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Exhibit 13

 
image01.jpg

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Shareholders and the Board of Directors of Middlefield Banc Corp.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Middlefield Banc Corp. and subsidiaries (the “Company”) as of December 31, 2022 and 2021; the related consolidated statements of income, comprehensive (loss) income, changes in stockholders’ equity, and cash flows for the years then ended; and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent, with respect to the Company, in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the Audit Committee and that: (1) relate to accounts or disclosures that are material to the financial statements; and (2) involve our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter, in any way, our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

1
 

 

image02.jpg

 

Allowance for Loan Losses (ALL) – Qualitative Factors

 

Description of the Matter

The Company’s loan portfolio totaled $1.35 billion as of December 31, 2022, and the associated ALL was $14.4 million. As discussed in Notes 1 and 5 to the consolidated financial statements, determining the amount of the ALL requires significant judgment about the collectability of loans, which includes an assessment of quantitative factors such as historical loss experience within each risk category of loans and testing of certain commercial loans for impairment. Management applies additional qualitative adjustments to reflect the inherent losses that exist in the loan portfolio at the balance sheet date that are not reflected in the historical loss experience. Qualitative adjustments are made based upon changes in lending policies and practices, economic conditions, changes in the loan portfolio mix, trends in loan delinquencies and classified loans, collateral values, and concentrations of credit risk for the commercial loan portfolios.

 

We identified these qualitative adjustments within the ALL as critical audit matters because they involve a high degree of subjectivity. In turn, auditing management’s judgments regarding the qualitative factors applied in the ALL calculation involved a high degree of subjectivity.

 

How We Addressed the Matter in Our Audit

We gained an understanding of the Company’s process for establishing the ALL, including the qualitative adjustments made to the ALL. We evaluated the design and tested the operating effectiveness of controls over the Company’s ALL process, which included, among others, management’s review and approval controls designed to assess the need and level of qualitative adjustments to the ALL, as well as the reliability of the data utilized to support management’s assessment.

 

To test the qualitative adjustments, we evaluated the appropriateness of management’s methodology and assessed whether all relevant risks were reflected in the ALL and the need to consider qualitative adjustments.

 

Regarding the measurement of the qualitative adjustments, we evaluated the completeness, accuracy, and relevance of the data and inputs utilized in management’s estimate. For example, we compared the inputs and data to the Company’s historical loan performance data, third-party macroeconomic data, and peer bank data and considered the existence of new or contrary information. We also compared the ALL to a range of historical losses to evaluate the ALL, including the reasonableness of qualitative adjustments. Furthermore, we analyzed the changes in the components of the qualitative reserves relative to changes in external market factors, the Company’s loan portfolio, and asset quality trends, which included the evaluation of management’s ability to capture and assess relevant data from both external sources and internal reports on loan customers and the supporting documentation for substantiating revisions to qualitative factors. We assessed the reasonableness of the factors from both a directional perspective and from an overall magnitude perspective as compared to the underlying data.

 

We also utilized internal credit review specialists with knowledge to evaluate the appropriateness of management’s risk-rating processes, to ensure that the risk ratings applied to the commercial loan portfolio were reasonable.

 

2
 

 

image02.jpg

 

Accounting for Acquisitions

 

Description of the Matter

During 2022, the Company completed the acquisition of Liberty Bancshares, Inc. for net consideration of $73.3 million, as disclosed in Note 21 to the consolidated financial statements. The transaction was accounted for by applying the acquisition method.

 

Auditing the Company’s accounting for the acquisition of Liberty Bancshares, Inc. was complex due to the significant estimation required by management to determine the fair value of the loans acquired and core deposit intangibles of $312.6 million and $6.7 million, respectively. The Company determined the fair value of the acquired loans by estimating the principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. Management considered a number of factors in evaluating the acquisition-date fair value, including the remaining life of the acquired loans, delinquency status, estimated prepayments, payment options and other loan features, internal risk grade, estimated value of the underlying collateral, and interest rate environment. The Company determined the fair value of the core deposit intangibles by using a discounted cash flow model based on various factors, including discount rate, attrition rate, interest rate, cost of alternative funds, and net maintenance costs. The significant estimation was primarily due to the judgment involved in determining the discount rate used to discount the expected cash flows for acquired loans and core deposit intangibles, along with other factors described above, to establish the acquisition-date fair value of the loans and core deposit intangibles. These factors are forward-looking and could be affected by future economic and market conditions.

 

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s accounting for the acquisition. Our tests included testing controls over the completeness and accuracy of the data and the estimation process supporting the fair value of loans acquired and core deposit intangibles. We also tested management’s review of factors used in the valuation models.

 

To test the estimated fair value of the loans acquired and core deposit intangibles, we performed audit procedures that included, among others, evaluating the Company’s valuation methodology, evaluating the factors used by the Company’s valuation specialist, and evaluating the completeness and accuracy of the underlying data supporting the factors and estimates. For example, when evaluating the discount rate and other factors noted above, we compared the factors to current industry, market, and economic information in addition to factors used in historical acquisitions.

 

We have served as the Company’s auditor since 1986.

 

 

/s/S. R. Snodgrass, P.C.

 

 

Cranberry Township, Pennsylvania

March 15, 2023

 

3
 

 

 
 

MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET

(Dollar amounts in thousands)

 

 

December 31,

 
 

2022

 

2021

 
       

ASSETS

      

Cash and due from banks

$51,404 $97,172 

Federal funds sold

 2,405  22,322 

Cash and cash equivalents

 53,809  119,494 

Equity securities, at fair value

 915  818 

Investment securities available for sale, at fair value

 164,967  170,199 

Loans held for sale

 -  1,051 

Loans:

      

Commercial real estate:

      

Owner occupied

 191,748  111,470 

Non-owner occupied

 380,580  283,618 

Multifamily

 58,251  31,189 

Residential real estate

 296,308  240,089 

Commercial and industrial

 195,602  148,812 

Home equity lines of credit

 128,065  104,355 

Construction and other

 94,199  54,148 

Consumer installment

 8,119  8,010 

Total loans

 1,352,872  981,691 

Less: allowance for loan and lease losses

 14,438  14,342 

Net loans

 1,338,434  967,349 

Premises and equipment, net

 21,961  17,272 

Goodwill

 31,735  15,071 

Core deposit intangibles

 7,701  1,403 

Bank-owned life insurance

 33,811  17,060 

Other real estate owned

 5,821  6,992 

Accrued interest receivable and other assets

 28,528  14,297 
       

TOTAL ASSETS

$1,687,682 $1,331,006 
       

LIABILITIES

      

Deposits:

      

Noninterest-bearing demand

$503,907 $334,171 

Interest-bearing demand

 164,677  196,308 

Money market

 187,498  177,281 

Savings

 307,917  260,125 

Time

 238,020  198,725 

Total deposits

 1,402,019  1,166,610 

Short-term borrowings:

      

Federal Home Loan Bank advances

 65,000  - 

Other borrowings

 12,059  12,901 

Accrued interest payable and other liabilities

 10,913  6,160 

TOTAL LIABILITIES

 1,489,991  1,185,671 

STOCKHOLDERS' EQUITY

      

Common stock, no par value; 10,000,000 shares authorized, 9,916,466 and 7,330,548 shares issued; 8,245,235 and 5,888,737 shares outstanding

 161,029  87,131 

Retained earnings

 94,154  83,971 

Accumulated other comprehensive (loss) income

 (22,144) 3,462 

Treasury stock, at cost; 1,671,231 and 1,441,811 shares

 (35,348) (29,229)

TOTAL STOCKHOLDERS' EQUITY

 197,691  145,335 
       

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$1,687,682 $1,331,006 

 

See accompanying notes to the consolidated financial statements.

 

4
 

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF INCOME

(Dollar amounts in thousands, except per share data)

 

   

Year Ended December 31,

  
   

2022

    

2021

  

INTEREST AND DIVIDEND INCOME

                

Interest and fees on loans

   $ 48,513     $ 47,896  

Interest-earning deposits in other institutions

     472       90  

Federal funds sold

     219       3  

Investment securities:

                

Taxable interest

     1,811       1,679  

Tax-exempt interest

     3,707       2,565  

Dividends on stock

     184       102  

Total interest and dividend income

     54,906       52,335  
                 

INTEREST EXPENSE

                

Deposits

     4,018       3,913  

Short-term borrowings

     307       -  

Other borrowings

     404       282  

Total interest expense

     4,729       4,195  
                 

NET INTEREST INCOME

     50,177       48,140  
                 

Provision for loan losses

     -       700  
                 

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

     50,177       47,440  
                 

NONINTEREST INCOME

                

Service charges on deposit accounts

     3,850       3,425  

(Losses) gains on equity securities

     (173 )     209  

Gain on other real estate owned

     -       43  

Earnings on bank-owned life insurance

     459       546  

Gain on sale of loans

     24       1,240  

Revenue from investment services

     674       727  

Gross rental income

     951       180  

Other income

     961       879  

Total noninterest income

     6,746       7,249  
                 

NONINTEREST EXPENSE

                

Salaries and employee benefits

     17,548       17,151  

Occupancy expense

     2,033       2,048  

Equipment expense

     1,074       1,361  

Data processing costs

     3,701       3,298  

Ohio state franchise tax

     1,157       1,144  

Federal deposit insurance expense

     329       494  

Professional fees

     1,500       1,313  

Other real estate owned writedowns

     1,200       -  

Advertising expense

     1,033       885  

Software amortization expense

     143       361  

Core deposit intangible amortization

     372       321  

Gross other real estate owned expenses

     707       54  

Merger-related costs

     2,382       -  

Other expense

     4,851       3,561  

Total noninterest expense

     38,030       31,991  
                 

Income before income taxes

     18,893       22,698  

Income taxes

     3,220       4,065  
                 

NET INCOME

   $ 15,673     $ 18,633  
                 

EARNINGS PER SHARE

                

Basic

   $ 2.60     $ 3.01  

Diluted

     2.59       3.00  

 

See accompanying notes to the consolidated financial statements.

