MIDDLEFIELD BANC CORP - Quarter Report: 2010 March (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20552

FORM 10-Q

þ		QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

Middlefield Banc Corp.

Ohio		34-1585111
(State or other jurisdiction of incorporation		(IRS Employer Identification No.)
or organization)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Small reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

State the number of shares outstanding of each of the issuer’s classes of common equity as of the latest practicle date:

 

 

MIDDLEFIELD BANC CORP.

INDEX

		Page
		Number
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of March 31, 2010 and December 31, 2009			3
Consolidated Statement of Income (Unaudited) for the Three Months ended March 31, 2010 and 2009			4
Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the Three Months ended March 31, 2010			5
Consolidated Statement of Cash Flows (Unaudited) for the Three Months ended March 31, 2010 and 2009			6
Notes to Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures About Market Risk			24
Item 4. Controls and Procedures			25
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			26
Item 1A. Risk Factors			26
Item 2. Unregistered sales of equity securities and use of proceeds			26
Item 3. Default Upon Senior Securities			26
Item 4. Reserved			26
Item 5. Other Information			26
Item 6. Exhibits and Reports on Form 8-K			26
SIGNATURES			30
Exhibit 31.1
Exhibit 31.2
Exhibit 32
Exhibit 99

MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET

(Dollar amounts in thousands)

		(Unaudited)
		March 31,				December 31,
		2010				2009
ASSETS
Cash and due from banks		$	13,039			$	12,909
Federal funds sold			28,492				28,123
Interest-bearing deposits in other institutions			123				121
Cash and cash equivalents			41,654				41,153
Investment securities available for sale			164,852				136,711
Loans			359,651				353,597
Less allowance for loan losses			5,279				4,937
Net loans			354,372				348,660
Premises and equipment			8,408				8,394
Goodwill			4,559				4,559
Bank-owned life insurance			7,773				7,706
Accrued interest and other assets			12,399				11,475
TOTAL ASSETS		$	594,017			$	558,658
LIABILITIES
Deposits:
Noninterest-bearing demand		$	44,082			$	44,387
Interest-bearing demand			41,959				38,111
Money market			64,808				56,451
Savings			120,544				107,358
Time			250,885				240,799
Total deposits			522,278				487,106
Short-term borrowings			6,772				6,800
Other borrowings			25,374				25,865
Accrued interest and other liabilities			1,847				2,180
TOTAL LIABILITIES			556,271				521,951
STOCKHOLDERS’ EQUITY
Common stock, no par value; 10,000,000 shares authorized, 1,759,016 and 1,754,112 shares issued			28,035				27,919
Retained earnings			15,197				14,960
Accumulated other comprehensive income			1,248				562
Treasury stock, at cost; 189,530 shares in 2010 and 2009			(6,734	)			(6,734	)
TOTAL STOCKHOLDERS’ EQUITY			37,746				36,707
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	594,017			$	558,658

See accompanying notes to the unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF INCOME

(Unaudited)

(Dollar amounts in thousands, except per share data)

		Three Months Ended
		March 31,
		2010				2009
INTEREST INCOME
Interest and fees on loans		$	5,097			$	4,998
Interest-bearing deposits in other institutions			4				7
Federal funds sold			11				4
Investment securities:
Taxable interest			1,203				853
Tax-exempt interest			592				446
Dividends on FHLB stock			17				16
Total interest income			6,924				6,324
INTEREST EXPENSE
Deposits			2,485				2,716
Short-term borrowings			58				6
Other borrowings			190				257
Trust preferred securities			136				132
Total interest expense			2,869				3,111
NET INTEREST INCOME			4,055				3,213
Provision for loan losses			439				154
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			3,616				3,059
NONINTEREST INCOME
Service charges on deposit accounts			415				439
Investment securities gains, net			9				—
Earnings on bank-owned life insurance			67				69
Other income			118				116
Total noninterest income			609				624
NONINTEREST EXPENSE
Salaries and employee benefits			1,511				1,371
Occupancy expense			276				255
Equipment expense			198				123
Data processing costs			243				249
Ohio state franchise tax			136				123
Federal deposit insurance expense			202				172
Other expense			992				703
Total noninterest expense			3,558				2,996
Income before income taxes			667				687
Income taxes			22				84
NET INCOME		$	645			$	603
EARNINGS PER SHARE
Basic		$	0.41			$	0.39
Diluted			0.41				0.39
DIVIDENDS DECLARED PER SHARE		$	0.26			$	0.26

See accompanying notes to the unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollar amounts in thousands, except dividend per share amount)

										Accumulated
										Other								Total
		Common				Retained				Comprehensive				Treasury				Stockholders’				Comprehensive
		Stock				Earnings				Income				Stock				Equity				Income
Balance, December 31, 2009		$	27,919			$	14,960			$	562			$	(6,734	)		$	36,707
Net income							645												645			$	645
Other comprehensive income:
Unrealized gains on available for sale securities net of taxes of $353											686								686				686
Comprehensive income																						$	1,331
Dividend reinvestment and purchase plan			116																116
Cash dividends ($0.26 per share)							(408	)											(408	)
Balance, March 31, 2010		$	28,035			$	15,197			$	1,248			$	(6,734	)		$	37,746

See accompanying notes to the unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

(Dollar amounts in thousands)

