realized securities
gains or losses are reported within noninterest income in the Consolidated Statement of Income. The cost of securities sold
is based on the specific identification method.
Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more
frequently when economic or market conditions warrant such an evaluation. Investment securities are generally evaluated for
OTTI under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320, Investments
— Debt and Equity Securities. Consideration is given to the length of time and the extent to which the fair value has been
less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by
macroeconomic conditions and whether the Company has the intent to sell the debt security or more likely than not will be
required to sell the debt security before its anticipated recovery. In analyzing an issuer’s financial condition, the Company
may consider whether the securities are issued by the federal government or its agencies, or U.S. government-sponsored
enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial
condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and
judgment and is based on the information available to management at a point in time.
When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security
or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If an entity
intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis,
the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its
fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new
amortized cost basis of the investment. For debt securities that do not meet the aforementioned criteria, the amount of
impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income
statement and 2) OTTI related to other factors, which is recognized in other comprehensive income or loss. The credit loss is
defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
For equity securities, the entire amount of impairment is recognized through earnings.
Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises, and state and political
subdivisions accounted for more than 99.3% of the total available-for-sale portfolio as of December 31, 2017, 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
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.
• 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.
Refer to Note 3 in the consolidated financial statements.
88
Income Taxes
The Company estimates income tax expense based on amounts expected to be owed to the various tax jurisdictions in which
the Company conducts business. On a quarterly basis, management assesses the reasonableness of the Company’s effective
tax rate based upon management’s current estimate of the amount and components of net income, tax credits and the
applicable statutory tax rates expected for the full year. The estimated income tax expense is recorded in the Consolidated
Statement of Income.
Deferred income tax assets and liabilities are determined using the balance sheet method and are reported in accrued taxes,
interest and expenses in the Consolidated Balance Sheet. Under this method, the net deferred tax asset or liability is based on
the tax effects of the differences between the book and tax basis of assets and liabilities and recognizes enacted changes in
tax rates and laws. Deferred tax assets are recognized to the extent they exist and are subject to a valuation allowance based
on management’s judgment that realization is more likely than not.
Accrued taxes represent the net estimated amount due to taxing jurisdictions and are reported in accrued taxes, interest and
expenses in the Consolidated Balance Sheet. The Company evaluates and assesses the relative risks and appropriate tax
treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other information
and maintains tax accruals consistent with management’s evaluation of these relative risks and merits. Changes to the estimate
of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being
conducted by taxing authorities and changes to statutory, judicial and regulatory guidance that impact the relative risks of tax
positions. These changes, when they occur, can affect deferred taxes and accrued taxes as well as the current period’s income
tax expense and can be significant to the operating results of the Company.
Goodwill and Other Intangible Assets
Goodwill is the excess of the purchase price over the fair value of the assets acquired in connection with business acquisitions
accounted for as purchases. Other intangible assets consist of branch acquisition core deposit premiums. Initially, an
assessment of qualitative factors (Step 0) is performed to determine whether the existence of events or circumstances leads
to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after
assessing the totality of events or circumstances, we determine it is not more likely than not that the fair value of a reporting
unit is less than its carrying value, then performing the two-step impairment test is unnecessary. However, if we conclude
otherwise, then we are required to perform the first step (Step 1) of the two-step impairment test by calculating the fair value
of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the fair value is less than
the carrying value, an expense may be required on our books to write down the goodwill to the proper carrying value. Step
2 of impairment testing, which is necessary only if Step 1 fails, compares the implied fair value of the goodwill with the
carrying amount of the goodwill.
The Company must assess goodwill and other intangible assets each year for impairment. The gross carrying amount of
goodwill and intangible assets is tested for impairment in the fourth quarter, after the annual forecasting process.
Fair Value of Financial Instruments
The disclosure of the fair value of financial instruments is based on available market prices or management’s estimates of the
fair value of such instruments.
Management consults with a third party for available market prices as well as performs calculations of the present value of
contractual cash flows discounted at current comparative market inputs. Prepayment estimates are utilized when appropriate.
Changes in Financial Condition
General The Company’s total assets increased $318.5 million or 40.4% to $1.1 billion at December 31, 2017 from $787.8
million at December 31, 2016. This increase was mostly due to an increase in net loans of $313.5 million largely due to the
acquisition of Liberty, which was partially offset by a decrease in investments of $19.1 million.
The increase in the Company’s total assets reflects a related increase in total liabilities of $275.6 million or 38.8% to a total
balance of $986.5 million at December 31, 2017 from $710.9 million at December 31, 2016. The Company experienced an
increase in total stockholders’ equity of $42.9 million.
89
The increase in total liabilities was due to growth in deposits and other borrowings for the year, along with an increase in
deposits due to the acquisition of Liberty. Total deposits increased $248.3 million or 39.4% to $878.2 million at December
31, 2017 from $629.9 million as of December 31, 2016. Other borrowings increased $19.6 million or 208.0% to $29.1 million
at December 31, 2017 from $9.4 million as of December 31, 2016. The net increase in total stockholders’ equity can be
attributed to an increase in common stock and retained earnings of $36.9 million and $6.1 million, respectively.
On January 12, 2017, the Company completed its acquisition of Liberty pursuant to a previously announced definitive merger
agreement. Under the terms of the merger agreement, Liberty shareholders received $37.96 in cash or 1.1934 shares of
Middlefield’s common stock in exchange for each share of Liberty common stock they owned immediately prior to the
merger. Middlefield issued 544,610 shares of its common stock in the merger and the aggregate merger consideration was
approximately $42.2 million.
In a private placement completed on May 10, 2017, the Company sold 400,000 shares of its common stock, without par
value, at a purchase price of $40.00 per share. The offering was to accredited investors only. The gross proceeds of the
offering were $16.0 million before compensation of $760,000 payable to the investment bank acting as placement agent. The
offer and sale of the Company’s common stock in the private placement were exempt from the registration requirements of
the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Section 4(a)(2) of, and Rule 506 of Regulation D
under, the Securities Act. The Company used the proceeds of the private placement to repay outstanding borrowings of
approximately $12.0 million, for general corporate purposes, and for future cash flows.