 

5
 

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME

(Dollar amounts in thousands)

  

   

Year Ended December 31,

  
   

2022

    

2021

  
                 

Net income

   $ 15,673     $ 18,633  
                 

Other comprehensive loss:

                

Net unrealized holding loss on available- for-sale investment securities

     (32,413 )     (1,041 )

Tax effect

     6,807       219  
                 

Total other comprehensive loss

     (25,606 )     (822 )
                 

Comprehensive (loss) income

   $ (9,933 )   $ 17,811  

  

See accompanying notes to the consolidated financial statements.

 

6
 

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

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

 

              

Accumulated

         
              

Other

      

Total

 
  

Common Stock

  

Retained

  

Comprehensive

  

Treasury

  

Stockholders'

 
  

Shares

  

Amount

  

Earnings

  

(Loss) Income

  

Stock

  

Equity

 

Balance, December 31, 2020

  7,308,685  $86,886  $69,578  $4,284  $(16,938) $143,810 
                         

Net income

          18,633           18,633 

Other comprehensive loss

              (822)      (822)

Stock options exercised

  10,650   94               94 

Stock-based compensation, net

  11,213   151               151 

Treasury shares acquired (512,449 shares)

                  (12,291)  (12,291)

Cash dividends ($0.69 per share)

          (4,240)          (4,240)
                         

Balance, December 31, 2021

  7,330,548  $87,131  $83,971  $3,462  $(29,229) $145,335 
                         

Net income

          15,673           15,673 

Other comprehensive loss

              (25,606)      (25,606)

Common stock issued in business combination

  2,561,513   73,265               73,265 

Stock-based compensation, net

  24,405   633               633 

Treasury shares acquired (229,420 shares)

                  (6,119)  (6,119)

Cash dividends ($0.81 per share)

          (5,490)          (5,490)
                         

Balance, December 31, 2022

  9,916,466  $161,029  $94,154  $(22,144) $(35,348) $197,691 

 

See accompanying notes to the consolidated financial statements.

 

7
 

 

 

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollar amounts in thousands)

 

  

Year Ended December 31,

 
  

2022

  

2021

 

OPERATING ACTIVITIES

        

Net income

 $15,673  $18,633 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Provision for loan losses

  -   700 

Loss (gain) on equity securities

  173   (209)

Depreciation and amortization of premises and equipment, net

  1,330   1,420 

Software amortization expense

  143   361 

Financing lease amortization expense

  176   313 

Amortization of premium and discount on investment securities, net

  624   506 

Accretion of deferred loan fees, net

  (1,804)  (4,780)

Amortization of core deposit intangibles

  372   321 

Stock-based compensation expense, net

  307   478 

Origination of loans held for sale

  (1,350)  (34,081)

Proceeds from sale of loans

  1,641   35,148 

Gain on sale of loans

  (24)  (1,240)

Earnings on bank-owned life insurance

  (459)  (546)

Deferred income tax

  (324)  (401)

Gain on other real estate owned

  -   (43)

Other real estate owned writedowns

  1,200   - 

(Increase) decrease in accrued interest receivable

  (209)  1,078 

Increase (decrease) in accrued interest payable

  395   (343)

Other, net

  498   (1,893)

Net cash provided by operating activities

  18,362   15,422 
         

INVESTING ACTIVITIES

        

Investment securities available for sale:

        

Proceeds from repayments and maturities

  4,235   11,521 

Proceeds from sale of securities

  57,887   - 

Purchases

  (32,290)  (68,907)

(Increase) decrease in loans, net

  (55,908)  127,294 

Proceeds from the sale of other real estate owned

  -   501 

Purchase of premises and equipment

  (884)  (605)

Proceeds from the disposal of premises and equipment

  165   - 

Purchase of restricted stock

  (1,448)  - 

Redemption of restricted stock

  1,183   658 

Proceeds from bank-owned life insurance

  -   424 

Acquisition, net of cash paid

  18,406   - 

Net cash (used in) provided by investing activities

  (8,654)  70,886 
         

FINANCING ACTIVITIES

        

Net decrease in deposits

  (128,553)  (58,590)

Increase in short-term borrowings, net

  65,000   - 

Repayment of other borrowings

  (231)  (4,204)

Stock options exercised

  -   94 

Repurchase of treasury shares

  (6,119)  (12,291)

Cash dividends

  (5,490)  (4,240)

Net cash used in financing activities

  (75,393)  (79,231)
         

(Decrease) increase in cash and cash equivalents

  (65,685)  7,077 
         

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

  119,494   112,417 
         

CASH AND CASH EQUIVALENTS AT END OF YEAR

 $53,809  $119,494 

 

See accompanying notes to the consolidated financial statements.

 

8
 

 

   

Year Ended December 31,

  
   

2022

    

2021

  

SUPPLEMENTAL INFORMATION

                

Cash paid during the year for:

                

Interest on deposits and borrowings

   $ 4,334     $ 4,408  

Income taxes

     3,579       5,526  
                 

Noncash investing transactions:

                

Common stock issued in business acquisition

   $ 73,265     $ -  

Transfers from loans held for sale to loans held for investment

     (784 )     63  

Decrease (increase) in finance lease assets included in premises and equipment

     611       (67 )

Transfers from loans to other real estate owned

     29       -  
                 

Noncash financing transactions:

                

(Decrease) increase in finance lease liabilities included in other borrowings

   $ (611 )   $ 67  

 

See accompanying notes to the consolidated financial statements.

 

   

Year Ended December 31,

  
Acquisition of Liberty  

2022

    

2021

  

Noncash assets acquired

                

Investments

   $ 57,907     $ -  

Loans

     312,618        

Premises and equipment, net

     6,087       -  

Accrued interest receivable

     1,563       -  

Bank-owned life insurance

     16,290       -  

Core deposit intangible

     6,670       -  

Mortgage servicing rights

     1,680        

Other assets

     3,111       -  

Goodwill

     16,664       -  

Total noncash assets acquired

     422,590       -  
                 

Liabilities assumed

                

Time deposits

     (69,278 )     -  

Deposits other than time deposits

     (294,684 )     -  

Accrued interest payable

     (246 )     -  

Other liabilities

     (3,523 )     -  

Total liabilities assumed

     (367,731 )     -  
                 

Liberty stock acquired in business combination

     (73,265 )     -  
                 

Cash and cash equivalents acquired, net

   $ 18,406     $ -  

 

See accompanying notes to the consolidated financial statements.

 

9
 

 

 

MIDDLEFIELD BANC CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A summary of the significant accounting and reporting policies applied in the presentation of the accompanying financial statements follows:

 

Nature of Operations and Basis of Presentation

 

Middlefield Banc Corp. (the “Company”) is an Ohio corporation organized to become the holding company of The Middlefield Banking Company (“MBC”). MBC is a state-chartered bank located in Ohio, whose consolidated financial statements also include the accounts of MBC’s subsidiaries, Middlefield Investments, Inc. (MI) and Middlefield Insurance Services (MIS). MI was established in the first quarter of 2019. In the first quarter of 2022, MBC established a wholly-owned subsidiary named MIS, headquartered in Middlefield, Ohio. This operating subsidiary exists to offer retail and business customers a variety of insurance services, including home, renters, automobile, pet, identity theft, travel, and professional liability insurance. As a result of the bank merger, Middlefield Banc Corp. acquired a 100% ownership interest in LBSI Insurance, LLC (“LBSI”), a wholly owned financial subsidiary of Liberty National Bank. LBSI is no longer in operation following the merger, and it is the Bank’s intention to merge it with and into its own insurance subsidiary. Significant intercompany items have been eliminated in preparing MBC’s consolidated financial statements. On October 23, 2009, the Company established an asset resolution subsidiary named EMORECO, Inc. The Company and its subsidiaries derive substantially all of their income from banking and bank-related services, including interest earnings on residential real estate, commercial mortgage, commercial and consumer financings, and interest earnings on investment securities and deposit services to its customers through 22 full-service locations. The Company is supervised by the Board of Governors of the Federal Reserve System. At the same time, MBC is subject to regulation and supervision by the FDIC and the Ohio Division of Financial Institutions.

 

The consolidated financial statements of the Company include its wholly owned subsidiaries, MBC and EMORECO, Inc. Significant intercompany items have been eliminated in preparing the consolidated financial statements.

 

On December 1, 2022, the Company completed its merger with Liberty Bancshares, Inc. (“Liberty’), pursuant to a previously announced definitive merger agreement. Under the terms of the merger agreement, Liberty shareholders received 2.752 shares of the Company’s common stock in exchange for each share of Liberty common stock they owned immediately before the merger. The Company issued 2.6 million shares of its common stock in the merger and the aggregate merger consideration was approximately $73.3 million. Upon closing, Liberty National Bank was merged into MBC, and its six full-service bank offices, in Ada and Kenton in Hardin County, in Bellefontaine and Bellefontaine South in Logan County, in Marysville in Union County, and in Westerville in Franklin County, became offices of MBC.

 

The financial statements have been prepared according to U.S. Generally Accepted Accounting Principles. In preparing the financial statements, management must make estimates and assumptions that affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from those estimates.

 

Investment and Equity Securities

 

Investment securities are classified at the time of purchase, based on management’s intention and ability, as securities held to maturity or securities available for sale. Debt securities acquired with the intent and ability to hold to maturity are stated at cost, adjusted for amortization of premium and accretion of discount, computed using a level yield method, and recognized as interest income adjustments. Certain other debt securities have been classified as available for sale to serve principally as a source of liquidity. Unrealized holding gains and losses for available-for-sale securities are reported as a separate component of stockholders’ equity, net of tax, until realized. Realized security gains and losses are computed using the specific identification method. Interest and dividends on investment securities are recognized as income when earned. For 2022 and 2021, this category includes common stocks of public companies that the Company has the positive intent and ability to hold for an indeterminate amount of time. Such securities are reported at fair value, with unrealized holding gains and losses included in earnings.

 

Securities are evaluated quarterly and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value is other-than-temporary. For debt securities, management considers whether the present value of cash flows expected to be collected is less than the security’s amortized cost basis (the difference defined as the credit loss), the magnitude and duration of the decline, the reasons underlying the decline and the Bank’s intent to sell the security or whether it is more likely than not that the Bank would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other-than-temporary. Once a decline in value is determined to be other-than-temporary, if the Bank does not intend to sell the security, and it is more likely than not that it will not be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss. Any remaining difference between fair value and amortized cost (the difference defined as the non-credit portion) is recognized in other comprehensive income, net of applicable taxes. Otherwise, the difference between fair value and the amortized cost is charged to earnings.