		Three Months Ended
		March 31,
		2010				2009
OPERATING ACTIVITIES
Net income		$	645			$	603
Adjustments to reconcile net income to net cash used for operating activities:
Provision for loan losses			439				154
Depreciation and amortization			189				144
Amortization of premium and discount on investment securities			(59	)			(45	)
Amortization of deferred loan fees, net			(3	)			(7	)
Investment securities (gains) losses, net			(9	)			—
Earnings on bank-owned life insurance			(67	)			(69	)
Deferred income taxes			(227	)			274
Expense related to stock options			—				15
Loss on other real estate owned			44				—
Increase in accrued interest receivable			(681	)			(611	)
Increase (decrease) in accrued interest payable			26				(139	)
Decrease (increase) in prepaid federal deposit insurance			186				(4	)
Other, net			(941	)			(638	)
Net cash used for operating activities			(458	)			(323	)
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from repayments and maturities			6,986				3,935
Purchases			(37,913	)			(2,748	)
Proceeds from sale of securities			3,893				—
Increase in loans, net			(6,298	)			(5,421	)
Purchase of Federal Home Loan Bank stock			—				(14	)
Purchase of premises and equipment			(165	)			(28	)
Proceeds from the sale of other real estate owned			96				—
Net cash used for investing activities			(33,401	)			(4,276	)
FINANCING ACTIVITIES
Net increase in deposits			35,171				9,266
Decrease in short-term borrowings, net			(28	)			(354	)
Repayment of other borrowings			(491	)			(3,013	)
Proceeds from dividend reinvestment & purchase plan			116				112
Cash dividends			(408	)			(399	)
Net cash provided by financing activities			34,360				5,612
Increase in cash and cash equivalents			501				1,013
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			41,153				17,455
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	41,654			$	18,468
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings		$	2,843			$	3,250
Income taxes			400				150
Non-cash investing transactions:
Transfers from loans to other real estate owned		$	150			$	221

See accompanying notes to the 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 two bank subsidiaries The Middlefield Banking Company (“MB”) and Emerald Bank (“EB”) and a non-bank asset resolution subsidiary EMORECO, Inc. All significant inter-company items have been eliminated.

The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles and the instructions for Form 10-Q and Article 10 of Regulation S-X. In management’s opinion, the financial statements include all adjustments, consisting of normal recurring adjustments, that the Company considers necessary to fairly state the Company’s financial position and the results of operations and cash flows. The consolidated balance sheet at December 31, 2009, has been derived from the audited financial statements at that date but does not include all of the necessary informational disclosures and footnotes as required by U. S. generally accepted accounting principles. The accompanying financial statements should be read in conjunction with the financial statements and notes thereto included with Middlefield’s Form 10-K (File No. 000-32561). The results of Middlefield’s operations for any interim period are not necessarily indicative of the results of Middlefield’s operations for any other interim period or for a full fiscal year.

Recent Accounting Pronouncements

In December 2009, the FASB issued ASU 2009-16, Accounting for Transfer of Financial Assets. ASU 2009-16 provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. ASU 2009-16 is effective for annual periods beginning after November 15, 2009 and for interim periods within those fiscal years. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

In December 2009, the FASB issued ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. The objective of ASU 2009-17 is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. ASU 2009-17 is effective for annual periods beginning after November 15, 2009 and for interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.

In September 2009, the FASB issued new guidance impacting Topic 820. This creates a practical expedient to measure the fair value of an alternative investment that does not have a readily determinable fair value. This guidance also requires certain additional disclosures. This guidance is effective for interim and annual periods ending after December 15, 2009. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.

In October 2009, the FASB issued ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company is currently evaluating the impact the adoption of this standard will have on the Company’s financial position or results of operation.

In January 2010, the FASB issued ASU 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash — a consensus of the FASB Emerging Issues Task Force. ASU 2010-01 clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend. ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009 and should be applied on a retrospective basis. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.

In January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810): Accounting and reporting for Decreases in Ownership of a Subsidiary — a Scope Clarification. ASU 2010-02 amends Subtopic 810-10 to address implementation issues related to changes in ownership provisions including clarifying the scope of the decrease in ownership and additional disclosures. ASU 2010-02 is effective beginning in the period that an entity adopts Statement 160. If an entity has previously adopted Statement 160, ASU 2010-02 is effective beginning in the first interim or annual reporting period ending on or after December 15, 2009 and should be applied retrospectively to the first period Statement 160 was adopted. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.

In January 2010, the FASB issued ASU 2010-04, Accounting for Various Topics — Technical Corrections to SEC Paragraphs. ASU 2010-04 makes technical corrections to existing SEC guidance including the following topics: accounting for subsequent investments, termination of an interest rate swap, issuance of financial statements — subsequent events, use of residential method to value acquired assets other than goodwill, adjustments in assets and liabilities for holding gains and losses, and selections of discount rate used for measuring defined benefit obligation. ASU 2010-04 is effective January 15, 2010. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.

In January 2010, the FASB issued ASU 2010-05, Compensation — Stock Compensation (Topic 718): Escrowed Share Arrangements and the Presumption of Compensation. ASU 2010-05 updates existing guidance to address the SEC staff’s views on overcoming the presumption that for certain shareholders escrowed share arrangements represent compensation. ASU 2010-05 is effective January 15, 2010. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

In February 2010, the FASB issued ASU 2010-08, Technical Corrections to Various Topics. ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operation.

In March 2010, the FASB issued ASU 2010-11, Derivatives and Hedging. ASU 2010-11 provides clarification and related additional examples to improve financial reporting by resolving potential ambiguity about the breadth of the embedded credit derivative scope exception in ASC 815-15-15-8. ASU 2010-11 is effective at the beginning of the first fiscal quarter beginning after June 15, 2010. The adoption of this guidance is not expected to have a significant impact on the Company’s financial statements.

In April 2010, the FASB issued ASU 2010-13, Compensation — Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. ASU 2010-13 provides guidance on the classification of a share-based payment award as either equity or a liability. A share-based payment that contains a condition that is not a market, performance, or service condition is required to be classified as a liability. ASU 2010-13 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010 and is not expected to have a significant impact on the Company’s financial statements.

NOTE 2 — STOCK-BASED COMPENSATION

The Company has no unrecognized stock-based compensation costs or unvested stock options outstanding as of March 31, 2010.

Stock option activity during the three months ended March 31, 2010 and 2009 is as follows:

						Weighted-								Weighted-
						average								average
						Exercise								Exercise
		2010				Price				2009				Price
Outstanding, January 1			99,219			$	26.85				110,465			$	27.21
Granted			—				—				—				—
Exercised			—				—				—				—
Forfeited			—				—				(2,265	)			37.33
Outstanding, March 31			99,219			$	26.85				108,200			$	27.00

NOTE 3 — EARNINGS PER SHARE

The Company provides dual presentation of Basic and Diluted earnings per share. Basic earnings per share utilizes net income as reported as the numerator and the actual average shares outstanding as the denominator. Diluted earnings per share include any dilutive effects of options, warrants, and convertible securities.