Cash and cash equivalents Cash and due from banks and federal funds sold represent cash and cash equivalents which
increased $7.4 million or 22.7% to $39.9 million at December 31, 2017 from $32.5 million at December 31, 2016. 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 Management's objective in structuring the portfolio is to maintain a prudent level of liquidity while
providing an acceptable rate of return without sacrificing asset quality. Maturing securities have historically provided
sufficient liquidity. The balance of total securities decreased $19.1 million, or 16.7%, as compared to 2016, with the ratio of
securities to total assets decreasing to 8.6% at December 31, 2017, compared to 14.5% at December 31, 2016.
The Company benefits from owning municipal bonds, which totaled $66.9 million or 70.2% of the Company's total
investment portfolio at December 31, 2017. The weighted-average federal tax equivalent (FTE) yield on all debt securities at
year-end 2017 was 4.22%, as compared to 4.18% at year-end 2016. While the Company's focus is to generate interest revenue
primarily through loan growth, management will continue to invest excess funds in securities when opportunities arise.
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 commercial loans to
finance the business operations and to a lesser extent construction and consumer loans. Net loans receivable increased $313.5
million or 52.0% to $916.0 million at December 31, 2017 from $602.5 million at December 31, 2016 due to both the Liberty
acquisition and organic growth. The Liberty acquisition resulted in a net increase of loans receivable of $195.4 million as of
the date of acquisition. Included in the total increase to loans receivable were increases in the commercial real estate,
residential real estate, commercial and industrial, construction, and consumer installment portfolios of $188.5 million, $47.3
million, $40.7 million, $23.3 million, and $14.3 million, respectively.
The product mix in the loan portfolio is commercial real estate loans equaling 47.4%, residential real estate loans 34.5%,
commercial and industrial loans 11.0%, construction loans 5.1%, and consumer loans 2.0% at December 31, 2017 compared
with 41.0%, 44.5%, 10.0%, 3.9%, and 0.7%, respectively, at December 31, 2016.
Loans contributed 91.5% of total interest income in 2017 and 86.0% in 2016. The loan portfolio yield of 4.69% in 2017 was
27 basis points higher than the average yield for total interest-earning assets. Management recognizes that while the loan
portfolio holds some of the Company’s highest yielding assets, it is inherently the most risky portfolio. Accordingly,
management attempts to balance credit risk versus return with conservative credit standards. Management has developed and
maintains comprehensive underwriting guidelines and a loan review function that monitors credits during and after the
approval process. Management follows additional procedures to obtain current borrower financial information annually
throughout the life of the loan obligation.
90
To minimize risks associated with changes in the borrower’s future repayment capacity, the Company generally requires
scheduled periodic principal and interest payments on all types of loans and normally requires collateral.
The Company will continue to monitor the size of its loan portfolio growth. The Company's lending markets have rebounded
from the suppressed levels of loan originations in previous years. The Company anticipates total loan growth to be steady,
with volume to continue at a moderate pace. The Company remains committed to sound underwriting practices without
sacrificing asset quality and avoiding exposure to unnecessary risk that could weaken the credit quality of the portfolio.
Restricted stock. The Company’s investment in restricted stock increased $1.4 million, or 62.9%, to $3.6 million as of
December 31, 2017, compared to $2.2 million as of December 31, 2016.
Goodwill. Goodwill results from prior business acquisitions and represents the excess of the purchase price over the fair
value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed annually for
impairment and any such impairment is recognized in the period identified by a charge to earnings.
The process of evaluating goodwill for impairment requires management to make significant estimates and judgments. The
use of different estimates, judgments or approaches to estimate fair value could result in a different conclusion regarding
impairment of goodwill. Based on the analysis, management has determined that there is no goodwill impairment.
The Company values core deposits and monitors the ongoing value of core deposit intangibles and goodwill on an annual
basis. As of December 31, 2017, the Company recorded net increases in goodwill and core deposit intangibles of $10.5
million and $2.7 million, respectively. These increases are the direct result of the Liberty acquisition.
Bank owned life insurance. Bank owned life insurance (BOLI) is universal life insurance, purchased by the Company, on
the lives of the Company’s officers. The beneficial aspects of these universal life insurance policies are tax-free earnings and
a tax-free death benefit, which are realized by the Company as the owner of the policies. BOLI increased by $2.1 million to
$15.6 million as of December 31, 2017 from $13.5 million at the end of 2016 as a result of the Liberty acquisition and
increases in cash surrender value.
Deposits. Interest-earning assets are funded generally by both interest-bearing and noninterest-bearing core deposits.
Deposits are influenced by changes in interest rates, economic conditions and competition from other banks. The Company
considers various sources when evaluating funding needs, including but not limited to deposits, which represented 89.4% of
the Company’s total funding sources at December 31, 2017. The deposit base consists of demand deposits, savings, money
market accounts and time deposits. Total deposits increased $248.3 million or 39.4% to $878.2 million at December 31, 2017
from $629.9 million at December 31, 2016. The Liberty acquisition resulted in a net increase of deposits of $198.0 million
as of the date of acquisition.
Savings and time deposits are the largest sources of funding for the Company's earning assets, making up a combined 51.4%
of total deposits. The total increase in deposits is the result of increases in money market, noninterest-bearing demand, time,
savings, and interest-bearing demand deposits of $75.3 million or 100.5%, $58.8 million or 44.0%, $53.5 million or 28.3%,
$36.1 million or 21.0%, and $24.4 million or 41.0%, respectively, at December 31, 2017.
The Company will continue to experience increased competition for deposits in its market areas, which could challenge net
growth in its deposit balances. The Company will continue to evaluate its deposit portfolio mix to properly employ both retail
and wholesale funds to support earning assets and minimize interest costs.
Borrowed funds. The Company uses short and long-term borrowings as another source of funding to benefit asset growth
and liquidity needs. These borrowings primarily include FHLB advances, junior subordinated debt, lines of credit from other
banks and repurchase agreement borrowings. Borrowed funds increased $26.0 million or 33.4% to $103.8 million at
December 31, 2017 from $77.8 million at December 31, 2016. Borrowings increased in order to fund loan growth.
Stockholders’ equity. The Company maintains a capital level that exceeds regulatory requirements as a margin of safety for
its depositors and shareholders. All of the capital ratios exceeded the regulatory well-capitalized guidelines.