 

10
 
 

Restricted Stock

 

Common stock of the FHLB represents ownership in an institution that is wholly owned by other financial institutions. This equity security is accounted for at cost and classified with other assets. The FHLB of Cincinnati has reported profits for 2022 and 2021, remains in compliance with regulatory capital and liquidity requirements and continues to pay dividends on the stock and make redemptions at the par value. Considering these factors, management concluded that the stock was not impaired on December 31, 2022, or 2021.

 

Mortgage Banking Activities

 

The Bank sells mortgage loans on a servicing retained basis. Servicing rights are initially recorded at fair value, with the income statement effect recorded in gains on sales of loans. The Bank measures servicing assets using the amortization method. Loan servicing rights are amortized in proportion to and throughout estimated net future servicing revenue. The expected period of the estimated net servicing income is partly based on the expected prepayment of the underlying mortgages. The unamortized balance of mortgage servicing rights is included in accrued interest and other assets on the Consolidated Balance Sheet.

 

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Late fees and ancillary fees related to loan servicing are not material. The Bank is servicing loans for others in the amount of $94.8 million and $105.9 million on December 31, 2022, and 2021, respectively.

 

Loans

 

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

 

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

 

Allowance for Loan and Lease Losses

 

The allowance for loan and lease losses represents the amount that management estimates is adequate to provide for probable loan losses inherent in the loan portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan and lease losses is established through a provision for loan losses charged to operations. The provision is based on management’s periodic evaluation of the adequacy of the allowance for loan and lease losses, which encompasses the overall risk characteristics of the various portfolio segments, experience with losses, the impact of economic conditions on borrowers, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan and lease losses, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to a significant change in the near term.

 

A loan is considered impaired when it is probable the borrower will not repay the loan according to the original contractual terms of the loan agreement. Loans that experience insignificant payment delays, which are defined as 89 days or less, generally are not classified as impaired. A loan is not impaired during a period of delay in payment if the Company expects to collect all amounts due, including interest accrued, at the contractual interest rate for the period of delay. All loans identified as impaired are evaluated independently by management. The Company estimates credit losses on impaired loans based on the present value of expected cash flows or the fair value of the underlying collateral if the loan repayment is expected to come from the sale or operation of such collateral. Impaired loans, or portions thereof, are charged off when a realized loss has occurred. An allowance for loan and lease losses is maintained for estimated losses until such time. Cash receipts on impaired loans are applied first to accrued interest receivable unless otherwise required by the loan terms, except when an impaired loan is also a nonaccrual loan, in which case the portion of the payment related to interest is used to reduce principal.

 

Mortgage loans secured by one-to-four family properties and all consumer loans are large groups of smaller-balance homogeneous loans and are measured for impairment collectively. Management determines the significance of payment delays on a case-by-case basis, considering all circumstances concerning the loan, the creditworthiness and payment history of the borrower, the length of the payment delay, and the amount of shortfall concerning the principal and interest owed.

 

11
 
 

Loans Acquired

 

Loans acquired, including loans that have evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, are initially recorded at fair value (as determined by the present value of expected future cash flows) with no valuation allowance. Loans are evaluated individually to determine if there is evidence of deterioration of credit quality since origination. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the undiscounted cash flows expected at acquisition, or the “non-acceptable difference,” are not recognized as a yield adjustment or as a loss accrual or a valuation allowance. Increases in expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over its remaining estimated life. Decreases in expected cash flows are recognized immediately as impairment. Any valuation allowances on these impaired loans reflect only losses incurred after acquisition.

 

For purchased loans acquired that are not deemed impaired at acquisition, credit discounts representing the principal losses expected over the life of the loan are a component of the initial fair value. Loans are aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. Subsequent to the purchase date, the methods utilized to estimate the required allowance for credit losses for these loans is similar to originated loans; however, the Company records a provision for loan losses only when the required allowance exceeds any remaining credit discounts. The remaining differences between the purchase price and the unpaid principal balance at the date of acquisition are recorded in interest income over the life of the loans.

 

Premises and Equipment

 

Land is carried at cost. Premises and equipment are stated at cost net of accumulated depreciation. Depreciation is computed on the straight-line method over the assets' estimated useful lives, which range from three to 20 years for furniture, fixtures, and equipment and 3 to 40 years for buildings and leasehold improvements. Expenditures for maintenance and repairs are charged against income as incurred. Costs of significant additions and improvements are capitalized.

 

Leases

 

The Company has operating and financing leases for several branch locations and office space. Generally, the underlying lease agreements do not contain any material residual value guarantees or material restrictive covenants. The Company may also lease specific office equipment under operating leases. Many of our leases include both lease (e.g., minimum rent payments) and non-lease components (e.g., common-area or other maintenance costs). The Company accounts for each element separately based on the standalone price of each component. In addition, there may be operating and financing leases with lease terms of less than one year. Therefore we have elected the practical expedient to exclude these short-term leases from our right-of-use assets and lease liabilities.

 

Most leases include one or more options to renew. The exercise of lease renewal options is typically at the sole discretion of management. It is based on whether the extension options are reasonably certain to be exercised after giving proper consideration to all facts and circumstances of the lease. If management determines that the Company is reasonably sure to exercise the extension option(s), the additional term is included in the calculation of the right-of-use asset and a lease liability.

 

As most of our leases do not provide an implicit rate, we use the fully collateralized FHLB borrowing rate commensurate with the lease terms based on the information available at the lease commencement date in determining the present value of the lease payments.

 

Goodwill

 

The Company accounts for goodwill using a qualitative assessment for testing the impairment of goodwill on at least an annual basis. This approach could cause more volatility in the Company’s reported net income because impairment losses, if any, could occur irregularly and in varying amounts. No impairment of goodwill was recognized in any of the periods presented.

 

Intangible Assets

 

Intangible assets include core deposit intangibles, which measure the value of consumer demand and savings deposits acquired in business combinations accounted for as purchases. The core deposit intangibles are amortized to their estimated residual values over their expected useful lives, commonly ten years. The recoverability of the carrying value of intangible assets is evaluated on an ongoing basis, and permanent declines in value, if any, are charged to expense.

 

12
 
 

Bank-Owned Life Insurance (“BOLI”)

 

The Company owns insurance on the lives of a specific group of key employees. The policies were purchased to help offset the increase in the costs of various fringe benefit plans, including healthcare. The cash surrender value of these policies is included as an asset on the Consolidated Balance Sheet, and any increases in the cash surrender value are recorded as noninterest income on the Consolidated Statement of Income. In the event of the death of an insured individual under these policies, the Company would receive a death benefit, which would be recorded as tax-free noninterest income.

 

Other Real Estate Owned (“OREO”)

 

Real estate properties acquired through foreclosure are initially recorded at fair value at the foreclosure date, establishing a new cost basis. After foreclosure, management periodically performs valuations, and the real estate is carried at the lower of cost or fair value less estimated cost to sell. Revenue and expenses from operations of the properties, gains or losses on sales, and additions to the valuation allowance are included in operating results. The Company is required to disclose the carrying amount of residential real estate loans in the process of foreclosure. At December 31, 2022 and 2021, the Company reported $68,000 and $1.0 million, respectively, in residential real estate loans in the process of foreclosure. As of December 31, 2022, the Company held one commercial property with a carrying amount of $5.8 million and one residential mortgage with a carrying amount of $28,000 in OREO. As of December 31, 2021, the Company held one commercial property with a carrying amount of $7.0 million in OREO. OREO decreased from December 31, 2021 due to $1.2 million in write-downs for the twelve months ended December 31, 2022.

 

Income Taxes

 

The Company and its subsidiaries file a consolidated federal income tax return. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

 

Treasury Stock

 

When shares recognized as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognized as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury share reserve. The reserve for the Company’s treasury shares comprises the cost of the Company’s shares held by the Company. As of December 31, 2022, the Company had 1,671,231 of the Company’s shares, which is an increase of 229,420 shares from the 1,441,811 shares held as of December 31, 2021.

 

Earnings Per Share

 

The Company provides a dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated utilizing net income as reported in the numerator and average shares outstanding in the denominator. The computation of diluted earnings per share differs in that the dilutive effects of any stock options, warrants, and convertible securities are adjusted in the denominator. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.

 

Stock-Based Compensation

 

The Company accounts for stock compensation based on the grant date fair value of all share-based payment awards expected to vest, including employee share options to be recognized as employee compensation expense over the requisite service period.

 

Compensation cost is recognized for restricted stock issued to employees based on the fair value of these awards at the grant date. The market price of the Company’s common shares at the grant date is used to estimate the fair value of restricted stock and stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period, and is recorded in "Salaries and employee benefits" expense. (See Note 14-Employee Benefits). The Company’s restricted stock plan allows for a portion of the value to be received in cash by the participant upon vesting. Therefore, the Company records the expense as a liability until the shares vest and the split of the payment between shares and cash can be determined. The Company also measures the fair value of the liability each reporting period and adjusts accordingly.

 

Cash Flow Information

 

The Company has defined cash and cash equivalents as those amounts included in the Consolidated Balance Sheet captions as “Cash and due from banks” and “Federal funds sold” with original maturities of less than 90 days.

 

Advertising Costs

 

Advertising costs are expensed as incurred.

 

13
 
 

Reclassification of Comparative Amounts

 

Certain comparative amounts for prior years have been reclassified to conform to current-year presentations. Such reclassifications did not affect net income or retained earnings.

 

Recently Issued Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets. This standard, along with several other subsequent codification updates, replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses that are expected to occur over the remaining life of a financial asset and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new current expected credit losses model (“CECL”) will apply to the allowance for loan losses, available-for-sale and held-to-maturity debt securities, purchased financial assets with credit deterioration and certain off-balance sheet credit exposures.

 

Management has completed its implementation plan, segmentation and testing, and model validation. The implementation plan included drafting of additional controls and policies to govern data uploads to its third-party vendor, balancing and reconciling, testing and auditing of inputs, and review and decision-making surrounding segmentation, methodologies, qualitative factor adjustments, and reasonable and supportable forecasts and reversion techniques. Parallel runs were processed during 2022 and the results were consistent with management's expectations. The implementation plan is currently going through the Company's control structure and internal control testing is being performed.

