MIDDLEFIELD BANC CORP - Quarter Report: 2011 March (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		34 — 1585111
(State or other jurisdiction of incorporation or organization)		(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:

 

 

MIDDLEFIELD BANC CORP.

INDEX

		Page
		Number
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of March 31, 2011 and December 31, 2010			3
Consolidated Statement of Income (Unaudited) for the Three Months ended March 31, 2011 and 2010			4
Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) for the Three Months ended March 31, 2011			5
Consolidated Statement of Cash Flows (Unaudited) for the Three Months ended March 31, 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			29
Item 4. Controls and Procedures			30
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			31
Item 2. Unregistered sales of equity securities and use of proceeds			31
Item 3. Default Upon Senior Securities			31
Item 4. Reserved			31
Item 5. Other Information			31
Item 6. Exhibits and Reports on Form 8 - K			31
SIGNATURES			35
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,
		2011				2010
ASSETS
Cash and due from banks		$	11,555			$	10,473
Federal funds sold			30,581				20,162
Cash and cash equivalents			42,136				30,635
Investment securities available for sale			189,640				201,772
Loans			376,529				372,498
Less allowance for loan losses			6,685				6,221
Net loans			369,844				366,277
Premises and equipment			8,053				8,179
Goodwill			4,559				4,559
Bank-owned life insurance			8,052				7,979
Accrued interest and other assets			13,553				12,796
TOTAL ASSETS		$	635,837			$	632,197
LIABILITIES
Deposits:
Noninterest-bearing demand		$	52,831			$	53,391
Interest-bearing demand			54,371				48,869
Money market			75,046				71,105
Savings			155,945				146,993
Time			230,411				244,893
Total deposits			568,604				565,251
Short-term borrowings			7,301				7,632
Other borrowings			18,956				19,321
Accrued interest and other liabilities			1,693				1,971
TOTAL LIABILITIES			596,554				594,175
STOCKHOLDERS’ EQUITY
Common stock, no par value; 10,000,000 shares authorized, 1,836,139 and 1,780,553 shares issued			29,286				28,429
Retained earnings			16,418				15,840
Accumulated other comprehensive income			313				487
Treasury stock, at cost; 189,530 shares			(6,734	)			(6,734	)
TOTAL STOCKHOLDERS’ EQUITY			39,283				38,022
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	635,837			$	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
		March 31,
		2011				2010
INTEREST INCOME
Interest and fees on loans		$	5,301			$	5,097
Interest-bearing deposits in other institutions			2				4
Federal funds sold			9				11
Investment securities:
Taxable interest			1,323				1,203
Tax-exempt interest			698				592
Dividends on stock			26				17
Total interest income			7,359				6,924
INTEREST EXPENSE
Deposits			2,037				2,485
Short term borrowings			59				58
Other borrowings			109				190
Trust preferred securities			136				136
Total interest expense			2,341				2,869
NET INTEREST INCOME			5,018				4,055
Provision for loan losses			865				439
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			4,153				3,616
NONINTEREST INCOME
Service charges on deposit accounts			428				415
Investment securities gains, net			15				9
Earnings on bank-owned life insurance			73				67
Other income			183				118
Total noninterest income			699				609
NONINTEREST EXPENSE
Salaries and employee benefits			1,690				1,511
Occupancy expense			272				276
Equipment expense			158				198
Data processing costs			180				243
Ohio state franchise tax			128				136
Federal deposit insurance expense			225				202
Professional fees			211				192
Loss (gain) on sale of other real estate owned			(20	)			121
Other expense			861				679
Total noninterest expense			3,705				3,558
Income before income taxes			1,147				667
Income taxes			145				22
NET INCOME		$	1,002			$	645
EARNINGS PER SHARE
Basic		$	0.62			$	0.41
Diluted			0.62				0.41
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
(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							1,002												1,002			$	1,002
Other comprehensive income:
Unrealized loss on available for sale securities net of taxes of $89, net of reclassification adjustment											(174	)							(174	)			(174	)
Comprehensive income																						$	828
Stock based compensation expense (2,400 shares)			43																43
Common stock issuance (41,625 shares)			666																666
Dividend reinvestment and purchase plan (8,436 shares)			148																148
Cash dividends ($0.26 per share)							(424	)											(424	)
Balance, March 31, 2011		$	29,286			$	16,418			$	313			$	(6,734	)		$	39,283

See accompanying notes to the unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollar amounts in thousands)

(Unaudited)