There are no convertible securities that would affect the numerator in calculating basic and diluted earnings per share; therefore, net income as presented on the Consolidated Statement of Income (Unaudited) will be used as the numerator. The following tables set forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.

		For the Three Months Ended
		March 31,
		2010				2009
Weighted average common shares outstanding			1,754,984				1,726,460
Average treasury stock shares			(189,530	)			(189,530	)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share			1,565,454				1,536,930
Additional common stock equivalents (stock options) used to calculate diluted earnings per share			1,987				1,604
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share			1,567,441				1,538,534

Options to purchase 89,077 shares of common stock at prices ranging from $22.33 to $40.24 were outstanding during the three months ended March 31, 2010 but were not included in the computation of diluted earnings per share as they were anti-dilutive due to the strike price being greater than the market price as of March 31, 2010. For the three months ended March 31, 2009, there were 97,926 options to purchase shares of common stock at prices ranging from $22.33 to $40.24 but were not included in the computation of diluted earnings per share.

NOTE 4 — COMPREHENSIVE INCOME

The components of comprehensive income consist exclusively of unrealized gains and losses on available for sale securities. For the three months ended March 31, 2010, this activity is shown under the heading Comprehensive Income as presented in the Consolidated Statement of Changes in Stockholders’ Equity (Unaudited).

The following shows the components and activity of comprehensive income during the periods ended March 31, 2010 and 2009 (net of the income tax effect):

		For the Three Months Ended
		March 31,
(Dollar amounts in thousands)		2010				2009
Unrealized holding gains (losses) arising during the period on securities held		$	692			$	(531	)
Reclassification adjustment for gains included in net income			(6	)			—
Net change in unrealized gains (losses) during the period			686				(531	)
Unrealized holding gains (losses), beginning of period			562				(295	)
Unrealized holding gains (losses), end of period			1,248				(826	)
Net income			645				603
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during the period			686				(531	)
Comprehensive income		$	1,331			$	72

NOTE 5 — FAIR VALUE MEASUREMENTS

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

Level I:		Quoted prices are available in active markets for identical assets or liabilities as of the reported date.
Level II:		Pricing inputs are other than the quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these assets and liabilities includes items for which quoted prices are available but traded less frequently and items that are fair-valued using other financial instruments, the parameters of which can be directly observed.
Level III:		Assets and liabilities that have little to no pricing observe ability as of the reported date. These items do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.

The following tables present the assets measured on a recurring basis on the consolidated statements of financial condition at their fair value as of March 31, 2010 and December 31, 2009 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.

		March 31, 2010
(Dollar amounts in thousands)		Level I				Level II				Level III				Total
Assets Measured on a Recurring Basis:
U.S. government agency securities		$	—			$	19,041			$	—			$	19,041
Obligations of states and political subdivisions			—				68,215				—				68,215
Mortgage-backed securities			—				76,706				—				76,706
Total debt securities			—				163,962				—				163,962
Equity securities			890				—				—				890
Total		$	890			$	163,962			$	—			$	164,852

		December 31, 2009
		Level I				Level II				Level III				Total
Assets Measured on a Recurring Basis:
U.S. government agency securities		$	—			$	18,330			$	—			$	18,330
Obligations of states and political subdivisions			—				56,720				—				56,720
Mortgage-backed securities			—				60,742				—				60,742
Total debt securities			—				135,792				—				135,792
Equity securities			919				—				—				919
Total		$	919			$	135,792			$	—			$	136,711

Financial instruments are considered Level III when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. In addition to these unobservable inputs, the valuation models for Level III financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Level III financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. The Company has no securities considered to be Level III as of March 31, 2010.

The Company uses prices compiled by third party vendors due to the recent stabilization in the markets along with improvements in third party pricing methodology that have narrowed the variances between third party vendor prices and actual market prices.

The following tables present the assets measured on a nonrecurring basis on the consolidated balance sheet at their fair value as of March 31, 2010 and December 31, 2009, by level within the fair value hierarchy. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Techniques used to value the collateral that secure the impaired loan include: quoted market prices for identical assets classified as Level I inputs; observable inputs, employed by certified appraisers, for similar assets classified as Level II inputs. In cases where valuation techniques included inputs that are unobservable and are based on estimates and assumptions developed by management based on the best information available under each circumstance, the asset valuation is classified as Level III inputs.

		(Dollar amounts in thousands)
		March 31, 2010
		Level I				Level II				Level III				Total
Assets Measured on a non-recurring Basis:
Impaired loans		$	—			$	4,627			$	2,136			$	6,763
Other real estate owned			—				2,175				—				2,175

		December 31, 2009
		Level I				Level II				Level III				Total
Assets Measured on a non-recurring Basis:
Impaired loans		$	—			$	5,644			$	149			$	5,793
Other real estate owned			—				2,164				—				2,164

The estimated fair value of the Company’s financial instruments is as follows:

		March 31, 2010								December 31, 2009
		Carrying				Fair				Carrying				Fair
(Dollar amounts in thousands)		Value				Value				Value				Value
Financial assets:
Cash and cash equivalents		$	41,654			$	41,654			$	41,153			$	41,153
Investment securities Available for sale			164,852				164,852				136,711				136,711
Net loans			354,372				337,156				348,660				332,401
Bank-owned life insurance			7,773				7,773				7,706				7,706
Federal Home Loan Bank stock			1,887				1,887				1,887				1,887
Accrued interest receivable			2,093				2,093				1,411				1,411
Financial liabilities:
Deposits		$	522,278			$	526,737			$	487,106			$	491,436
Short-term borrowings			6,772				6,772				6,800				68,003
Other borrowings			25,374				27,955				25,864				27,356
Accrued interest payable			931				931				905				905

Financial instruments are defined as cash, evidence of ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.

Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.

If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses, and other factors as determined through various option pricing formulas or simulation modeling. Since many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition, changes in assumptions on which the estimated fair values are based may have a significant impact on the resulting estimated fair values.

As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.

The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions:

Cash and Cash Equivalents, Federal Home Loan Bank Stock, Accrued Interest Receivable, Accrued Interest Payable, and Short-Term Borrowings

The fair value is equal to the current carrying value.

Bank-Owned Life Insurance

The fair value is equal to the cash surrender value of the life insurance policies.

Investment Securities Available for Sale

The fair value of investment securities is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. Fair value for certain private-label collateralized mortgage obligations were determined utilizing discounted cash flow models, due to the absence of a current market to provide reliable market quotes for the instruments.

Loans

The fair value is estimated by discounting future cash flows using current market inputs at which loans with similar terms and qualities would be made to borrowers of similar credit quality. Where quoted market prices were available, primarily for certain residential mortgage loans, such market rates were utilized as estimates for fair value.

Deposits and Other Borrowed Funds

The fair values of certificates of deposit and other borrowed funds are based on the discounted value of contractual cash flows. The discount rates are estimated using rates currently offered for similar instruments with similar remaining maturities. Demand, savings, and money market deposits are valued at the amount payable on demand as of year-end.

Commitments to Extend Credit

These financial instruments are generally not subject to sale, and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure.

NOTE 6 — INVESTMENT SECURITIES AVAILABLE FOR SALE

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

		March 31, 2010
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(Dollar amounts in thousands)		Cost				Gains				Losses				Value
U.S. government agency securities		$	19,078			$	94			$	(131	)		$	19,041
Obligations of states and political subdivisions:
Taxable			5,384				10				(101	)			5,293
Tax-exempt			62,044				1,173				(295	)			62,922
Mortgage-backed securities			75,513				2,189				(996	)			76,706
Total debt securities			162,019				3,466				(1,523	)			163,962
Equity Securities			944				50				(104	)			890
Total		$	162,963			$	3,516			$	(1,627	)		$	164,852

		December 31, 2009
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. government agency securities		$	18,657			$	38			$	(365	)		$	18,330
Obligations of states and political subdivisions:
Taxable			3,451				10				(86	)			3,375
Tax-exempt			52,752				943				(349	)			53,346
Mortgage-backed securities			60,055				1,817				(1,130	)			60,742
Total debt securities			134,915				2,807				(1,930	)			135,792
Equity Securities			944				80				(105	)			919
Total		$	135,859			$	2,887			$	(2,035	)		$	136,711

The amortized cost and fair value of debt securities at March 31, 2010, 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		$	2,061			$	2,084
Due after one year through five years			7,760				8,111
Due after five years through ten years			23,223				23,748
Due after ten years			128,975				130,019
Total		$	162,019			$	163,962

Proceeds from sales of investment securities available for sale were $3.9 million and $0 during the three-months ended March 31, 2010 and March 31, 2009, respectively. Gross gains realized were $9,000 and $0, during the three-months ended March 31, 2010 and March 31, 2009, respectively.

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.

		March 31, 2010
		Less than Twelve Months								Twelve Months or Greater								Total
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(Dollar amounts in thousands)		Value				Losses				Value				Losses				Value				Losses
U.S. government agency securities		$	9,368			$	(131	)		$	—			$	—			$	9,368			$	(131	)
Obligations of states and political subdivisions			20,517				(289	)			1,430				(107	)			21,947				(396	)
Mortgage-backed securities			4,822				(339	)			3,835				(657	)			8,657				(996	)
Equity securities			580				(68	)			11				(36	)			591				(104	)
Total		$	35,287			$	(827	)		$	5,276			$	(800	)		$	40,563			$	(1,627	)

		December 31, 2009
		Less than Twelve Months								Twelve Months or Greater								Total
						Gross								Gross								Gross
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
U.S. government agency securities		$	17,134			$	(365	)		$	—			$	—			$	17,134			$	(365	)
Obligations of states and political subdivisions			21,594				(314	)			1,417				(121	)			23,011				(435	)
Mortgage-backed securities			18,509				(334	)			4,064				(796	)			22,573				(1,130	)
Equity securities			580				(68	)			8				(37	)			588				(105	)
Total		$	57,817			$	(1,082	)		$	5,489			$	(953	)		$	63,306			$	(2,035	)

On a quarterly basis, the Company performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment (OTTI) pursuant to FASB ASC Topic 320 “Investments — Debt and Equity Securities. A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The accounting literature requires the Company to assess whether the unrealized loss is other-than-temporary. Prior to the adoption of FSP FAS 115-2 which was subsequently incorporated into FASB ASC Topic 320 “Investments — Debt and Equity Securities, unrealized losses that were determined to be temporary were recorded, net of tax, in other comprehensive income for available for sale securities, whereas unrealized losses related to held-to-maturity securities determined to be temporary were not recognized. Regardless of whether the security was classified as available for sale or held to maturity, unrealized losses that were determined to be other-than-temporary were recorded to earnings. An unrealized loss was considered other-than-temporary if (i) it was probable that the holder would not collect all amounts due according to the contractual terms of the debt security, or (ii) the fair value was below the amortized cost of the debt security for a prolonged period of time and the Company did not have the positive intent and ability to hold the security until recovery or maturity.

The Company adopted this ASC during the second quarter of 2009 which amended the OTTI model for debt securities. Under the new guidance, OTTI losses must be recognized in earnings if an investor 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 a 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.

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

Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises, and state and political subdivisions accounted for more than 87% of the total available-for-sale portfolio as of March 31, 2010 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government and the lack of significant unrealized loss positions within the obligations of state and political subdivisions security portfolio. The Company’s assessment was concentrated mainly on private-label collateralized mortgage obligations of approximately $20.5 million for which the Company evaluates credit losses on a quarterly basis. Gross unrealized gain and loss positions related to these private-label collateralized mortgage obligations amounted to $1.1 million and $670,000, respectively. The Company considered the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

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

For the three months ended March 31, 2010, there were no available-for-sale debt securities with an unrealized loss that suffered OTTI.