 

As a result of adopting this standard, the Company expects to increase its reserve through a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. These estimates are subject to further refinements based on ongoing evaluations of our model, methodologies, and judgments, as well as prevailing economic conditions and forecasts as of the adoption date.  The adoption of ASU 2016-13 is not expected to have a significant impact on our regulatory capital ratios.

 

At adoption, the Company did not have any securities classified as HTM debt securities.

 

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Update is effective for smaller reporting companies and all other entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. This Update is not expected to have a significant impact on the Company’s financial statements.

 

In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. It is too early to predict whether a new rate index replacement and the adoption of the ASU will have a material impact on the Company’s financial statements.

 

14
 
 
 

2.

REVENUE RECOGNITION

 

Following ASC Topic 606, Revenue from Contracts with Customers (Topic 606), management determined that the primary sources of revenue, which emanate from interest income on loans and investments, along with noninterest revenue resulting from investment security gains (losses), gains on the sale of loans, and BOLI income, are not within the scope of ASC 606. These revenue sources cumulatively comprise 89.6% of the total revenue of the Company.

 

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

 

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

 

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

 

Revenue from investment services – The Company earns investment services revenue through its servicing partnership with LPL Financial. The performance obligation to investment management customers is satisfied over time, and therefore, revenue is recognized over time.  The Company generally receives trailing investment services revenue in arrears and recognizes the revenue when the monthly statement is received.

 

Miscellaneous Fee income – Fees earned on other services, such as ATM surcharge fees, money order fees, and check fees, are recognized at the time of the event or the applicable billing cycle.

 

The following table depicts the disaggregation of revenue derived from contracts with customers to describe the nature, amount, timing, and uncertainty of revenue and cash flows for the years ended December 31:

 

Noninterest Income

  

2022

    

2021

  

(Dollar amounts in thousands)

                
                 

Service charges on deposit accounts:

                

Overdraft fees

   $ 905     $ 727  

ATM banking fees

     1,489       1,377  

Service charges and other fees

     1,456       1,321  

(Loss) gain on equity securities (a)

     (173 )     209  

Gain on other real estate owned

     -       43  

Earnings on bank-owned life insurance (a)

     459       546  

Gain on sale of loans (a)

     24       1,240  

Revenue from investment services (b)

     674       727  

Miscellaneous Fee income

     299       276  

Gross rental income

     951       180  

Other income

     662       603  

Total noninterest income

   $ 6,746       7,249  

 

(a) Not within scope of ASC 606

(b) From services offered by the Company through it's servicing partnership with LPL Financial

 

15
 
 
 

3.

EARNINGS PER SHARE

 

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

 

The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation for the year ended December 31:

 

  

2022

  

2021

 
         

Weighted-average common shares issued

  7,551,769   7,325,449 
         

Average treasury stock shares

  (1,524,678)  (1,138,783)
         

Weighted-average common shares and common stock equivalents used to calculate basic earnings per share

  6,027,091   6,186,666 
         

Additional common stock equivalents (stock options and restricted stock) used to calculate diluted earnings per share

  17,291   24,410 
         

Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share

  6,044,382   6,211,076 

 

There were no options to purchase shares of common stock outstanding on December 31, 2022. Also outstanding were 63,646 shares of restricted stock, 46,355 shares of which were anti-dilutive.

 

There were no options to purchase shares of common stock outstanding on December 31, 2021. Also outstanding were 76,933 shares of restricted stock, 53,438 shares of which were anti-dilutive.

 

 

4.

INVESTMENT AND EQUITY SECURITIES

 

The amortized cost, gross gains and losses and fair values of securities available for sale are as follows:

 

  

December 31, 2022

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 

(Dollar amounts in thousands)

 

Cost

  

Gains

  

Losses

  

Value

 
                 

Subordinated debt

 $32,300  $3  $(2,139) $30,164 

Obligations of states and political subdivisions:

                

Taxable

  500   -   -   500 

Tax-exempt

  151,896   49   (25,111)  126,834 

Mortgage-backed securities in government-sponsored entities

  8,302   -   (833)  7,469 

Total

 $192,998  $52  $(28,083) $164,967 

 

16
 
 
  

December 31, 2021

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 

(Dollar amounts in thousands)

 

Cost

  

Gains

  

Losses

  

Value

 
                 

Subordinated debt

 $32,300  $356  $(119) $32,537 

Obligations of states and political subdivisions:

                

Taxable

  500   2   -   502 

Tax-exempt

  122,877   4,307   (341)  126,843 

Mortgage-backed securities in government-sponsored entities

  10,140   257   (80)  10,317 

Total

 $165,817  $4,922  $(540) $170,199 

 

Equity securities totaled $915,000 and $818,000 on December 31, 2022, and 2021, respectively, which incorporates a recognized net (loss) gain on equity investments of $(173,000) and $209,000 for the years ended December 31, 2022, and 2021, respectively. No net gains were realized from sales of equity securities during these periods.

 

The amortized cost and fair value of debt securities on December 31, 2022, 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

 $1,125  $1,126 

Due after one year through five years

  3,004   2,904 

Due after five years through ten years

  45,363   42,881 

Due after ten years

  143,506   118,056 
         

Total

 $192,998  $164,967 

 

Investment securities with an approximate carrying value of $89.9 million and $77.1 million on December 31, 2022, and 2021, respectively, were pledged to secure deposits and other purposes as required by law.

 

The Company sold the entire $57.9 million investment portfolio acquired in the Liberty Bancshares merger. These securities were acquired at fair value and then sold. Therefore, there were no realized gains or losses recognized during the year ended December 31, 2022. There were no securities sold during the year ended December 31, 2021.

 

The following tables show 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.

 

  

December 31, 2022

 
  

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

 
                         

Subordinated debt

 $12,638  $(1,129) $8,790  $(1,010) $21,428  $(2,139)

Obligations of states and political subdivisions

                        

Tax-exempt

  75,343   (10,488)  41,138   (14,623)  116,481   (25,111)

Mortgage-backed securities in government-sponsored entities

  6,153   (480)  1,316   (353)  7,469   (833)

Total

 $94,134  $(12,097) $51,244  $(15,986) $145,378  $(28,083)

 

17
 
 
  

December 31, 2021

 
  

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

 
                         

Subordinated debt

 $9,150  $(100) $731  $(19) $9,881  $(119)

Obligations of states and political subdivisions

                        

Tax-exempt

  24,273   (341)  -   -   24,273   (341)

Mortgage-backed securities in government-sponsored entities

  -   -   1,980   (80)  1,980   (80)

Total

 $33,423  $(441) $2,711  $(99) $36,134  $(540)

 

There were 141 securities in an unrealized loss position for less than twelve months and 60 securities in an unrealized loss position for twelve months or greater on December 31, 2022.

 

Every quarter, the Company assesses whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment (“OTTI”). A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The accounting literature requires the Company to assess whether the unrealized loss is other-than-temporary. For equity securities where the fair value has been significantly below cost for one year, the Company’s policy recognizes an impairment loss unless sufficient evidence is available that the decline is not other-than-temporary and a recovery period can be predicted.

 

The Company has asserted that on December 31, 2022, and 2021, the declines outlined in the above table represent temporary declines and the Company does not intend to sell and does not believe it will be required to sell these securities before recovery of their cost basis, which may be at maturity. The Company has concluded that any impairment of its investment securities portfolio outlined in the above table is not other-than-temporary and results from interest rate changes, sector credit rating changes, or company-specific rating changes that are not expected to result in the non-collection of principal and interest during the period.

 

Debt securities issued by state and political subdivisions and mortgage-backed securities in government-sponsored entities accounted for 81.7% of the total available-for-sale portfolio as of December 31, 2022. 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 evaluates credit losses quarterly. 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.

 

 

●

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.

 

18
 
 
 

5.

LOANS AND RELATED ALLOWANCE FOR LOAN AND LEASE LOSSES

 

The Company’s primary business activity is with loan customers located within its local Northeastern Ohio 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, Sunbury, Powell, Plain City, Marysville, and Westerville, Ohio. The Company services loan customers in western Ohio through our offices located in Hardin and Logan counties. The Northeastern Ohio trade area includes Cuyahoga and Summit County, locations in Beachwood, Twinsburg, and Solon, Ohio. Commercial, residential, and consumer loans are granted. Although the Company has a diversified loan portfolio on December 31, 2022, and 2021, loans outstanding to individuals and businesses depend on the local economic conditions in the Company’s immediate trade area.

 

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

 

December 31, 2022

 

Ending Loan Balance by Impairment Evaluation

 
  

Individually

  

Loans acquired

with deteriorated

credit quality

  

Collectively

  

Total Loans

 

Loans:

                

Commercial real estate:

                

Owner occupied

 $5,650  $-  $186,098  $191,748 

Non-owner occupied

  13,570   2,992   364,018   380,580 

Multifamily

  -   -   58,251   58,251 

Residential real estate

  1,023   24   295,261   296,308 

Commercial and industrial

  1,828   -   193,774   195,602 

Home equity lines of credit

  244   -   127,821   128,065 

Construction and other

  -   3,052   91,147   94,199 

Consumer installment

  -   -   8,119   8,119 

Total

 $22,315  $6,068  $1,324,489  $1,352,872 

 

 

December 31, 2021

 

Ending Loan Balance by Impairment Evaluation

 
  

Individually

  

Loans acquired

with deteriorated

credit quality

  

Collectively

  

Total Loans

 

Loans:

                

Commercial real estate:

                

Owner occupied

 $731  $-  $110,739  $111,470 

Non-owner occupied

  5,297   -   278,321   283,618 

Multifamily

  -   -   31,189   31,189 

Residential real estate

  1,104   -   238,985   240,089 

Commercial and industrial

  587   -   148,225   148,812 

Home equity lines of credit

  250   -   104,105   104,355 

Construction and other

  -   -   54,148   54,148 

Consumer installment

  -   -   8,010   8,010 

Total

 $7,969  $-  $973,722  $981,691 

 

The amounts above include net deferred loan origination fees of $2.0 million and $3.6 million on December 31, 2022, and December 31, 2021, respectively. The net deferred loan origination fees include $1,000 and $1.3 million of unearned deferred fees from PPP loans at December 31, 2022 and 2021, respectively.