Stockholders’ equity totaled $119.9 million at December 31, 2017, compared to $77.0 million at December 31, 2016, which
represents an increase of 55.7%. This growth was largely the result of an increase in common stock in relation to the Liberty
acquisition (Note 20), and the proceeds from the private placement discussed previously. There was no change in the treasury
stock balance of $13.5 million from 2016 to 2017. Retained earnings increased $6.1 million resulting from net income, less
cash dividends paid of $3.4 million, or $1.08 per share, year-to-date. Common stock increased $36.9 million, or 77.0%, to
91
$84.9 million at December 31, 2017 from $47.9 million at December 31, 2016. The Company maintains a dividend
reinvestment and stock purchase plan. The plan allows shareholders to purchase additional shares of Company stock. A
benefit of the plan is to permit the shareholders to reinvest cash dividends as well as make supplemental purchases without
the usual payment of brokerage commissions. During 2017, shareholders invested $0.5 million through the dividend
reinvestment and stock purchase plan. These proceeds resulted in the issuance of 11,721 new shares at a weighted average
price of $46.07.
Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information
concerning the total dollar amounts of interest income from interest-earning assets and the resultant average yields, the total
dollar amounts of interest expense on interest-bearing liabilities and the resultant average costs, net interest income, interest
rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average balances
are calculated using monthly averages and the average loan balances include nonaccrual loans and exclude the allowance for
loan and lease losses, and interest income includes accretion of net deferred loan fees. Yields on tax-exempt securities (tax-
exempt for federal income tax purposes) are shown on a fully tax-equivalent basis utilizing a federal tax rate of 34%.
2017
For the Twelve Months Ended December 31,
2016
2015
(Dollar amounts in
thousands)
Average
Balance
Average
Average
Average
Average
Average
Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
Interest-earning assets:
Loans receivable
Investment securities
$
857,361 $ 40,235
4.69% $ 565,223 $ 25,798
4.55% $ 494,931 $ 23,824
4.81 %
(3)
104,444 3,168
4.22% 131,797 4,019
4.18% 152,015 4,627
4.11 %
Interest-bearing
deposits with other
banks
Total interest-earning
47,168
592
1.26%
22,316
177
0.79%
23,855
144
0.60 %
assets
1,008,973 43,995
Noninterest-earning assets
Total assets
Interest-bearing liabilities:
Interest-bearing demand
60,683
$ 1,069,656
4.42% 719,336 29,994
37,716
$ 757,052
4.37% 670,801 28,595
39,470
$ 710,271
deposits
$
Money market deposits
Savings deposits
Certificates of deposit
Borrowings
236
87,678
980
158,159
193,003
608
241,195 3,526
96,154 1,297
195
0.27% $ 65,403
332
80,331
0.62%
0.32% 174,995
427
1.46% 186,627 2,664
572
46,865
1.35%
191
0.30% $ 62,064
312
76,034
0.41%
0.24% 179,095
542
1.42% 190,097 2,381
394
22,108
1.22%
4.51 %
0.31 %
0.41 %
0.30 %
1.25 %
1.78 %
Total interest-bearing
liabilities
Noninterest-bearing
liabilities
Other liabilities
Stockholders' equity
Total liabilities and
776,189 6,647
0.86% 554,221 4,190
0.75% 529,398 3,820
0.72 %
182,501
110,966
134,090
68,741
116,218
64,655
stockholders' equity
$ 1,069,656
$ 757,052
$ 710,271
Net interest income
Interest rate spread (1)
Net interest margin (2)
Ratio of average interest-
earning assets to
average interest-bearing
liabilities
$ 37,348
$ 25,804
$ 24,775
3.57%
3.82%
3.61%
3.79%
3.78 %
3.94 %
129.99%
129.79%
126.71 %
(1) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities
(2) Net interest margin represents net interest income as a percentage of average interest-earning assets.
(3) Tax-equivalent adjustments to calculate the yield on tax-exempt securities were $1,239, $1,501, and 1,628, for 2017,
2016, and 2015, respectively.
92
Interest Rates and Interest Differential
2017 versus 2016
2016 versus 2015
(Dollars in thousands)
Interest-earning assets:
Loans receivable
Investment securities
Interest-bearing deposits with
other banks
Total interest-earning assets
Interest-bearing liabilities:
Interest-bearing demand
deposits
Money market deposits
Savings deposits
Certificates of deposit
Borrowings
Total interest-bearing liabilities
Volume
Increase (decrease) due to
Rate
Total
Volume
Increase (decrease) due to
Rate
Total
$
13,501 $
(1,149)
936 $
298
14,437 $
(851)
3,292 $
(838)
(1,318) $
230
254
12,606
161
1,395
415
14,001
(11)
2,443
44
(1,044)
63
401
50
786
633
1,933
(22)
247
131
76
92
524
41
648
181
862
725
2,457
10
18
(11)
(46)
371
342
(6)
2
(104)
329
(193)
28
1,974
(608)
33
1,399
4
20
(115)
283
178
370
Net interest income
$
10,673 $
871 $
11,544 $
2,101 $
(1,072) $
1,029
Allowance for Loan and Lease Losses. The allowance for loan and lease losses (“ALLL”) represents the amount
management estimates is adequate to provide for probable losses inherent in the loan portfolio as of the balance sheet date.
Accordingly, all loan losses are charged to the allowance, and all recoveries credited to it. The ALLL is established through
a provision for loan losses, which is charged to operations. The provision is based on management's periodic evaluation of
the adequacy of the ALLL, taking into account the overall risk characteristics of the various portfolio segments, the
Company's loan loss experience, the impact of economic conditions on borrowers, and other relevant factors. The estimates
used to determine the adequacy of the ALLL, including the amounts and timing of future cash flows expected on impaired
loans, are particularly susceptible to significant change in the near term. The total ALLL is a combination of a specific
allowance for identified problem loans and a general allowance for homogeneous loan pools.
The allowance for loan and lease loss balance as of December 31, 2017 totaled $7.2 million representing a $0.6 million
increase from the end of 2016. For the year of 2017, the provision for loan losses was $1.0 million which represented an
increase of $0.4 million from the $0.6 million provided during 2016. Asset quality is a high priority in our overall business
plan as it relates to long-term asset growth projections. During 2017, net charge-offs increased by $0.1 million to $0.5 million
compared to $0.4 million in 2016. Two key ratios to monitor asset quality performance are net charge-offs to average loans
and the allowance for loan and lease losses to nonperforming loans. At year-end 2017, these ratios were 0.05% and 53.6%,
respectively, compared to 0.06% and 54.8% in 2016.