		Three Months Ended
		March 31,
		2011				2010
OPERATING ACTIVITIES
Net income		$	1,002			$	645
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Provision for loan losses			865				439
Investment securities gains, net			(15	)			(9	)
Depreciation and amortization			211				189
Amortization of premium and discount on investment securities			116				(59	)
Amortization of deferred loan fees, net			(40	)			(3	)
Earnings on bank-owned life insurance			(73	)			(67	)
Deferred income taxes			(384	)			(227	)
Loss on sale of other real estate owned			(20	)			44
Increase in accrued interest receivable			(487	)			(681	)
Increase (decrease) in accrued interest payable			(31	)			26
Decrease in prepaid federal deposit insurance			225				186
Other, net			(338	)			(941	)
Net cash provided by (used for) operating activities			1,031				(458	)
INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from repayments and maturities			10,135				6,986
Proceeds from sale of securities			14,879				3,893
Purchases			(13,247	)			(37,913	)
Increase in loans, net			(4,487	)			(6,298	)
Proceeds from the sale of other real estate owned			170				96
Purchase of premises and equipment			(26	)			(165	)
Net cash provided by (used for) investing activities			7,423				(33,401	)
FINANCING ACTIVITIES
Net increase in deposits			3,353				35,171
Decrease in short-term borrowings, net			(331	)			(28	)
Repayment of other borrowings			(365	)			(491	)
Common stock issuance			666				—
Proceeds from dividend reinvestment & purchase plan			148				116
Cash dividends			(424	)			(408	)
Net cash provided by financing activities			3,047				34,360
Increase in cash and cash equivalents			11,501				501
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD			30,635				41,153
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	42,136			$	41,654
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings		$	2,372			$	2,843
Income taxes			850				400
Non-cash investing transactions:
Transfers from loans to other real estate owned		$	96			$	150

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. 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 did not have a material impact 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.

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.

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 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.

In April 2010, the FASB issued ASU 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan is a Part of a Pool That is Accounted for as a Single Asset — a consensus of the FASB Emerging Issues Task Force. ASU 2010-18 clarifies the treatment for a modified loan that was acquired as part of a pool of assets. Refinancing or restructuring the loan does not make it eligible for removal from the pool, the FASB said. The amendment will be effective for loans that are part of an asset pool and are modified during financial reporting periods that end July 15, 2010 or later and is not expected to have a significant impact on the Company’s financial statements.

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 is currently evaluating the impact the adoption of this guidance will have on the Company’s financial position or results of operations.

In August, 2010, the FASB issued ASU 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules. This ASU amends various SEC paragraphs pursuant to the issuance of Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules, and Codification of Financial Reporting Policies and is not expected to have a significant impact on the Company’s financial statements.

In August, 2010, the FASB issued ASU 2010-22, Technical Corrections to SEC Paragraphs — An announcement made by the staff of the U.S. Securities and Exchange Commission. This ASU amends various SEC paragraphs based on external comments received and the issuance of SAB 112, which amends or rescinds portions of certain SAB topics and is not expected to have a significant impact on the Company’s financial statements.

In September, 2010, the FASB issued ASU 2010-25, Plan Accounting — Defined Contribution Pension Plans. The amendments in this ASU require that participant loans be classified as notes receivable from participants, which are segregated from plan investments and measured at their unpaid principal balance plus any accrued but unpaid interest. The amendments in this update are effective for fiscal years ending after December 15, 2010 and are not expected to have a significant impact on the Company’s financial statements.

In October, 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This ASU addresses the diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral, The amendments are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2011 and are not expected to have a significant impact on the Company’s financial statements.

In December, 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This ASU modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating an impairment may exist. The qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. For public entities, the amendments in this Update are effective for fiscal year, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities may early adopt the amendments using the effective date for public entities. This ASU is not expected to have a significant impact on the Company’s financial.

In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this Update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. This ASU is not expected to have a significant impact on the Company’s financial statements.

In January 2011, the FASB issued ASU 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. The amendments in this Update temporarily delay the effective date of the disclosures about troubled debt restructurings in Update 2010-20, enabling public-entity creditors to provide those disclosures after the FASB clarifies the guidance for determining what constitutes a troubled debt restructuring. The deferral in this Update will result in more consistent disclosures about troubled debt restructurings. This amendment does not defer the effective date of the other disclosure requirements in Update 2010-20. In the proposed Update for determining what constitutes a troubled debt restructuring, the FASB proposed that the clarifications would be effective for interim and annual periods ending after June 15, 2011. For the new disclosures about troubled debt restructurings in Update 2010-20, those clarifications would be applied retrospectively to the beginning of the fiscal year in which the proposal is adopted. The adoption of this guidance in not expected to have a significant impact on the Company’s 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.