 

19
 
 

December 31, 2022

 

Ending Allowance Balance by Impairment Evaluation

 
  

Individually

Evaluated for

Impairment

  

Loans acquired

with deteriorated

credit quality

  

Collectively

Evaluated for

Impairment

  

Total Allocation

 

Loans:

                

Commercial real estate:

                

Owner occupied

 $407  $-  $1,796  $2,203 

Non-owner occupied

  167   -   5,430   5,597 

Multifamily

  -   -   662   662 

Residential real estate

  28   -   2,019   2,047 

Commercial and industrial

  39   -   1,444   1,483 

Home equity lines of credit

  48   -   1,705   1,753 

Construction and other

  -   -   609   609 

Consumer installment

  -   -   84   84 

Total

 $689  $-  $13,749  $14,438 

 

 

December 31, 2021

 

Ending Allowance Balance by Impairment Evaluation

 
  

Individually

Evaluated for

Impairment

  

Loans acquired

with deteriorated

credit quality

  

Collectively

Evaluated for

Impairment

  

Total Allocation

 

Loans:

                

Commercial real estate:

                

Owner occupied

 $10  $-  $1,826  $1,836 

Non-owner occupied

  655   -   6,776   7,431 

Multifamily

  -   -   454   454 

Residential real estate

  17   -   1,723   1,740 

Commercial and industrial

  42   -   840   882 

Home equity lines of credit

  16   -   1,436   1,452 

Construction and other

  -   -   533   533 

Consumer installment

  -   -   14   14 

Total

 $740  $-  $13,602  $14,342 

 

As a result of the Liberty merger, the Company acquired loans with deteriorated credit quality with an unpaid principal balance of $8.0 million and an estimated fair value of $6.1 million. For loans that were acquired with specific evidence of deterioration in credit quality, loan losses will be accounted for through a reduction of the specific reserve and will not impact the allowance for loan losses until actual losses exceed the allotted reserves. For loans acquired without deterioration of credit quality, losses incurred will result in adjustments to the allowance for loan losses through the allowance for loan loss adequacy calculation.

 

The Company’s loan portfolio is segmented to a level that allows management to monitor risk and performance. The portfolio is segmented into Commercial Real Estate (“CRE”) which is further segmented into Owner Occupied (“CRE OO”), Non-owner Occupied (“CRE NOO”), and Multifamily, Residential Real Estate (“RRE”), Commercial and Industrial (“C&I”), Home Equity Lines of Credit (“HELOC”), Construction and Other (“Construction”), and Consumer Installment Loans. The commercial real estate loan segments consist of loans made to finance the activities of commercial real estate owners and operators and certain agricultural loans. The residential real estate and HELOC loan segments consist of loans made to finance the activities of residential homeowners. The C&I loan segment consists of loans made to finance the activities of commercial customers and certain agricultural loans. 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 commercial segments for possible impairment based on guidelines established by the Board of Directors. Loans are considered 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 concerning the principal and interest owed. The Company does not separately evaluate individual consumer and residential mortgage loans for impairment unless such loans are part of a larger relationship that is impaired, or the loan was modified in a troubled debt restructuring.

 

20
 
 

Once the determination has been made that a loan is impaired, the decision 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. The evaluation of the need and amount of a specific allowance allocation and whether a loan can be removed from impairment status is made quarterly. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

 

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

 

December 31, 2022

 

Impaired Loans

 
      

Unpaid

     
  

Recorded

  Principal  

Related

 
  

Investment

  Balance  

Allowance

 

With no related allowance recorded:

            

Commercial real estate:

            

Owner occupied

 $4,141  $4,141  $- 

Non-owner occupied

  1,042   1,042   - 

Residential real estate

  706   770   - 

Commercial and industrial

  450   547   - 

Home equity lines of credit

  112   112   - 

Total

 $6,451  $6,612  $- 
             

With an allowance recorded:

            

Commercial real estate:

            

Owner occupied

 $1,509  $1,509  $407 

Non-owner occupied

  12,528   12,528   167 

Residential real estate

  317   317   28 

Commercial and industrial

  1,378   1,378   39 

Home equity lines of credit

  132   132   48 

Total

 $15,864  $15,864  $689 
             

Total:

            

Commercial real estate:

            

Owner occupied

 $5,650  $5,650  $407 

Non-owner occupied

  13,570   13,570   167 

Residential real estate

  1,023   1,087   28 

Commercial and industrial

  1,828   1,925   39 

Home equity lines of credit

  244   244   48 

Total

 $22,315  $22,476  $689 

 

21
 
 

December 31, 2021

 

Impaired Loans

 
      Unpaid    
  

Recorded

   Principal  

Related

 
  

Investment

   Balance  

Allowance

 

With no related allowance recorded:

            

Commercial real estate:

            

Non-owner occupied

 $1,547  $1,802  $- 

Residential real estate

  820   874   - 

Commercial and industrial

  370   538   - 

Home equity lines of credit

  7   7   - 

Total

 $2,744  $3,221  $- 
             

With an allowance recorded:

            

Commercial real estate:

            

Owner occupied

 $731  $731  $10 

Non-owner occupied

  3,750   4,277   655 

Residential real estate

  284   284   17 

Commercial and industrial

  217   230   42 

Home equity lines of credit

  243   243   16 

Total

 $5,225  $5,765  $740 
             

Total:

            

Commercial real estate:

            

Owner occupied

 $731  $731  $10 

Non-owner occupied

  5,297   6,079   655 

Residential real estate

  1,104   1,158   17 

Commercial and industrial

  587   768   42 

Home equity lines of credit

  250   250   16 

Total

 $7,969  $8,986  $740 

 

The tables above include troubled debt restructurings totaling $3.3 million and $2.6 million as of December 31, 2022, and 2021, respectively. The amounts allocated within the allowance for losses for troubled debt restructurings were $72,000 and $150,000 on December 31 2022 and 2021, respectively.

 

The carrying value of the loans acquired and accounted for in accordance with ASC 310-30, was determined by projecting discounted contractual cash flows. The table below presents the components of the purchase accounting adjustments related to the purchased impaired loans acquired in the Liberty merger as of December 1, 2022:

 

(In Thousands)

 

December 1, 2022

 

Unpaid principal balance

 $7,919 

Interest

  2,978 

Contractual cash flows

  10,897 

Non-accretable premium

  117 

Expected cash flows

  11,014 

Accretable discount

  (4,995)

Estimated fair value

  6,019 

 

The following table presents additional information regarding loans acquired with specific evidence of deterioration in credit quality under ASC 310-30:

 

(In Thousands)

 

December 1, 2022

  

December 31, 2022

 

Outstanding balance

 $7,919  $7,998 

Carrying amount

  6,019   6,068 

 

22
 
 

Changes in the amortizable yield for purchased credit-impaired loans were as follows for the year ended December 31, 2022:

 

(In Thousands)

 

December 31, 2022

 

Balance at beginning of period

 $- 

Additions

  1,900 

Accretion

  30 

Balance at end of period

  1,930 

 

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

 

  

As of December 31, 2022

  

As of December 31, 2021

 
  

Average

Recorded

Investment

  

Interest

Income

Recognized

  

Average

Recorded

Investment

  

Interest

Income

Recognized

 
                 

Commercial real estate:

                

Owner occupied

 $2,637  $231  $1,334  $53 

Non-owner occupied

  8,671   646   5,023   262 

Residential real estate

  998   46   1,208   56 

Commercial and industrial

  1,331   145   763   62 

Home equity lines of credit

  247   12   245   12 

Total

 $13,884  $1,080  $8,573  $445 

 

Troubled Debt Restructuring (“TDR”) describes loans on which the bank has granted concessions for reasons related to the customer’s financial difficulties. Such concessions may include one or more of the following:

 

●

reduction in the interest rate to below-market rates

 

●

extension of repayment requirements beyond standard terms

 

●

reduction of the principal amount owed

 

●

reduction of accrued interest due

 

●

acceptance of other assets in full or partial payment of a debt

 

In each case, the concession is made due to deterioration in the borrower’s financial condition, and the new terms are less stringent than those required on a new loan with similar risk.

 

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

 

  

December 31, 2022

 
  

Number of Contracts

  

Pre-Modification

  

Post-Modification

 

 

 

Term

            Outstanding Recorded    Outstanding Recorded 
Troubled Debt Restructurings   Modification  

Other

  

Total

    Investment    Investment 
 Commercial and industrial  3   -   3  $1,252  $1,252 
           $1,252  $1,252 

 

  

December 31, 2021

 
  

Number of Contracts

  

Pre-Modification

  

Post-Modification

 

 

 

Term

            Outstanding Recorded    Outstanding Recorded 
 Troubled Debt Restructurings   Modification  

Other

  

Total

    Investment   Investment  

Commercial real estate:

                    

Non-owner occupied

  1   -   1  $730  $730 

Residential real estate

  1   -   1   96   96 
           $826  $826 

 

There were no subsequent defaults of troubled debt restructurings for the years ended December 31, 2022, or 2021.

 

23
 
 

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 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 or Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable. 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 borrowers' present and future capacity 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 with loan balances of $750,000 or greater.  Confirmation of the appropriate risk grade is included in the ongoing review.  The Company engages an external consultant to conduct loan reviews on a semiannual basis. Detailed reviews, including resolutions plans, are performed on loans classified as Substandard every quarter.  Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in determining the allowance.