MBC recorded loans acquired through the Liberty acquisition without carrying over any allowance. As such, the acquisition
of these loans had a negligible effect on the determination of the allowance for loans and lease losses as of December 31,
2017. However, these assets have been considered in the determination of the allowance for loan and lease losses for any
subsequent deterioration after the acquisition date.
The specific allowance incorporates the results of measuring impaired loans. The formula allowance is calculated by applying
loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Loss factors
are based on management's determination of the amounts necessary for concentrations and changes in mix and volume of the
loan portfolio, and consideration of historical loss experience.
The non-specific allowance is determined based upon management's evaluation of existing economic and business conditions
affecting the key lending areas of the Company and other conditions, such as new loan products, credit quality trends,
collateral values, unique industry conditions within portfolio segments that existed as of the balance sheet date, and the impact
93
of those conditions on the collectability of the loan portfolio. Management reviews these conditions quarterly. The non-
specific allowance is subject to a higher degree of uncertainty because it considers risk factors that may not be reflected in
the historical loss factors.
Although management uses the best information available to make the determination of the adequacy of the ALLL at
December 31, 2017, future adjustments could be necessary if circumstances or economic conditions differ substantially from
the assumptions used in making the initial determinations. A downturn in the local economy could result in increased levels
of nonperforming assets and charge-offs, increased loan loss provisions, and reductions in income. Additionally, as an integral
part of the examination process, bank regulatory agencies periodically review a Bank’s ALLL. The banking agencies could
require the recognition of additions to the loan loss allowance based on their judgment of information available to them at
the time of their examination.
The following table sets forth information concerning the Company's ALLL at the dates and for the periods presented.
(Dollars in thousands)
2017
For the Years Ended
December 31,
2016
2015
Allowance balance at beginning of period
$
6,598
$
6,385
$
6,846
Loans charged off:
Commercial and industrial
Real estate-construction
Real estate-mortgage:
Residential
Commercial
Consumer installment
Total loans charged off
Recoveries of loans previously charged-off:
Commercial and industrial
Real estate-construction
Real estate-mortgage:
Residential
Commercial
Consumer installment
Total recoveries
Net loans charged off
Provision for loan losses
(536)
-
(117)
(39)
(462)
(1,154)
234
34
241
111
81
701
(237 )
-
(414 )
(70 )
(22 )
(743 )
90
-
141
140
15
386
(453)
(357 )
1,045
570
(280 )
(385 )
(425 )
(92 )
(15 )
(1,197 )
207
-
186
5
23
421
(776 )
315
Allowance balance at end of period
Loans outstanding:
Average
End of period
$
$
Ratio of allowance for loan and lease losses to loans
outstanding at end of period
Net charge-offs to average loans
7,190
$
6,598
$
6,385
857,361
923,213
$
565,223
609,140
$
494,931
533,710
0.78%
0.05%
1.08 %
0.06 %
1.20 %
0.16 %
94
The following table illustrates the allocation of the Company's allowance for probable loan losses for each category of loan
for each reported period. The allocation of the allowance to each category is not necessarily indicative of future loss in a
particular category and does not restrict our use of the allowance to absorb losses in other loan categories.
2017
At December 31,
2016
2015
Percent of
Loans in
Each
Category to
Total Loans Amount
Percent of
Loans in
Each
Category to
Total Loans Amount
Percent of
Loans in
Each
Category to
Total Loans
Amount
(Dollars in Thousands)
Type of Loans:
Commercial and industrial $
Real estate construction
Mortgage:
Residential
Commercial
Consumer installment
999
313
1,760
4,036
82
11.0% $
5.1
34.5
47.4
2.0
448
172
2,818
3,135
25
10.0% $
3.9
44.5
41.0
0.7
867
276
3,139
2,078
25
8.0%
4.2
43.6
43.4
0.8
Total
$
7,190
100.0% $
6,598
100.0% $
6,385
100.0%
Nonperforming assets. Nonperforming assets include nonaccrual loans, troubled debt restructurings (TDRs), loans 90 days
or more past due, assets purchased by EMORECO, OREO, and repossessed assets. A loan is classified as nonaccrual when,
in the opinion of management, there are serious doubts about collectability of interest and principal. Accrual of interest is
discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s
financial condition is such that collection of principal and interest is doubtful. Payments received on nonaccrual loans are
applied against 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 48 TDRs with a total balance
of $5.4 million as of December 31, 2017 compared to 48 TDRs totaling $6.7 million as of December 31, 2016. Nonperforming
loans amounted to $13.4 million or 1.5% of total loans and $12.0 million or 2.0% of total loans at December 31, 2017 and
December 31, 2016, respectively.
A major factor in determining the appropriateness of the ALLL is the type of collateral which secures the loans. Although
this does not insure against all losses, the real estate provides substantial recovery, even in a distressed-sale and declining-
value environment. The Bank’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.
95
The following table summarizes nonperforming assets by category.
Loans accounted for on a nonaccrual basis:
Commercial and industrial
Real estate - construction
Real estate-mortgage:
Residential
Commercial
Consumer installment
Total nonaccrual loans
Troubled debt restructuring, not on a nonaccrual basis:
Commercial and industrial
Real estate - construction
Real estate-mortgage:
Residential
Commercial
Consumer installment
Total troubled debt restructuring
Accruing loans which are contractually past due 90 days or
more:
Real estate-mortgage:
Residential
Total accruing loans which are contractually past due 90
days or more
Total nonperforming loans
Other real estate owned
Total nonperforming assets
Total nonperforming loans to total loans
Total nonperforming loans to total assets
Total nonperforming assets to total assets
$
$
2017
At December 31,
2016
2015
(Dollars in Thousands)
1,120 $
-
4,002
3,311
-
8,433
1,527
44
1,966
1,441
4
4,982
454 $
-
4,034
1,409
6
5,903
1,487
909
2,006
1,733
5
6,140
1,450
130
4,122
1,842
1
7,545
509
129
1,398
680
-
2,716
-
-
2
-
13,415
212
13,627 $
1.45 %
1.21 %
1.23 %
-
12,043
934
12,977 $
1.98 %
1.53 %
1.65 %
2
10,263
1,412
11,675
1.92%
1.40%
1.59%
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.
