Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis (MD&A) provide further detail to the financial condition and results of operations of the Company. The MD&A should be read in conjunction with the notes and financial statements presented in this report.
The information contained or incorporated by reference in this 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
General. The Company’s total assets ended the March 31, 2020 quarter at $1.21 billion, an increase of $31.5 million from December 31, 2019. For the same time period, cash and cash equivalents increased $20.2 million, or 57.6%, while net loans increased $11.3 million, or 1.2%. Total liabilities increased $36.6 million or 3.5%, while stockholders’ equity decreased $5.1 million, or 3.7%.
Cash and cash equivalents. Cash and cash equivalents increased $20.2 million, or 57.6%, to $55.3 million at March 31, 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. As of March 31, 2020, no material fluctuations in cash were noted.
Investment securities. Investment securities available for sale on March 31, 2020 totaled $103.0 million, a decrease of $2.8 million, or 2.6%, from $105.7 million at December 31, 2019. During this period, the Company recorded repayments, calls, and maturities of $2.8 million and a net unrealized holding loss through AOCI of $5.2 million. Securities purchased were $5.3 million, and there were no sales of securities for the three months ended March 31, 2020. The Company recorded $160,000 in losses on equity securities as of March 31, 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 three-month period. Included in the Company’s available-for-sale investment securities as of March 31, 2020 is an investment in the subordinated debt of an Ohio-based community bank in the amount of $4.0 million at an annual interest rate of 6%.
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 79% 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 March 31, 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. 80% 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, 17.6% benefit from a bond insurance policy, which provides an additional layer of payment support for the securities.
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 disbursed, geographically, with the five branches in the central Ohio market comprising 24.8% of the Company’s total loans. Net loans receivable increased $11.3 million, or 1.2%, to $988.8 million as of March 31, 2020 from $977.5 million at December 31, 2019. Included in the total increase for loans receivable were increases in the commercial and industrial, owner occupied, construction and other, and home equity lines of credit portfolios of $17.3 million, or 19.3%, $10.9 million, or 10.6%, $4.5 million, or 6.8%, and $2.7 million, or 2.4%, respectively. This increase is net of decreases in the residential real estate, consumer installment, non-owner occupied, and multifamily portfolios of $898,000, or 0.4%, $1.6 million, or 10.8%, $9.4 million, or 3.1%, and $9.8 million, or 15.7%, respectively.
The Company’s Mortgage Banking operation generates loans for sale to the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Loans held for sale on March 31, 2020 totaled $513,000, a decrease of $707,000, or 58.0%, from December 31, 2019. This decrease is the result of fewer saleable loans being held at quarter end. The Company recorded proceeds from the sale of $4.1 million of these loans for $114,000 in gains on sale of loans as of March 31, 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 March 31, 2020 non-owner-occupied commercial real estate loans (including construction, land and land development loans) represent 310.7% of total risk-based capital. Construction, land and land development loans represent 51.0% 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 proforma 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 March 31, 2020, unused line of credit commitments increased $3.2 million from December 31, 2019.
Allowance for Loan and Lease Losses and Asset Quality. The allowance for loan and lease losses increased $2.5 million, or 36.6%, to $9.2 million at March 31, 2020 from $6.8 million at December 31, 2019. For the three months ended March 31, 2020, net loan charge-offs totaled $264,000, or 0.11% of average loans, compared to net charge-offs of $462,000, or 0.19% of average loans, for the same period in 2019. To maintain the allowance for loan and lease losses, the Company recorded a provision for loan loss of $2.7 million in the three-month period ended March 31, 2020. The ratio of the allowance for loan and lease losses to nonperforming loans was 109.98% for the three-month period ended March 31, 2020, compared to 68.81% 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 at March 31, 2020. See additional discussions on the provision for loan losses section below.