NOTE 7 — SUBSEQUENT EVENTS

None

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

The following discussion and analysis provides further detail to the financial condition and results of operations of the Company. The MD&A should be read in conjunction with the notes and financial statements presented in this report.

CHANGES IN FINANCIAL CONDITION

General. The Company’s total assets ended the March 31, 2010 quarter at $594.0 million, an increase of $35.4 million or 6.3% from December 31, 2009. Investment securities available for sale and net loans increased $28.1 million, and $5.7 million, respectively. The increase in total assets reflected a corresponding increase in total liabilities of $34.3 million or 6.6% and an increase in stockholders’ equity of $1.0 million or 2.8%. The increase in total liabilities was the result of deposit growth of $35.2 million or 7.2%. This was partially offset by decreases to other borrowing and short term borrowing of $491,000 and $28,000, respectively, for the quarter. The increase in stockholders’ equity was the result of an increase in accumulated other comprehensive income, retained earnings and common stock of $686,000, 237,000 and 116,000, respectively.

Cash on hand and due from banks. Cash on hand and due from banks, Federal funds sold and interest-bearing deposits in other institutions represent cash and cash equivalents. Cash equivalents increased a combined $501,000 or 1.2% to $41.7 million at March 31, 2010 from $41.2 million at December 31, 2009. Deposits from customers into savings and checking accounts, loan and security repayments and proceeds from borrowed funds typically increase these accounts. Decreases result from customer withdrawals, new loan originations, security purchases and repayments of borrowed funds.

Investment securities. Investment securities available for sale ended the March 31, 2010 quarter at $164.9 million an increase of $28.1 million or 20.6% from $136.7 million at December 31, 2009. During this period the Company recorded purchases of available for sale securities of $37.9 million, consisting of purchases of mortgage backed securities, municipal and U. S. government bonds. Offsetting some of the purchases of securities were repayments and maturities of $7.0 million and sales of mortgage backed securities totaling $3.9 million during the three months ended March 31, 2009. In addition, the securities portfolio increased approximately $686,000 due to an increase in the fair value. These fair value adjustments represent temporary fluctuations resulting from changes in market rates in relation to average yields in the available for sale portfolio. If securities are held to their respective maturity dates, no fair value gain or loss is realized.

Loans receivable. The loans receivable category consists primarily of single family mortgage loans used to purchase or refinance personal residences located within the Company’s market area and commercial real estate loans used to finance properties that are used in the borrowers businesses or to finance investor-owned rental properties, and to a lesser extent commercial and consumer loans. Net loans receivable increased $5.7 million or 1.6% to $354.4 million as of March 31, 2010 from $348.7 million at December 31, 2009. Included in this amount was an increase in the commercial and industrial loan portfolio of $2.2 million or 3.8% and real estate and construction loans of $2.9 million or 37.5% during the three months ended March 31, 2010. The Company’s lending philosophy is to focus on the commercial loans and to attempt to grow that segment of the portfolio. To attract and build the commercial loan portfolio, the Company has taken a proactive approach in contacting new and current clients to ensure that the Company is servicing its client’s needs. These lending relationships generally offer more attractive returns than residential loans and also offer opportunities for attracting larger balance deposit relationships. However, the shift in loan portfolio mix from residential real estate to commercial oriented loans may increase credit risk.

Allowance for Loan Losses and Asset Quality. In the first quarter of 2010, the combination of sustained weakness in commercial real estate values and a recessionary economy continued to have an adverse impact on the financial condition of commercial borrowers. These factors resulted in the Company downgrading loan quality ratings of several commercial loans during the first quarter. The distressed commercial real estate market also caused certain existing impaired commercial real estate loans to become under-collateralized during the quarter, resulting in the loans being charged down to the estimated net realizable value of the underlying collateral.

The Company increased the allowance for loan losses to $5.3 million, or 1.47% of total loans, at March 31, 2010, compared to $4.9 million, or 1.40%, at December 31, 2009. The increase in the allowance for loan losses was necessitated by loan downgrades and an increase to specific reserves for impaired commercial real estate loans discussed above, coupled with the impact of charge-offs remaining at an elevated level. First quarter 2010 net loan charge-offs totaled $97,000, or 0.03% of average loans, compared to $90,000, or 0.03%, for the first quarter of 2009. To maintain the adequacy of the allowance for loan losses, the Company recorded a first quarter provision for loan losses of $439,000, versus $154,000 for the first quarter of 2009.

Management analyzes the adequacy of the allowance for loan losses regularly through reviews of the performance of the loan portfolio considering economic conditions, changes in interest rates and the effect of such changes on real estate values and changes in the amount and composition of the loan portfolio. The allowance for loan losses is a material estimate that is particularly susceptible to significant changes in the near term. Such evaluation, which includes a review of all loans for which full collectibility may not be reasonably assured, considers among other matters, historical loan loss experience, the estimated fair value of the underlying collateral, economic conditions, current interest rates, trends in the borrower’s industry and other factors that management believes warrant recognition in providing for an appropriate allowance for loan losses. Future additions to the allowance for loan losses will be dependent on these factors. Additionally, the Company utilizes an outside party to conduct an independent review of commercial and commercial real estate loans. The Company uses the results of this review to help determine the effectiveness of the existing policies and procedures, and to provide an independent assessment of the allowance for loan losses allocated to these types of loans. Management believes that the allowance for loan losses was appropriately stated at March 31, 2010. Based on the variables involved and the fact that management must make judgments about outcomes that are uncertain, the determination of the allowance for loan losses is considered a critical accounting policy.