 

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

 

      

Special

          

Total

 

December 31, 2022

 

Pass

  

Mention

  

Substandard

  

Doubtful

  

Loans

 
                     

Commercial real estate:

                    

Owner occupied

 $176,400  $6,873  $8,475  $-  $191,748 

Non-owner occupied

  331,584   6,387   42,609   -   380,580 

Multifamily

  58,251   -   -   -   58,251 

Residential real estate

  294,254   -   2,054   -   296,308 

Commercial and industrial

  185,674   7,936   1,992   -   195,602 

Home equity lines of credit

  127,080   -   985   -   128,065 

Construction and other

  90,728   308   3,163   -   94,199 

Consumer installment

  8,117   -   2   -   8,119 

Total

 $1,272,088  $21,504  $59,280  $-  $1,352,872 

 

      

Special

          

Total

 

December 31, 2021

 

Pass

  

Mention

  

Substandard

  

Doubtful

  

Loans

 
                     

Commercial real estate:

                    

Owner occupied

 $104,217  $2,400  $4,853  $-  $111,470 

Non-owner occupied

  230,672   3,038   49,908   -   283,618 

Multifamily

  31,189   -   -   -   31,189 

Residential real estate

  237,132   -   2,957   -   240,089 

Commercial and industrial

  143,911   2,748   2,153   -   148,812 

Home equity lines of credit

  103,296   -   1,059   -   104,355 

Construction and other

  53,807   341   -   -   54,148 

Consumer installment

  8,005   -   5   -   8,010 

Total

 $912,229  $8,527  $60,935  $-  $981,691 

 

24
 
 

Management further monitors the loan portfolio's performance and credit quality by analyzing the portfolio's age as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the aging categories of loans (in thousands):

 

                      

Purchase

     
      

30-59 Days

  

60-89 Days

  

90 Days+

  

Total

  

Credit

  

Total

 

December 31, 2022

 

Current

  

Past Due

  

Past Due

  

Past Due

  

Past Due

  

Impaired Loans

  

Loans

 
                             

Commercial real estate:

                            

Owner occupied

 $191,748  $-  $-  $-  $-  $-   191,748 

Non-owner occupied

  380,467   113   -   -   113   2,992   380,580 

Multifamily

  58,251   -   -   -   -   -   58,251 

Residential real estate

  293,698   2,093   111   406   2,610   24   296,308 

Commercial and industrial

  195,532   62   4   4   70   -   195,602 

Home equity lines of credit

  127,494   415   145   11   571   -   128,065 

Construction and other

  93,997   202   -   -   202   3,052   94,199 

Consumer installment

  8,096   23   -   -   23   -   8,119 

Total

 $1,349,283  $2,908  $260  $421  $3,589  $6,068   1,352,872 

 

 

                      

Purchase

     
      

30-59 Days

  

60-89 Days

  

90 Days+

  

Total

  

Credit

  

Total

 

December 31, 2021

 

Current

  

Past Due

  

Past Due

  

Past Due

  

Past Due

  

Impaired Loans

  

Loans

 
                             

Commercial real estate:

                            

Owner occupied

 $111,257  $81  $132  $-  $213  $-   111,470 

Non-owner occupied

  282,365   880   -   373   1,253   -   283,618 

Multifamily

  31,189   -   -   -   -   -   31,189 

Residential real estate

  238,483   1,187   -   419   1,606   -   240,089 

Commercial and industrial

  148,437   112   -   263   375   -   148,812 

Home equity lines of credit

  104,316   -   39   -   39   -   104,355 

Construction and other

  54,148   -   -   -   -   -   54,148 

Consumer installment

  7,799   16   19   176   211   -   8,010 

Total

 $977,994  $2,276  $190  $1,231  $3,697  $-   981,691 

 

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

 

      

90+ Days Past

 

December 31, 2022

 

Nonaccrual

  Due and Accruing 
         

Commercial real estate:

        

Owner occupied

 $69  $- 

Residential real estate

  1,431   - 

Commercial and industrial

  186   - 

Home equity lines of credit

  191   - 

Construction and other

  68   - 

Consumer installment

  166   - 

Total

 $2,111  $- 

 

      

90+ Days Past

 

December 31, 2021

 

Nonaccrual

  Due and Accruing 
         

Commercial real estate:

        

Owner occupied

 $81  $- 

Non-owner occupied

  2,442   - 

Residential real estate

  1,577   - 

Commercial and industrial

  456   - 

Home equity lines of credit

  121   - 

Consumer installment

  182   - 

Total

 $4,859  $- 

 

25
 
 

There were no loans past due 90 days or more and still accruing interest on December 31, 2022 or 2021. Interest income that would have been recorded had these loans not been placed on nonaccrual status was $125,000 in 2022 and $204,000 in 2021.

 

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

 

The Company’s methodology for determining the ALLL is based on the requirements of ASC Section 310-10-35 for loans individually evaluated for impairment (discussed above) and ASC Subtopic 450-20 for loans collectively evaluated for impairment, as well as the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other bank regulatory guidance.   The total of the two components represents the Company’s ALLL. Management also performs impairment analysis on TDRs, resulting in specific reserves. Loans that are collectively evaluated for impairment are analyzed, with general allowances being made as appropriate.  For general allowances, historical loss trends are used to estimate losses in the current portfolio.  Other qualitative factors modify these historical loss amounts.

 

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

 

Management has identified several additional qualitative factors to supplement the historical charge-off factor. These factors likely cause estimated credit losses associated with the existing loan pools to differ from historical loss experience.  The additional factors that are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources are:

 

●

national and local economic trends and conditions;

 

●

levels of and trends in delinquency rates and nonaccrual loans;

 

●

trends in volumes and terms of loans;

 

●

effects of changes in lending policies;

 

●

experience, ability, and depth of lending staff;

 

●

value of underlying collateral;

 

●

and concentrations of credit from a loan type, industry, and/or geographic standpoint.

 

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

 

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

 

  

Allowance for Loan and Lease Losses

 
  

Balance

              

Balance

 
  

December 31, 2021

  

Charge-offs

  

Recoveries

  

Provision

  

December 31, 2022

 

Loans:

                    

Commercial real estate:

                    

Owner occupied

 $1,836  $-  $5  $362  $2,203 

Non-owner occupied

  7,431   (150)  23   (1,707)  5,597 

Multifamily

  454   -   -   208   662 

Residential real estate

  1,740   -   61   246   2,047 

Commercial and industrial

  882   (40)  312   329   1,483 

Home equity lines of credit

  1,452   (25)  -   326   1,753 

Construction and other

  533   -   -   76   609 

Consumer installment

  14   (231)  141   160   84 

Total

 $14,342  $(446) $542  $-  $14,438 

 

26
 
 
  

Allowance for Loan and Lease Losses

 
  

Balance

              

Balance

 
  

December 31, 2020

  

Charge-offs

  

Recoveries

  

Provision

  

December 31, 2021

 

Loans:

                    

Commercial real estate:

                    

Owner occupied

 $1,342  $-  $45  $449  $1,836 

Non-owner occupied

  6,817   (313)  138   789   7,431 

Multifamily

  461   -   -   (7)  454 

Residential real estate

  1,683   (27)  27   57   1,740 

Commercial and industrial

  1,353   (1)  194   (664)  882 

Home equity lines of credit

  1,405      56   (9)  1,452 

Construction and other

  378   -   46   109   533 

Consumer installment

  20   (124)  142   (24)  14 

Total

 $13,459  $(465) $648  $700  $14,342 

 

The provision fluctuations during the year ended December 31, 2022, allocated to:

 

●

non-owner occupied commercial loans due to a decrease in substandard credits.

 

●

owner occupied commercial loans due to an increase in loans, coupled with an increase in the specific reserve on impaired loans.

 

●

commercial and industrial loans, residential real estate loans, and multifamily loans are due to an increase in loans

 

●

home equity lines of credit and residential loans are due to an increase in loans, coupled with an increase in the specific reserve on impaired loans.

 

The provision fluctuations during the year ended December 31, 2021, allocated to:

 

●

non-owner occupied commercial real estate loans are due to exposure to the substandard-rated credits related to the hospitality industry.

 

●

commercial and industrial loans are due to a decrease in outstanding balances as PPP loans receive forgiveness.

 

●

owner-occupied are due to an increase in substandard-rated credits.

 

 

6.

PREMISES AND EQUIPMENT

 

Major classifications of premises and equipment at December 31:

 

(Dollar amounts in thousands)

 

2022

  

2021

 
         

Land and land improvements

 $4,896  $2,963 

Building and leasehold improvements

  20,537   16,531 

Furniture, fixtures, and equipment

  9,485   9,596 

Financing right-of-use assets

  3,703   4,491 

Total premises and equipment

  38,621   33,581 

Less accumulated depreciation and amortization

  16,660   16,309 
         

Total premises and equipment, net

 $21,961  $17,272 

 

Depreciation expense charged to operations was $1.3 million in 2022 and $1.4 million in 2021.

 

27
 
 
 

7.

GOODWILL AND INTANGIBLE ASSETS

 

Goodwill totaled $31.7 million and $15.1 million for the years ended December 31, 2022 and 2021, respectively. Core deposit intangible carrying amount was $7.7 million and $1.4 million for the years ended December 31, 2022, and 2021, respectively. Core deposit accumulated amortization was $2.1 million and $1.7 million for the years ended December 31, 2022, and 2021. Amortization expense totaled $372,000 and $321,000 in 2022 and 2021, respectively.

 

Core deposit intangible assets are amortized to their estimated residual values over their expected useful lives, commonly ten years. The estimated aggregate future amortization expense for core deposit intangible assets as of December 31, 2022, is as follows:

 

 

(Dollar amounts in thousands)

 

Remaining     2023

 $1,059 

2024

  1,031 

2025

  998 

2026

  968 

2027

  691 

Thereafter

  2,954 

Total

 $7,701 

 

Activity for mortgage servicing rights (“MSR”s) follows:

 

(Dollar amounts in thousands)

 

2022

  

2021

 
         

Beginning of year

 $542  $476 

Purchases (1)

  1,680   - 

Additions

  19   257 

Amortized to expense

  (169)  (191)
         

End of year

 $2,072  $542 

 

 

(1)

This reflects the fair value of the mortgage servicing rights acquired in the merger.

 

 

8.

ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS

 

The components of accrued interest receivable and other assets at the years ended December 31:

 

(Dollar amounts in thousands)

 

2022

  

2021

 
         

Restricted stock

 $5,777  $4,399 

Accrued interest receivable on investment securities

  1,571   1,312 

Accrued interest receivable on loans

  4,333   2,820 

Deferred tax asset, net

  9,454   1,693 

Operating right-of-use assets

  717   872 

Other

  6,676   3,201 
         

Total

 $28,528  $14,297 

 

28
 
 
 

9.

DEPOSITS

 

Time deposits that meet or exceed the FDIC Insurance limit of $250,000 as of December 31, 2022, and 2021 were $50.9 million and $33.4 million, respectively.

