MIDDLEFIELD BANC CORP - Quarter Report: 2011 September (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20552

FORM 10-Q

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

Commission File Number 000-32561

Middlefield Banc Corp.

(Exact name of registrant as specified in its charter)

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

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:

Class: Common Stock, without par value
Outstanding at November 10, 2011: 1,754,856

 

 

MIDDLEFIELD BANC CORP.

INDEX

		Page
		Number
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of September 30, 2011 and December 31, 2010			3
Consolidated Statement of Income (Unaudited) for the Three and Nine Months ended September 30, 2011 and 2010			4
Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the Nine Months ended September 30, 2011			5
Consolidated Statement of Cash Flows (Unaudited) for the Nine Months ended September 30, 2011 and 2010			6
Notes to Unaudited Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			33
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			34
Item 1A. Risk Factors			34
Item 2. Unregistered sales of equity securities and use of proceeds			34
Item 3. Default Upon Senior Securities			34
Item 4. Reserved			34
Item 5. Other Information			34
Item 6. Exhibits and Reports on Form 8 - K			34
SIGNATURES			38
Exhibit 31
Exhibit 31.1
Exhibit 32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET

(Dollar amounts in thousands)

(Unaudited)

		September 30,				December 31,
		2011				2010
ASSETS
Cash and due from banks		$	21,269			$	10,473
Federal funds sold			22,318				20,162
Cash and cash equivalents			43,587				30,635
Investment securities available for sale			204,455				201,772
Loans			388,558				372,498
Less allowance for loan losses			7,574				6,221
Net loans			380,984				366,277
Premises and equipment			8,042				8,179
Goodwill			4,559				4,559
Bank-owned life insurance			8,188				7,979
Accrued interest and other assets			10,864				12,796
TOTAL ASSETS		$	660,679			$	632,197
LIABILITIES
Deposits:
Noninterest-bearing demand		$	60,806			$	53,391
Interest-bearing demand			61,483				48,869
Money market			76,851				71,105
Savings			166,531				146,993
Time			221,567				244,893
Total deposits			587,238				565,251
Short-term borrowings			6,908				7,632
Other borrowings			17,955				19,321
Accrued interest and other liabilities			1,915				1,971
TOTAL LIABILITIES			614,016				594,175
STOCKHOLDERS’ EQUITY
Common stock, no par value; 10,000,000 shares authorized, 1,944,386 and 1,780,553 shares issued			31,112				28,429
Retained earnings			17,335				15,840
Accumulated other comprehensive income			4,950				487
Treasury stock, at cost; 189,530 shares			(6,734	)			(6,734	)
TOTAL STOCKHOLDERS’ EQUITY			46,663				38,022
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	660,679			$	632,197

See accompanying notes to the unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF INCOME

(Dollar amounts in thousands, except per share data)

(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
INTEREST INCOME
Interest and fees on loans		$	5,555			$	5,325			$	16,255			$	15,721
Interest-bearing deposits in other institutions			4				3				8				10
Federal funds sold			—				15				13				38
Investment securities:
Taxable interest			1,220				1,290				3,832				3,832
Tax-exempt interest			724				702				2,124				1,941
Dividends on stock			25				33				76				82
Total interest income			7,528				7,368				22,308				21,624
INTEREST EXPENSE
Deposits			1,836				2,391				5,877				7,249
Short term borrowings			59				66				177				186
Other borrowings			100				147				313				520
Trust preferred securities			139				148				412				412
Total interest expense			2,134				2,752				6,779				8,367
NET INTEREST INCOME			5,394				4,616				15,529				13,257
Provision for loan losses			920				1,226				2,485				2,355
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			4,474				3,390				13,044				10,902
NONINTEREST INCOME
Service charges on deposit accounts			455				473				1,299				1,321
Investment securities gains (losses), net			6				18				(16	)			45
Earnings on bank-owned life insurance			70				72				209				204
Other income			155				132				487				419
Total noninterest income			686				695				1,979				1,989
NONINTEREST EXPENSE
Salaries and employee benefits			1,754				1,543				5,388				4,767
Occupancy expense			242				224				737				717
Equipment expense			175				156				488				558
Data processing costs			162				160				515				575
Ohio state franchise tax			126				134				351				404
Federal deposit insurance expense			176				197				673				589
Professional fees			181				110				577				490
Losses on other real estate owned			195				536				498				750
Other expense			895				682				2,676				2,278
Total noninterest expense			3,906				3,742				11,903				11,128
Income before income taxes			1,254				343				3,120				1,763
Income taxes (benefit)			175				(120	)			319				(60	)
NET INCOME		$	1,079			$	463			$	2,801			$	1,823
EARNINGS PER SHARE
Basic		$	0.63			$	0.29			$	1.69			$	1.16
Diluted			0.63				0.29				1.69				1.16
DIVIDENDS DECLARED PER SHARE		$	0.26			$	0.26			$	0.78			$	0.78