Non-performing assets. Non-performing assets includes non-accrual loans, troubled debt restructurings (TDR), loans 90 days or more past due, assets purchased by EMORECO from EB in November 2009, other real estate, and repossessed assets. A loan is classified as non-accrual when, in the opinion of management, there are serious doubts about collectibility of interest and principal. At the time the accrual of interest is discontinued, future income is recognized only when cash is received. 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 had one TDR with a balance of $463,000 as of March 31, 2010. Non-performing loans amounted to $18.1 million or 5.0% and $16.3 million or 4.6% of total loans at March 31, 2010 and December 31, 2009, respectively. The increase in nonperforming loans has occurred primarily in the commercial loan portfolio and in one-to-four family real estate loans. Non-performing loans secured by real estate totaled $14.4 million as of March 31, 2010, up $1.5 million from $12.9 million at December 31, 2009. The depressed state of the economy and rising levels of unemployment have contributed to this trend, as well as the decline in the housing market across our geographic footprint that reflected declining home prices and increasing inventories of houses for sale. Real estate owned is written down to fair value at its initial recording and continually monitored.

Nonperforming Assets and Allowance for Loan Losses. The following table indicates asset quality data over the past five quarters.

Asset Quality History
(Dollar amounts in thousands)

		3/31/2010				12/31/2009				9/30/2009				6/30/2009				3/31/2009
Nonperforming loans		$	18,143			$	16,285			$	14,368			$	14,023			$	13,370
Real estate owned			2,175				2,164				1,775				1,967				1,331
Nonperforming assets		$	20,318			$	18,449			$	16,143			$	15,990			$	14,701
Allowance for loan losses		$	5,279			$	4,937			$	4,422			$	3,668			$	3,621
Ratios
Nonperforming loans to total loans			5.04	%			4.61	%			4.15	%			4.18	%			4.16	%
Nonperforming assets to total assets			3.42	%			3.30	%			3.12	%			3.33	%			3.14	%
Allowance for loan losses to total loans			1.47	%			1.40	%			1.28	%			1.09	%			1.13	%
Allowance for loan losses to nonperforming loans			29.10	%			30.32	%			30.78	%			26.16	%			27.08	%

A major factor in determining the appropriateness of the allowance for loan losses is the type of collateral which secures the loans. Of the total nonperforming loans at March 31, 2010, 80% were secured by real estate. Although this does not insure against all losses, the real estate provides substantial recovery, even in a distressed-sale and declining-value environment. In response to the poor economic conditions which have eroded the performance of the Company’s loan portfolio, additional resources have been allocated to the loan workout process. The Company’s objective is to work with the borrower to minimize the burden of the debt service and to minimize the future loss exposure to the Company.

Deposits. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which are a significant source of funds totaling $522.3 million or 94.2% of the Company’s total funding sources at March 31, 2010. Total deposits increased $35.2 million or 7.2% to $522.3 million at March 31, 2010 from $487.1 million at December 31, 2009. The increase in deposits is primarily related to the growth of money market, savings and certificate of deposit accounts of $8.4 million or 14.8%, $13.2 million or 12.3% and $10.1 million or 4.2%, respectively, at March 31, 2010. Interest-bearing demand increased $3.8 million or 10.1% for the quarter. These increases were nominally offset by a decline in non-interest bearing demand deposit accounts of $305,000 during the three months ended March 31, 2010.

Borrowed funds. The Company utilizes short and long-term borrowings as another source of funding used for asset growth and liquidity needs. These borrowings primarily include FHLB advances, junior subordinated debt, short-term borrowings from other banks and repurchase agreements. Short-term borrowings decreased $28,000 or 0.4% to $6.8 million as of March 31, 2010. Other borrowings declined $491,000 for the quarter which represents advances from the Federal Home Loan Bank of Cincinnati. The decline in FHLB advances was the result of scheduled principal payments.

Stockholders’ equity. Stockholders’ equity increased $1.0 million or 2.8% to $37.7 million at March 31, 2010 from $36.7 million at December 31, 2009. This increase was the result of increases in common stock, retained earnings and accumulated other comprehensive income of $116,000, $237,000 and $686,000, respectively. The increase of accumulated other comprehensive income was the result of an increase in the market value of the Company’s securities available for sale portfolio. The increase in common stock was the result of the issuing 4,904 shares through the Company’s dividend reinvestment and purchase plan at an average price of $23.50 since December 31, 2009.

RESULTS OF OPERATIONS

General. Net income for the three months ended March 31, 2010, was $645,000, a $42,000, or 6.9% increase from the $603,000 earned during the same period in 2009. Diluted earnings per share for the first quarter of 2010 was $0.41 compared to $0.39 for the same period in 2009.

The Company’s annualized return on average assets (ROA) and return on average equity (ROE) for the first quarter were 0.45% and 7.06%, respectively, compared with 0.52% and 7.00% for the first quarter of 2009.

The Company’s year-to-date earnings were positively impacted by an increase in investment interest income combined with a decrease in interest expense. This was partially offset by increases in the provision for loan losses and non-interest expense.

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

Net interest income for the first quarter totaled $4.1 million, an increase of 26.2% from the $3.2 million reported for the comparable period of 2009. The net interest margin was 3.29% for the first quarter of 2010, up from the 3.21% reported for the same quarter of 2009. The increase is primarily attributable to lower deposit costs, an increase of $28.1 million in the investment securities portfolio since year end 2009 and competitive pricing on lending opportunities associated with the current interest rate environment. Deposit growth at the banks has primarily been in products such as savings and money market accounts, which generally carry lower interest costs than other deposit alternatives.

Interest income. Interest income increased $600,000, or 9.5%, for the three months ended March 31, 2010, compared to the same period in the prior year. This increase can be attributed to an increase in interest earned on loans receivable of $99,000 which was coupled with a $496,000 increase in interest earned on investment securities for the quarter.

Interest earned on loans receivable increased $99,000, or 2.0%, for the three months ended March 31, 2010, compared to the same period in the prior year. This increase was attributable to a $32.9 million or 10.2% increase in the average balance of loans receivable from March 31, 2009. This increase was partially offset by a decline in the yield on the total loan portfolio of 47 basis points to 5.80% for the three months ended March 31, 2010 from 6.27% for the same period in the prior year.