A loan is considered impaired when it is probable the borrower will not repay the loan according to the original contractual
terms of the loan agreement, including all troubled debt restructurings. Management has determined that first mortgage loans
on one-to-four family properties and all consumer loans represent large groups of smaller-balance homogeneous loans that
are to be collectively evaluated. Loans that experience insignificant payment delays, which are defined as 90 days or less,
generally are not classified as impaired. A loan is not impaired during a period of delay in payment if the Company expects
to collect all amounts due, including interest accrued at the contractual interest rate for the period of delay. Management
evaluates all loans identified as impaired individually. The Company estimates credit losses on impaired loans based on the
present value of expected cash flows, or the fair value of the underlying collateral if loan repayment is expected to come from
the sale or operation of the collateral. Impaired loans, or portions thereof, are charged off when it is determined a realized
loss has occurred. Until that time, an allowance for loan and lease loss is maintained for estimated losses.
Interest income that would have been recorded had these loans not been placed on nonaccrual status was $437,000 in 2017,
$309,000 in 2016; and $259,000 in 2015. Management is not aware of any trends or uncertainties related to any loans
classified as doubtful or substandard that might have a material effect on earnings, liquidity, or capital resources.
96
Changes in Results of Operations
2017 Results Compared to 2016 Results
General The Company posted net income of $9.5 million, compared to $6.4 million for the year ended December 31, 2016.
On a per share basis, 2017 earnings were $3.10 per diluted share, representing an increase from the $3.03 per diluted share
for the year ended December 31, 2016. The return on average equity for the year ended December 31, 2017, was 8.52% and
the Company’s return on average assets was 0.88%.
Net interest income Net interest income, which is the Company’s largest revenue source, is the difference between interest
income on earning assets and interest expense paid on liabilities. Net interest income is affected by the changes in interest
rates and the composition of interest-earning assets and interest-bearing liabilities. Net interest income increased by $11.5
million in 2017 to $37.3 million compared to $25.8 million for 2016. This increase is the result of a $14.0 million increase
in interest and dividend income with only a $2.5 million increase in interest expense. Interest-earning assets averaged $1.01
billion during 2017, a year-over-year increase of $289.6 million from $719.3 million for 2016. The Company’s average
interest-bearing liabilities increased from $554.2 million in 2016 to $776.2 million in 2017.
The profit margin, or spread, on invested funds is a key performance indicator. The Company monitors two key performance
indicators — net interest spread and net interest margin. The net interest spread represents the difference between the average
rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest margin
represents the overall profit margin: net interest income as a percentage of total interest-earning assets. This performance
indicator gives effect to interest earned for all investable funds including the substantial volume of interest-free funds. For
2017 the net interest margin, measured on a fully taxable equivalent basis, increased to 3.82%, compared to 3.79% in 2016.
Interest and dividend income Interest and dividend income increased $14.0 million to $44.0 million for 2017 which is
attributable to a $14.4 million increase in interest and fees on loans (including the interest and fees on the loans acquired
through the Liberty acquisition). This change was the result of an increase in the average balance of loans receivable,
accompanied by a higher yield on the portfolio. The average balance of loans receivable increased by $292.1 million or 51.7%
to $857.4 million for the year ended December 31, 2017 as compared to $565.2 million for the year ended December 31,
2016. The loans receivable yield increased to 4.69% for 2017, from 4.55% in 2016. The net increase in interest and fees
earned on loans receivable attributable to the Liberty acquisition is $10.9 million for the year ended December 31, 2017.
Interest on investment securities decreased $0.9 million to $3.2 million for 2017, compared to $4.0 million for 2016. The
average balance of investment securities decreased $27.4 million to $104.4 million for the year ended December 31, 2017 as
compared to $131.8 million for the year ended December 31, 2016. The investment securities yield increased 4 basis points
to 4.22% for 2017, compared to 4.18% for 2016.
Interest expense Interest expense increased $2.5 million or 58.6% to $6.6 million for 2017, compared with $4.2 million for
2016. This change in interest expense can be attributed to an increase in the average balance of interest-bearing liabilities.
For the year ended December 31, 2017 the average balance of interest-bearing liabilities increased by $222.0 million to
$776.2 million as compared to $554.2 million for the year ended December 31, 2016. Interest incurred on deposits increased
by $1.7 million for the year from $3.6 million in 2016 to $5.3 million for year end 2017. The change in deposit expense was
due to an increase in the average balance as well as a 7 basis point increase during the year. Interest expense incurred on
FHLB advances, repurchase agreements, junior subordinated debt and other borrowings increased 126.7% from 2016. The
increase was due to a $49.3 million increase in the average balance. The Liberty acquisition resulted in a net increase of
interest expense of $834,000 as of December 31, 2017.
Provision for loan losses The provision for loan losses is an operating expense recorded to maintain the related balance sheet
allowance for loan and lease losses at an amount considered adequate to cover probable losses incurred in the normal course
of lending. The provision for loan losses for the year ended December 31, 2017 was $1.0 million compared to $0.6 million
in 2016. The loan loss provision is based upon management's assessment of a variety of factors, including types and amounts
of nonperforming loans, historical loss experience, collectability of collateral values and guaranties, pending legal action for
collection of loans and related guaranties, and current economic conditions. The loan loss provision reflects management's
judgment of the current period cost-of-credit risk inherent in the loan portfolio. Although management believes the loan loss
provision has been sufficient to maintain an adequate allowance for loan and lease losses, actual loan losses could exceed the
amounts that have been charged to operations. The ratio of the allowance for loan and lease losses to total loans decreased to
0.78% of total loans at December 31, 2017 compared to the 1.08% at December 31, 2016. This decrease is due to the
acquisition of Liberty loans without their ALLL determination.
97
Noninterest income Noninterest income increased $0.9 million or 22.7% to $4.9 million for 2017 compared to $3.9 million
for 2016. The increase was largely the result of an increase in net investment security gains of $0.9 million and gains on sales
of loans of $0.8 million.