See accompanying notes to the unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

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

(Unaudited)

										Accumulated
										Other								Total
		Common				Retained				Comprehensive				Treasury				Stockholders’				Comprehensive
		Stock				Earnings				Income				Stock				Equity				Income
Balance, December 31, 2010		$	28,429			$	15,840			$	487			$	(6,734	)		$	38,022
Net income							2,801												2,801			$	2,801
Other comprehensive income:
Unrealized gain on available for sale securities net of taxes of $2,299, net of reclassification adjustment											4,463								4,463				4,463
Comprehensive income																						$	7,264
Stock-based compensation expense (2,400 shares)			59																59
Common stock issuance (138,150 shares)			2,210																2,210
Dividend reinvestment and purchase plan (23,283 shares)			414																414
Cash dividends ($0.78 per share)							(1,306	)											(1,306	)
Balance, September 30, 2011		$	31,112			$	17,335			$	4,950			$	(6,734	)		$	46,663

See accompanying notes to the unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

		Nine Months Ended
		September 30,
		2011				2010
OPERATING ACTIVITIES
Net income		$	2,801			$	1,823
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			2,485				2,355
Investment securities (gains) losses, net			16				(45	)
Depreciation and amortization			639				581
Amortization of premium and discount on investment securities			247				(93	)
Amortization of deferred loan fees, net			(120	)			(37	)
Earnings on bank-owned life insurance			(209	)			(204	)
Deferred income taxes			(173	)			(384	)
Stock based compensation expense			59				—
Losses on other real estate owned			498				750
Increase in accrued interest receivable			(384	)			(447	)
Increase (decrease) in accrued interest payable			(73	)			33
Decrease in prepaid federal deposit insurance			642				545
Other, net			(746	)			(1,240	)
Net cash provided by operating activities			5,682				3,637
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from repayments and maturities			56,940				31,882
Proceeds from sale of securities			24,305				5,829
Purchases			(77,429	)			(89,919	)
Increase in loans, net			(18,217	)			(14,431	)
Proceeds from the sale of other real estate owned			777				923
Purchase of premises and equipment			(321	)			(292	)
Net cash used for investing activities			(13,945	)			(66,008	)
FINANCING ACTIVITIES
Net increase in deposits			21,987				76,385
Increase (decrease) in short-term borrowings, net			(724	)			962
Repayment of other borrowings			(1,366	)			(3,830	)
Common stock issuance			2,210				—
Proceeds from dividend reinvestment & purchase plan			414				396
Cash dividends			(1,306	)			(1,225	)
Net cash provided by financing activities			21,215				72,688
Increase in cash and cash equivalents			12,952				10,317
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			30,635				41,153
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	43,587			$	51,470
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings		$	6,852			$	8,334
Income taxes			515				850
Non-cash investing transactions:
Transfers from loans to other real estate owned		$	1,146			$	1,525

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, 2010, 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 (GAAP). 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 July 2010, FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The amendments in ASU 2010-20 encourage, but do not require, comparative disclosures for earlier reporting periods that ended before initial adoption. However, an entity should provide comparative disclosures for those reporting periods ending after initial adoption. The Company has provided the necessary disclosure in note 7 to the financial statements.

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The amendments in this Update provide additional guidance or clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. The amendments in this Update are effective for the first interim or annual reporting period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. This ASU is not expected to have a significant impact on the Company’s financial statements.

In April 2011, the FASB issued ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements. The main objective in developing this Update is to improve the accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this Update remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this Update apply to all entities, both public and nonpublic. The amendments affect all entities that enter into agreements to transfer financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The guidance in this Update is effective for the first interim or annual period beginning on or after December 15, 2011 and should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in this Update are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. For nonpublic entities, the amendments are effective for annual periods beginning after December 15, 2011. Early application by public entities is not permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income. The amendments in this Update improve the comparability, clarity, consistency, and transparency of financial reporting and increase the prominence of items reported in other comprehensive income. To increase the prominence of items reported in other comprehensive income and to facilitate convergence of U.S. GAAP and IFRS, the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. All entities that report items of comprehensive income, in any period presented, will be affected by the changes in this Update. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. For nonpublic entities, the amendments are effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. The amendments in this Update should be applied retrospectively, and early adoption is permitted. The Company is currently evaluating the impact the adoption of this guidance will have on the Company’s financial position or results of operations.