Management analyzes the adequacy of the allowance for loan and lease losses regularly through reviews of the performance of the loan portfolio considering economic conditions, changes in interest rates and the effect of such changes on real estate values, and changes in the amount and composition of the loan portfolio. The allowance for loan and lease losses is a significant estimate that is particularly susceptible to changes in the near term. Management’s analysis includes a review of all loans designated as impaired, historical loan loss experience, the estimated fair value of the underlying collateral, economic conditions, current interest rates, trends in the borrower’s industry and other factors that management believes warrant recognition in providing for an appropriate allowance for loan and lease losses. Future additions or reductions to the allowance for loan and lease losses will be dependent on these factors. Additionally, the Company uses an outside party to conduct an independent review of commercial and commercial real estate loans that is designed to validate management conclusions of risk ratings and the appropriateness of the allowance allocated to these loans. The Company uses the results of this review to help determine the effectiveness of policies and procedures and to assess the adequacy of the allowance for loan and lease losses allocated to these types of loans. Management believes the allowance for loan and lease losses is appropriately stated at March 31, 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.
Goodwill. The Company considers the negative economic impact resulting from the COVID-19 shutdowns to be a triggering event necessitating a mid-cycle analysis for impairment. Based on the analysis performed as of March 31, 2020, the Company determined that goodwill was not impaired.
Nonperforming assets. Nonperforming assets include nonaccrual loans, loans 90 days or more past due, other real estate, and repossessed assets. Real estate owned is written down to fair value at its initial recording and continually monitored for changes in fair value. A loan is classified as nonaccrual when, in the opinion of management, there are serious doubts about collectability of interest and principal. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of principal and interest is doubtful. Payments received on nonaccrual loans are applied against principal until doubt about collectability ceases.
|
|
Asset Quality History
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands)
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
September 30, 2019
|
|
|
June 30, 2019
|
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans
|
|
$
|
8,405
|
|
|
$
|
8,879
|
|
|
$
|
10,053
|
|
|
$
|
10,729
|
|
|
$
|
10,472
|
|
Other real estate owned
|
|
|
456
|
|
|
|
155
|
|
|
|
89
|
|
|
|
89
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets
|
|
$
|
8,861
|
|
|
$
|
9,034
|
|
|
$
|
10,142
|
|
|
$
|
10,818
|
|
|
$
|
10,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan and lease losses
|
|
|
9,244
|
|
|
|
6,768
|
|
|
|
7,001
|
|
|
|
7,304
|
|
|
|
7,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans
|
|
|
0.84
|
%
|
|
|
0.90
|
%
|
|
|
1.01
|
%
|
|
|
1.07
|
%
|
|
|
1.04
|
%
|
Nonperforming assets to total assets
|
|
|
0.73
|
%
|
|
|
0.76
|
%
|
|
|
0.79
|
%
|
|
|
0.84
|
%
|
|
|
0.83
|
%
|
Allowance for loan and lease losses to total loans
|
|
|
0.93
|
%
|
|
|
0.69
|
%
|
|
|
0.70
|
%
|
|
|
0.73
|
%
|
|
|
0.72
|
%
|
Allowance for loan and lease losses to nonperforming loans
|
|
|
109.98
|
%
|
|
|
76.22
|
%
|
|
|
69.64
|
%
|
|
|
68.08
|
%
|
|
|
68.81
|
%
|
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 26 TDRs accruing interest with a balance of $2.9 million as of March 31, 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 $7.4 million as of March 31, 2020, a decrease of $451,000 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 March 31, 2020, 87.9% 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 0.93% as of March 31, 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 $1.00 billion or 95.4% of the Company’s total average funding sources at March 31, 2020. Total deposits decreased $17.1 million, or 1.7%, at March 31, 2020 from $1.02 billion at December 31, 2019. The total decrease in deposits is the net of increases in interest-bearing demand deposits, and noninterest-bearing demand deposits of $17.3 million, or 16.1%, and $15.0 million, or 7.8%, respectively, and decreases in money market deposits, savings, and time deposits of $4.3 million, or 2.7%, $16.5 million, or 8.6%, and $28.7 million, or 7.8%, respectively, at March 31, 2020. 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 $25.1 million at March 31, 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 FHLB advances, junior subordinated debt, short-term borrowings from other banks, and federal funds purchased. Short-term borrowings increased $54.9 million to $60.0 million as of March 31, 2020 as a result of a strategic shift to reprice funding at lower rates. Other borrowings decreased $88,000, or 0.7%, to $12.7 million as of March 31, 2020 from $12.8 million as of December 31, 2019.
