MBCN 10-Q Quarterly Report Sept. 30, 2020

MIDDLEFIELD BANC CORP

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mbcn20200930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ___________ to ___________

Commission File Number 001-36613

Middlefield Banc Corp.

(Exact Name of Registrant as Specified in its Charter)

Ohio		34-1585111
State or Other Jurisdiction of		I.R.S. Employer Identification No.
Incorporation or Organization

15985 East High Street , Middlefield , Ohio		44062-0035
Address of Principal Executive Offices		Zip Code

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


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

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

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, Without Par Value

MBCN

The NASDAQ Stock Market, LLC

(NASDAQ Capital Market)

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

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

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

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

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

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

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

Outstanding at November 3, 2020: 6,378,960

MIDDLEFIELD BANC CORP.

INDEX

Part I – Financial Information

	Item 1.	Financial Statements (unaudited)

		Consolidated Balance Sheet as of September 30, 2020 and December 31, 2019	3

		Consolidated Statement of Income for the Three and Nine Months ended September 30, 2020 and 2019	4

		Consolidated Statement of Comprehensive Income for the Three and Nine Months ended September 30, 2020 and 2019	5

		Consolidated Statement of Changes in Stockholders' Equity for the Three and Nine Months ended September 30, 2020 and 2019	6

		Consolidated Statement of Cash Flows for the Nine Months ended September 30, 2020 and 2019	8

		Notes to Unaudited Consolidated Financial Statements	10

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	34

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48

	Item 4.	Controls and Procedures	49

Part II – Other Information

	Item 1.	Legal Proceedings	50

	Item 1a.	Risk Factors	50

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

	Item 3.	Defaults by the Company on its Senior Securities	51

	Item 4.	Mine Safety Disclosures	51

	Item 5.	Other Information	51

	Item 6.	Exhibits and Reports on Form 8-K	51

Signatures			56

Exhibit 31.1

Exhibit 31.2

Exhibit 32

MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET

(Dollar amounts in thousands, except share data)

(Unaudited)

	September 30,			December 31,
	2020			2019

ASSETS
Cash and due from banks	$	46,097		$	35,113
Federal funds sold		6,884			-
Cash and cash equivalents		52,981			35,113
Equity securities, at fair value		553			710
Investment securities available for sale, at fair value		112,968			105,733
Loans held for sale		10,457			1,220
Loans:
Commercial real estate:
Owner occupied		107,342			102,386
Non-owner occupied		310,512			302,180
Multifamily		39,622			62,028
Residential real estate		222,237			234,798
Commercial and industrial		258,313			89,527
Home equity lines of credit		115,223			112,248
Construction and other		60,613			66,680
Consumer installment		10,534			14,411
Total loans		1,124,396			984,258
Less: allowance for loan and lease losses		11,359			6,768
Net loans		1,113,037			977,490
Premises and equipment, net		18,633			17,874
Goodwill		15,071			15,071
Core deposit intangibles		1,807			2,056
Bank-owned life insurance		16,832			16,511
Other real estate owned		7,391			155
Accrued interest receivable and other assets		15,079			10,542

TOTAL ASSETS	$	1,364,809		$	1,182,475

LIABILITIES
Deposits:
Noninterest-bearing demand	$	268,838		$	191,370
Interest-bearing demand		179,080			107,844
Money market		184,936			160,826
Savings		231,696			192,003
Time		329,413			368,800
Total deposits		1,193,963			1,020,843
Short-term borrowings:
Federal funds purchased		-			75
Federal Home Loan Bank advances		-			5,000
Total short-term borrowings		-			5,075
Other borrowings		17,100			12,750
Accrued interest payable and other liabilities		11,690			6,032
TOTAL LIABILITIES		1,222,753			1,044,700

STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized, 7,307,472 and 7,294,792 shares issued; 6,378,110 and 6,423,630 shares outstanding		86,871			86,617
Retained earnings		68,046			65,063
Accumulated other comprehensive income		4,077			1,842
Treasury stock, at cost; 929,362 and 871,162 shares		( 16,938	)		( 15,747	)
TOTAL STOCKHOLDERS' EQUITY		142,056			137,775

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,364,809		$	1,182,475

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF INCOME

(Dollar amounts in thousands, except per share data)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	12,603		$	12,804		$	36,962		$	37,998
Interest-earning deposits in other institutions		8			193			109			549
Federal funds sold		-			24			21			56
Investment securities:
Taxable interest		249			206			612			599
Tax-exempt interest		618			613			1,881			1,731
Dividends on stock		29			45			86			156
Total interest and dividend income		13,507			13,885			39,671			41,089

INTEREST EXPENSE
Deposits		2,106			3,173			7,307			9,395
Short-term borrowings		14			42			81			334
Other borrowings		28			92			166			283
Total interest expense		2,148			3,307			7,554			10,012

NET INTEREST INCOME		11,359			10,578			32,117			31,077

Provision for loan losses		4,000			80			7,740			430

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,359			10,498			24,377			30,647

NONINTEREST INCOME
Service charges on deposit accounts		691			571			1,810			1,609
Investment securities gains on sale, net		-			4			-			194
(Loss) gain on equity securities		( 28	)		( 32	)		( 157	)		12
Earnings on bank-owned life insurance		109			109			321			323
Gain on sale of loans		660			128			1,155			285
Other income		379			325			1,251			1,113
Total noninterest income		1,811			1,105			4,380			3,536

NONINTEREST EXPENSE
Salaries and employee benefits		3,597			4,272			11,197			12,474
Occupancy expense		497			535			1,530			1,584
Equipment expense		363			244			943			770
Data processing costs		683			580			2,033			1,594
Ohio state franchise tax		282			262			831			782
Federal deposit insurance expense		123			-			320			230
Professional fees		289			401			1,007			1,235
Gain on other real estate owned		( 195	)		( 18	)		( 257	)		( 130	)
Advertising expense		217			202			643			605
Software amortization expense		70			100			285			206
Core deposit intangible amortization		83			86			249			256
Other expense		1,013			1,009			3,182			3,049
Total noninterest expense		7,022			7,673			21,963			22,655

Income before income taxes		2,148			3,930			6,794			11,528
Income taxes		295			661			934			1,958

NET INCOME	$	1,853		$	3,269		$	5,860		$	9,570

EARNINGS PER SHARE
Basic	$	0.29		$	0.51		$	0.92		$	1.48
Diluted	$	0.29		$	0.50		$	0.92		$	1.47

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Dollar amounts in thousands)

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019

Net income	$	1,853		$	3,269		$	5,860		$	9,570

Other comprehensive income:
Net unrealized holding gain on available-for-sale investment securities		400			883			2,829			3,011
Tax effect		( 84	)		( 100	)		( 594	)		( 547	)

Reclassification adjustment for investment securities gains included in net income		-			( 4	)		-			( 194	)
Tax effect		-			1			-			41

Total other comprehensive income		316			780			2,235			2,311

Comprehensive income	$	2,169		$	4,049		$	8,095		$	11,881

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

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

(Unaudited)

								Accumulated
								Other					Total
	Common Stock				Retained			Comprehensive		Treasury			Stockholders'
	Shares		Amount		Earnings			Income		Stock			Equity

Balance, June 30, 2020		7,298,829	$	86,722	$	67,150		$	3,761	$	( 16,938	)	$	140,695

Net income						1,853								1,853
Other comprehensive income									316					316
Stock options exercised		500		4										4
Stock-based compensation, net		8,143		145										145
Cash dividends ($ 0.15 per share)						( 957	)							( 957	)

Balance, September 30, 2020		7,307,472	$	86,871	$	68,046		$	4,077	$	( 16,938	)	$	142,056

								Accumulated
								Other					Total
	Common Stock				Retained			Comprehensive		Treasury			Stockholders'
	Shares		Amount		Earnings			Income		Stock			Equity

Balance, June 30, 2019		7,292,994	$	86,590	$	60,517		$	1,377	$	( 14,224	)	$	134,260

Net income						3,269								3,269
Other comprehensive income									780					780
Dividend reinvestment and purchase plan		1,298		27										27
Treasury shares acquired ( 63,338 )											( 1,523	)		( 1,523	)
Cash dividends ($ 0.14 per share)						( 900	)							( 900	)

Balance, September 30, 2019		7,294,292	$	86,617	$	62,886		$	2,157	$	( 15,747	)	$	135,913

(continued on following page)

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

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

(Unaudited, continued from previous page)

								Accumulated
								Other					Total
	Common Stock				Retained			Comprehensive		Treasury			Stockholders'
	Shares		Amount		Earnings			Income		Stock			Equity

Balance, December 31, 2019		7,294,792	$	86,617	$	65,063		$	1,842	$	( 15,747	)	$	137,775

Net income						5,860								5,860
Other comprehensive income									2,235					2,235
Stock options exercised		500		4										4
Stock-based compensation, net		12,180		250										250
Treasury shares acquired ( 58,200 )											( 1,191	)		( 1,191	)
Cash dividends ($ 0.45 per share)						( 2,877	)							( 2,877	)

Balance, September 30, 2020		7,307,472	$	86,871	$	68,046		$	4,077	$	( 16,938	)	$	142,056

								Accumulated
								Other						Total
	Common Stock				Retained			Comprehensive			Treasury			Stockholders'
	Shares		Amount		Earnings			Income (Loss)			Stock			Equity

Balance, December 31, 2018		7,260,994	$	85,925	$	56,037		$	( 154	)	$	( 13,518	)	$	128,290

Net income						9,570									9,570
Other comprehensive income									2,311						2,311
Dividend reinvestment and purchase plan		17,866		372											372
Stock options exercised		400		4											4
Stock-based compensation, net		15,032		316											316
Treasury shares acquired ( 98,832 )												( 2,229	)		( 2,229	)
Cash dividends ($ 0.42 per share)						( 2,721	)								( 2,721	)

Balance, September 30, 2019		7,294,292	$	86,617	$	62,886		$	2,157		$	( 15,747	)	$	135,913

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2020			2019
OPERATING ACTIVITIES
Net income	$	5,860		$	9,570
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		7,740			430
Investment securities gains on sale, net		-			( 194	)
Loss (gain) on equity securities		157			( 12	)
Depreciation and amortization of premises and equipment, net		990			778
Software amortization expense		285			206
Financing lease amortization expense		209			264
Gain on sale of premises and equipment		( 27	)		-
Amortization of premium and discount on investment securities, net		270			240
Accretion of deferred loan fees, net		( 2,134	)		( 557	)
Amortization of core deposit intangibles		249			256
Stock-based compensation (income) expense, net		( 156	)		366
Origination of loans held for sale		( 44,080	)		( 12,845	)
Proceeds from sale of loans		35,998			12,936
Gain on sale of loans		( 1,155	)		( 285	)
Earnings on bank-owned life insurance		( 321	)		( 323	)
Deferred income tax		615			117
Net gain on other real estate owned		( 257	)		( 130	)
(Increase) decrease in accrued interest receivable		( 2,527	)		( 51	)
(Decrease) increase in accrued interest payable		( 129	)		276
Other, net		4,048			( 1,329	)
Net cash provided by operating activities		5,635			9,713

INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from repayments and maturities		12,676			8,571
Proceeds from sale of securities		-			12,325
Purchases		( 17,352	)		( 24,844	)
Increase in loans, net		( 148,807	)		( 7,529	)
Proceeds from the sale of other real estate owned		675			360
Net purchase of premises and equipment		( 948	)		( 1,420	)
Proceeds from the disposal of premises and equipment		27			-
Purchase of restricted stock		( 1,600	)		( 169	)
Redemption of restricted stock		241			-
Net cash used in investing activities		( 155,088	)		( 12,706	)

FINANCING ACTIVITIES
Net increase in deposits		173,120			18,346
(Decrease) increase in short-term borrowings, net		( 5,075	)		1,602
Borrowings (repayment) of other borrowings		3,340			( 245	)
Restricted stock cash portion		-			( 44	)
Stock options exercised		4			4
Proceeds from dividend reinvestment and purchase plan		-			372
Repurchase of treasury shares		( 1,191	)		( 2,229	)
Cash dividends		( 2,877	)		( 2,721	)
Net cash provided by financing activities		167,321			15,085

Increase in cash and cash equivalents		17,868			12,092

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		35,113			107,933

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	52,981		$	120,025

See accompanying notes to unaudited consolidated financial statements.

	Nine Months Ended
	September 30,
	2020			2019
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings	$	7,683		$	9,736
Income taxes		2,002			2,180

Noncash operating transactions:
Operating lease assets added to other, net	$	-		$	( 1,071	)
Operating lease liabilities added to other, net		-			1,071
Noncash investing transactions:
Transfers from loans to other real estate owned	$	7,654		$	56
Finance lease assets added to premises and equipment		( 1,010	)		( 3,801	)
Noncash financing transactions:
Finance lease liabilities added to other borrowings funds	$	1,010		$	3,801

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The consolidated financial statements of Middlefield Banc Corp. ("Company") include its bank subsidiary, The Middlefield Banking Company (“MBC” or “Middlefield Bank”), and a nonbank asset resolution subsidiary EMORECO, Inc. The consolidated financial statements also include the accounts of MBC’s subsidiary, Middlefield Investments, Inc. (MI), established March 13, 2019. All significant inter-company items have been eliminated.

The unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10 -Q and Article 10 of Regulation S- X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10 -K for the year ended December 31, 2019. The interim consolidated financial statements include all adjustments (consisting of only normal recurring items) that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year.

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

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016 - 13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments , which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be 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. 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. In November 2019, the FASB issued ASU 2019 - 10, Financial Instruments ‒ Credit Losses (Topic 326 ), Derivatives and Hedging (Topic 815 ), and Leases (Topic 842 ) . This Update defers the effective date of ASU 2016 - 13 for SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Management will continue to monitor model output throughout the deferral period.

CECL Adoption . The Company continues to monitor the opportunity to early adopt ASC Topic 326, which replaces the current incurred loss approach for measuring credit losses with an expected loss model ("CECL"). CECL applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance-sheet credit exposures, which include, but are not limited to, loans, leases, held-to-maturity securities, loan commitments and financial guarantees. The adoption of this guidance is expected to result in an increase of the allowance for credit losses, an increase in the allowance for unfunded commitments, and a reduction of retained earnings. Incurred loss will be used until the tax benefits associated with increased reserves are maximized. Management may consider early adoption of CECL, which would have no initial impact to the income statement.