In September 2011, the FASB issued ASU 2011-08, Intangibles — Goodwill and Other Topics (Topic 350), Testing Goodwill for Impairment. The objective of this update is to simplify how entities, both public and nonpublic, test goodwill for impairment. The amendments in the Update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this Update, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this Update apply to all entities, both public and nonpublic, that have goodwill reported in their financial statements and are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. This ASU 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 outstanding as of September 30, 2011.

Stock option activity during the nine months ended September 30, 2011 and 2010 is as follows:

						Weighted-								Weighted-
						average								average
						Exercise								Exercise
		2011				Price				2010				Price
Outstanding, January 1			89,077			$	27.87				99,219			$	26.85
Granted			—				—				—				—
Exercised			—				—				—				—
Exercisable			9,000				17.55				—				—
Forfeited			(7,549	)			29.22				—				—
Outstanding, September 30			90,528			$	24.99				99,219			$	26.85

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 includes any dilutive effects of options, warrants, and convertible securities.

There are no convertible securities that would affect the denominator in calculating basic and diluted earnings per share. 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								For the Nine
		Months Ended								Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Weighted average common shares outstanding			1,894,207				1,768,362				1,847,945				1,761,292
Average treasury stock shares			(189,530	)			(189,530	)			(189,530	)			(189,530	)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share			1,704,677				1,578,832				1,658,415				1,571,762
Additional common stock equivalents (stock options) used to calculate diluted earnings per share			—				—				—				964
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share			1,704,677				1,578,832				1,658,415				1,572,726

The average share price for the quarter-ended September 30, 2011 was $17.23 while the year-to-date price was $17.36. The options to purchase 90,528 shares of common stock at prices ranging from $17.55 to $40.24 were outstanding during the three and nine months ended September 30, 2011 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 average market price.

NOTE 4 — COMPREHENSIVE INCOME

The components of comprehensive income consist exclusively of unrealized gains and losses on available for sale securities. For the nine months ended September 30, 2011, 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 September 30, 2011 and 2010 (net of the income tax effect):

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
(Dollar amounts in thousands)		2011				2010				2011				2010
Unrealized holding gains arising during the period on securities held		$	2,114			$	1,926			$	4,452			$	4,019
Reclassification adjustment for (gains) losses included in net income income, net of income taxes			(4	)			(12	)			11				(30	)
Net change in unrealized gains during the period			2,110				1,914				4,463				3,989
Unrealized holding gains, beginning of period			2,840				2,637				487				562
Unrealized holding gains, end of period		$	4,950			$	4,551			$	4,950			$	4,551
Net income		$	1,079			$	463			$	2,801			$	1,823
Other comprehensive income, net of tax:
Unrealized holding gains arising during the period			2,110				1,914				4,463				3,989
Comprehensive income		$	3,189			$	2,377			$	7,264			$	5,812

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 Balance Sheet at their fair value as of September 30, 2011 and December 31, 2010 by level within the fair value hierarchy. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

						September 30, 2011
(Dollar amounts in thousands)		Level I				Level II				Level III				Total
Assets Measured on a Recurring Basis:
U.S. government agency securities		$	—			$	34,679			$	—			$	34,679
Obligations of states and political subdivisions			—				89,235				—				89,235
Mortgage-backed securities in government- sponsored entities							71,699								71,699
Private-label mortgage-backed securities			—				8,088				—				8,088
Total debt securities			—				203,701				—				203,701
Equity securities in financial institutions			9				745				—				754
Total		$	9			$	204,446			$	—			$	204,455

						December 31, 2010
		Level I				Level II				Level III				Total
Assets Measured on a Recurring Basis:
U.S. government agency securities		$	—				32,603				—				32,603
Obligations of states and political subdivisions			—				76,880				—				76,880
Mortgage-backed securities in government- sponsored entities							74,043								74,043
Private-label mortgage-backed securities			—				17,326				—				17,326
Total debt securities			—				200,852				—				200,852
Equity securities in financial institutions			920				—				—				920
Total		$	920				200,852				—				201,772

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 September 30, 2011 and December 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 September 30, 2011 and December 31, 2010, 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.