Stockholders’ equity. Stockholders’ equity decreased $5.1 million, or 3.7%, to $132.7 million at March 31, 2020 from $137.8 million at December 31, 2019. This decrease was the result of decreases in AOCI of $4.1 million, dividends paid of $964,000, and an increase in treasury stock of $1.2 million, or 7.6% to $16.9 million as of March 31, 2020, from $15.7 million as of December 31, 2019. 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 three months ended March 31, 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 it is the best use of capital.
RESULTS OF OPERATIONS
General. Net income for the three months ended March 31, 2020, was $1.0 million, a $2.0 million, or 65.4%, decrease from the amount earned during the same period in 2019. Diluted earnings per share for the quarter decreased to $0.16, compared to $0.46 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 0.35% and 3.01%, respectively, compared with 1.01% and 9.36% 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 March 31, 2020 totaled $10.0 million, a decrease of 1.9% from that reported in the comparable period of 2019. The net interest margin was 3.63% for the first quarter of 2020, a decrease from the 3.69% reported for the same quarter of 2019. The decline in the net interest margin is attributable to a 12 basis point decrease in loans receivable yield combined with an average balance decline of $16.3 million in the same category. 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. Yields on interest-earning deposits with other banks decreased 86 basis points leading to a $107,000 decline in interest income. The $475,000 decrease in interest income was partially offset by a $278,000 decrease in interest expense.
Interest and dividend income. Interest and dividend income decreased $475,000, or 3.5%, for the three months ended March 31, 2020, compared to the same period in the prior year. This is mainly attributable to a decrease in interest and fees on loans of $410,000.
Interest and fees earned on loans receivable decreased $410,000, or 3.3%, for the three months ended March 31, 2020, compared to the same period in the prior year. This is attributable to a decrease in average loan balances of $16.3 million, accompanied by a 12 basis point decrease in the average yield to 4.95%.
Net interest earned on securities increased by $42,000 for the three months ended March 31, 2020 when compared to the same period in the prior year. The average balance of investment securities increased $8.4 million, or 8.6%, while the 3.62% yield on the investment portfolio decreased by 10 basis points, from 3.72%, for the same period in the prior year.
Interest expense. Interest expense decreased $278,000, or 8.5%, for the three months ended March 31, 2020, compared to the same period in the prior year. The decrease is attributable to decreases in the average balances of money market deposits and short-term borrowings of $36.2 million, or 18.7%, and $20.6 million, or 58.2%, respectively. It is further attributable to a 31 basis point decrease in savings cost. This decrease was partially offset by an increase in the average balances of certificates of deposits of $53.6 million, or 16.7%.
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 $2.7 million was recorded for the quarter ended March 31, 2020, an increase of $2.5 million from the quarter ended March 31, 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.
Macroeconomic trends have yet to fully capture the impact of the COVID-19 crisis, but underlying economic weaknesses existed on March 31, 2020. While management expects remaining 2020 provisions to be higher than historical levels, we do not anticipate provisions to be at the level seen in the first quarter.
At March 31, 2020, we considered the effect of the economic shutdown to combat COVID-19 on our borrowers and local economy. Although stimulus and mitigation efforts are expected to reduce the impact, we believe a 20 basis point downgrade to the economic qualitative factor was warranted. Most of the increased provision is the result of increases to the current economic condition’s qualitative factors. The impact of those increases for the three months ended March 31, 2020 is (in thousands):
Commercial real estate:
|
|
|
|
|
Owner occupied
|
|
$
|
197
|
|
Non-owner occupied
|
|
|
515
|
|
Multifamily
|
|
|
87
|
|
Residential real estate
|
|
|
453
|
|
Commercial and industrial
|
|
|
206
|
|
Home equity lines of credit
|
|
|
228
|
|
Construction and other
|
|
|
142
|
|
Consumer installment
|
|
|
8
|
|
Total
|
|
$
|
1,836
|
|
Nonperforming loans were $8.4 million, or 0.84%, of total loans at March 31, 2020 compared with $10.5 million, or 1.04%, at March 31, 2019. For the three months ended March 31, 2020, net loan charge-offs totaled $264,000, or 0.11% of average loans, compared to net charge-offs of $462,000, or 0.19% of average loans, for the first quarter of 2019.