Noninterest expense Operating expenses increased $6.6 million, or 31.7% to $27.5 million for 2017 compared to $20.9
million for 2016. Salaries and employee benefits, occupancy expense, and data processing costs increased $3.5 million, $0.6
million, and $0.5 million, respectively. These increases were partially offset by a decrease in other expense. The salary
increase is mostly due to annual pay adjustments and the increase of employees due to the acquisition of Liberty. Data
processing and occupancy expenses are also higher due to additional ongoing services provided and property maintenance
costs related to the acquisition. Core deposit intangible amortization increased $334,000 to $374,000 for 2017 compared to
$40,000 for 2016 as a result of the Liberty acquisition. Nonrecurring merger expense due to the acquisition of Liberty included
in noninterest expense is $1.1 million as of December 31, 2017.
Provision for income taxes The provision for income taxes increased by $2.3 million, or 121.6%, to $4.2 million for 2017
from $1.9 million for 2016. The Company’s effective federal income tax rate in 2017 was 30.9% compared to 22.9% in 2016.
The increase in the effective tax rate is due to a lower level of nontaxable income and the write-down of the Company’s
deferred taxes due to a change in the corporate tax rate.
2016 Results Compared to 2015 Results
General The Company posted net income of $6.4 million, compared to $6.9 million for the year ended December 31, 2015.
On a per share basis, 2016 earnings were $3.03 per diluted share, representing a decrease from the $3.39 per diluted share
for the year ended December 31, 2015. The return on average equity for the year ended December 31, 2016, was 9.33% and
the Company’s return on average assets was 0.85%.
Net interest income Net interest income, which is the Company’s largest revenue source, is the difference between interest
income on earning assets and interest expense paid on liabilities. Net interest income is affected by the changes in interest
rates and the composition of interest-earning assets and interest-bearing liabilities. Net interest income increased by $1.0
million in 2016 to $25.8 million compared to $24.8 million for 2015. This increase is the result of a $1.4 million increase in
interest income with only a $0.4 million increase in interest expense. Interest-earning assets averaged $719.3 million during
2016, a year-over-year increase of $48.5 million from $670.8 million for 2015. The Company’s average interest-bearing
liabilities increased from $529.4 million in 2015 to $554.2 million in 2016.
The profit margin, or spread, on invested funds is a key performance indicator. The Company monitors two key performance
indicators — net interest spread and net interest margin. The net interest spread represents the difference between the average
rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest margin
represents the overall profit margin: net interest income as a percentage of total interest-earning assets. This performance
indicator gives effect to interest earned for all investable funds including the substantial volume of interest-free funds. For
2016 the net interest margin, measured on a fully taxable equivalent basis, decreased to 3.79%, compared to 3.94% in 2015.
Interest and dividend income Interest income increased $1.4 million to $30.0 million for 2016 which is attributable to a
$2.0 million increase in interest and fees on loans. This change was the result of an increase in the average balance of loans
receivable, partially offset by a lower yield on the portfolio. The average balance of loans receivable increased by $70.3
million or 14.2% to $565.2 million for the year ended December 31, 2016 as compared to $494.9 million for the year ended
December 31, 2015. The loans receivable yield decreased to 4.55% for 2016, from 4.81% in 2015.
Interest on investment securities decreased $0.6 million to $4.0 million for 2016, compared to $4.6 million for 2015. The
average balance of investment securities decreased $20.2 million to $131.8 million for the year ended December 31, 2016 as
compared to $152.0 million for the year ended December 31, 2015. The investment securities yield increased 7 basis points
to 4.18% for 2016, compared to 4.11% for 2015.
Interest expense Interest expense increased $0.4 million or 9.7% to $4.2 million for 2016, compared with $3.8 million for
2015. This change in interest expense can be attributed to an increase in the average balance of interest-bearing liabilities.
For the year ended December 31, 2016 the average balance of interest-bearing liabilities increased by $24.8 million to $554.2
million as compared to $529.4 million for the year ended December 31, 2015. Interest incurred on deposits increased by $0.2
million for the year from $3.4 million in 2015 to $3.6 million for year end 2016. The change in deposit expense was due to
an increase in the average balance as well as a 4 basis point increase during the year. Interest expense incurred on FHLB
advances, repurchase agreements, junior subordinated debt and other borrowings declined 45.2% from 2015. The increase
was due to a $24.8 million increase in the average balance.
98
Loan Loss Provision The provision for loan losses is an operating expense recorded to maintain the related balance sheet
allowance for loan and lease losses at an amount considered adequate to cover probable losses incurred in the normal course
of lending. The provision for loan losses for the year ended December 31, 2016 was $0.6 million compared to $0.3 million
in 2015. The loan loss provision is based upon management's assessment of a variety of factors, including types and amounts
of nonperforming loans, historical loss experience, collectability of collateral values and guaranties, pending legal action for
collection of loans and related guaranties, and current economic conditions. The loan loss provision reflects management's
judgment of the current period cost-of-credit risk inherent in the loan portfolio. Although management believes the loan loss
provision has been sufficient to maintain an adequate allowance for loan and lease losses, actual loan losses could exceed the
amounts that have been charged to operations. The ratio of the allowance for loan and lease losses to total loans decreased to
1.08% of total loans at December 31, 2016 compared to the 1.20% at December 31, 2015.
Noninterest income Noninterest income decreased $0.1 million or 2.1% to $3.9 million for 2016 compared to $4.0 million
for 2015. The decrease is due to a decrease in earnings on bank-owned life insurance.
Noninterest expense Operating expenses increased $0.8 million, or 4.0% to $20.9 million for 2016 compared to $20.1
million for 2015. Salaries and benefits and professional fees increased $0.5 million, and $0.2 million, or 5.1%, and 15.6%,
respectively. The salaries increased as a result of the addition of key people and pay increases. The primary driver of increase
in other expense was an increase in miscellaneous loan expense. Advertising expense increased as a result of strategic
branding efforts. These were partially offset by an increase in gain on other real estate owned of $0.4 million.
Provision for Income Taxes The provision for income taxes increased by $0.3 million, or 22.0%, to $1.9 million for 2016
from $1.6 million for 2015. The Company’s effective federal income tax rate in 2016 was 22.9% compared to 18.5% in 2015.