Interest earned on securities increased $496,000, or 38.2%, for the three months ended March 31, 2010, compared to the same period in the prior year. This increase was primarily the result of an increase in the average balance of the securities portfolio of $46.8 million, or 44.6%, to $151.8 million at March 31, 2010 from $105.0 million for the same period in the prior year. Interest income on investment securities was adversely affected by a decrease in the portfolio yield. The total investment securities portfolio yield of 5.61% for the three months ended March 31, 2010 decreased by 34 basis points from 5.95% for the same period in the prior year.

Interest expense. Interest expense decreased $242,000, or 7.8%, for the three months ended March 31, 2010, compared to the same period in the prior year. This decline in interest expense can be attributed to decreases in interest incurred on deposits and other borrowings of $231,000 and $67,000, respectively. This reduction in interest cost was mainly due to the rate paid on interest-bearing liabilities which declined by 89 basis points when comparing the two quarters.

Interest incurred on deposits, the largest component of the Company’s interest-bearing liabilities, declined $231,000, or 8.5%, for the three months ended March 31, 2010, compared to the same period in the prior year. This decrease was attributed to a decline in average rate paid on deposits of 2.19% for the three months ended March 31, 2010 from 3.11% for the same period in the prior year. The improvement in interest cost due to rate was partially offset by an increase in the average balance of interest-bearing deposits of $106.5 million, or 30.1%, to $460.5 million for the three months ended March 31, 2010, compared to $354.0 million for the same period in the prior year. This increase is reflected in the quarterly rate volume report presented below which depicts that the decrease to the costs associated with the interest-bearing liabilities. The Company diligently monitors the interest rates on its products as well as the rates being offered by its competition and utilizing rate surveys to keep its total interest expense costs down.

Interest incurred on borrowed funds, declined by $11,000, for the three months ended March 31, 2010, compared with the same period in the prior year. This decline was primarily attributable to a reduction of $67,000 in interest paid on FHLB advances when compared to March 31, 2009. This decrease was partially offset by an increase in interest paid on short-term borrowing of $52,000 when compared to the same period in the prior year. This increase is the result of the Company borrowing $5.7 million in the fourth quarter of 2009 to fund its non-bank subsidiary.

Provision for loan losses. The provision for loan losses represents the charge to income necessary to adjust the allowance for loan losses to an amount that represents management’s assessment of the estimated probable incurred credit losses inherent in the loan portfolio. Each quarter management performs a review of estimated probable incurred credit losses in the loan portfolio. Based on this review, a provision for loan losses of $439,000 was recorded for the quarter ended March 31, 2010 compared to $154,000 for the quarter ended March 31, 2009. The provision for loan losses was higher for the current quarter due to increases in net charge-offs, increases in nonperforming and delinquent loans and the current distressed state of the economy. Nonperforming loans were $18.1 million, or 5.0% of total loans at March 31, 2010 compared with $14.7 million, or 4.2% at March 31, 2009. Net charge-offs were $97,000 for the quarter ended March 31, 2010 compared with $90,000 for the quarter ended March 31, 2009. Total loans were $359.7 million at March 31, 2010 compared with $326.7 million at March 31, 2009.

Non-interest income. Non-interest income decreased $15,000 for the three-month period of 2010 over the comparable 2009 period. This decrease was the result of lower service charge revenue associated with deposit accounts, as well as a decrease in the earnings rate on bank-owned life insurance. A nominal increase in other non-interest income was driven by greater ATM/Debit card usage and credit card fees. On February 22, 2010 the Company sold twenty-two mortgage-backed securities at a net gain of $9,000.

Non-interest expense. Non-interest expense of $3.6 million for the first quarter of 2010 was 18.8%, or $562,000, higher than the first quarter of 2009. The increase in salaries and employee benefits of $140,000 is primarily attributable to the growth of the Company and a 10% increase in employee health insurance premiums. FDIC premiums continue to increase and are $30,000 higher than they were for the same quarter last year. The Company is in the process of changing data processors and upgrading its computer network. These improvements have resulted in an increase of $75,000 in equipment expense when compared to March 31, 2010. Other expenses grew $289,000 over the 2009 quarter. Expenses related to delinquent loans, foreclosures and other real estate owned totaled $220,000 or 76.1% of the increase. Included in this total is the Company’s non-bank asset resolution subsidiary EMORECO which had $128,000 in loan and other real estate owned expenses as of March 31, 2010.

Provision for income taxes. The Company recognized $22,000 in income tax expense, which reflected an effective tax rate of 3.3% for the three months, ended March 31, 2010, as compared to $84,000 with an effective tax rate of 12.2% for the respective 2009 period. The decline in the tax provision can be associated with an increase in non-taxable income from obligations of states and political subdivisions of $146,000 or 32.6% when compared to the same quarter in the prior year.

CRITICAL ACCOUNTING ESTIMATES

The Company’s critical accounting estimates involving the more significant judgments and assumptions used in the preparation of the consolidated financial statements as of March 31, 2010, have remained unchanged from December 31, 2009.

Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resultant average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the resultant average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average balances are calculated using monthly averages and the average loan balances include non-accrual loans and exclude the allowance for loan losses, and interest income includes accretion of net deferred loan fees. Interest and yields on tax-exempt securities (tax-exempt for federal income tax purposes) are shown on a fully tax equivalent basis utilizing a federal tax rate of 34%. Yields and rates have been calculated on an annualized basis utilizing monthly interest amounts.