Noninterest income. Noninterest income decreased $58,000, or 5.1%, for the three months ended March 31, 2020 over the comparable 2019 period. This decrease was the result of a loss on equity securities of $160,000 (see Note 7), which was partially offset by an increase in gains on sale of loans and in other income of $55,000, or 93.2%, and $58,000, or 14.4%, respectively. The increase in gains on sale of loans is due to an increase in saleable loans being sold during the quarter, and the increase in other income is due to an increase in recoveries on student loans.
Noninterest expense. Noninterest expense of $7.3 million for the first quarter 2020 was 3.3%, or $248,000, lower than the first quarter of 2019. Data processing costs and other expense increased $201,000, or 43.2%, and $196,000, or 22.5%, respectively. These increases were offset by a decrease in salaries and employee benefits of $600,000, or 14.5%. The increase in data processing costs is due to new and increased costs of processing agreements, and the increase in other expense is due to increases in miscellaneous loan expenses, sundry gains and losses, and no offsetting gains on sales of OREO properties. The decrease in salary expense is due to the valuation adjustment for share-based compensation liability (see Note 3), as well as a decrease in profit sharing expense recorded.
Provision for income taxes. The Company recognized $74,000 in income tax expense, which reflected an effective tax rate of 6.6% for the three months ended March 31, 2020, as compared to $611,000 with an effective tax rate of 16.9% for the comparable 2019 period.
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 March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Cost
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Cost
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable (3)
|
|
$
|
984,034
|
|
|
$
|
12,078
|
|
|
|
4.95
|
%
|
|
$
|
1,000,343
|
|
|
$
|
12,488
|
|
|
|
5.07
|
%
|
Investment securities (3)
|
|
|
105,894
|
|
|
|
786
|
|
|
|
3.62
|
%
|
|
|
97,484
|
|
|
|
744
|
|
|
|
3.72
|
%
|
Interest-earning deposits with other banks (4)
|
|
|
41,717
|
|
|
|
145
|
|
|
|
1.40
|
%
|
|
|
45,283
|
|
|
|
252
|
|
|
|
2.26
|
%
|
Total interest-earning assets
|
|
|
1,131,645
|
|
|
|
13,009
|
|
|
|
4.69
|
%
|
|
|
1,143,110
|
|
|
|
13,484
|
|
|
|
4.84
|
%
|
Noninterest-earning assets
|
|
|
65,003
|
|
|
|
|
|
|
|
|
|
|
|
60,576
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,196,648
|
|
|
|
|
|
|
|
|
|
|
$
|
1,203,686
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
$
|
113,691
|
|
|
$
|
119
|
|
|
|
0.42
|
%
|
|
$
|
96,402
|
|
|
$
|
72
|
|
|
|
0.30
|
%
|
Money market deposits
|
|
|
158,008
|
|
|
|
552
|
|
|
|
1.41
|
%
|
|
|
194,236
|
|
|
|
755
|
|
|
|
1.58
|
%
|
Savings deposits
|
|
|
183,137
|
|
|
|
226
|
|
|
|
0.50
|
%
|
|
|
207,848
|
|
|
|
417
|
|
|
|
0.81
|
%
|
Certificates of deposit
|
|
|
373,866
|
|
|
|
1,968
|
|
|
|
2.12
|
%
|
|
|
320,243
|
|
|
|
1,701
|
|
|
|
2.15
|
%
|
Short-term borrowings
|
|
|
14,808
|
|
|
|
35
|
|
|
|
0.95
|
%
|
|
|
35,390
|
|
|
|
213
|
|
|
|
2.44
|
%
|
Other borrowings
|
|
|
12,703
|
|
|
|
76
|
|
|
|
2.41
|
%
|
|
|
13,447
|
|
|
|
96
|
|
|
|
2.90
|
%
|
Total interest-bearing liabilities
|
|
|
856,213
|
|
|
|
2,976
|
|
|
|
1.40
|
%
|
|
|
867,566
|
|
|
|
3,254
|
|
|
|
1.52
|
%
|
Noninterest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
|
195,411
|
|
|
|
|
|
|
|
|
|
|
|
198,286
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