NOTE 2 — STOCK-BASED COMPENSATION

The Company has no unrecognized stock-based compensation costs or unvested stock options outstanding as of March 31, 2011.

Stock option activity during the three months ended March 31, 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			—				—				—				—
Forfeited			(7,549	)			29.22				—				—
Outstanding, March 31			81,528			$	27.75				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 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,
		2011				2010
Weighted average common shares outstanding			1,811,419				1,754,984
Average treasury stock shares			(189,530	)			(189,530	)
Weighted average common shares and common stock equivalents used to calculate basic earnings per share			1,621,889				1,565,454
Additional common stock equivalents (stock options) used to calculate diluted earnings per share			—				1,987
Weighted average common shares and common stock equivalents used to calculate diluted earnings per share			1,621,889				1,567,441

Options to purchase 81,528 shares of common stock at prices ranging from $22.33 to $40.24 were outstanding during the three months ended March 31, 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 market price as of March 31, 2011. For the three months ended March 31, 2010, there were 89,077 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, 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 March 31, 2011 and 2010 (net of the income tax effect):

		For the Three Months
		Ended March 31,
(Dollar amounts in thousands)		2011				2010
Unrealized holding gains (losses) arising during the period on securities held		$	(164	)		$	692
Reclassification adjustment for gains included in net income			(10	)			(6	)
Net change in unrealized gains (losses) during the period			(174	)			686
Unrealized holding gains, beginning of period			487				562
Unrealized holding gains, end of period			313				1,248
Net income			1,002				645
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during the period			(174	)			686
Comprehensive income		$	828			$	1,331

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, 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.

		March 31, 2011
(Dollar amounts in thousands)		Level I				Level II				Level III				Total
Assets Measured on a Recurring Basis:
U.S. government agency securities		$	—			$	26,470			$	—			$	26,470
Obligations of states and political subdivisions			—				76,286				—				76,286
Mortgage-backed securities in government-sponsored entities							69,897								69,897
Private-label mortgage-backed securities			—				16,233				—				16,233
Total debt securities			—				188,886				—				188,886
Equity securities in financial institutions			754				—				—				754
Total		$	754			$	188,886			$	—			$	189,640

		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 March 31, 2011.

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, 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.

		March 31, 2011
(Dollar amounts in thousands)		Level I				Level II				Level III				Total
Assets Measured on a non-recurring Basis:
Impaired loans		$	—			$	1,818			$	6,695			$	8,513
Other real estate owned			—				2,248				—				2,248

		December 31, 2010
		Level I				Level II				Level III				Total
Assets Measured on a non-recurring Basis:
Impaired loans		$	—			$	4,312			$	2,758			$	7,070
Other real estate owned			—				2,302				—				2,302

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

		March 31, 2011								December 31, 2010
		Carrying				Fair				Carrying				Fair
(Dollar amounts in thousands)		Value				Value				Value				Value
Financial assets:
Cash and cash equivalents		$	42,136			$	42,136			$	30,635			$	30,635
Investment securities
Available for sale			189,640				189,640				201,772				201,772
Net loans			369,844				347,335				366,277				347,599
Bank-owned life insurance			8,052				8,052				7,979				7,979
Federal Home Loan Bank stock			1,887				1,887				1,887				1,887
Accrued interest receivable			2,746				2,746				2,259				2,259
Financial liabilities:
Deposits		$	568,604			$	573,117			$	565,251			$	570,471
Short-term borrowings			7,301				7,301				7,632				7,632
Other borrowings			18,956				20,980				19,321				19,801
Accrued interest payable			759				759				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:

		March 31, 2011
						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(Dollar amounts in thousands)		Cost				Gains				Losses				Value
U.S. government agency securities		$	27,269			$	64			$	(863	)		$	26,470
Obligations of states and political subdivisions:
Taxable			7,369				49				(59	)			7,359
Tax-exempt			68,562				1,064				(699	)			68,927
Mortgage-backed securities in government sponsored entities			69,604				1,108				(815	)			69,897
Private-label mortgage backed securities			15,418				1,025				(210	)			16,233
Total debt securities			188,222				3,310				(2,646	)			188,886
Equity securities in financial institutions			944				—				(190	)			754
Total		$	189,166			$	3,310			$	(2,836	)		$	189,640

		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 March 31, 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		$	1,975			$	2,000
Due after one year through five years			5,685				5,962
Due after five years through ten years			19,501				20,128
Due after ten years			161,061				160,796
Total		$	188,222			$	188,886

Proceeds from sales of investment securities available for sale were $14.9 and $3.9 million during the three-months ended March 31, 2011 and March 31, 2010, respectively. Gross losses and gains realized were $15,000 and $9,000 during the three-months ended March 31, 2011 and March 31, 2010, respectively.