 

Scheduled maturities of all time deposits as of December 31, 2022, are as follows:

 

(Dollar amounts in thousands)

    

2023

 $136,767 

2024

  85,780 

2025

  6,665 

2026

  5,331 

2027

  3,477 

Total

 $238,020 

 

Scheduled maturities of time deposits that meet or exceed the FDIC Insurance limit of $250,000 as of December 31, 2022, are as follows:

 

(Dollar amounts in thousands)

 

Amount

  

Percent of Total

 
         

Within three months

 $9,807   19.26%

Beyond three but within six months

  5,094   10.00%

Beyond six but within twelve months

  11,166   21.93%

Beyond one year

  24,850   48.81%
         

Total

 $50,917   100.00%

 

Deposits of related parties amounted to $24.1 million and $29.2 million as of December 31, 2022 and 2021, respectively.

 

 

10.

SHORT-TERM BORROWINGS

 

For the year ended December 31, outstanding balances and related information of short-term borrowings, which includes securities sold under agreements to repurchase and short-term borrowings from other banks, are summarized as follows:

 

(Dollar amounts in thousands)

  

2022

    

2021

  
                 

Balance at year-end

   $ 65,000     $ -  

Average balance outstanding

     8,576       85  

Maximum month-end balance

     80,000       -  

Weighted-average rate at year-end

     4.38 %     N/A  

Weighted-average rate during the year

     3.58 %     0.40 %

 

Average balances outstanding during the year represent daily average balances, and average interest rates represent interest expense divided by the related average balance.

 

The Company maintains a $6.0 million line of credit and a $10.0 million line of credit. Both lines of credit have adjustable rates based on the time of borrowing. On December 31, 2022, and 2021, there were no outstanding borrowings under these lines of credit. The additional borrowing capacity on FHLB advances was $380.8 million and $417.4 million on December 31, 2022, and 2021, respectively.

 

29
 
 
 

11.

OTHER BORROWINGS

 

Other borrowings consist of advances from the FHLB and subordinated debt as follows:

 

        

Weighted-

  

Stated interest

         

(Dollar amounts in thousands)

 

Maturity range

  

average

  

rate range

         

Description

 

from

  to  

interest rate

  

from

   to   2022   2021 

Finance lease liabilities

 

10/30/34

 

 

11/30/41   3.01%  2.50

%

  3.51

%

 $3,811  $4,653 

Junior subordinated debt

 

12/21/37

 

 

12/21/37   3.25%  4.45

%

  4.45

%

  8,248   8,248 
                           

Total

                 $12,059  $12,901 

 

The scheduled maturities of other borrowings are as follows:

 

(Dollar amounts in thousands)

        
      

Weighted-

 

Year Ending December 31,

 

Amount

  

Average Rate

 

2023

 $196   3.01%

2024

  202   3.01%

2025

  214   3.01%

2026

  227   3.01%

2027

  234   3.01%

Beyond 2025

  10,986   4.79%
         

Total

 $12,059   4.74%

 

Under the terms of a blanket agreement, FHLB borrowings are secured by certain qualifying assets of the Company, which consist principally of first mortgage loans or mortgage-backed securities. Under this credit arrangement, the Company had an available borrowing capacity of approximately $380.8 million on December 31, 2022.

 

The Bank has a $64.0 million irrevocable Standby Letter of Credit Agreement with the FHLB outstanding at December 31, 2022. This letter of credit is issued to secure municipal deposit accounts as required by law.  The amount of funds available from the FHLB to the Bank is reduced by any letters of credit outstanding.

 

The Company formed a special purpose entity (“Entity”) to issue $8.0 million of floating rate, obligated mandatorily redeemable securities, and $248,000 in common securities as part of a pooled offering. The rate adjusts quarterly, equal to LIBOR plus 1.67%. The Entity may redeem them at face value in whole or in part. The Company borrowed the issuance proceeds from the Entity in December 2006 in the form of an $8.3 million note payable, which matures in December 2037, and is included in the other borrowings on the Company’s Consolidated Balance Sheet.

 

As of December 31, 2022, the Company had finance lease liabilities of $3.8 million on the Consolidated Balance Sheet. See Note 15 of the financial statements for more information.

 

 

12.

ACCRUED INTEREST PAYABLE AND OTHER LIABILITIES

 

The components of accrued interest payable and other liabilities are as follows at December 31:

 

  

2022

  

2021

 

(Dollar amounts in thousands)

        

Accrued interest payable

 $878  $237 

Accrued directors' benefits

  4,440   2,247 

Accrued salary and benefits expense

  1,942   1,631 

Operating lease liabilities

  723   878 

Other

  2,930   1,167 
         

Total

 $10,913  $6,160 

 

30
 
 
 

13.

INCOME TAXES

 

The provision for federal income taxes for the years ended December 31 consists of:

 

(Dollar amounts in thousands)

 

2022

  

2021

 
         

Current payable

 $3,544  $4,466 

Deferred

  (324)  (401)
         

Total provision

 $3,220  $4,065 

 

The tax effects of deductible and taxable temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows at December 31:

 

(Dollar amounts in thousands)

 

2022

  

2021

 
         

Deferred tax assets:

        

Allowance for loan and lease losses

 $2,921  $3,012 

Supplemental retirement plan

  932   608 

Investment security basis adjustment

  18   18 

Nonaccrual interest income

  319   350 

Accrued compensation

  328   293 

Deferred origination fees, net

  26   - 

Net unrealized loss on AFS securities

  5,886   - 

Lease liability

  952   1,161 

Acquisition fair value adjustments

  728   - 

Net operating losses

  366   - 

Other

  252   - 

Gross deferred tax assets

  12,728   5,442 
         

Deferred tax liabilities:

        

Premises and equipment

  1,123   632 

Net unrealized gain on AFS securities

  -   920 

Net unrealized gain on equity securities

  48   85 

FHLB stock dividends

  242   139 

Intangibles

  474   450 

Mortgage servicing rights

  435   114 

Deferred origination fees, net

  -   34 

Acquisition fair value adjustments

  -   249 

Right of use assets

  928   1,126 

Other

  24   - 

Gross deferred tax liabilities

  3,274   3,749 
         

Net deferred tax assets

 $9,454  $1,693 

 

No valuation allowance was established on December 31, 2022, and 2021, in view of the Company’s tax strategies, coupled with the anticipated future taxable income as evidenced by the Company’s earnings potential.

 

31
 
 

The reconciliation between the federal statutory rate and the Company’s effective consolidated income tax rate for the years ended December 31, is as follows:

 

(Dollar amounts in thousands)

 

2022

  

2021

 
      

% of

      

% of

 
      

Pretax

      

Pretax

 
  

Amount

  

Income

  

Amount

  

Income

 
                 

 

                

Provision at statutory rate

 $3,967   21.0% $4,766   21.0%

Tax-exempt income

  (893)  (4.7)%  (703)  (3.1)%

Nondeductible interest expense

  5   -%  -   -%

Nondeductible acquisition expense

  175   0.9%  -   -%

Other

  (34)  (0.2)%  2   -%

 

                

Actual tax expense and effective rate

 $3,220   17.0% $4,065   17.9%

 

ASC 740-10 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

 

At December 31, 2022 and 2021, the Company had no ASC 740-10 unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase within the next 12 months. The Company recognizes interest and penalties on unrecognized tax benefits as a component of income tax expense.

 

The Company and the Bank are subject to U.S. federal income tax as well as an income tax in the states of Ohio and Florida, and the Bank is subject to a capital-based franchise tax in the state of Ohio. The Company and the Bank are no longer subject to examination by taxing authorities for years before 2019.

 

 

14.

EMPLOYEE BENEFITS

 

Employee Retirement Plan

 

The Bank maintains section 401(k) employee savings and investment plans for all full-time employees and officers of the Bank who are at least 21 years of age. The Bank’s contributions to the plans are discretionary and were based on 66% matching of voluntary contributions up to 6% of compensation for the years ended December 31, 2022.  The Bank’s contributions to the plans are discretionary and were based on 50% matching of voluntary contributions up to 6% of compensation for the years ended December 31, 2021. Employee contributions are vested at all times, and MBC contributions are fully vested after six years beginning at the second year in 20% increments. Prior service by Liberty employees who become Middlefield employees is reviewed for purposes of eligibility, vesting and, contribution allocations. Contributions for 2022 and 2021 to these plans amounted to $427,000 and $347,000, respectively.

 

Executive Deferred Compensation Plans

 

The Company maintains executive deferred compensation plans to provide post-retirement payments to members of senior management. The plan agreements are noncontributory, defined contribution arrangements that provide supplemental retirement income benefits to several officers, with contributions made solely by the Bank. Accrued executive deferred compensation amounted to $3.7 million and $1.9 million as of December 31, 2022, and 2021, respectively. In addition, during 2022 and 2021, the Company recognized nonqualified deferred compensation expense of $164,000 and $264,000, respectively, to the plans.

 

32
 
 

Stock Option and Restricted Stock Plan

 

In 2007, the Company adopted the 2007 Omnibus Equity Plan (the “2007 Plan”) for granting incentive stock options, nonqualified stock options, and restricted stock to key officers and employees and nonemployee directors. Three hundred twenty thousand shares of common stock were reserved for issuance under the 2007 Plan, which expired ten years from the date of board approval of the plan. No remaining shares are outstanding in incentive stock options awards granted under the 2007 Plan. The per-share exercise price of an option granted is not less than the fair value of a share of common stock on the date the option was granted.

 

In 2017, the Company adopted the 2017 Omnibus Equity Plan (the “2017 Plan”) for granting incentive stock options, nonqualified stock options, restricted stock, and other equity awards to key officers and employees and nonemployee directors of the Company. The Company’s stockholders approved the 2017 Plan at the annual meeting of the stockholders held on May 10, 2017. A total of 448,000 shares of authorized and unissued or issued common stock are reserved for issuance under the 2017 Plan, which expires ten years from the date of board approval of the plan. The per-share exercise price of an option granted will not be less than the fair value of a share of common stock on the date the option is granted. The remaining available shares that can be issued under the 2017 Plan were 390,839 on December 31, 2022.

 

There was no stock option activity during the twelve months ended December 31, 2022.