5,816
|
|
|
|
|
|
|
|
|
|
|
|
7,384
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
139,208
|
|
|
|
|
|
|
|
|
|
|
|
130,450
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
1,196,648
|
|
|
|
|
|
|
|
|
|
|
$
|
1,203,686
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
10,033
|
|
|
|
|
|
|
|
|
|
|
$
|
10,230
|
|
|
|
|
|
Interest rate spread (1)
|
|
|
|
|
|
|
|
|
|
|
3.29
|
%
|
|
|
|
|
|
|
|
|
|
|
3.32
|
%
|
Net interest margin (2)
|
|
|
|
|
|
|
|
|
|
|
3.63
|
%
|
|
|
|
|
|
|
|
|
|
|
3.69
|
%
|
Ratio of average interest-earning assets to average interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
132.17
|
%
|
|
|
|
|
|
|
|
|
|
|
131.76
|
%
|
(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 $189 and $170 for the three months ended March 31, 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 March 31, 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
|
|
$
|
(206
|
)
|
|
$
|
(204
|
)
|
|
$
|
(410
|
)
|
Investment securities
|
|
|
78
|
|
|
|
(36
|
)
|
|
|
42
|
|
Interest-earning deposits with other banks
|
|
|
(20
|
)
|
|
|
(87
|
)
|
|
|
(107
|
)
|
Total interest-earning assets
|
|
|
(148
|
)
|
|
|
(327
|
)
|
|
|
(475
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
|
13
|
|
|
|
34
|
|
|
|
47
|
|
Money market deposits
|
|
|
(142
|
)
|
|
|
(61
|
)
|
|
|
(203
|
)
|
Savings deposits
|
|
|
(50
|
)
|
|
|
(141
|
)
|
|
|
(191
|
)
|
Certificates of deposit
|
|
|
287
|
|
|
|
(20
|
)
|
|
|
267
|
|
Short-term borrowings
|
|
|
(125
|
)
|
|
|
(53
|
)
|
|
|
(178
|
)
|
Other borrowings
|
|
|
(5
|
)
|
|
|
(15
|
)
|
|
|
(20
|
)
|
Total interest-bearing liabilities
|
|
|
(22
|
)
|
|
|
(256
|
)
|
|
|
(278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
(126
|
)
|
|
$
|
(71
|
)
|
|
$
|
(197
|
)
|
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 Federal Home Loan Bank of Cincinnati, and the adjustment of interest rates to obtain depositors. Management believes the Company has the capital adequacy, profitability and reputation to meet the current and projected needs of its customers.
At March 31, 2020, additional borrowing capacity at the FHLB was $222.4 million, as compared to $273.4 million at December 31, 2020. This decrease was the result of shifting funding sources from wholesale to FHLB, as the former grew more expensive in the first quarter of the year. For the three months ended March 31, 2020, wholesale funding decreased $92.0 million. The Company has additional assets to collateralize with the FHLB if the need for increased capacity arises. 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 March 31, 2020. Management plans to continually monitor liquidity in future periods to look for signs of stress resulting from the COVID-19 pandemic.
For the three months ended March 31, 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 March 31, 2020. The following table indicates the capital ratios for Middlefield Bank and Company at March 31, 2020 and December 31, 2019.
|
|
As of March 31, 2020
|
|
|
|
Leverage
|
|
|
Tier 1 Risk Based
|
|
|
Common
Equity Tier 1
|
|
|
Total Risk
Based
|
|
The Middlefield Banking Company
|
|
|
10.53
|
%
|
|
|
12.18
|
%
|
|
|
12.18
|
%
|
|
|
13.09
|
%
|
Middlefield Banc Corp.
|
|
|
10.22
|
%
|
|
|
12.38
|
%
|
|
|
11.59
|
%
|
|
|
13.29
|
%
|
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
|
|
|
|
Leverage
|
|
|
Tier 1 Risk
Based
|
|
|
Common
Equity Tier 1
|
|
|
Total Risk
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.