		For the Three Months Ended March 31,
		2010												2009
		Average								Average				Average								Average
(Dollar amounts in thousands)		Balance				Interest				Yield/Cost				Balance				Interest				Yield/Cost
		(Dollars in thousands)												(Dollars in thousands)
Interest-earning assets:
Loans receivable		$	356,239			$	5,097				5.80	%		$	323,330			$	4,998				6.27	%
Investments securities (3)			151,807				1,795				5.61	%			104,973				1,307				5.95	%
Interest-bearing deposits with other banks			30,020				32				0.43	%			6,805				19				1.13	%
Total interest-earning assets			538,066				6,924				5.45	%			435,108				6,324				6.11	%
Noninterest-earning assets			38,144												35,503
Total assets		$	576,210											$	470,611
Interest-bearing liabilities:
Interest-bearing demand deposits			38,874				95				0.99	%		$	27,722				61				0.89	%
Money market deposits			60,491				279				1.87	%			28,796				151				2.12	%
Savings deposits			113,593				427				1.53	%			71,406				246				1.40	%
Certificates of deposit			247,559				1,684				2.76	%			226,107				2,259				4.05	%
Borrowings			32,328				384				4.81	%			34,520				394				4.63	%
Total interest-bearing liabilities			492,845				2,869				2.36	%			388,552				3,111				3.25	%
Noninterest-bearing liabilities
Other liabilities			46,306												47,100
Stockholders’ equity			37,060												34,959
Total liabilities and stockholders’ equity		$	576,210											$	470,611
Net interest income						$	4,055											$	3,213
Interest rate spread (1)											3.09	%											2.86	%
Net yield on interest-earning assets (2)											3.29	%											3.21	%
Ratio of average interest-earning assets to average interest-bearing liabilities											109.18	%											111.98	%

Analysis of Changes in Net Interest Income. The following tables analyzes the changes in interest income and interest expense, between the three month periods ended March 31, 2010 and 2009, in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Company’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior period rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances. Changes in interest income on securities reflects the changes in interest income on a fully tax-equivalent basis.

		2010 versus 2009
		Increase (decrease) due to
(Dollar amounts in thousands)		Volume				Rate				Total
		(Dollars in thousands)
Interest-earning assets:
Loans receivable		$	509			$	(410	)		$	99
Investments securities			687				(199	)			488
Interest-bearing deposits with other banks			65				(52	)			13
Total interest-earning assets			1,261				(661	)			600
Interest-bearing liabilities:
Interest-bearing demand deposits			25				9				34
Money market deposits			166				(37	)			129
Savings deposits			145				36				181
Certificates of deposit			214				(790	)			(576	)
Borrowings			(25	)			15				(10	)
Total interest-bearing liabilities			525				(767	)			(242	)
Net interest income		$	736			$	106			$	842

LIQUIDITY

Management’s objective in managing liquidity is maintaining the ability to continue meeting the cash flow needs of its customers, such as borrowings or deposit withdrawals, as well as its own financial commitments. The principal sources of liquidity are net income, loan payments, maturing and principal reductions on securities and sales of securities available for sale, federal funds sold and cash and deposits with banks. Along with its liquid assets, the Company has additional sources of liquidity available to ensure that adequate funds are available as needed. These include, but are not limited to, the purchase of federal funds, and the ability to borrow funds under line of credit agreements with correspondent banks and a borrowing agreement with the Federal Home Loan Bank of Cincinnati, Ohio and the adjustment of interest rates to obtain depositors. Management feels that it has the capital adequacy, profitability and reputation to meet the current and projected needs of its customers.

For the three months ended March 31, 2010, the adjustments to reconcile net income to net cash from operating activities consisted mainly of depreciation and amortization of premises and equipment, the provision for loan losses, net amortization of securities and net changes in other assets and liabilities. For a more detailed illustration of sources and uses of cash, refer to the condensed consolidated statements of cash flows.

INFLATION

Substantially all of the Company’s assets and liabilities relate to banking activities and are monetary in nature. The consolidated financial statements and related financial data are presented in accordance with U.S. Generally Accepted Accounting Principles. 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 multi-bank holding company. The affiliate banks are subject to regulations of the Federal Deposit Insurance Corporation (FDIC) and the State of Ohio, Division of Financial Institutions.

Effective February 11, 2010, the Board of Directors of the Company’s subsidiary, EB, entered into a Memorandum of Understanding (“MOU”) with the FDIC and the Ohio Division of Financial Institutions as a result of the joint examination by the FDIC and the Ohio Division of Financial Institutions completed in the fourth quarter of 2009. The MOU sets forth certain actions required to be taken by management of EB to rectify unsatisfactory conditions identified by the federal and state banking regulators that relate to EB’s concentration of credit for non-owner occupied 1 — 4 family residential mortgage loans. The MOU requires EB to reduce delinquent and classified loans and enhance credit administration for non-owner occupied residential real estate; to develop specific plans for the reduction of borrower indebtedness on classified and delinquent credits; to correct violations of laws and regulations listed in the joint examination report; to implement an earnings improvement plan; to maintain specified capital discussed below; to submit to the FDIC and the Ohio Division of Financial Institutions for review and comment a revised methodology for calculating and determining the adequacy of the allowance for loan losses; and to provide 30 days’ advance notification of proposed dividend payments.

Compliance with the terms of the MOU is a high priority for the Company. In anticipation of the requirements that would be imposed by the MOU executed February 11, 2010, management devoted significant resources to the preceding matters during the fiscal year ended December 31, 2009, and intends to continue to do so during 2010. Specific actions taken included the evaluation and reorganization of lending and credit administration personnel, retention of collection and workout personnel, and the sale of $4.6 million of nonperforming assets to a sister, nonbank-asset resolution subsidiary established late in the fourth quarter of 2009. In 2009, the Company invested $1.25 million in EB in the form of capital infusions to maintain Tier I capital at the level expected by the FDIC and the Ohio Division of Financial Institutions.

The MOU requires that EB submit plans and report to the Ohio Division of Financial Institutions and the FDIC regarding EB’s loan portfolio and profit plan, among other matters. The MOU also requires that the Bank maintain its Tier I Leverage Capital ratio at not less than 9 percent.

The following table sets forth the capital requirements for EB under the FDIC regulations and EB’s capital ratios at March 31, 2010 and December 31, 2009:

FDIC Regulations

		Adequately												December 31,
Capital Ratio		Capitalized				Well Capitalized				March 31, 2010				2009
Tier I Leverage Capital			4.00	%			5.00	%(1)			9.38	%			10.29	%
Risk-Based Capital:
Tier I			4.00				6.00				13.39				13.63
Total			8.00				10.00				14.67				14.91