						September 30, 2011
(Dollar amounts in thousands)		Level I				Level II				Level III				Total
Assets Measured on a non-recurring Basis:
Impaired loans		$	—			$	—				9,491			$	9,491
Other real estate owned			—				2,173				—				2,173

						December 31, 2010
		Level I				Level II				Level III				Total
Assets Measured on a non-recurring Basis:
Impaired loans		$	—			$	—			$	7,070			$	7,070
Other real estate owned			—				2,302				—				2,302

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

		September 30, 2011								December 31, 2010
		Carrying				Fair				Carrying				Fair
(Dollar amounts in thousands)		Value				Value				Value				Value
Financial assets:
Cash and cash equivalents		$	43,587			$	43,587			$	30,635			$	30,635
Investment securities Available for sale			204,455				204,455				201,772				201,772
Net loans			380,984				355,040				366,277				347,599
Bank-owned life insurance			8,188				8,188				7,979				7,979
Federal Home Loan Bank stock			1,887				1,887				1,887				1,887
Accrued interest receivable			2,643				2,643				2,259				2,259
Financial liabilities:
Deposits		$	587,238			$	593,820			$	565,251			$	570,471
Short-term borrowings			6,908				6,908				7,632				7,632
Other borrowings			17,955				19,696				19,321				19,801
Accrued interest payable			717				717				790				790

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:

		September 30, 2011
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(Dollar amounts in thousands)		Cost				Gains				Losses				Value
U.S. government agency securities		$	34,229			$	451			$	(1	)		$	34,679
Obligations of states and political subdivisions:
Taxable			8,210				899				—				9,109
Tax-exempt			76,799				3,415				(88	)			80,126
Mortgage-backed securities in government sponsored entities			69,107				2,592				—				71,699
Private-label mortgage-backed securities			7,703				450				(65	)			8,088
Total debt securities			196,048				7,807				(154	)			203,701
Equity securities in financial institutions			907				—				(153	)			754
Total		$	196,955			$	7,807			$	(307	)		$	204,455

		December 31, 2010
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
U.S. government agency securities		$	33,332			$	111			$	(840	)		$	32,603
Obligations of states and political subdivisions:
Taxable			7,371				80				(34	)			7,417
Tax-exempt			69,363				1,058				(958	)			69,463
Mortgage-backed securities in government sponsored entities			73,390				2,270				(654	)			74,043
Private-label mortgage-backed securities			16,636				55				(328	)			17,326
Total debt securities			200,092				3,574				(2,814	)			200,852
Equity securities in financial institutions			944				80				(104	)			920
Total		$	201,036			$	3,654			$	(2,918	)		$	201,772

The amortized cost and fair value of debt securities at September 30, 2011, 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		$	1,120			$	1,125
Due after one year through five years			5,138				5,412
Due after five years through ten years			16,861				17,832
Due after ten years			172,929				179,332
Total		$	196,048			$	203,701

Proceeds from sales of investment securities available for sale were $24.3 and $5.8 million during the nine months ended September 30, 2011 and September 30, 2010, respectively. Net losses realized were $16,000 for the nine months ended September 30, 2011 and net gains realized were $45,000 for the nine months ended September 30, 2010.

Proceeds from sales of investment securities available for sale were $14.2 million and $715,000 during the quarters ended September 30, 2011 and September 30, 2010, respectively. Net gains realized were $6,000 and $18,000 for the quarter ended September 30, 2011 and September 30, 2010, respectively.

Investment securities with an approximate carrying value of $55.8 and $51.7 million at September 30, 2011 and December 31, 2010, respectively, were pledged to secure deposits and other purposes as required by law.

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

		September 30, 2011
		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		$	1,999			$	(1	)		$	—			$	—			$	1,999			$	(1	)
Obligations of states and political subdivisions			4,642				(61	)			719				(27	)			5,361				(88	)
Private-label mortgage-backed securities			1,634				(45	)			446				(20	)			2,080				(65	)
Equity securities in financial institutions			174				(85	)			580				(68	)			754				(153	)
Total		$	8,449			$	(192	)		$	1,745			$	(115	)		$	10,194			$	(307	)

		December 31, 2010
		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		$	24,406			$	(840	)		$	—			$	—			$	24,406			$	(840	)
Obligations of states and political subdivisions			35,846				(940	)			439				(52	)			36,285				(992	)
Mortgage-backed securities in government sponsored entities			27,792				(654	)			—				—				27,792				(654	)
Private-label mortgage-backed securities			510				(11	)			2,480				(317	)			2,990				(328	)
Equity securities in financial institutions			—				—				590				(104	)			590				(104	)
Total		$	88,554			$	(2,445	)		$	3,509			$	(473	)		$	92,063			$	(2,918	)

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 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 security, or (ii) the fair value was below the amortized cost of the 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.