Asset and Liability Management
The primary objective of the Company’s asset and liability management function is to maximize net interest income while
maintaining an acceptable level of interest rate risk given the Company’s operating environment, capital and liquidity
requirements, performance objectives and overall business focus. The principal determinant of the exposure of the
Company’s earnings to interest rate risk is the timing difference between the re-pricing or maturity of interest-earning assets
and the re-pricing or maturity of 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 a
strong asset/liability management process in order to insulate the Company from material and prolonged increases in interest
rates.
The Company’s Board of Directors has established an Asset and Liability Management Committee consisting of outside
directors and senior management. This committee, which meets quarterly, generally monitors asset and liability management
policies and strategies.
Interest Rate Sensitivity Simulation Analysis
The Company uses income simulation modeling to measure interest rate risk and manage interest rate sensitivity. The Asset
and Liability Management Committee believes the various rate scenarios of the simulation modeling enables the Company
to more accurately evaluate and manage the exposure of interest rate fluctuations on net interest income, the yield curve, loan
prepayments, and deposit decay assumptions.
Earnings simulation modeling and assumptions about the timing and volatility of cash flows are critical in net portfolio equity
valuation analysis. Particularly important are the assumptions driving mortgage prepayments and expected attrition of the
core deposit portfolios. These assumptions are based on the Company’s historical experience and industry standards and are
applied consistently across all rate risk measures.
The Company has established the following guidelines for assessing interest rate risk:
Net interest income simulation- Given a 200 basis point parallel gradual increase or decrease in market interest rates, net
interest income may not change by more than 10% for a one-year period. Given a 100 basis point parallel gradual 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 in market interest rates, portfolio equity may not correspondingly decrease
99
or increase by more than 20% of stockholders’ equity. Given a 100 basis point immediate and permanent decrease in market
interest rates, portfolio equity may not correspondingly decrease or increase by more than 10% of stockholders’ equity.
The following table presents the simulated impact of a 200 basis point upward or 100 basis point downward shift of market
interest rates on net interest income and the change in portfolio equity. This analysis was done assuming the interest-earning
asset and interest-bearing liability levels at December 31, 2017 remained constant. The impact of the market rate movements
was developed by simulating the effects of rates changing gradually from the December 31, 2017 levels for net interest
income and portfolio equity. The impact of market rate movements was developed by simulating the effects of an immediate
and permanent change in rates at December 31, 2017 for portfolio equity:
Net interest income - decrease
Portfolio equity - decrease
Liquidity and Capital Resources
Increase
200 Basis Points
Decrease
100 Basis Points
(1.1)%
(2.3 )%
13.5%
(21.3 )%
Liquidity. Liquidity management involves monitoring the ability to meet the cash flow needs of bank customers, such as
borrowings or deposit withdrawals, as well as the Company’s own financial commitments. The principal sources of liquidity
are net income, loan payments, maturing and principal reductions on securities and sales of securities available for sale,
federal funds sold and cash and deposits with banks. Along with its liquid assets, the Company has additional sources of
liquidity available to ensure adequate funds are available as needed. These include, but are not limited to, the purchase of
federal funds, the ability to borrow funds under line of credit agreements with correspondent banks, a borrowing agreement
with the Federal Home Loan Bank of Cincinnati, Ohio and the adjustment of interest rates to obtain deposits. Management
believes the Company has the capital adequacy, profitability and reputation to meet the current and projected needs of its
customers.
Liquidity is managed based on factors including core deposits as a percentage of total deposits, the degree of funding source
diversification, the allocation and amount of deposits among deposit types, the short-term funding sources used to fund assets,
the amount of non-deposit funding used to fund assets, the availability of unused funding sources, off-balance sheet
obligations, the availability of assets readily converted to cash without undue loss, the amount of cash and liquid securities
we hold, and the re-pricing characteristics and maturities of our assets when compared to the re-pricing characteristics of our
liabilities and other factors.
The Company's liquid assets consist of cash and cash equivalents, which include investments in very short-term investments
(i.e., federal funds sold), and investment securities classified as available for sale. The level of these assets is dependent on
the Company's operating, investing, and financing activities during any given period. At December 31, 2017, cash and cash
equivalents totaled $39.9 million or 3.6% of total assets while investment securities classified as available for sale totaled
$95.3 million or 8.6% of total assets. Management believes that the liquidity needs of the Company are satisfied by the current
balance of cash and cash equivalents, readily available access to traditional funding sources, FHLB advances, junior
subordinated debt, and the portion of the investment and loan portfolios that mature within one year. These sources of funds
will enable the Company to meet cash obligations and off-balance sheet commitments as they come due.
Operating activities provided net cash of $14.1 million, $7.8 million, and $7.2 million for 2017, 2016, and 2015, respectively,
generated principally from net income of $9.5 million, $6.4 million, and $6.9 million in each of these respective periods.
Investing activities used $95.4 million which consisted primarily of investment activity, loan originations, and acquisition
activity. The cash usages primarily consisted of loan increases of $119.9 million and investment purchases of $3.1 million.
Cash provided in relation to the Liberty acquisition was $5.4 million for the year ended December 31, 2017. Partially
offsetting the usage are proceeds from repayments and maturities and proceeds from sale of securities of $14.9 million and
$6.5 million, respectively. For the same period ended 2016, investing activities used $45.9 million which consisted primarily
of investment activity and loan originations. The cash usages primarily consisted of loan increases of $76.2 million and
investment purchases of $1.7 million. Partially offsetting the usage are proceeds from repayments and maturities and proceeds
from sale of securities of $23.2 million and $9.1 million, respectively. For the same period ended 2015, investing activities
used $59.4 million which consisted primarily of investment activity and loan originations. The cash usages primarily
consisted of loan increases of $63.9 million and investment purchases of $21.9 million. Partially offsetting the usage are
100
proceeds from repayments and maturities and proceeds from sale of securities of $13.5 million and $15.7 million,
respectively.