In November 2019, the FASB issued ASU 2019 - 11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses , to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019 - 10. 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 March 2020, the FASB issued ASU 2020 - 3 , Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments , in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019 - 04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016 - 01. Amendments related to ASU 2016 - 13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016 - 13. Early adoption is not permitted before an entity’s adoption of ASU 2016 - 13. Amendments related to ASU 2016 - 13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. 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 January 2020, the FASB issued ASU 2020 - 4, Reference Rate Reform (Topic 848 ): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to re-measure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one -time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Company's financial statements.

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.

NOTE 2 – REVENUE RECOGNITION

In accordance with ASC Topic 606, management determined that the primary sources of revenue, which emanate from interest income on loans and investments, along with noninterest revenue resulting from investment security gains, gains on the sale of loans, and BOLI income, are not within the scope of ASC 606. These revenue sources cumulatively comprise 92.6 % of the total revenue of the Company.

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

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

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

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

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
Noninterest Income	2020			2019			2020			2019
(Dollar amounts in thousands)

Service charges on deposit accounts:
Overdraft fees	$	163		$	201		$	475		$	639
ATM banking fees		298			255			771			690
Service charges and other fees		230			115			564			280
Investment securities gains on sale, net ^(a)		-			4			-			194
Gain (loss) on equity securities ^(a)		( 28	)		( 32	)		( 157	)		12
Earnings on bank-owned life insurance ^(a)		109			109			321			323
Gain on sale of loans ^(a)		660			128			1,155			285
Revenue from investment services		132			99			400			361
Other income		247			226			851			752
Total noninterest income	$	1,811		$	1,105		$	4,380		$	3,536

Net gain on other real estate owned	$	195		$	18		$	257		$	130

(a) Not within scope of ASC 606

NOTE 3 - STOCK-BASED COMPENSATION

The Company had no nonvested stock options outstanding as of September 30, 2020 and 2019.

Stock option activity during the nine months ended September 30, 2020 is as follows:

				Weighted-
				average
				Exercise Price
	Shares			Per Share

Outstanding, January 1, 2020		14,500		$	8.78
Exercised		( 1,500	)		8.78

Outstanding, September 30, 2020		13,000		$	8.78

Exercisable, September 30, 2020		13,000		$	8.78

The following table presents the activity during the nine months ended September 30, 2020 related to awards of restricted stock:

				Weighted-
				average
				Grant Date Fair
	Units			Value Per Unit

Nonvested at January 1, 2020		56,066		$	21.67
Granted		22,700			26.09
Vested		( 11,006	)		19.35
Nonvested at September 30, 2020		67,760		$	23.52

Expected to vest as of September 30, 2020		1,000		$	22.65

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

Share-based compensation (recovery) expense of ($ 75,000 ) and $ 180,000 was recognized for the three -month periods ended September 30, 2020 and 2019, respectively. Share-based compensation (recovery) expense of ($ 188,000 ) and $ 270,000 was recognized for the nine -month periods ended September 30, 2020 and 2019, respectively. The (recovery) expense recorded for the three and nine -month periods ended September 30, 2020 is the result of the decrease in the market valuations of the plans during these periods. Vesting of shares under the plan is contingent on a combination of service period and a performance condition tied to the total shareholder return on the Company’s stock. Due to the change in market conditions during 2020, there was a decrease in the probability of the achievement of the performance condition which resulted in a decrease in the liability related to the plan and a reversal of compensation expense. Since the shares of restricted stock are historically paid out at the vesting date in a combination of shares and cash, the Company has recorded a liability related to this plan which totals $ 289,000 and $ 416,000 at September 30, 2020 and 2019, respectively. When the shares vest, the amount distributed in shares is transferred to common stock and the remainder is distributed in cash.

Total unrecognized stock compensation cost related to nonvested share-based compensation on restricted stock as of September 30, 2020 totals $ 228,000 , of which $ 42,000 is estimated for the rest of 2020, $ 129,000 for 2021, $ 51,000 for 2022, and $ 6,000 for 2023.

NOTE 4 - EARNINGS PER SHARE

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

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

	For the Three						For the Nine
	Months Ended						Months Ended
	September 30,						September 30,
	2020			2019			2020			2019

Weighted-average common shares issued		7,305,653			7,294,014			7,301,091			7,283,808

Average treasury stock shares		( 929,362	)		( 835,756	)		( 913,510	)		( 797,606	)

Weighted-average common shares and common stock equivalents used to calculate basic earnings per share		6,376,291			6,458,258			6,387,581			6,486,202

Additional common stock equivalents (stock options and restricted stock) used to calculate diluted earnings per share		9,474			20,808			10,093			20,636

Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share		6,385,765			6,479,066			6,397,674			6,506,838

Options to purchase 13,000 shares of common stock at $ 8.78 per share were outstanding during the three and nine months ended September 30, 2020. All options were dilutive. Also outstanding were 67,760 shares of restricted stock, 67,405 shares of which were anti-dilutive.

Options to purchase 14,500 shares of common stock at $ 8.78 per share were outstanding during the three and nine months ended September 30, 2019. Also outstanding were 61,540 shares of restricted stock. None of the outstanding options or restricted stock were anti-dilutive.

When shares recognized as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognized as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury share reserve. The reserve for the Company’s treasury shares comprises the cost of the Company’s shares held by the Company. As of September 30, 2020, the Company held 929,362 of the Company’s shares, which is an increase of 58,200 from the 871,162 shares held as of December 31, 2019.

NOTE 5 - FAIR VALUE MEASUREMENTS

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

Level I:

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

Level II:

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

Level III:

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

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

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

			September 30, 2020
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
Subordinated debt	$	-	$	16,598	$	-	$	16,598
Obligations of states and political subdivisions		-		81,303		-		81,303
Mortgage-backed securities in government-sponsored entities		-		15,067		-		15,067
Total debt securities		-		112,968		-		112,968
Equity securities in financial institutions		553		-		-		553
Total	$	553	$	112,968	$	-	$	113,521

			December 31, 2019
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a recurring basis:
Subordinated debt	$	-	$	4,126	$	-	$	4,126
Obligations of states and political subdivisions		-		82,977		-		82,977
Mortgage-backed securities in government-sponsored entities		-		18,630		-		18,630
Total debt securities		-		105,733		-		105,733
Equity securities in financial institutions		710		-		-		710
Total	$	710	$	105,733	$	-	$	106,443

Investment Securities Available for S ale - The Company obtains fair values from an independent pricing service which represent quoted prices for similar assets, fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level II).

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

The following tables present the assets measured on a non-recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Collateral-dependent impaired loans are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. A new cost basis is established at the time a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken to the property’s value at initial foreclosure or subsequent to the initial measurement. No such devaluation occurred in the nine months ended September 30, 2020.

			September 30, 2020
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	-	$	-	$	4,126	$	4,126
Other real estate owned		-		-		6,992		6,992

			December 31, 2019
(Dollar amounts in thousands)	Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	-	$	-	$	5,166	$	5,166

Impaired Loans – The Company has measured impairment on collateral-dependent impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third -party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral-dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the above table as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the above table as it is not currently being carried at its fair value. The fair values in the above table exclude estimated selling costs of $ 853,000 as of September 30, 2020 and December 31, 2019.

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

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

Quantitative Information about Level III Fair Value Measurements

(Dollar amounts in thousands)

Fair Value Estimate

Valuation Techniques

Unobservable Input

Range (Weighted Average)

September 30, 2020

Impaired loans

4,126

Appraisal of collateral (1)

Appraisal adjustments (2)

18.6 %

46.2 %

( 23.1 %)

Other real estate owned

6,992

Appraisal of collateral (1)

Appraisal adjustments (2)

19.9 %

Quantitative Information about Level III Fair Value Measurements

(Dollar amounts in thousands)

Fair Value Estimate

Valuation Techniques

Unobservable Input

Range (Weighted Average)

December 31, 2019

Impaired loans

5,166

Appraisal of collateral (1)

Appraisal adjustments (2)

40.3 %

47.4 %

( 41.8 %)

( 1 )

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

( 2 )

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

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

	September 30, 2020
	Carrying								Total
	Value		Level I		Level II		Level III		Fair Value
	(Dollar amounts in thousands)
Financial assets:
Cash and cash equivalents	$	52,981	$	52,981	$	-	$	-	$	52,981
Loans held for sale		10,457		-		10,457		-		10,457
Net loans		1,113,037		-		-		1,113,962		1,113,962
Bank-owned life insurance		16,832		16,832		-		-		16,832
Federal Home Loan Bank stock		5,207		5,207		-		-		5,207
Accrued interest receivable		5,998		5,998		-		-		5,998

Financial liabilities:
Deposits	$	1,193,963	$	864,550	$	-	$	334,172	$	1,198,722
Short-term borrowings		-		-		-		-		-
Other borrowings		17,100		-		-		13,149		13,149
Accrued interest payable		788		788		-		-		788

	December 31, 2019
	Carrying								Total
	Value		Level I		Level II		Level III		Fair Value
	(Dollar amounts in thousands)
Financial assets:
Cash and cash equivalents	$	35,113	$	35,113	$	-	$	-	$	35,113
Loans held for sale		1,220		-		1,220		-		1,220
Net loans		977,490		-		-		974,213		974,213
Bank-owned life insurance		16,511		16,511		-		-		16,511
Federal Home Loan Bank stock		3,848		3,848		-		-		3,848
Accrued interest receivable		3,471		3,471		-		-		3,471

Financial liabilities:
Deposits	$	1,020,843	$	652,043	$	-	$	371,193	$	1,023,236
Short-term borrowings		5,075		5,075		-		-		5,075
Other borrowings		12,750		-		-		12,783		12,783
Accrued interest payable		917		917		-		-		917

All financial instruments included in the above tables, with the exception of net loans, deposits, and other borrowings, are carried at cost, which approximates the fair value of the instrument.

NOTE 6 – ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table presents the changes in accumulated other comprehensive income (“AOCI”) by component net of tax for the three and nine months ended September 30, 2020 and 2019, respectively:

(Dollars in thousands)	Unrealized gains/(losses) on available-for-sale securities (a)
Balance as of June 30, 2020	$	3,761
Other comprehensive income		316
Balance at September 30, 2020	$	4,077

Balance as of December 31, 2019	$	1,842
Other comprehensive income		2,235
Balance at September 30, 2020	$	4,077

(Dollars in thousands)	Unrealized gains/(losses) on available-for-sale securities (a)
Balance as of June 30, 2019	$	1,377
Other comprehensive income		783
Amount reclassified from accumulated other comprehensive income		( 3	)
Period change		780
Balance at September 30, 2019	$	2,157

Balance as of December 31, 2019	$	( 154	)
Other comprehensive income		2,464
Amount reclassified from accumulated other comprehensive income		( 153	)
Period change		2,311
Balance at September 30, 2019	$	2,157

(a)

All amounts are net of tax. Amounts in parentheses indicate debits to AOCI.

The following tables present significant amounts reclassified from or to each component of AOCI:

	Amounts Reclassified from Accumulated Other					Affected Line Item in
	Comprehensive Income					the Statement Where
(Dollars in thousands)	For the Three Months Ended					Net Income is
Details about other comprehensive income	September 30, 2020		September 30, 2019			Presented

Unrealized gains on available-for-sale securities (a)	$	-	$	4		Investment securities gains on sale, net
		-		( 1	)	Income taxes
	$	-	$	3

	Amount Reclassified from Accumulated Other					Affected Line Item in
	Comprehensive Income					the Statement Where
(Dollars in thousands)	For the Nine Months Ended					Net Income is
Details about other comprehensive income	September 30, 2020		September 30, 2019			Presented

Unrealized gains on available-for-sale securities (a)	$	-	$	194		Investment securities gains on sale, net
		-		( 41	)	Income taxes
	$	-	$	153

(a)

For unrealized gains on available-for-sale securities, amounts in parentheses indicate expenses and other amounts indicate income.

NOTE 7 – INVESTMENT AND EQUITY SECURITIES

The amortized cost and fair values of investment securities available for sale are as follows:

	September 30, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollar amounts in thousands)	Cost		Gains		Losses			Value

Subordinated debt	$	16,100	$	498	$	-		$	16,598
Obligations of states and political subdivisions:
Taxable		500		2		-			502
Tax-exempt		76,718		4,083		-			80,801
Mortgage-backed securities in government-sponsored entities		14,489		579		( 1	)		15,067
Total	$	107,807	$	5,162	$	( 1	)	$	112,968

	December 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
(Dollar amounts in thousands)	Cost		Gains		Losses			Value

Subordinated debt	$	4,000	$	126	$	-		$	4,126
Obligations of states and political subdivisions:
Taxable		500		1		-			501
Tax-exempt		80,436		2,065		( 25	)		82,476
Mortgage-backed securities in government-sponsored entities		18,465		274		( 109	)		18,630
Total	$	103,401	$	2,466	$	( 134	)	$	105,733

The Company recognized a net (loss) on equity investments of ($ 28,000 ) and ($ 157,000 ), respectively, for the three and nine months ended September 30, 2020. The Company recognized a net (loss) gain on equity investments of ($ 32,000 ) and $ 12,000 , respectively, for the three and nine months ended September 30, 2019. No net gains or losses on sold equity securities were realized during these periods.

The amortized cost and fair value of debt securities at September 30, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
(Dollar amounts in thousands)	Cost		Value

Due in one year or less	$	3	$	3
Due after one year through five years		2,240		2,282
Due after five years through ten years		27,348		28,114
Due after ten years		78,216		82,569
Total	$	107,807	$	112,968

Proceeds from the sales of investment securities and the gross realized gains and losses are as follows:

(Dollar amounts in thousands)	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Proceeds from sales	$	-	$	518	$	-	$	12,325
Gross realized gains		-		4		-		227
Gross realized losses		-		-		-		( 33	)

Investment securities with an approximate carrying value of $ 76.8 million and $ 55.6 million at September 30, 2020 and December 31, 2019, respectively, were pledged to secure deposits and for other purposes as required by law.

The following table shows the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.

	September 30, 2020
	Less than Twelve Months					Twelve Months or Greater				Total
			Gross					Gross				Gross
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
(Dollar amounts in thousands)	Value		Losses			Value		Losses		Value		Losses

Mortgage-backed securities in government-sponsored entities	$	1,141	$	( 1	)	$	-	$	-	$	1,141	$	( 1	)
Total	$	1,141	$	( 1	)	$	-	$	-	$	1,141	$	( 1	)

	December 31, 2019
	Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollar amounts in thousands)	Value		Losses			Value		Losses			Value		Losses

Obligations of states and political subdivisions:
Tax-exempt	$	4,324	$	( 25	)	$	-	$	-		$	4,324	$	( 25	)
Mortgage-backed securities in government-sponsored entities		1,409		( 2	)		8,223		( 107	)		9,632		( 109	)
Total	$	5,733	$	( 27	)	$	8,223	$	( 107	)	$	13,956	$	( 134	)

There were 2 securities considered temporarily impaired at September 30, 2020.