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

An unrealized loss is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. As a result the credit loss 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 96% of the total available-for-sale portfolio as of September 30, 2011 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 $8.1 million for which the Company evaluates credit losses on a quarterly basis. The gross unrealized gain position related to these private-label collateralized mortgage obligations amounted to $450,000 and the gross unrealized loss position was $65,000 on September 30, 2011. 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 nine months ended September 30, 2011, there were no available-for-sale debt securities with an unrealized loss that suffered OTTI.

NOTE 7 — LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES

Major classifications of net loans are summarized as follows (in thousands):

		September 30,				December 31,
		2011				2010
Commercial and industrial		$	58,903			$	57,501
Real estate — construction			21,619				15,845
Real estate — mortgage:
Residential			209,449				209,863
Commercial			93,827				84,304
Consumer installment			4,760				4,985
			388,558				372,498
Less allowance for loan losses			(7,574	)			(6,221	)
Net loans		$	380,984			$	366,277

The Company’s primary business activity is with customers located within its local trade area, eastern Geauga County, and contiguous counties to the north, east, and south. The company also serves the central Ohio market with offices in Dublin and Westerville, Ohio. Commercial, residential, consumer, and agricultural loans are granted. Although the Company has a diversified loan portfolio at September 30, 2011 and 2010, loans outstanding to individuals and businesses are dependent upon the local economic conditions in its immediate trade area.

The following tables summarize the primary segments of the loan portfolio as of September 30, 2011 and December 31, 2010 (in thousands):

		Commercial				Real estate-				Real Estate- Mortgage								Consumer
September 30, 2011		and industrial				construction				Residential				Commercial				installment				Total
Total loans		$	58,903			$	21,619			$	209,449			$	93,827			$	4,760			$	388,558
Individually evaluated for impairment		$	4,109			$	873			$	6,603			$	5,722			$	—			$	17,307
Collectively evaluated for impairment			54,794				20,746				202,846				88,105				4,760				371,251

		Commercial				Real estate-				Real estate- Mortgage								Consumer
December 31, 2010		and industrial				construction				Residential				Commercial				installment				Total
Total loans		$	57,501			$	15,845			$	209,863			$	84,304			$	4,985			$	372,498
Individually evaluated for impairment		$	5,477			$	1,299			$	4,329			$	6,266			$	17			$	17,388
Collectively evaluated for impairment			52,024				14,546				205,534				78,038				4,968				355,110

The Company’s loan portfolio is segmented to a level that allows management to monitor risk and performance. The portfolio is segmented into Commercial and Industrial (C & I), Real Estate Construction, Real Estate — Mortgage which is further segmented into Residential and Commercial real estate, and Consumer Installment Loans. The C&I loan segment consists of loans made for the purpose of financing the activities of commercial customers. The residential mortgage loan segment consists of loan made for the purpose of financing the activities of residential homeowners. The commercial mortgage loan segment consists of loans made for the purposed of financing the activities of commercial real estate owners and operators. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts.

Management evaluates individual loans in all of the commercial segments for possible impairment if the loan is greater than $150,000 and if the loan either is in nonaccrual status, or is risk rated Special Mention or Substandard and is greater than 90 days past due. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired.

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

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not necessary as of September 30, 2011 and 2010 (in thousands):

										Impaired Loans
										with No
		Impaired Loans with								Specific
		Specific Allowance								Allowance				Total Impaired Loans
																		Unpaid
		Recorded				Related				Recorded				Recorded				Principal
		Investment				Allowance				Investment				Investment				Balance
September 30, 2011
Commercial and industrial		$	526			$	184			$	1,726			$	2,252			$	2,253
Real estate — construction			276				125				367				643				643
Real estate — mortgage:
Residential			—				—				1,423				1,423				1,427
Commercial			2,858				627				3,177				6,035				6,054
Consumer installment			—				—				50				50				50
Total impaired loans		$	3,660			$	936			$	6,743			$	10,403			$	10,427
December 31, 2010
Commercial and industrial		$	655			$	203			$	1,874			$	2,529			$	2,540
Real estate — construction			—				—				618				618				614
Real estate — mortgage:
Residential			594				221				—				594				594
Commercial			1,879				188				1,441				3,320				3,314
Consumer installment			—				—				—				—				—
Total impaired loans		$	3,128			$	612			$	3,933			$	7,681			$	7,062