Investment securities with an approximate carrying value of $47,187,000 and $41,554,000 at March 31, 2011 and 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.

		March 31, 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		$	22,690			$	(863	)		$	—			$	—			$	22,690			$	(863	)
Obligations of states and political subdivisions			32,515				(681	)			414				(77	)			32,929				(758	)
Mortgage-backed securities in government sponsored entities			30,538				(815	)			—				—				30,538				(815	)
Private-label mortgage backed securities			488				(21	)			2,102				(189	)			2,590				(210	)
Equity securities in financial institutions			165				(85	)			590				(105	)			755				(190	)
Total		$	86,396			$	(2,465	)		$	3,106			$	(371	)		$	89,502			$	(2,836	)

		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.

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 86% of the total available-for-sale portfolio as of March 31, 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 $16.2 million for which the Company evaluates credit losses on a quarterly basis. The net unrealized gain position related to these private-label collateralized mortgage obligations amounted to $1.0 million and the net unrealized loss position was $210,000 on March 31, 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 three months ended March 31, 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 are summarized as follows (in thousands):

		March 31,				December 31,
		2011				2010
Commercial and industrial		$	59,068			$	57,501
Real estate — construction			16,974				15,845
Real estate — mortgage:
Residential			208,444				209,863
Commercial			87,325				84,304
Consumer installment			4,718				4,985
			376,529				372,498
Less allowance for loan losses			6,685				6,221
Net loans		$	369,844			$	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 March 31, 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 (in thousands):

		Real Estate- Mortgage
		Commercial and				Real estate-												Consumer
March 31, 2011		industrial				construction				Residential				Commercial				installment				Total
Total loans		$	59,068			$	16,974			$	208,444			$	87,325			$	4,718			$	376,529
Individually evaluated for impairment		$	5,413			$	1,290			$	5,829			$	5,466			$	—			$	17,388
Collectively evaluated for impairment			53,655				15,684				202,615				81,859				4,718				359,141

		Real estate- Mortgage
		Commercial and				Real estate-												Consumer
December 31, 2010		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 commercial and industrial (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 March 31, 2011 and 2010 (in thousands):

										Impaired Loans
										with No
		Impaired Loans with								Specific				Total Impaired Loans
		Specific Allowance								Allowance								Unpaid
		Recorded				Related				Recorded				Recorded				Principal
		Investment				Allowance				Investment				Investment				Balance
March 31, 2011
Commercial and industrial		$	1,633			$	572			$	1,694			$	3,327			$	3,338
Real estate — construction			—				—				618				618				614
Real estate — mortgage:
Residential			582				217				—				582				581
Commercial			652				261				2,555				3,207				3,202
Total impaired loans		$	2,867			$	1,050			$	4,867			$	7,734			$	7,735
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
Total impaired loans		$	3,128			$	612			$	3,933			$	7,681			$	7,062

Management uses a nine point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first five categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as bankruptcy, repossession, or death occurs to raise awareness of a possible credit event. The Company’s Commercial Loan Officers are responsible for the timely and accurate risk rating of the loans in their portfolios at origination and on an ongoing basis. The Credit Department performs an annual review of all commercial relationships $200,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Company has an experienced Loan Review Department that continually reviews and assesses loans within the portfolio. The Company engages an external consultant to conduct loan reviews on a semi-annual basis. Generally, the external consultant reviews commercial relationships greater than $250,000 and/or criticized relationships greater than $125,000. Detailed reviews, including plans for resolution, are performed on loans classified as Substandard on a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of March 31, 2011 (in thousands):

						Special												Total
		Pass				Mention				Substandard				Doubtful				Loans
March 31, 2011
Commercial and industrial		$	53,394			$	1,053			$	4,397			$	224			$	59,068
Real estate — construction			15,646				—				1,328				—				16,974
Real estate — mortgage:
Residential			192,505				1,529				14,410				—				208,444
Commercial			79,446				341				7,538				—				87,325
Consumer installment			4,680				10				28				—				4,718
Total		$	345,671			$	2,933			$	27,701			$	224			$	376,529

						Special												Total
		Pass				Mention				Substandard				Doubtful				Loans
December 31, 2010
Commercial and industrial		$	52,008			$	903			$	4,366			$	224			$	57,501
Real estate — construction			14,481				—				1,364				—				15,845
Real estate — mortgage:
Residential			192,823				1,601				15,439				—				209,863
Commercial			76,979				353				6,972				—				84,304
Consumer installment			4,937				11				37				—				4,985
Total		$	341,228			$	2,868			$	28,178			$	224			$	372,498