On a quarterly basis, the Company performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment (“OTTI”). A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The Company assesses whether the unrealized loss is other than temporary.

OTTI losses are recognized in earnings when the Company has the intent to sell the debt security or it is more likely than not that it will be required to sell the debt security before recovery of its amortized cost basis. However, even if the Company does not expect to sell a debt security, it must evaluate expected cash flows to be received and determine if a credit loss has occurred.

An unrealized loss is generally deemed to be other than temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. As a result, the credit loss of an OTTI is recorded as a component of investment securities gains (losses) in the accompanying Consolidated Statement of Income, while the remaining portion of the impairment loss is recognized in other comprehensive income, provided the Company does not intend to sell the underlying debt security and it is “more likely than not” that the Company will not have to sell the debt security prior to recovery.

Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises, and state and political subdivisions accounted for 85 % of the total available-for-sale portfolio as of September 30, 2020 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government and the lack of prolonged unrealized loss positions within the obligations of the state and political subdivisions security portfolio. The Company considers the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

	•	The length of time and the extent to which the fair value has been less than the amortized cost basis;
	•	Changes in the near-term prospects of the underlying collateral of a security such as changes in default rates, loss severity given default and significant changes in prepayment assumptions;
	•	The level of cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities; and
	•	Any adverse change to the credit conditions and liquidity of the issuer, taking into consideration the latest information available about the overall financial condition of the issuer, credit ratings, recent legislation and government actions affecting the issuer’s industry and actions taken by the issuer to deal with the present economic climate.

For the nine months ended September 30, 2020 and 2019, there were no available-for-sale debt securities with an unrealized loss that suffered OTTI. Management does not believe any individual unrealized loss as of September 30, 2020 or December 31, 2019 represented an other-than-temporary impairment. The unrealized losses on debt securities are primarily the result of interest rate changes. These conditions will not prohibit the Company from receiving its contractual principal and interest payments on these debt securities. The fair value of these debt securities is expected to recover as payments are received on these securities and they approach maturity. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

NOTE 8 - LOANS AND RELATED ALLOWANCE FOR LOAN AND LEASE LOSSES

The Company’s primary business activity is with customers located within its local Northeastern Ohio trade area, eastern Geauga County, and contiguous counties. The Company also serves the central Ohio market with offices in Dublin, Plain City, Powell, Sunbury, and Westerville, Ohio. Commercial, residential, consumer, and agricultural loans are granted. Although the Company has a diversified loan portfolio, loans outstanding to individuals and businesses are dependent upon the local economic conditions in the Company’s immediate trade area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances net of the allowance for loan and lease losses. Interest income is recognized on the accrual method. The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of interest is doubtful. Interest payments received on nonaccrual loans are applied against the unpaid principal balance until accrual status is restored.

Loan origination fees and certain direct loan origination costs are deferred with the net amount amortized over the contractual life of the loan as an adjustment of the related loan’s yield.

The following tables summarize the primary segments of the loan portfolio and allowance for loan and lease losses (in thousands):

September 30, 2020
Impairment Evaluation
	Individually		Collectively		Total Loans
Loans:
Commercial real estate:
Owner occupied	$	2,300	$	105,042	$	107,342
Non-owner occupied		11,138		299,374		310,512
Multifamily		-		39,622		39,622
Residential real estate		1,225		221,012		222,237
Commercial and industrial		1,624		256,689		258,313
Home equity lines of credit		248		114,975		115,223
Construction and other		-		60,613		60,613
Consumer installment		-		10,534		10,534
Total	$	16,535	$	1,107,861	$	1,124,396

December 31, 2019
Impairment Evaluation
	Individually		Collectively		Total Loans
Loans:
Commercial real estate:
Owner occupied	$	3,474	$	98,912	$	102,386
Non-owner occupied		7,084		295,096		302,180
Multifamily		-		62,028		62,028
Residential real estate		1,278		233,520		234,798
Commercial and industrial		882		88,645		89,527
Home equity lines of credit		351		111,897		112,248
Construction and other		-		66,680		66,680
Consumer installment		1		14,410		14,411
Total	$	13,070	$	971,188	$	984,258

The commercial and industrial loan portfolio as of September 30, 2020 includes $ 143.8 million in loans issued through the Paycheck Protection Program (PPP) (see Note 10 ).

The amounts above include net deferred loan origination fees of $ 5.6 million and $ 1.3 million at September 30, 2020 and December 31, 2019, respectively. The net deferred loan origination fees at September 30, 2020 include $ 3.3 million of unearned deferred fees from PPP loans.

September 30, 2020
Ending Allowance Balance Attributable to Loans:
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total Allocation
Loans:
Commercial real estate:
Owner occupied	$	10	$	1,093	$	1,103
Non-owner occupied		403		5,002		5,405
Multifamily		-		346		346
Residential real estate		21		1,350		1,371
Commercial and industrial		60		1,443		1,503
Home equity lines of credit		21		1,305		1,326
Construction and other		-		293		293
Consumer installment		-		12		12
Total	$	515	$	10,844	$	11,359

December 31, 2019
Ending Allowance Balance Attributable to Loans:
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total Allocation
Loans:
Commercial real estate:
Owner occupied	$	45	$	756	$	801
Non-owner occupied		582		2,800		3,382
Multifamily		-		340		340
Residential real estate		28		698		726
Commercial and industrial		3		453		456
Home equity lines of credit		2		930		932
Construction and other		-		103		103
Consumer installment		-		28		28
Total	$	660	$	6,108	$	6,768

The Company’s loan portfolio is segmented to a level that allows management to monitor risk and performance. The portfolio is segmented into Commercial Real Estate (“CRE”) which is further segmented into Owner Occupied (“CRE OO”), Non-owner Occupied (“CRE NOO”), and Multifamily Residential, Residential Real Estate (“RRE”), Commercial and Industrial (“C&I”), Home Equity Lines of Credit (“HELOC”), Construction and Other (“Construction”), and Consumer Installment Loans. The commercial real estate loan segments consist of loans made for the purpose of financing the activities of commercial real estate owners and operators. The residential real estate and HELOC loan segments consist of loans made for the purpose of financing the activities of residential homeowners. The C&I loan segment consists of loans made for the purpose of financing the activities of commercial customers. Although PPP loans are included with C&I loans, the nature of PPP loans differs considerably from the rest of the category. Loans funded through the PPP program are fully guaranteed by the U.S. government. This guarantee exists at the inception of the loans and throughout the lives of the loans and was not entered into separately and apart from the loans. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts. The increases in the allowance for loan loss for the CRE, RRE, C&I, HELOC, and Construction portfolios were partially offset by a decrease in the allowance for the Consumer Installment portfolios.

Management evaluates individual loans in all of the commercial segments for possible impairment based on guidance established by the Board of Directors. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired, or the loan was modified in a troubled debt restructuring.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of the following methods: (a) the present value of expected future cash flows discounted at the loan’s effective interest rate; (b) the loan’s observable market price; or (c) the fair value of the collateral less selling costs. The method is selected on a loan-by-loan basis. The evaluation of the need and amount of a specific allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The following tables present impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary (in thousands):

September 30, 2020
Impaired Loans
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	1,844	$	1,863	$	-
Non-owner occupied		7,518		7,518		-
Residential real estate		797		927		-
Commercial and industrial		1,336		1,833		-
Home equity lines of credit		81		93		-
Total	$	11,576	$	12,234	$	-

With an allowance recorded:
Commercial real estate:
Owner occupied	$	456	$	456	$	10
Non-owner occupied		3,620		3,894		403
Residential real estate		428		428		21
Commercial and industrial		288		288		60
Home equity lines of credit		167		167		21
Total	$	4,959	$	5,233	$	515

Total:
Commercial real estate:
Owner occupied	$	2,300	$	2,319	$	10
Non-owner occupied		11,138		11,412		403
Residential real estate		1,225		1,355		21
Commercial and industrial		1,624		2,121		60
Home equity lines of credit		248		260		21
Total	$	16,535	$	17,467	$	515

December 31, 2019
Impaired Loans
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial real estate:
Owner occupied	$	1,772	$	1,772	$	-
Non-owner occupied		3,845		3,845		-
Residential real estate		759		829		-
Commercial and industrial		747		1,524		-
Home equity lines of credit		220		228		-
Consumer installment		1		1		-
Total	$	7,344	$	8,199	$	-

With an allowance recorded:
Commercial real estate:
Owner occupied	$	1,702	$	1,713	$	45
Non-owner occupied		3,239		3,239		582
Residential real estate		519		569		28
Commercial and industrial		135		135		3
Home equity lines of credit		131		131		2
Total	$	5,726	$	5,787	$	660

Total:
Commercial real estate:
Owner occupied	$	3,474	$	3,485	$	45
Non-owner occupied		7,084		7,084		582
Residential real estate		1,278		1,398		28
Commercial and industrial		882		1,659		3
Home equity lines of credit		351		359		2
Consumer installment		1		1		-
Total	$	13,070	$	13,986	$	660

The tables above include troubled debt restructuring totaling $ 2.9 million and $ 3.6 million as of September 30, 2020 and December 31, 2019, respectively. The amounts allocated within the allowance for losses for troubled debt restructurings was $ 36,000 and $ 33,000 at September 30, 2020 and December 31, 2019, respectively.

The following tables present the average balance and interest income by class, recognized on impaired loans (in thousands):

	For the Three Months Ended September 30, 2020				For the Nine Months Ended September 30, 2020
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Commercial real estate:
Owner occupied	$	2,893	$	-	$	3,173	$	55
Non-owner occupied		12,912		129		9,988		387
Residential real estate		1,242		14		1,229		39
Commercial and industrial		1,376		28		1,136		49
Home equity lines of credit		298		1		323		5
Consumer installment		-		-		1		-
Total	$	18,721	$	172	$	15,850	$	535

	For the Three Months Ended September 30, 2019				For the Nine Months Ended September 30, 2019
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Commercial real estate:
Owner occupied	$	3,548	$	35	$	3,891	$	107
Non-owner occupied		7,796		60		6,426		179
Residential real estate		1,632		14		1,713		37
Commercial and industrial		1,786		20		1,992		44
Home equity lines of credit		150		-		134		1
Construction and other		-		-		810		-
Consumer installment		2		-		2		-
Total	$	14,914	$	129	$	14,968	$	368

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 have potential weaknesses, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan-rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as payment delinquency, bankruptcy, repossession, or death, occurs to raise awareness of a possible credit quality event. The Company’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Credit Department performs an annual review of all commercial relationships with loan balances of $ 500,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Company engages an external consultant to conduct loan reviews on a semiannual basis. Generally, the external consultant reviews commercial relationships greater than $ 250,000 and criticized relationships greater than $ 150,000 . Detailed reviews, including plans for resolution, are performed on criticized loans on at least a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The primary risk of commercial and industrial loans is related to deterioration in the cash flow of the business that may result in the liquidation of the business assets securing the loan. C&I loans are, by nature, secured by less substantial collateral than real estate-secured loans. The primary risk of real estate construction loans is potential delays and disputes during the completion process. The primary risk of residential real estate loans is current economic uncertainties. The primary risk of commercial real estate loans is loss of income of the owner or occupier of the property and the inability of the market to sustain rent levels. Consumer installment loans historically have experienced higher delinquency rates. Consumer installments are typically secured by less substantial collateral than other types of credits.

The following tables present the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk-rating system (in thousands):

			Special						Total
September 30, 2020	Pass		Mention		Substandard		Doubtful		Loans

Commercial real estate:
Owner occupied	$	101,389	$	3,751	$	2,202	$	-	$	107,342
Non-owner occupied		283,379		1,761		25,372		-		310,512
Multifamily		39,622		-		-		-		39,622
Residential real estate		218,450		270		3,517		-		222,237
Commercial and industrial		253,197		2,620		2,496		-		258,313
Home equity lines of credit		113,884		-		1,339		-		115,223
Construction and other		60,613		-		-		-		60,613
Consumer installment		10,522		-		12		-		10,534
Total	$	1,081,056	$	8,402	$	34,938	$	-	$	1,124,396

			Special						Total
December 31, 2019	Pass		Mention		Substandard		Doubtful		Loans

Commercial real estate:
Owner occupied	$	95,518	$	3,951	$	2,917	$	-	$	102,386
Non-owner occupied		292,192		3,038		6,950		-		302,180
Multifamily		62,028		-		-		-		62,028
Residential real estate		231,633		420		2,745		-		234,798
Commercial and industrial		84,136		3,619		1,772		-		89,527
Home equity lines of credit		111,354		-		894		-		112,248
Construction and other		66,680		-		-		-		66,680
Consumer installment		14,398		-		13		-		14,411
Total	$	957,939	$	11,028	$	15,291	$	-	$	984,258

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due.

Nonperforming assets are nonaccrual loans including nonaccrual troubled debt restructurings (“TDR”), loans 90 days or more past due, other real estate owned, and repossessed assets. A loan is classified as nonaccrual when, in the opinion of management, there are serious doubts about collectability of interest and principal. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of principal and interest is doubtful. Payments received on nonaccrual loans are applied against the principal balance.