Financing activities consist of the solicitation and repayment of customer deposits, borrowings and repayments and the
payment of dividends. During 2017, net cash provided by financing activities totaled $88.7 million, principally derived from
increases in deposit accounts, proceeds from other borrowings, and the issuance of common stock of $50.2 million, $30.0
million, and $15.2 million, respectively. Partially offsetting the proceeds are repayments of other borrowings and the payment
of cash dividends of $10.4 million and $3.4 million, respectively. During 2016, net cash provided by financing activities
totaled $46.9 million, principally derived from increases in short-term borrowings and the issuance of common stock of $32.5
million and $11.2 million, respectively, and partially offset by $2.3 million in cash dividends. During 2015, net cash provided
by financing activities totaled $50.4 million, principally derived from increases in deposit accounts and short-term borrowings
of $38.3 million and $21.0 million, respectively, and partially offset by treasury stock purchase of $6.8 million and $2.2
million in cash dividends.
Liquidity may be adversely affected by many circumstances, including unexpected deposit outflows and increased draws on
lines of credit. Management monitors projected liquidity needs and determines the desirable level based in part on the
Company's commitment to make loans and management's assessment of the Company's ability to generate funds. The
Company anticipates having sufficient liquidity to satisfy estimated short and long-term funding needs.
Capital Resources. The Company's primary source of capital is retained earnings. Historically, the Company has generated
net retained income to support normal growth and expansion. Management has developed a capital planning policy to not
only ensure regulatory compliance but capital adequacy for future expansion.
Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters
The Company had approximately 1,057 stockholders of record as of December 31, 2017. The Company’s common stock is
traded and authorized for quotation on NASDAQ under the symbol “MBCN.”
The following table shows the high and low bid prices of and cash dividends paid on the Company’s common stock in 2017
and 2016, adjusted for stock splits and stock dividends. This information does not reflect retail mark-up, markdown or
commissions, and does not necessarily represent actual transactions.
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High Bid
Low Bid
per share
Cash Dividends
$
$
$
$
$
$
$
$
46.00 $
54.60 $
50.75 $
50.50 $
34.39 $
33.00 $
34.25 $
39.00 $
38.40 $
43.60 $
42.10 $
42.95 $
31.50 $
31.19 $
31.66 $
33.50 $
0.27
0.27
0.27
0.27
0.27
0.27
0.27
0.27
101
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing
Standard No. 5), 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 by management or employees in the normal course of performing their
assigned functions.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on this assessment, management
believes that, as of December 31, 2017, the Company’s internal control over financial reporting was effective.
The Company’s independent registered public accounting firm, S.R. Snodgrass, P.C., that audited the consolidated financial
statements has issued an audit report on the effective operation of the Company’s internal control over financial reporting as
of December 31, 2017.
/s/ Thomas G. Caldwell
By: Thomas G. Caldwell
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 7, 2018
/s/ Donald L. Stacy
By: Donald L. Stacy
Treasurer
(Principal Financial & Accounting Officer)
Date: March 7, 2018
102
SHAREHOLDER INFORMATION
Corporate Headquarters
Middlefield Banc Corp.
15985 East High Street
P.O. Box 35
Middlefield, Ohio 44062
888.801.1666 • 440.632.1666
fax: 440.632.1700
Form 10-K and 10-Q Availability
A copy of Middlefield Banc Corp.’s Annual Report on Form
10-K and Quarterly Reports on 10-Q filed with the Securities
and Exchange Commission will be furnished to any shareholder,
free of charge, upon written or e-mail request to:
Donald L. Stacy
Senior Vice President,
Treasurer and CFO
Middlefield Banc Corp.
P.O. Box 35
Middlefield, Ohio 44062
or dstacy@middlefieldbank.com
Market Makers
The symbol for Middlefield Banc Corp. common stock is MBCN
and the CUSIP is 596304204.
Sweney Cartwright & Co.
17 South High Street, Suite 300
Columbus, Ohio 43215
614.228.5391 • 800.334.7481
www.swencart.com
Boenning & Scattergood, Inc.
9922 Brewster Lane
Powell, Ohio 43065
866.326.8113
www.boenninginc.com
Keefe, Bruyette & Woods
787 Seventh Avenue
New York, New York 10019
800.342.5529
Notice of Annual Meeting
The Annual Meeting of Shareholders of Middlefield Banc Corp.
will be held at 1:00 p.m. on Wednesday, May 16, 2018, at:
Sun Valley Banquet and Party Center
10000 Edwards Lane
Aurora, Ohio 44202
Transfer Agent and Registrar
American Stock Transfer & Trust Company
59 Maiden Lane
Plaza Level
New York, New York 10038
800.937.5449
Independent Auditors
S.R. Snodgrass, P.C.
2009 Mackenzie Way, Suite 340
Cranberry Township, Pennsylvania 16066
724.934.0344
Internet Information
Information on the Company and its subsidiary bank is
available on the Internet at www.middlefieldbank.bank.
Dividend Payment Dates
Subject to action by the Board of Directors, Middlefield Banc
Corp. will pay dividends in March, June, September, and
December.
Dividend Reinvestment and
Stock Purchase Plan
Shareholders may elect to reinvest their dividends in additional
shares of Middlefield Banc Corp.’s common stock through the
Company’s Dividend Reinvestment Plan. To arrange automatic
purchase of shares with quarterly dividend proceeds, please call
888.801.1666.
Direct Deposit of Dividends
The direct deposit program, which is offered at no charge,
provides for automatic deposit of quarterly dividends directly
to a checking or savings account with The Middlefield Banking
Company. For information regarding this program, please call
888.801.1666.
Market for Common Equity and
Related Stockholder Matters
Middlefield Banc Corp. had approximately 1,065 shareholders
of record as of February 21, 2018. Our common stock trades on
the NASDAQ Capital Market under the ticker symbol MBCN.
The following table shows the high and low bid prices of and
cash dividends paid on the Company’s common stock during
the periods indicated. The high and low bid prices are compiled
from data available through NASDAQ. This information does not
reflect retail mark-up, markdowns or commissions, and does not
necessarily represent actual transactions.
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Bid
Low
Bid
Cash
Dividends
per share
$46.00
$54.60
$50.75
$50.50
$34.39
$33.00
$34.25
$39.00
$38.40
$43.60
$42.10
$42.95
$31.50
$31.19
$31.66
$33.50
$0.27
$0.27
$0.27
$0.27
$0.27
$0.27
$0.27
$0.27
Middlefield Banc Corp.
15985 East High Street, Middlefield, Ohio 44062
888.801.1666 • www.middlefieldbank.bank