The following tables present the aging of the recorded investment in past-due loans by class of loans (in thousands):

			30-59 Days		60-89 Days		90 Days+		Total		Total
September 30, 2020	Current		Past Due		Past Due		Past Due		Past Due		Loans

Commercial real estate:
Owner occupied	$	106,416	$	61	$	177	$	688	$	926	$	107,342
Non-owner occupied		306,800		2,379		739		594		3,712		310,512
Multifamily		39,622		-		-		-		-		39,622
Residential real estate		219,234		1,224		342		1,437		3,003		222,237
Commercial and industrial		257,784		320		127		82		529		258,313
Home equity lines of credit		115,025		93		55		50		198		115,223
Construction and other		60,613		-		-		-		-		60,613
Consumer installment		10,169		170		5		190		365		10,534
Total	$	1,115,663	$	4,247	$	1,445	$	3,041	$	8,733	$	1,124,396

			30-59 Days		60-89 Days		90 Days+		Total		Total
December 31, 2019	Current		Past Due		Past Due		Past Due		Past Due		Loans

Commercial real estate:
Owner occupied	$	101,264	$	64	$	-	$	1,058	$	1,122	$	102,386
Non-owner occupied		298,941		-		-		3,239		3,239		302,180
Multifamily		62,028		-		-		-		-		62,028
Residential real estate		232,518		1,439		34		807		2,280		234,798
Commercial and industrial		88,965		190		66		306		562		89,527
Home equity lines of credit		111,792		274		29		153		456		112,248
Construction and other		66,680		-		-		-		-		66,680
Consumer installment		13,378		622		216		195		1,033		14,411
Total	$	975,566	$	2,589	$	345	$	5,758	$	8,692	$	984,258

The following tables present the recorded investment in nonaccrual loans and loans past due over 89 days and still on accrual by class of loans (in thousands):

September 30, 2020	Nonaccrual		90+ Days Past Due and Accruing

Commercial real estate:
Owner occupied	$	1,138	$	-
Non-owner occupied		594		-
Residential real estate		3,462		-
Commercial and industrial		400		-
Home equity lines of credit		859		-
Consumer installment		237		-
Total	$	6,690	$	-

December 31, 2019	Nonaccrual		90+ Days Past Due and Accruing

Commercial real estate:
Owner occupied	$	1,162	$	-
Non-owner occupied		3,289		-
Residential real estate		2,576		-
Commercial and industrial		946		-
Home equity lines of credit		709		-
Consumer installment		197		-
Total	$	8,879	$	-

Interest income that would have been recorded had these loans not been placed on nonaccrual status was $ 112,000 for the three months ended September 30, 2020 and $ 47,000 for the three months ended December 31, 2019. Interest income that would have been recorded had these loans not been placed on nonaccrual status was $ 215,000 for the nine months ended September 30, 2020 and $ 342,000 for the year ended December 31, 2019.

An allowance for loan and lease losses (“ALLL”) is maintained to absorb losses from the loan portfolio. The ALLL is based on management’s continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of nonperforming loans.

The Company’s methodology for determining the ALLL is based on the requirements of ASC Section 310 - 10 - 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 analyses on TDRs, which may result in specific reserves.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.

The classes described above, which are based on the purpose code assigned to each loan, provide the starting point for the ALLL analysis. Management tracks the historical net charge-off activity at the call code level. The historical charge-off factor was calculated using the last twelve consecutive historical quarters.

Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are: national and local economic trends and conditions; levels of and trends in delinquency rates and nonaccrual loans; trends in volumes and terms of loans; effects of changes in lending policies; experience, ability, and depth of lending staff; value of underlying collateral; and concentrations of credit from a loan type, industry and geographic standpoint.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order to make appropriate and timely adjustments to the ALLL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALLL.

The following tables summarize the ALLL within the primary segments of the loan portfolio and the activity within those segments (in thousands):

	For the nine months ended September 30, 2020
	Allowance for Loan and Lease Losses
	Balance									Balance
	December 31, 2019		Charge-offs			Recoveries		Provision		September 30, 2020
Loans:
Commercial real estate:
Owner occupied	$	801	$	( 50	)	$	15	$	337	$	1,103
Non-owner occupied		3,382		( 3,022	)		73		4,972		5,405
Multifamily		340		-			-		6		346
Residential real estate		726		( 51	)		30		666		1,371
Commercial and industrial		456		( 185	)		268		964		1,503
Home equity lines of credit		932		( 54	)		65		383		1,326
Construction and other		103		-			146		44		293
Consumer installment		28		( 396	)		12		368		12
Total	$	6,768	$	( 3,758	)	$	609	$	7,740	$	11,359

	For the nine months ended September 30, 2019
	Allowance for Loan and Lease Losses
	Balance										Balance
	December 31, 2018		Charge-offs			Recoveries		Provision			September 30, 2019
Loans:
Commercial real estate:
Owner occupied	$	1,315	$	( 31	)	$	3	$	( 450	)	$	837
Non-owner occupied		2,862		-			-		622			3,484
Multifamily		474		-			-		( 85	)		389
Residential real estate		761		( 361	)		44		288			732
Commercial and industrial		969		( 393	)		55		( 242	)		389
Home equity lines of credit		820		( 156	)		28		249			941
Construction and other		100		-			57		( 52	)		105
Consumer installment		127		( 110	)		7		100			124
Total	$	7,428	$	( 1,051	)	$	194	$	430		$	7,001

	For the three months ended September 30, 2020
	Allowance for Loan and Lease Losses
	Balance										Balance
	June 30, 2020		Charge-offs			Recoveries		Provision			September 30, 2020
Loans:
Commercial real estate:
Owner occupied	$	1,038	$	-		$	1	$	64		$	1,103
Non-owner occupied		5,159		( 3,021	)		-		3,267			5,405
Multifamily		291		-			-		55			346
Residential real estate		1,167		-			-		204			1,371
Commercial and industrial		1,105		( 16	)		29		385			1,503
Home equity lines of credit		1,203		-			49		74			1,326
Construction and other		236		-			111		( 54	)		293
Consumer installment		11		( 6	)		2		5			12
Total	$	10,210	$	( 3,043	)	$	192	$	4,000		$	11,359

	For the three months ended September 30, 2019
	Allowance for Loan and Lease Losses
	Balance										Balance
	June 30, 2019		Charge-offs			Recoveries		Provision			September 30, 2019
Loans:
Commercial real estate:
Owner occupied	$	866	$	-		$	1	$	( 30	)	$	837
Non-owner occupied		3,588		-			-		( 104	)		3,484
Multifamily		412		-			-		( 23	)		389
Residential real estate		747		( 360	)		4		341			732
Commercial and industrial		539		( 38	)		16		( 128	)		389
Home equity lines of credit		936		( 18	)		22		1			941
Construction and other		97		-			11		( 3	)		105
Consumer installment		119		( 22	)		1		26			124
Total	$	7,304	$	( 438	)	$	55	$	80		$	7,001

The provision fluctuations during the nine -month period ended September 30, 2020 allocated to:

●

a $ 2.2 million increase in all lending categories’ qualitative factors during the second and third quarters of 2020 due to the economic uncertainty resulting from the COVID- 19 pandemic.

●

owner occupied, non-owner occupied, and commercial and industrial loans are due to an increase in substandard rated credits.

●

non-owner occupied portfolio are also due to the increase of specific reserves for two relationships totaling $ 1.3 million.

●

commercial and industrial loans are due to growth in loan volume along with an allocation for the PPP loans in the amount of $ 423,000 .

●

residential real estate loans are due to an increase in delinquent residential mortgages.

●

consumer installment loans are due to a large number of student loans that were charged off earlier in the year.

The provision fluctuations during the nine -month period ended September 30, 2019 allocated to:

●

commercial and industrial loans are due to the charge-off of a large relationship of $ 336,000 from a previous reserve of $ 358,000 in the first quarter.

●

residential real estate and home equity lines of credit loans are due to charge-offs and portfolio growth.

●

non-owner occupied loans are due to the reclassification of a large construction loan, with a first quarter reserve of $ 661,000 , from construction and other.

The provision fluctuations during the three -month period ended September 30, 2020 allocated to:

●

owner occupied, non-owner occupied, and commercial and industrial loans are due to an increase in substandard rated credits.

●

residential real estate loans are due to an increase in delinquent residential mortgages.

●

non-owner occupied loans are due to the increase in specific reserve and subsequent $ 3.0 million charge-off of the resolved asset purchased at Sheriff's Sale and booked to OREO for $ 7.0 million.

The provision fluctuation during the three -month period ended September 30, 2019 allocated to:

●

commercial and industrial loans and commercial real estate loans are due to decreases in volume within these portfolios during the quarter.

●

residential real estate portfolio are due to a strong growth in this portfolio during the quarter.

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. See Note 10 of the financial statements for disclosure of COVID- 19 loan forbearance programs.

Additionally, on April 7, 2020, federal banking regulators issued a revised interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID- 19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID- 19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID- 19 to borrowers who were current prior to any relief are not TDRs.

The following tables summarize troubled debt restructurings that did not meet the exemption criteria above (in thousands):

	For the Three Months Ended
	September 30, 2020
	Number of Contracts						Pre-Modification		Post-Modification
	Term						Outstanding Recorded		Outstanding Recorded
Troubled Debt Restructurings	Modification		Other		Total		Investment		Investment
Residential real estate		1		-		1	$	115	$	115
Commercial and industrial		1		-		1		2		2

	For the Nine Months Ended
	September 30, 2020
	Number of Contracts						Pre-Modification		Post-Modification
	Term						Outstanding Recorded		Outstanding Recorded
Troubled Debt Restructurings	Modification		Other		Total		Investment		Investment
Residential real estate		3		-		3	$	156	$	156
Commercial and industrial		3		-		3		120		119

For the Three Months Ended

September 30, 2019

Number of Contracts

Pre-Modification

Post-Modification

Term

Outstanding Recorded

Troubled Debt Restructurings

Modification

Other

Total

Investment

Residential real estate

For the Nine Months Ended

September 30, 2019

Number of Contracts

Pre-Modification

Post-Modification

Term

Outstanding Recorded

Troubled Debt Restructurings

Modification

Other

Total

Investment

Residential real estate

123

178

There were no subsequent defaults of troubled debt restructurings for the three -month periods ended September 30, 2020 and September 30, 2019, or for the nine -month periods ended September 30, 2020 and September 30, 2019.

NOTE 9 – STOCK SPLIT DISCLOSURE

On October 9, 2019, the Board of Directors of Middlefield Banc Corp. authorized a two -for- one stock split. Each shareholder of record at the close of business on October 25, 2019, received one additional share for every outstanding share held on the record date. The additional shares were paid on November 8, 2019. As a result, all share and earnings per share information have been retroactively adjusted to reflect the stock split.

With respect to the September 30, 2020 and 2019 financial statements, the effect of the stock split on September 30, 2019 amounts was recognized retroactively in the stockholders’ equity accounts in the Consolidated Balance Sheets, and in all share data in the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations. The effect of the stock split on per share amounts and weighted average common shares outstanding for the three and nine months ended September 30, 2019 is as follows:

	For the three months ended		For the nine months ended
	September 30, 2019		September 30, 2019
Restated net income per common share - basic	$	0.51	$	1.48
Restated net income per common share - diluted	$	0.50	$	1.47
Restated weighted-average common shares issued		7,294,014		7,283,808
Restated average treasury stock shares		835,756		797,606
Restated average shares outstanding - basic		6,458,258		6,486,202
Restated stock options and restricted stock		20,808		20,636
Restated average shares outstanding - diluted		6,479,066		6,506,838
Restated period ending shares outstanding		6,423,130		6,423,130
Restated treasury shares outstanding		871,162		871,162

NOTE 1 0 – RISKS AND UNCERTAINTIES

COVID- 19 Update

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and as a qualified SBA lender, we were automatically authorized to originate PPP loans. As of September 30, 2020, we approved 1,414 applications for up to $ 143.8 million of loans under the PPP.

As of September 30, 2020, 41 loans aggregating $ 63.5 million remained on principal and interest deferral compared to 362 loans aggregating $ 214.8 million at June 30, 2020.

Details with respect to second deferral loan modifications are as follows:

Second Deferrals
Loan Type	Number of Loans		Balance (in thousands)		% of Total Loans
Retail		10	$	18,638		1.7	%
Multifamily & Residential NOO		-		-		-
Ambulatory Care, Nursing/Rehabilitation and Social Assistance		1		9,672		0.9	%
Hospitality and tourism		15		31,707		2.8	%
Restaurant/food service/bar		-		-		-
Other		4		499		0.0	%
Total		30	$	60,516		5.4	%

Since the opening of the PPP, several larger banks have been subject to litigation regarding the process and procedures that those banks used in processing applications for the PPP. Middlefield Bank may be exposed to the risk of similar litigation, from both customers and non-customers that approached the bank regarding PPP loans, regarding the process and procedures used in processing applications for the PPP. If any such litigation is filed against Middlefield Bank and is not resolved in a manner favorable to Middlefield Bank, it may result in significant financial liability or adversely affect Middlefield Bank’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of operations.

Middlefield Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by Middlefield Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by Middlefield Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from Middlefield Bank.

COVID- 19 Loan Forbearance Programs. Section 4013 of the CARES Act provides that banks may elect not to categorize a loan modification as a TDR if the loan modification is ( 1 ) related to COVID- 19; ( 2 ) executed on a loan that was not more than 30 days past due as of December 31, 2019; and ( 3 ) executed between March 1, 2020, and the earlier of (A) 60 days after the date on which the national emergency concerning the novel coronavirus disease ( COVID–19 ) outbreak declared by the President on March 13, 2020, under the National Emergencies Act terminates, or (B) December 31, 2020. According to the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) issued by the federal bank regulatory agencies on April 7, 2020, short-term loan modifications not otherwise eligible under Section 4013 that are made on a good faith basis in response to COVID- 19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. See Note 8 of the financial statements for additional disclosure of TDRs at September 30, 2020.

Item 2. Management’s Dis cussion and Analysis of Financial Condition and Results of Operations

The information contained or incorporated by reference in this report on Form 10-Q contains forward-looking statements, including certain plans, expectations, goals, and projections, which are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those contained or implied by such statements for a variety of factors, including: changes in economic conditions; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the nature, extent, and timing of government actions and reforms; and extended disruption of vital infrastructure and the potential impact of the COVID-19 pandemic. All forward-looking statements included in this report on Form 10-Q are based on information available at the time of the report. Middlefield Banc Corp. assumes no obligation to update any forward-looking statement.

CHANGES IN FINANCIAL CONDITION

Overview

The following is management’s discussion and analysis of certain significant factors which have affected the financial condition and results of operations of the Company as reflected in the unaudited consolidated balance sheet as of September 30, 2020, as compared with December 31, 2019, and operating results for the three and nine month periods ended September 30, 2020 and 2019. These comments should be read in conjunction with the Company’s unaudited consolidated financial statements and accompanying notes appearing elsewhere herein.

This discussion contains certain performance measures determined by methods other than in accordance with GAAP. Management of the Company uses these non-GAAP measures in its analysis of the Company’s performance. These measures are useful when evaluating the underlying performance and efficiency of the Company’s operations and balance sheet. The Company’s management believes that these non-GAAP measures provide a greater understanding of ongoing operations, enhance comparability of results with prior periods and demonstrate the effects of significant gains and charges in the current period. The Company’s management believes that investors may use these non-GAAP financial measures to evaluate the Company’s financial performance without the impact of unusual items that may obscure trends in the Company’s underlying performance. These disclosures should not be viewed as a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Non-GAAP measures include tangible book value per common share and return on average tangible common equity. The Company calculates the regulatory capital ratios using current regulatory report instructions. The Company’s management uses these measures to assess the quality of capital and believes that investors may find them useful in their evaluation of the Company. These capital measures may or may not be necessarily comparable to similar capital measures that may be presented by other companies.

	For the Three Months Ended															For the Nine Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,
	2020			2020			2020			2019			2019			2020			2019
Per common share data ⁽⁵⁾
Net income per common share - basic	$	0.29		$	0.47		$	0.16		$	0.48		$	0.51		$	0.92		$	1.48
Net income per common share - diluted	$	0.29		$	0.46		$	0.16		$	0.48		$	0.50		$	0.92		$	1.47
Dividends declared per share	$	0.15		$	0.15		$	0.15		$	0.15		$	0.14		$	0.45		$	0.42
Book value per share (period end)	$	22.27		$	22.09		$	20.83		$	21.45		$	21.16		$	22.27		$	21.16
Tangible book value per share (period end) ^{(2) (3)}	$	19.63		$	19.43		$	18.16		$	18.78		$	18.48		$	19.63		$	18.48
Dividends declared	$	957		$	956		$	964		$	964		$	900		$	2,877		$	2,721
Dividend yield		3.09	%		2.91	%		3.82	%		2.28	%		2.37	%		3.11	%		2.40	%
Dividend payout ratio		51.65	%		32.23	%		92.60	%		30.69	%		27.53	%		49.10	%		28.43	%
Average shares outstanding - basic		6,376,291			6,369,467			6,417,109			6,423,543			6,458,258			6,387,581			6,486,202
Average shares outstanding - diluted		6,385,765			6,388,118			6,429,443			6,455,387			6,479,066			6,397,674			6,506,838
Period ending shares outstanding		6,378,110			6,369,467			6,369,467			6,423,630			6,423,130			6,378,110			6,423,130

Selected ratios
Return on average assets		0.54	%		0.90	%		0.35	%		1.04	%		1.07	%		0.61	%		1.06	%
Return on average equity		5.04	%		8.56	%		3.01	%		8.87	%		9.41	%		5.48	%		9.52	%
Return on average tangible common equity ^{(2) (4)}		5.70	%		9.76	%		3.43	%		10.11	%		10.76	%		6.22	%		10.93	%
Efficiency ⁽¹⁾		51.96	%		61.29	%		63.47	%		61.75	%		63.93	%		58.59	%		63.75	%
Equity to assets at period end		10.41	%		10.47	%		10.93	%		11.65	%		10.61	%		10.41	%		10.61	%
Noninterest expense to average assets		0.52	%		0.58	%		0.61	%		0.61	%		0.64	%		1.70	%		1.88	%

(1)	The efficiency ratio is calculated by dividing noninterest expense less amortization of intangibles by the sum of net interest income on a fully taxable equivalent basis plus noninterest income
(2)	See reconciliation of non-GAAP measures below
(3)	Calculated by dividing tangible common equity by shares outstanding
(4)	Calculated by dividing annualized net income for each period by average tangible common equity
(5)	All share and per share information has been adjusted for the two-for-one stock split completed on November 8, 2019

	For the Three Months Ended															For the Nine Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,			September 30,			September 30,
Yields	2020			2020			2020			2019			2019			2020			2019
Interest-earning assets:
Loans receivable ⁽²⁾		4.48	%		4.53	%		4.95	%		4.97	%		5.10	%		4.64	%		5.09	%
Investment securities ⁽²⁾		3.66	%		3.76	%		3.62	%		3.94	%		3.71	%		3.68	%		3.71	%
Interest-earning deposits with other banks		0.27	%		0.23	%		1.40	%		1.65	%		2.31	%		0.56	%		2.26	%
Total interest-earning assets		4.23	%		4.27	%		4.69	%		4.75	%		4.86	%		4.38	%		4.86	%
Deposits:
Interest-bearing demand deposits		0.32	%		0.35	%		0.42	%		0.41	%		0.39	%		0.36	%		0.35	%
Money market deposits		0.70	%		0.93	%		1.41	%		1.41	%		1.43	%		1.00	%		1.47	%
Savings deposits		0.20	%		0.21	%		0.50	%		0.62	%		0.68	%		0.29	%		0.73	%
Certificates of deposit		1.77	%		2.00	%		2.12	%		2.18	%		2.18	%		1.97	%		2.24	%
Total interest-bearing deposits		0.93	%		1.11	%		1.39	%		1.43	%		1.48	%		1.14	%		1.50	%
Non-Deposit Funding:
Borrowings		0.45	%		0.53	%		1.62	%		2.52	%		3.03	%		0.73	%		2.65	%
Total interest-bearing liabilities		0.91	%		1.07	%		1.40	%		1.46	%		1.51	%		1.12	%		1.54	%
Cost of deposits		0.72	%		0.85	%		1.13	%		1.15	%		1.20	%		0.89	%		1.21	%
Cost of funds		0.71	%		0.83	%		1.14	%		1.17	%		1.23	%		0.88	%		1.25	%
Net interest margin ⁽¹⁾		3.57	%		3.49	%		3.63	%		3.66	%		3.72	%		3.56	%		3.69	%

(1)	Net interest margin represents net interest income as a percentage of average interest-earning assets.
(2)	Tax-equivalent adjustments to calculate the yield on tax-exempt securities and loans were determined using an effective tax rate of 21%.

Reconciliation of Common Stockholders' Equity to Tangible Common Equity *	For the Three Months Ended										For the Nine Months Ended
(Dollar amounts in thousands, unaudited)	September 30, 2020		June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		September 30, 2020		September 30, 2019

Stockholders' Equity	$	142,056	$	140,695	$	132,687	$	137,775	$	135,913	$	142,056	$	135,913
Less Goodwill and other intangibles		16,878		16,961		17,044		17,127		17,212		16,878		17,212
Tangible Common Equity	$	125,178	$	123,734	$	115,643	$	120,648	$	118,701	$	125,178	$	118,701

Shares outstanding		6,378,110		6,369,467		6,369,467		6,423,630		6,423,130		6,378,110		6,423,130
Tangible book value per share	$	19.63	$	19.43	$	18.16	$	18.78	$	18.48	$	19.63	$	18.48

Reconciliation of Average Equity to Return on Average Tangible Common Equity	For the Three Months Ended															For the Nine Months Ended
	September 30, 2020			June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019			September 30, 2020			September 30, 2019

Average Stockholders' Equity	$	146,253		$	139,287		$	139,208		$	140,475		$	137,843		$	142,949		$	134,376
Less Average Goodwill and other intangibles		16,919			17,002			17,085			17,169			17,254			17,002			17,338
Average Tangible Common Equity	$	129,334		$	122,285		$	122,123		$	123,306		$	120,589		$	125,947		$	117,038

Net income	$	1,853		$	2,966		$	1,041		$	3,141		$	3,269		$	5,860		$	9,570
Return on average tangible common equity (annualized)		5.70	%		9.76	%		3.43	%		10.11	%		10.76	%		6.22	%		10.93	%

*	All share and per share information has been adjusted for a two-for-one stock split completed on November 8, 2019

General . The Company’s total assets ended the September 30, 2020 quarter at $1.36 billion, an increase of $182.3 million from December 31, 2019. For the same time period, cash and cash equivalents increased $17.9 million, or 50.9%, while net loans increased $135.5 million, or 13.9%. Total liabilities increased $178.1 million or 17.0%, while stockholders’ equity increased $4.3 million, or 3.1%.

Cash and cash equivalents . Cash and cash equivalents increased $17.9 million, or 50.9%, to $53.0 million at September 30, 2020 from $35.1 million at December 31, 2019. Deposits from customers into savings and checking accounts, loan and securities repayments, and proceeds from borrowed funds typically increase these accounts. Decreases result from customer withdrawals, new loan originations, purchases of investment securities and repayments of borrowed funds.

The Company will continue to hold elevated levels of cash and cash equivalents to meet the demands of customers during the economic downturn. The Company monitors cash and cash equivalents on a daily basis to ensure adequate liquidity positions are maintained.

Investment securities. Investment securities available for sale on September 30, 2020 totaled $113.0 million, an increase of $7.2 million, or 6.8%, from $105.7 million at December 31, 2019. During this period, the Company recorded repayments, calls, and maturities of $12.7 million and a net unrealized holding gain through AOCI of $2.8 million. Securities purchased were $17.4 million, and there were no sales of securities for the nine months ended September 30, 2020. The Company recorded $157,000 in losses on equity securities as of September 30, 2020 on the Company’s Consolidated Statement of Income and Consolidated Statement of Cash Flows. The loss on equity securities is the result of remeasurements of fair value of the equity securities held during this nine-month period.

At September 30, 2020, the Company held $16.6 million of subordinated debt in other banks, as compared to $4.1 million at December 31, 2019. The average yield on this portfolio was 5.62% at September 30, 2020 as compared to 5.98% at December 31, 2019.

Periodically, management reviews the entire municipal bond portfolio to assess credit quality. Each security held in this portfolio is assessed on attributes that have historically influenced default incidence in the municipal market, such as: sector, security, impairment filing, timeliness of disclosure, external credit assessment(s), credit spread, state, vintage, and underwriter. Municipal bonds compose 72% of the overall portfolio. While these investments have historically proven to have extremely low credit risk, the current economic environment may pose a threat to the cash flows of these governmental entities. The September 30, 2020 review shows portfolio credit quality to be strong with 99.5% of the portfolio having an assigned investment-grade rating or secured by an escrow of US government or agency securities. 78.7% of the portfolio is either pre-refunded or rated in the broad rating categories of AA or AAA. While not included in the assessment of the credit quality of portfolio holdings, 19.3% benefit from a bond insurance policy, which provides an additional layer of payment support for the securities. The portfolio's greatest sector exposure is to Local General Obligation (“GO”) bonds, one of the strongest municipal sectors, which accounts for 76.2% of portfolio par, or $58.2M of the portfolio. Securities representing 97 distinct issuers are spread across 24 states. The portfolio is well diversified, with the largest geographic exposures being Texas and Ohio at 15.7% and 10.0% of the portfolio, respectively. The average issuer exposure is approximately $0.8M.

Loans receivable. The loans receivable category consists primarily of single-family mortgage loans used to purchase or refinance personal residences located within the Company’s market area, commercial and industrial loans, home equity lines of credit, and commercial real estate loans used to finance properties that are used in the borrowers’ businesses, or to finance investor-owned rental properties, and, to a lesser extent, construction and consumer loans. The portfolio is well dispersed, geographically, with the five branches in the central Ohio market comprising 23.3% of the Company’s total loans. Net loans receivable increased $135.5 million, or 13.9%, to $1.11 billion as of September 30, 2020 from $977.5 million at December 31, 2019. Included in the total increase for loans receivable were increases in the commercial and industrial, CRE non-owner occupied, CRE owner occupied, and home equity lines of credit portfolios of $168.8 million, or 188.5%, $8.3 million, or 2.8%, $5.0 million, or 4.8%, and $3.0 million, or 2.7%, respectively. This increase is net of decreases in the consumer installment, construction and other, residential real estate, and CRE multifamily portfolios of $3.9 million, or 26.9%, $6.1 million, or 9.1%, $12.6 million, or 5.3%, and $22.4 million, or 36.1%, respectively. The increase in the commercial and industrial portfolio includes the PPP loans issued as of September 30, 2020 of $143.8 million.

The Company’s Mortgage Banking operation generates loans for sale to the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Loans held for sale on September 30, 2020 totaled $10.5 million, an increase of $9.2 million, or 757.1%, from December 31, 2019. This increase is the result of increased activity due to the low rate environment. The Company recorded proceeds from the sale of $36.0 million of these loans for $1.2 million in gains on sale of loans as of September 30, 2020 on the Company’s Consolidated Statement of Cash Flows.

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. At September 30, 2020 non-owner-occupied commercial real estate loans (including construction, land and land development loans) represent 296.1% of total risk-based capital. Construction, land and land development loans represent 41.6% of total risk-based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, and strong underwriting criteria with respect to its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital, and may adversely affect shareholder returns. The Company has an extensive capital planning policy, which includes pro forma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well-capitalized ratios.

The Company monitors daily fluctuations in unused commitments as a means of identifying potentially material drawdowns on existing lines of credit. At September 30, 2020, unused line of credit commitments increased $8.4 million, or 4.0%, from December 31, 2019.

Allowance for Loan and Lease Losses and Asset Quality. The allowance for loan and lease losses increased $4.6 million, or 67.8%, to $11.4 million at September 30, 2020 from $6.8 million at December 31, 2019. For the three months ended September 30, 2020, net loan charge-offs totaled $2.9 million, or 1.01% of average loans, annualized, compared to net charge-offs of $383,000, or 0.15% of average loans, annualized, for the same period in 2019. To maintain the allowance for loan and lease losses, the Company recorded a provision for loan loss of $4.0 million in the three-month period ended September 30, 2020. For the nine months ended September 30, 2020, net loan charge-offs totaled $3.1 million, or 0.39% of average loans, annualized, compared to net charge-offs of $857,000, or 0.11% of average loans, annualized, for the same period in 2019. To maintain the allowance for loan and lease losses, the Company recorded a provision for loan loss of $7.7 million in the nine-month period ended September 30, 2020. The ratio of the allowance for loan and lease losses to nonperforming loans was 169.8% for the three-month period ended September 30, 2020, compared to 69.64% for the same period in the prior year. This is due to an increase in impaired loans and the allowance being adjusted to address the economic slowdown during the nine months ended September 30, 2020.

Management analyzes the adequacy of the allowance for loan and lease losses regularly through reviews of the performance of the loan portfolio considering economic conditions, changes in interest rates and the effect of such changes on real estate values, and changes in the amount and composition of the loan portfolio. The allowance for loan and lease losses is a significant estimate that is particularly susceptible to changes in the near term. Management’s analysis includes a review of all loans designated as impaired, historical loan loss experience, the estimated fair value of the underlying collateral, economic conditions, current interest rates, trends in the borrower’s industry and other factors that management believes warrant recognition in providing for an appropriate allowance for loan and lease losses. Future additions or reductions to the allowance for loan and lease losses will be dependent on these factors. Additionally, the Company uses an outside party to conduct an independent review of commercial and commercial real estate loans that is designed to validate management conclusions of risk ratings and the appropriateness of the allowance allocated to these loans. The Company uses the results of this review to help determine the effectiveness of policies and procedures and to assess the adequacy of the allowance for loan and lease losses allocated to these types of loans. Management believes the allowance for loan and lease losses is appropriately stated at September 30, 2020. Based on the variables involved and management’s judgments about uncertain outcomes, the determination of the allowance for loan and lease losses is considered a critical accounting policy.

G oodwill. The carrying value of goodwill was $15.1 million at September 30, 2020 and December 31, 2019. The Company considered the negative economic impact resulting from the COVID-19 shutdowns to be a triggering event necessitating a mid-cycle analysis for impairment. The Company performed a quantitative analysis of goodwill as of March 31, 2020 using multiple approaches. The primary methodology was the discounted cash flow approach, while also considering a market approach of comparing to multiples of similar public companies as well as market price with control premiums. The results from each of the primary approaches showed valuation of the reporting unit in excess of carrying value at March 31, 2020. A weighted average of the methodologies resulted in a fair value approximately 18% higher than its carrying value.

Each of the valuation methods used by the Company requires significant assumptions. Depending on the specific method, assumptions are made regarding growth rates, discount rates for cash flows, control premiums, and selected multiples. Changes to any of the assumptions could result in significantly different results. Based on the analysis performed as of March 31, 2020, the Company determined that goodwill was not impaired.

Accrued Interest Receivable and Other Assets. Accrued interest receivable and other assets increased $11.8 million, or 110.1%, to $22.5 million at September 30, 2020 from $10.7 million at December 31, 2019. Income receivable on loans has increased $2.5 million, largely as a result of the COVID-19 payment deferral program. Also included in this increase are increases in FHLB stock owned of $1.4 million, other real estate owned of $7.2 million, and an increase in the holding company franchise tax asset of $269,000. The increase in FHLB stock is due to the growth in the loan portfolio. Most of the increase in other real estate owned is the result of adding a $7.0 million property during the third quarter.

Nonperforming assets. Nonperforming assets include nonaccrual loans, loans 90 days or more past due, other real estate owned, and repossessed assets. Real estate owned is written down to fair value at its initial recording and continually monitored for changes in fair value. A loan is classified as nonaccrual when, in the opinion of management, there are serious doubts about collectability of interest and principal. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of principal and interest is doubtful. Payments received on nonaccrual loans are applied against principal until doubt about collectability ceases.

	Asset Quality History

(Dollar amounts in thousands)	September 30, 2020			June 30, 2020			March 31, 2020			December 31, 2019			September 30, 2019

Nonperforming loans	$	6,690		$	9,803		$	8,405		$	8,879		$	10,053
Other real estate owned		7,391			687

Nonperforming assets	$	14,081		$	10,490		$	8,861		$	9,034		$	10,142

Allowance for loan and lease losses		11,359			10,210			9,244			6,768			7,001

Ratios:
Nonperforming loans to total loans		0.59	%		0.88	%		0.84	%		0.90	%		1.01	%
Nonperforming assets to total assets		1.03	%		0.78	%		0.73	%		0.76	%		0.79	%
Allowance for loan and lease losses to total loans		1.01	%		0.92	%		0.93	%		0.69	%		0.70	%
Allowance for loan and lease losses to nonperforming loans		169.79	%		104.15	%		109.98	%		76.22	%		69.64	%

Nonperforming loans exclude TDRs that are performing in accordance with their terms over a prescribed period of time. TDRs are those loans which the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. The Company has 23 TDRs accruing interest with a balance of $2.6 million as of September 30, 2020. A TDR that yields a market interest rate at the time of restructuring and is in compliance with its modified terms is no longer reported as a TDR in calendar years after the year in which the restructuring took place. To be in compliance with its modified terms, a loan that is a TDR must not be in nonaccrual status and must be current or less than 30 days past due on its contractual principal and interest payments under the modified repayment terms. Nonperforming loans secured by real estate totaled $5.6 million as of September 30, 2020, a decrease of $2.2 million from $7.8 million at December 31, 2019.

A major factor in determining the appropriateness of the allowance for loan and lease losses is the type of collateral which secures the loans. Of the total nonperforming loans at September 30, 2020, 83.3% were secured by real estate. Although this does not insure against all losses, real estate typically provides for at least partial recovery, even in a distressed-sale and declining-value environment. The Company’s objective is to minimize the future loss exposure of the Company.

The allowance for loan and lease losses to total loans ratio increased from 0.69% as of December 31, 2019 to 1.01% as of September 30, 2020.

Deposits. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which are a significant source of funds, totaling $1.19 billion or 104.3% of the Company’s total average funding sources at September 30, 2020. Total deposits increased $173.1 million, or 17.0%, at September 30, 2020 from $1.02 billion at December 31, 2019. The total increase in deposits is the net of increases in noninterest-bearing demand deposits, interest-bearing demand deposits, savings, and money market deposits of $77.5 million, or 40.5%, $71.2 million, or 66.1%, $39.7 million, or 20.7%, and $24.1 million, or 15.0%, respectively, and a decrease in time deposits of $39.4 million, or 10.7%, at September 30, 2020, as some maturing certificates are not being renewed in the current low interest rate environment. Included in the net increase are deposits attributable to PPP loans. The Company uses certain non-core funding instruments in order to grow the balance sheet and maintain liquidity. These deposits, either from a broker or a listing service, were $62.2 million at September 30, 2020, as compared to $117.1 million at December 31, 2019.

Borrowed funds. The Company uses short-term and long-term borrowings as another source of funding for asset growth and liquidity needs. These borrowings primarily include advances from the Federal Home Loan Bank of Cincinnati (the “FHLB”), subordinated debt, short-term borrowings from other banks, and federal funds purchased. Short-term borrowings decreased $5.1 million to $0 as of September 30, 2020. Other borrowings increased $4.4 million, or 34.1%, to $17.1 million as of September 30, 2020 from $12.8 million as of December 31, 2019.

Accrued interest payable and other liabilities. Accrued interest payable and other liabilities increased $5.7 million, or 93.8%, to $11.7 million at September 30, 2020 from $6.0 million at December 31, 2019. This increase was the result of a recognized liability for the funds to be disbursed to settle the purchase of a large loan currently recorded as OREO.

Stockholders’ equity. Stockholders’ equity increased $4.3 million, or 3.1%, to $142.1 million at September 30, 2020 from $137.8 million at December 31, 2019. This increase was the result of increases in retained earnings of $3.0 million, AOCI of $2.2 million, and common stock of $254,000. This increase is net of an increase in treasury stock of $1.2 million, or 7.6%, to $16.9 million as of September 30, 2020, from $15.7 million as of December 31, 2019. The change in retained earnings is due to the year-to-date net income offset by dividends paid, the change in AOCI is due to fair value adjustments of available-for-sale securities, and the change in treasury stock is due to the Company repurchasing 58,200 of its outstanding shares during the nine months ended September 30, 2020.

The Company suspended its stock repurchase program as a result of the economic slowdown and the focus on capital preservation. The suspension will continue until economic clarity arises and the Company is certain share repurchases represent the best use of capital.

RESULTS OF OPERATIONS

General. Net income for the three months ended September 30, 2020, was $1.9 million, a $1.4 million, or 43.3%, decrease from the amount earned during the same period in 2019. Diluted earnings per share for the quarter decreased to $0.29, compared to $0.50 from the same period in 2019. Net income for the nine months ended September 30, 2020, was $5.9 million, a $3.7 million, or 38.8%, decrease from the amount earned during the same period in 2019. Diluted earnings per share for this nine-month period decreased to $0.92, compared to $1.47 from the same period in 2019.

The Company’s annualized return on average assets (“ROA”) and return on average equity (“ROE”) for the quarter were 0.54% and 5.04%, respectively, compared with 1.07% and 9.41% for the same period in 2019. The Company’s ROA and ROE for the nine-month period were 0.61% and 5.48%, respectively, compared with 1.06% and 9.52% for the same period in 2019.

Net interest income. Net interest income, the primary source of revenue for the Company, is determined by the interest rate spread, which is defined as the difference between income on earning assets and the cost of funds supporting those assets, and the relative amounts of interest-earning assets and interest-bearing liabilities. Management periodically adjusts the mix of assets and liabilities, as well as the rates earned or paid on those assets and liabilities, in order to manage and improve net interest income. The level of interest rates and changes in the amount and composition of interest-earning assets and liabilities affect the Company’s net interest income. Management’s goal is to maintain a balance between steady net interest income growth and the risks associated with interest rate fluctuations.

Net interest income for the three months ended September 30, 2020 totaled $11.4 million, an increase of 7.4% from that reported in the comparable period of 2019. The net interest margin was 3.57% for the third quarter of 2020, a decrease from the 3.72% reported for the same quarter of 2019. The decline in the net interest margin is attributable to a 62 basis point decrease in loans receivable yield along with a 204 basis point decrease in the yield on interest-earning deposits with other banks. This decline was partially offset by an increase in average loan balances of $123.6 million or 12.4%. Net interest income for the nine months ended September 30, 2020 totaled $32.1 million, an increase of 3.3% from that reported in the comparable period of 2019. The net interest margin was 3.56% for the nine-month period ended September 30, 2020, a decrease from the 3.69% reported for the comparable period of 2019. The decline in the net interest margin is attributable to a 45 basis point decrease in loans receivable yield along with a 170 basis point decrease in the yield on interest-earning deposits with other banks. This decline was partially offset by an increase in average loan balances of $65.7 million or 6.6%. The Company’s net interest margin may be subject to further decline as a result of the abrupt decrease in interest rates during the first quarter of 2020, the reduced interest income on floating-rate commercial loans, and the business disruptions caused by the COVID-19 pandemic. As the Company is in an asset-sensitive position, reductions in market interest rates have a negative impact on margin as the Company’s interest-earning assets reprice faster than its interest-bearing liabilities. Much of our asset-sensitivity is due to commercial and consumer loans that have variable interest rates. Both loan types have floor rates. The benefit of these floors will become more evident in future quarters if the Federal Reserve maintains short-term interest rates at the low level established in March 2020. For the three months ended September 30, 2020, the decrease in yield on interest-earning deposits with other banks led to a $225,000 decline in interest income. The $378,000 overall decrease in interest income was offset by a $1.2 million decrease in interest expense. For the nine months ended September 30, 2020, the decrease in yield on interest-earning deposits with other banks led to a $545,000 decline in interest income. The $1.4 million overall decrease in interest income was offset by a $2.5 million decrease in interest expense.

Interest and dividend income. Interest and dividend income decreased $378,000, or 2.7%, for the three months ended September 30, 2020, compared to the same period in the prior year. This is attributable to decreases in interest and fees on loans and interest-earning deposits in other institutions of $201,000 and $225,000, respectively. Interest and dividend income decreased $1.4 million, or 3.5%, for the nine months ended September 30, 2020, compared to the same period in the prior year. This is attributable to decreases in interest and fees on loans and interest-earning deposits in other institutions of $1.0 million and $545,000, respectively.

Interest and fees earned on loans receivable decreased $201,000, or 1.6%, for the three months ended September 30, 2020, compared to the same period in the prior year. This is attributable to a 62 basis point decrease in the average yield to 4.48%, partially offset by an increase in average loan balances of $123.6 million. Interest and fees earned on loans receivable decreased $1.0 million, or 2.7%, for the nine months ended September 30, 2020, compared to the same period in the prior year. This is attributable to a 45 basis point decrease in the average yield to 4.64%, partially offset by an increase in average loan balances of $65.7 million. The increase in the average loan balance is due in part to the issuance of PPP loans in 2020, the related gross income of which was $2.3 million as of September 30, 2020.

Net interest earned on securities increased by $48,000 for the three months ended September 30, 2020 when compared to the same period in the prior year. The average balance of investment securities increased $7.1 million, or 6.8%, while the 3.66% yield on the investment portfolio decreased by 5 basis points, from 3.71%, for the same period in the prior year. Net interest earned on securities increased by $163,000 for the nine months ended September 30, 2020 when compared to the same period in the prior year. The average balance of investment securities increased $8.1 million, or 8.1%, while the 3.68% yield on the investment portfolio decreased by 3 basis points, from 3.71%, for the same period in the prior year.

Interest expense. Interest expense decreased $1.2 million, or 35.0%, for the three months ended September 30, 2020, compared to the same period in the prior year. This decrease is attributable to a decrease in the average balance of certificates of deposits of $44.4 million, or 11.3%, and is further attributable to decreases of 295, 229, 73, and 48 basis points in short-term borrowings, other borrowings, money market deposits, and savings deposits cost. This decrease was partially offset by an increase in the average balance of short-term borrowings of $14.6 million. Interest expense decreased $2.5 million, or 24.6%, for the nine months ended September 30, 2020, compared to the same period in the prior year. The decrease is attributable to a decrease in the average balance of certificates of deposit of $10.5 million, or 2.9%. This decrease is further attributable to decreases in costs of 213, 47, 44, and 27 basis points in short-term borrowings, money market deposits, savings deposits, and certificates of deposits costs. This decrease was partially offset by an increase in the average balance of short-term borrowings of $12.2 million, or 67.9%.

The decreases in costs were primarily due to decreasing interest rates on all deposit products in response to the unprecedented decrease in the targeted federal funds rate in March 2020. Also, as a result of the reductions in the targeted federal funds interest rate, as well as the impact of the COVID-19 pandemic, we expect that our net interest income and net interest margin could decrease in future periods.

Provision for loan losses. The provision for loan losses represents the charge to income necessary to adjust the allowance for loan and lease losses to an amount that represents management’s assessment of the estimated probable incurred credit losses inherent in the loan portfolio. Each quarter, management performs a review of estimated probable incurred credit losses in the loan portfolio. Based on this review, a provision for loan losses of $4.0 million was recorded for the quarter ended September 30, 2020, an increase of $3.9 million from the quarter ended September 30, 2019. A provision for loan losses of $7.7 million was recorded for the nine-month period ended September 30, 2020, an increase of $7.3 million from the same period in 2019. The Company remains confident in the conservative and disciplined approach to credit and risk management. However, the economic challenges caused by the COVID-19 crisis has an immediate impact on credit quality.

At September 30, 2020, we considered the effect of the economic shutdown to combat COVID-19 on our borrowers and local economy. Although stimulus and mitigation efforts have thus far reduced the impact, we believe a 30-40 basis point increase to the economic qualitative factors was warranted. The increased provision is largely the result of the resolution of an isolated commercial real estate loan along with increases to the current economic condition’s qualitative factors. The provision attributable to the commercial real estate loan resolution is $2.7 million. The impact of the factor changes for the nine months ended September 30, 2020 is (in thousands):

Commercial Real Estate:
Owner Occupied	$	283
Non-Owner Occupied		1,091
Multifamily		100
Residential Real Estate		648
Commercial and Industrial		918
Home Equity Lines of Credit		343
Construction and Other		222
Consumer Installment		8
Total	$	3,613

Nonperforming loans were $6.7 million, or 0.59%, of total loans at September 30, 2020 compared with $10.1 million, or 1.01%, at September 30, 2019. For the three months ended September 30, 2020, net loan charge-offs totaled $2.9 million, or 1.01% of average loans, compared to net charge-offs of $383,000, or 0.15% of average loans, for the third quarter of 2019. For the nine months ended September 30, 2020, net loan charge-offs totaled $3.1 million, or 0.39% of average loans, compared to net charge-offs of $857,000, or 0.11% of average loans, for the same period in 2019.

Noninterest income. Noninterest income increased $706,000, or 63.9%, for the three months ended September 30, 2020 over the comparable 2019 period. This increase was the result of increases in gains on sale of loans and service charges on deposit accounts of $532,000, or 415.6%, and $120,000, or 21.0%, respectively. The increase in gains on sale of loans is due to an increase in refinancing of mortgages due to a decrease in rates. The increase in service charges on deposit accounts is due to increased charges incurred including cash management fees. Noninterest income increased $844,000, or 23.9%, during the nine months ended September 30, 2020 over the comparable 2019 period. This increase was the result of increases in gains on sale of loans and service charges on deposit accounts of $870,000, or 305.3%, and $201,000, or 12.5%, respectively. This increase was partially offset by decreases in investment securities gains on sale, net, and gains on equity securities (Note 7) of $194,000, and $169,000, respectively. The increase in gains on sale of loans is due to an increase in refinancing of mortgages due to decreased rates and more saleable loans being sold during this time period. The increase in service charges on deposit accounts is due to increased charges incurred including cash management fees. The decrease in investment securities gains on sale is due to no available-for-sale securities being sold during the third quarter of 2020.

Noninterest expense. Noninterest expense of $7.0 million for the third quarter 2020 was 8.5%, or $651,000, lower than the third quarter of 2019. Federal deposit insurance expense and equipment expense increased $123,000, and $119,000, or 48.8%, respectively. These increases were offset by a decrease in salaries and employee benefits of $675,000, or 15.8%. Federal deposit insurance expense increased due to an increase in premiums, and the increase in equipment expense is due an increase in depreciation expense on fixed assets. The decrease in salary expense is due to a decrease in profit sharing expense recorded as well as an increase in the deferred costs related to PPP loans. Noninterest expense of $22.0 million for the nine-month period ended September 30, 2020 was 3.1%, or $692,000, lower than the same period in 2019. Data processing costs and equipment expense increased $439,000, or 27.5%, and $173,000, or 22.5%, respectively. These increases were offset by a decrease in salaries and employee benefits of $1.3 million, or 10.2%. The increase in data processing costs is due to new and increased costs of processing agreements, and the increase in equipment expense is due to an increase in depreciation expense on fixed assets. The decrease in salary expense is due to the valuation adjustment for share-based compensation liability (see Note 3), a decrease in profit sharing expense recorded, and an increase in the deferred costs related to PPP loans.

Provision for income taxes. The Company recognized $295,000 in income tax expense, which reflected an effective tax rate of 13.7% for the three months ended September 30, 2020, as compared to $661,000 with an effective tax rate of 16.8% for the comparable 2019 period. The Company recognized $934,000 in income tax expense, which reflected an effective tax rate of 13.7% for the nine months ended September 30, 2020, as compared to $2.0 million with an effective tax rate of 17.0% for the comparable 2019 period. The decrease in the effective tax rate is due to the reduction of net income.

Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resultant average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resultant average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average balances are calculated using monthly averages and the average loan balances include nonaccrual loans and exclude the allowance for loan and lease losses, and interest income includes accretion of net deferred loan fees. Yields on tax-exempt securities and loans (tax exempt for federal income tax purposes) are shown on a fully tax-equivalent basis utilizing a federal tax rate of 21%. Yields and rates have been calculated on an annualized basis utilizing monthly interest amounts.

	For the Three Months Ended September 30,
	2020							2019

	Average				Average			Average				Average
(Dollars in thousands)	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost
Interest-earning assets:
Loans receivable ⁽³⁾	$	1,121,763	$	12,603		4.48	%	$	998,183	$	12,804		5.10	%
Investment securities ⁽³⁾		111,994		867		3.66	%		104,878		819		3.71	%
Interest-earning deposits with other banks ⁽⁴⁾		53,826		37		0.27	%		44,925		262		2.31	%
Total interest-earning assets		1,287,583		13,507		4.23	%		1,147,986		13,885		4.86	%
Noninterest-earning assets		66,836							60,261
Total assets	$	1,354,419						$	1,208,247
Interest-bearing liabilities:
Interest-bearing demand deposits	$	149,048	$	120		0.32	%	$	104,212	$	103		0.39	%
Money market deposits		176,136		312		0.70	%		157,691		568		1.43	%
Savings deposits		223,507		113		0.20	%		196,187		337		0.68	%
Certificates of deposit		349,981		1,561		1.77	%		394,381		2,165		2.18	%
Short-term borrowings		19,740		14		0.28	%		5,156		42		3.23	%
Other borrowings		17,130		28		0.65	%		12,397		92		2.94	%
Total interest-bearing liabilities		935,542		2,148		0.91	%		870,024		3,307		1.51	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		270,868							197,015
Other liabilities		1,756							3,365
Stockholders' equity		146,253							137,843
Total liabilities and stockholders' equity	$	1,354,419						$	1,208,247
Net interest income			$	11,359						$	10,578
Interest rate spread ⁽¹⁾						3.32	%						3.35	%
Net interest margin ⁽²⁾						3.57	%						3.72	%
Ratio of average interest-earning assets to average interest-bearing liabilities						137.63	%						131.95	%

(1)	Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(2)	Net interest margin represents net interest income as a percentage of average interest-earning assets.
(3)	Tax-equivalent adjustments to calculate the yield on tax-exempt securities and loans were $186 and $185 for the three months ended September 30, 2020 and 2019, respectively.
(4)	Includes dividends received on restricted stock.

Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense, between the three-month periods ended September 30, 2020 and 2019, in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Company’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior period rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances.

	2020 versus 2019

	Increase (decrease) due to
(Dollars in thousands)	Volume			Rate			Total

Interest-earning assets:
Loans receivable	$	1,584		$	(1,785	)	$	(201	)
Investment securities		66			(18	)		48
Interest-earning deposits with other banks		52			(277	)		(225	)
Total interest-earning assets		1,702			(2,080	)		(378	)


Interest-bearing liabilities:
Interest-bearing demand deposits		44			(27	)		17
Money market deposits		66			(322	)		(256	)
Savings deposits		47			(271	)		(224	)
Certificates of deposit		(243	)		(361	)		(604	)
Short-term borrowings		118			(146	)		(28	)
Other borrowings		35			(99	)		(64	)
Total interest-bearing liabilities		67			(1,226	)		(1,159	)


Net interest income	$	1,635		$	(854	)	$	781

	For the Nine Months Ended September 30,
	2020							2019

	Average				Average			Average				Average
(Dollars in thousands)	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost
Interest-earning assets:
Loans receivable ⁽³⁾	$	1,065,964	$	36,962		4.64	%	$	1,000,291	$	37,998		5.09	%
Investment securities ⁽³⁾		108,551		2,493		3.68	%		100,461		2,330		3.71	%
Interest-earning deposits with other banks ⁽⁴⁾		51,361		216		0.56	%		44,985		761		2.26	%
Total interest-earning assets		1,225,876		39,671		4.38	%		1,145,737		41,089		4.86	%
Noninterest-earning assets		64,938							60,695
Total assets	$	1,290,814						$	1,206,432
Interest-bearing liabilities:
Interest-bearing demand deposits	$	130,886		349		0.36	%	$	100,822	$	263		0.35	%
Money market deposits		166,193		1,246		1.00	%		170,544		1,880		1.47	%
Savings deposits		201,871		443		0.29	%		199,829		1,090		0.73	%
Certificates of deposit		358,048		5,269		1.97	%		368,540		6,162		2.24	%
Short-term borrowings		30,174		81		0.36	%		17,967		334		2.49	%
Other borrowings		15,149		166		1.46	%		13,114		283		2.89	%
Total interest-bearing liabilities		902,321		7,554		1.12	%		870,816		10,012		1.54	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		242,951							196,871
Other liabilities		2,593							4,369
Stockholders' equity		142,949							134,376
Total liabilities and stockholders' equity	$	1,290,814						$	1,206,432
Net interest income			$	32,117						$	31,077
Interest rate spread ⁽¹⁾						3.26	%						3.32	%
Net interest margin ⁽²⁾						3.56	%						3.69	%
Ratio of average interest-earning assets to average interest-bearing liabilities						135.86	%						131.57	%

(1)	Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(2)	Net interest margin represents net interest income as a percentage of average interest-earning assets.

(3)	Tax-equivalent adjustments to calculate the yield on tax-exempt securities and loans were $565 and $523 for the nine months ended September 30, 2020 and 2019, respectively.

(4)	Includes dividends received on restricted stock.

Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense, between the nine-month periods ended September 30, 2020 and 2019, in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Company’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior period rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances.

	2020 versus 2019

	Increase (decrease) due to
(Dollars in thousands)	Volume			Rate			Total

Interest-earning assets:
Loans receivable	$	2,503		$	(3,539	)	$	(1,036	)
Investment securities		225			(62	)		163
Interest-earning deposits with other banks		108			(653	)		(545	)
Total interest-earning assets		2,836			(4,254	)		(1,418	)


Interest-bearing liabilities:
Interest-bearing demand deposits		79			7			86
Money market deposits		(48	)		(586	)		(634	)
Savings deposits		11			(658	)		(647	)
Certificates of deposit		(176	)		(717	)		(893	)
Short-term borrowings		228			(481	)		(253	)
Other borrowings		44			(161	)		(117	)
Total interest-bearing liabilities		138			(2,596	)		(2,458	)


Net interest income	$	2,698		$	(1,658	)	$	1,040

LIQUIDITY

Management's objective in managing liquidity is maintaining the ability to continue meeting the cash flow needs of banking customers, such as borrowings or deposit withdrawals, as well as the Company’s own financial commitments. The principal sources of liquidity are net income, loan payments, maturing and principal reductions on securities and sales of securities available for sale, federal funds sold and cash and deposits with banks. The Company offers a line of retail deposit products created to more closely align with customer expectations while expanding the Company’s core funding base. Along with its liquid assets, the Company has additional sources of liquidity available to ensure that adequate funds are available as needed. These include, but are not limited to, the purchase of federal funds, the ability to borrow funds under line of credit agreements with correspondent banks and a borrowing agreement with the FHLB, and the adjustment of interest rates to obtain depositors. Management believes the Company has the capital adequacy, profitability and reputation to meet the current and projected needs of its customers.

At September 30, 2020, additional borrowing capacity at the FHLB was $403.8 million, as compared to $273.4 million at December 31, 2020. This increase was the result of collateralizing additional assets. For the nine months ended September 30, 2020, wholesale funding decreased $54.9 million. The Company also has the option of borrowing from the Federal Reserve discount window with any assets not currently pledged elsewhere. Management believes that the combination of high levels of potentially liquid assets, cash flows from operations, and additional borrowing capacity provided Middlefield Bank with strong liquidity as of September 30, 2020. Management plans to continually monitor liquidity in future periods to look for signs of stress resulting from the COVID-19 pandemic.

For the nine months ended September 30, 2020, the adjustments to reconcile net income to net cash from operating activities consisted mainly of depreciation and amortization of premises and equipment and software, the provision for loan losses, net amortization of securities, earnings on bank-owned life insurance, accretion of net deferred loan fees, and net changes in other assets and liabilities. For a more detailed illustration of sources and uses of cash, refer to the Condensed Consolidated Statements of Cash Flows.

INFLATION

Substantially all of the Company's assets and liabilities relate to banking activities and are monetary in nature. The consolidated financial statements and related financial data are presented in accordance with GAAP. GAAP currently requires the Company to measure the financial position and results of operations in terms of historical dollars, with the exception of securities available for sale, impaired loans and other real estate loans that are measured at fair value. Changes in the value of money due to rising inflation can cause purchasing power loss.

Management's opinion is that movements in interest rates affect the financial condition and results of operations to a greater degree than changes in the rate of inflation. It should be noted that interest rates and inflation do affect each other, but do not always move in correlation with each other. The Company's ability to match the interest sensitivity of its financial assets to the interest sensitivity of its liabilities in its asset/liability management may tend to minimize the effect of changes in interest rates on the Company's performance.

REGULATORY MATTERS

The Company is subject to the regulatory requirements of the Federal Reserve System as a bank holding company. The bank subsidiary is subject to regulations of the Federal Deposit Insurance Corporation (“FDIC”) and the Ohio Division of Financial Institutions.

The Federal Reserve Board and the FDIC have extensive authority to prevent and to remedy unsafe and unsound practices and violations of applicable laws and regulations by institutions and holding companies. The agencies may assess civil money penalties, issue cease-and-desist or removal orders, seek injunctions, and publicly disclose those actions. In addition, the Ohio Division of Financial Institutions possesses enforcement powers to address violations of Ohio banking law by Ohio-chartered banks.

REGULATORY CAPITAL REQUIREMENTS

Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank and thrift holding companies. The net unrealized gain or loss on available-for-sale securities is generally not included in computing regulatory capital. In order to avoid limitations on capital distributions, including dividend payments, Middlefield Bank and the Company must each hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The implementation of the capital ratio buffer began January 1, 2016 at the 0.625% level and has been fully phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1, 2019). Within the tabular presentation that follows is the adequately capitalized ratio plus capital conservation buffer that includes the fully phased-in 2.50% buffer.

Middlefield Bank and the Company met each of the well-capitalized ratio guidelines at September 30, 2020. The following table indicates the capital ratios for Middlefield Bank and the Company at September 30, 2020 and December 31, 2019.

	As of September 30, 2020
				Tier 1 Risk			Common			Total Risk
	Leverage			Based			Equity Tier 1			Based
The Middlefield Banking Company		9.51	%		10.91	%		10.91	%		11.89	%
Middlefield Banc Corp.		10.28	%		11.15	%		10.46	%		12.13	%
Adequately capitalized ratio		4.00	%		6.00	%		4.50	%		8.00	%
Adequately capitalized ratio plus fully phased-in capital conservation buffer		4.00	%		8.50	%		7.00	%		10.50	%
Well-capitalized ratio (Bank only)		5.00	%		8.00	%		6.50	%		10.00	%

	As of December 31, 2019
				Tier 1 Risk			Common			Total Risk
	Leverage			Based			Equity Tier 1			Based
The Middlefield Banking Company		10.35	%		12.12	%		12.12	%		12.79	%
Middlefield Banc Corp.		10.23	%		12.56	%		11.77	%		13.23	%
Adequately capitalized ratio		4.00	%		6.00	%		4.50	%		8.00	%
Adequately capitalized ratio plus fully phased-in capital conservation buffer		4.00	%		8.50	%		7.00	%		10.50	%
Well-capitalized ratio (Bank only)		5.00	%		8.00	%		6.50	%		10.00	%

While we believe that Middlefield Bank is well prepared to weather the COVID-19 global pandemic, Middlefield Bank’s regulatory capital ratios could be adversely affected by credit losses and other adverse consequences associated with the pandemic.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

ASSET AND LIABILITY MANAGEMENT

The primary objective of the Company’s asset and liability management function is to maximize the Company’s net interest income while simultaneously maintaining an acceptable level of interest rate risk given the Company’s operating environment, capital and liquidity requirements, performance objectives and overall business focus. The principal determinant of the exposure of the Company’s earnings to interest rate risk is the timing difference between the re-pricing or maturity of interest-earning assets and the re-pricing or maturity of interest-bearing liabilities. The Company’s asset and liability management policies are designed to decrease interest rate sensitivity primarily by shortening the maturities of interest-earning assets while at the same time extending the maturities of interest-bearing liabilities. The Board of Directors of the Company continues to believe in a strong asset/liability management process in order to insulate the Company from material and prolonged increases in interest rates.

The Company’s Board of Directors has established an Asset and Liability Management Committee consisting of outside directors and senior management. This committee, which meets quarterly, generally monitors various asset and liability management policies and strategies.

Interest Rate Sensitivity Simulation Analysis

The Company engages an external consultant to facilitate income simulation modeling on a quarterly basis. This modeling measures interest rate risk and sensitivity. The Asset and Liability Management Committee of the Company believes the various rate scenarios of the simulation modeling enable the Company to more accurately evaluate and manage the exposure of interest rate fluctuations on net interest income, the yield curve, various loan and mortgage-backed security prepayments, and deposit decay assumptions.

Earnings simulation modeling and assumptions about the timing and volatility of cash flows are critical in net portfolio equity valuation analysis. Particularly important are the assumptions driving mortgage prepayments and expected attrition of the core deposit portfolios. These assumptions are based on the Company’s historical experience and industry standards and are applied consistently across all rate risk measures.

The Company has established the following guidelines for assessing interest rate risk:

Net interest income simulation (“NII”) - Projected net interest income over the next twelve months will not be reduced by more than 10% given a gradual shift (i.e., over 12 months) in interest rates of up to 200 basis points (+ or -) and assuming no balance sheet growth.

Portfolio equity simulation - Portfolio equity is the net present value of the Company’s existing assets and liabilities. The Company uses an Economic Value of Equity (“EVE”) analysis which shows the estimated changes in portfolio equity taking certain long-term shock rates into consideration. Given a 200 basis point immediate and permanent increase in market interest rates, portfolio equity may not correspondingly decrease or increase by more than 20% of stockholders’ equity. Given a 100 basis point immediate and permanent decrease in market interest rates, portfolio equity may not correspondingly decrease or increase by more than 10% of stockholders’ equity.

The following table presents the simulated impact of a 200 basis point upward or 100 basis point downward shift of market interest rates on net interest income, and the change in portfolio equity. This analysis was done assuming the interest-earning asset and interest-bearing liability levels at September 30, 2020 and December 31, 2019 remained constant. The impact of the market rate movements was developed by simulating the effects of rates changing gradually over a one-year period from the September 30, 2020 and December 31, 2019 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 September 30, 2020 and December 31, 2019 for portfolio equity:

	September 30, 2020						December 31, 2019
Change in Rates	% Change in NII			% Change in EVE			% Change in NII			% Change in EVE
+200bp		(1.20	)%		7.70	%		0.20	%		6.20	%
-100bp		(0.90	)%		(18.40	)%		(0.60	)%		(9.40	)%

CRITICAL ACCOUNTING ESTIMATES

The Company’s critical accounting estimates involving the more significant judgments and assumptions used in the preparation of the consolidated financial statements as of September 30, 2020, have remained unchanged from December 31, 2019.

Item 4. Controls and Procedures

Controls and Procedures Disclosure

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in internal control or in other factors that could significantly affect the Company’s internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 2), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course of performing their assigned functions.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

From time to time, the Company and MBC may be involved in litigation relating to claims arising out of their normal course of business. Currently, the Company and MBC are not involved in any legal proceedings the outcome of which, in management’s opinion, would be material to their financial condition or results of operations.

Item 1a.

Risk Factors

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material updates and additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

The economic impact of the novel COVID-19 outbreak could adversely affect our financial condition and results of operations.

In December 2019, a novel coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, more than 32 million people have filed claims for unemployment. In response to the COVID-19 outbreak, the Federal Reserve Board has reduced the benchmark federal funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies have encouraged lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies encouraged financial institutions to prudently work with affected borrowers and issued guidance providing relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

●

demand for our products and services may decline, making it difficult to increase our assets and income;

●

if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, nonperforming assets, and foreclosures may increase, resulting in increased loan charge-offs and additions to loan loss reserves and reduced income;

●

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

●

our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

●

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

●

as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

●

a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;

●

we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and

●

Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs for bank failures.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.

Defaults by the Company on its Senior Securities

None

Item 4.

Mine Safety Disclosures

N/A

Item 5.

Other information

None

Item 6.

Exhibits

Exhibit list for Middlefield Banc Corp.’s Form 10-Q Qu arterly Report for the Period Ended September 30 , 2020

Exhibit Number	Description	Location

3.1	Second Amended and Restated Articles of Incorporation of Middlefield Banc Corp., as amended	Incorporated by reference to Exhibit 3.1 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2005, filed on March 29, 2006

3.2	Regulations of Middlefield Banc Corp.	Incorporated by reference to Exhibit 3.2 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001

4	Specimen stock certificate	Incorporated by reference to Exhibit 4 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001

4.1	Amended and Restated Trust Agreement, dated as of December 21, 2006, between Middlefield Banc Corp., as Depositor, Wilmington Trust Company, as Property trustee, Wilmington Trust Company, as Delaware Trustee, and Administrative Trustees	Incorporated by reference to Exhibit 4.1 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006

4.2	Junior Subordinated Indenture, dated as of December 21, 2006, between Middlefield Banc Corp. and Wilmington Trust Company	Incorporated by reference to Exhibit 4.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006

4.3	Guarantee Agreement, dated as of December 21, 2006, between Middlefield Banc Corp. and Wilmington Trust Company	Incorporated by reference to Exhibit 4.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006

10.1.0*	2017 Omnibus Equity Plan	Incorporated by reference to Middlefield Banc Corp.’s definitive proxy statement for the 2017 Annual Meeting of Shareholders, Appendix A, filed on April 4, 2017

10.1.1*	2007 Omnibus Equity Plan	Incorporated by reference to Middlefield Banc Corp.’s definitive proxy statement for the 2008 Annual Meeting of Shareholders, Appendix A, filed on April 7, 2008

10.2*	Change in Control Agreement between Middlefield Banc Corp. and Thomas G. Caldwell	Incorporated by reference to Exhibit 10.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019

10.3*	Change in Control Agreement between Middlefield Banc Corp. and James R. Heslop, II	Incorporated by reference to Exhibit 10.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019

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*	Change in Control Agreement between Middlefield Banc Corp. and Charles O. Moore	Incorporated by reference to Exhibit 10.4.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019

10.4.3*	Change in Control Agreement between Middlefield Banc Corp. and Donald L. Stacy	Incorporated by reference to Exhibit 10.4.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019

10.4.4*	Severance Agreement between Middlefield Banc Corp. and Alfred F. Thompson, Jr., dated January 7, 2008	Incorporated by reference to Exhibit 10.4.4 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

10.4.5*	Change in Control Agreement between Middlefield Banc Corp. and Michael L. Allen	Incorporated by reference to Exhibit 10.4.5 of Middlefield Banc Corp.’s Form 10-Q Current Report filed on November 5, 2019

10.4.6*	Change in Control Agreement between Middlefield Banc Corp. and John D. Lane	Incorporated by reference to Exhibit 10.4.6 of Middlefield Banc Corp.’s Form 10-Q Current Report filed on November 5, 2019

10.5	[reserved]

10.6*	Amended Director Retirement Agreement with Richard T. Coyne	Incorporated by reference to Exhibit 10.6 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

10.7*	Amended Director Retirement Agreement with Frances H. Frank	Incorporated by reference to Exhibit 10.7 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

10.8	[reserved]

10.9	[reserved]

10.1	[reserved]

10.11*	Director Retirement Agreement with Martin S. Paul	Incorporated by reference to Exhibit 10.11 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2001, filed on March 28, 2002

10.12	[reserved]

10.13	[reserved]

10.14*	Executive Survivor Income Agreement (aka DBO agreement [death benefit only]) with Donald L. Stacy	Incorporated by reference to Exhibit 10.14 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.15*	DBO Agreement with Jay P. Giles	Incorporated by reference to Exhibit 10.15 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.16*	DBO Agreement with Alfred F. Thompson, Jr.	Incorporated by reference to Exhibit 10.16 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.17*	DBO Agreement with Teresa M. Hetrick	Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.18 *	Executive Deferred Compensation Agreement with Jay P. Giles	Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2011, filed on March 20, 2012

10.19	[reserved]

10.20*	DBO Agreement with James R. Heslop, II	Incorporated by reference to Exhibit 10.20 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.21*	DBO Agreement with Thomas G. Caldwell	Incorporated by reference to Exhibit 10.21 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.22*	Annual Incentive Plan	Incorporated by reference to Exhibit 10.22 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019

10.22.1	[reserved]

10.23**	Amended Executive Deferred Compensation Agreement with Thomas G. Caldwell	Incorporated by reference to Exhibit 10.23 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020

10.24**	Amended Executive Deferred Compensation Agreement with James R. Heslop, II	Incorporated by reference to Exhibit 10.24 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020

10.25**	Amended Executive Deferred Compensation Agreement with Donald L. Stacy	Incorporated by reference to Exhibit 10.25 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020

10.26**	Executive Variable Benefit Deferred Compensation Agreement with James R. Heslop, II	Incorporated by reference to Exhibit 10.26 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020

10.27**	Executive Variable Benefit Deferred Compensation Agreement with Donald L. Stacy	Incorporated by reference to Exhibit 10.27 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020

10.28**	Executive Deferred Compensation Agreement with Charles O. Moore	Incorporated by reference to Exhibit 10.28 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2019, filed on March 4, 2020

10.29*	Form of conditional stock award under the 2007 Omnibus Equity Plan	Incorporated by reference to Exhibit 10.29 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 4, 2016

10.29.1	Form of conditional stock award under the 2017 Omnibus Equity Plan	Incorporated by reference to Exhibit 10.29 of Middlefield Banc Corp.’s Form 8-K Current Report filed on July 24, 2017

10.30**	Executive Deferred Compensation Agreement with Michael L. Allen	Incorporated by reference to Exhibit 10.30 of Middlefield Banc Corp.’s Form 10-Q Current Report filed on May 7, 2019

10.31**	Executive Deferred Compensation Agreement with John D. Lane	Incorporated by reference to Exhibit 10.31 of Middlefield Banc Corp.’s Form 10-Q Current Report filed on May 7, 2019

31.1	Rule 13a-14(a) certification of Chief Executive Officer	filed herewith

31.2	Rule 13a-14(a) certification of Chief Financial Officer	filed herewith

32	Rule 13a-14(b) certification	filed herewith

99.1	Form of Indemnification Agreement with directors of Middlefield Banc Corp. and with executive officers of Middlefield Banc Corp. and The Middlefield Banking Company	Incorporated by reference to Exhibit 99.1 of Middlefield Banc Corp.’s registration statement on Form 10, Amendment No. 1, filed on June 14, 2001

101.INS***	Inline XBRL Instance	furnished herewith

101.SCH***	Inline XBRL Taxonomy Extension Schema	furnished herewith

101.CAL***	Inline XBRL Taxonomy Extension Calculation	furnished herewith

101.DEF***	Inline XBRL Taxonomy Extension Definition	furnished herewith

101.LAB***	Inline XBRL Taxonomy Extension Labels	furnished herewith

101.PRE***	Inline XBRL Taxonomy Extension Presentation	furnished herewith

104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* management contract or compensatory plan or arrangement

** management contract or compensatory plan or arrangement, a schedule has been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be provided on a supplemental basis to the Securities and Exchange Commission upon request

*** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned and hereunto duly authorized.

		MIDDLEFIELD BANC CORP.



Date: November 3, 2020		By: /s/Thomas G. Caldwell
		Thomas G. Caldwell
		President and Chief Executive Officer



Date: November 3, 2020		By: /s/Donald L. Stacy
		Donald L. Stacy
		Principal Financial and Accounting Officer

TABLE OF CONTENTS

Part I Financial Information Item 1. Financial Statements (unaudited)Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations 34 Item 3. Quantitative and Qualitative Disclosures About Market Risk 48 Item 4. Controls and Procedures 49 Part II Other Information Item 1. Legal Proceedings 50 Item 1A. Risk Factors 50 Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds 51 Item 3. Defaults By The Company on Its Senior Securities 51 Item 4. Mine Safety Disclosures 51 Item 5. Other Information 51 Item 6. Exhibits and Reports on Form 8-k 51 Note 1 - Basis Of Presentation Note 2 Revenue Recognition Note 3 - Stock-based Compensation Note 4 - Earnings Per Share Note 5 - Fair Value Measurements Note 6 Accumulated Other Comprehensive Income Note 7 Investment and Equity Securities Note 8 - Loans and Related Allowance For Loan and Lease Losses Note 9 Stock Split Disclosure Note 10 Risks and Uncertainties Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 2. Management S Dis Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II - Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults By The Company on Its Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

Exhibits

MBCN 10-Q Quarter ended Sept. 30, 2020

Exhibits