 

The following table presents share data related to stock option activity during 2021:

 

  

Shares

  

Weighted-

average Exercise

Price Per Share

 
         

Outstanding, January 1, 2021

  12,150  $8.78 

Exercised

  (12,150)  8.78 
         

Outstanding, December 31, 2021

  -  $- 
         

Exercisable, December 31, 2021

  -  $- 

 

For the year ended December 31, 2021, 12,150 options were exercised, resulting in net proceeds to the participant of $21,000.

 

During 2022 and 2021, the Compensation Committee of the Company's Board of Directors granted awards of restricted stock for an aggregate amount of 25,414 and 29,193 shares, respectively, to certain employees of the Bank. The expense recognized for all outstanding awards was $307,000 and $478,000 for the years ended 2022 and 2021, respectively. The number of restricted stock shares earned or settled will depend on specific conditions and are also subject to service period-based vesting. The award recipient must maintain service with Middlefield Banc Corp. and its affiliates until the third anniversary of the award to satisfy the service condition. In addition, the market condition will be met if the average total shareholder annual return (“TSR”) on Middlefield Banc Corp. stock for the three subsequent years meets target for 2021 and 2022. The target TSR is 10%, capped at 125% of target, and reduced proportionally between 0% and 10%.

 

The liability for these accrued officer benefits was $693,000 and $979,000 for the years ended December 31, 2022, and December 31, 2021, respectively.

 

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

 

The following table presents the activity during 2022 related to awards of restricted stock:

 

  

Units

  

Weighted-

average Grant

Date Fair Value

Per Unit

 

Nonvested at January 1, 2022

  76,933  $23.01 

Granted

  25,414   24.80 

Vested

  (25,263)  20.95 

Forfeited

  (13,438)  - 

Nonvested at December 31, 2022

  63,646  $24.34 

Expected to vest at December 31, 2022

  47,236  $23.97 

 

As of December 31, 2022, there was $533,000 of total unrecognized compensation cost related to nonvested restricted shares granted under the 2017 Plan. The cost is expected to be recognized over a weighted-average period of 1.92 years. The total fair value of shares vested during the years ended December 31, 2022, and 2021 was $529,000 and $447,000, respectively.

 

33
 
 
 

15.

COMMITMENTS

 

In the ordinary course of business, various outstanding commitments and certain contingent liabilities are not reflected in the accompanying consolidated financial statements. These commitments and contingent liabilities represent financial instruments with off-balance-sheet risk. The contract or notional amounts of those instruments reflect the extent of involvement in particular types of financial instruments, which were composed of the following on December 31:

 

(Dollar amounts in thousands)

 

2022

  

2021

 
         

Commitments to extend credit

 $443,364  $280,379 

Standby letters of credit

  869   586 
         

Total

 $444,233  $280,965 

 

These instruments involve, to varying degrees, elements of credit and interest rate risk over the amount recognized in the Consolidated Balance Sheet. The Company’s exposure to credit loss, in the event of nonperformance by the other parties to the financial instruments, is represented by the contractual amounts as disclosed. The Company minimizes its exposure to credit loss under these commitments by subjecting them to credit approval and review procedures and collateral requirements as deemed necessary. Commitments generally have fixed expiration dates within one year of their origination.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance-related contracts. The coverage period for these instruments is typically one year, with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized over the coverage period. The collateral is typically bank deposit instruments or customer business assets for secured letters of credit.

 

Leasing Commitments

 

The Company leases six of its branch locations and one loan production office. As of December 31, 2022, net assets recorded under leases amounted to $4.4 million and have remaining lease terms of 4 years to 19 years. As of December 31, 2022, finance lease assets included in premises and equipment, net, totaled $3.7 million, and operating lease assets included in accrued interest receivable and other assets on the Consolidated Balance Sheet totaled $717,000. As of December 31, 2022, finance lease obligations included in other borrowings totaled $3.8 million, and operating lease obligations included in accrued interest payable and other liabilities on the Consolidated Balance Sheet totaled $723,000.

 

Lease costs incurred are as follows for the years ended December 31:

 

  

2022

  

2021

 

Lease Costs:

        

Finance lease cost:

        

Amortization of right-of-use asset

 $176  $313 

Interest Expense

  116   130 

Other

  30   63 

Operating lease cost

  206   225 

Total lease cost

 $528  $731 

 

The following table displays the weighted-average term and discount rates for both operating and finance leases outstanding as of December 31, 2022:

 

  

Operating

  

Finance

 

Weighted-average term (years)

  5.0   15.6 

Weighted-average discount rate

  1.9%  3.0%

 

34
 
 

The following table displays the undiscounted cash flows due related to operating and finance leases as of December 31, 2022, along with a reconciliation to the discounted amount recorded on the December 31, 2022 balance sheet:

 

  

Operating

  

Finance

 

Undiscounted cash flows due within:

        

2023

 $169  $308 

2024

  169   308 

2025

  169   314 

2026

  134   320 

2027

  27   320 

2028 and thereafter

  95   3,207 

Total undiscounted cash flows

  763   4,777 
         

Impact of present value discount

  (40)  (966)
         

Amount reported on balance sheet

 $723  $3,811 

 
 

16.

REGULATORY RESTRICTIONS

 

The Company is subject to the regulatory requirements of the Federal Reserve System as a bank holding company. The bank is subject to regulations of the FDIC and the State of Ohio, Division of Financial Institutions.

 

Cash Requirements

 

The Federal Reserve Bank of Cleveland requires the Company to maintain certain average reserve balances. The reserves requirement was reduced to zero as of December 31, 2022, and 2021.

 

Loans

 

Federal law prevents the Company from borrowing from the Bank unless specific obligations secure the loans. Further, such a secured loan is limited to 10% of the Bank’s common stock and capital surplus.

 

Dividends

 

MBC is subject to dividend restrictions that generally limit the amount of dividends that an Ohio state-chartered bank can pay. Under the Ohio Banking Code, cash dividends may not exceed net profits as defined for that year combined with retained net profits for the two preceding years less any required transfers to surplus. Under this formula, the amount available for payment of dividends for 2023 approximates $7.0 million, plus 2023 profits retained up to the dividend declaration date.

 

35
 
 
 

17.

REGULATORY CAPITAL

 

The Bank and Company are subject to regulatory capital requirements administered by banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and regulators can lower classifications in some instances. As a result, failure to meet various capital requirements can initiate regulatory action that could directly affect the financial statements. As of December 31, 2022, the Bank and Company have met all capital adequacy requirements to which they are subject.

 

The prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, under-capitalized, significantly undercapitalized, and critically undercapitalized. However, these terms are not used to represent the overall financial condition. If an institution is adequately capitalized, regulatory approval is required before the institution may accept brokered deposits. If an institution is under capitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.

 

The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

 

The following tables present actual and required capital ratios as of December 31, 2022, and 2021 under the Basel III Capital Rules. Capital levels required to be considered well-capitalized are based upon prompt corrective action regulations, as amended to reflect the Basel III Capital Rules changes.

 

  

As of December 31, 2022

 
  Leverage  

Tier 1 Risk

Based

  

Common

Equity Tier 1

  

Total Risk

Based

 
                 

The Middlefield Banking Company

  11.16%  12.63%  12.63%  13.61%

Middlefield Banc Corp.

  11.30%  12.80%  12.25%  13.78%

Adequately capitalized ratio

  4.00%  6.00%  4.50%  8.00%

Adequately capitalized ratio plus fully phased-in capital conservation buffer

  4.00%  8.50%  7.00%  10.50%

Well-capitalized ratio (Bank only)

  5.00%  8.00%  6.50%  10.00%

 

  

As of December 31, 2021

 
  Leverage  

Tier 1 Risk

Based

  

Common

Equity Tier 1

  

Total Risk

Based

 
                 

The Middlefield Banking Company

  9.80%  12.72%  12.72%  13.97%

Middlefield Banc Corp.

  10.02%  12.96%  12.18%  14.21%

Adequately capitalized ratio

  4.00%  6.00%  4.50%  8.00%

Adequately capitalized ratio plus fully phased-in capital conservation buffer

  4.00%  8.50%  7.00%  10.50%

Well-capitalized ratio (Bank only)

  5.00%  8.00%  6.50%  10.00%

 

36
 
 
 

18.

FAIR VALUE DISCLOSURE MEASUREMENTS

 

The following disclosures show the hierarchal disclosure framework associated with the level of pricing observations utilized in measuring assets and liabilities at fair value. The three broad levels defined by U.S. generally accepted accounting principles are as follows:

 

Level I:

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

 

Level II:

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

 

Level III:

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

 

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

 

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

 

      

December 31, 2022

     
                 

(Dollar amounts in thousands)

 

Level I

  

Level II

  

Level III

  

Total

 
                 

Assets measured on a recurring basis:

                

Subordinated debt

 $-  $21,427  $8,737  $30,164 

Obligations of states and political subdivisions

  -   127,334   -   127,334 

Mortgage-backed securities in government-sponsored entities

  -   7,469   -   7,469 

Total debt securities

  -   156,230   8,737   164,967 

Equity securities in financial institutions

  915   -   -   915 

Total

 $915  $156,230  $8,737  $165,882 

 

      

December 31, 2021

     
                 

(Dollar amounts in thousands)

 

Level I

  

Level II

  

Level III

  

Total

 
                 

Assets measured on a recurring basis:

                

Subordinated debt

 $-  $20,337  $12,200  $32,537 

Obligations of states and political subdivisions

  -   127,345   -   127,345 

Mortgage-backed securities in government-sponsored entities

  -   10,317   -   10,317 

Total debt securities

  -   157,999   12,200   170,199 

Equity securities in financial institutions

  818   -   -   818 

Total

 $818  $157,999  $12,200  $171,017 

 

Investment Securities Available for Sale – An independent pricing service provides the Company fair values, which represent quoted prices for similar assets, fair values determined by pricing models using a market approach that considers observable market data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market makers and live trading systems (Level II). Level III securities are assets whose fair value cannot be determined by using observable measures. The inputs to the valuation methodology of these securities are unobservable and significant to the fair value measurement. Currently, this category includes certain subordinated debt investments that are valued based on the discounted cash flow approach assuming a yield curve of similarly structured instruments.

 

37
 
 

While the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of specific financial instruments could result in a different estimate of fair value at the reporting date. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective period-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments following the respective reporting dates may be different from the amounts reported at each period-end.

 

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

 

The following table presents the fair value reconciliation of Level 3 assets measured at fair value on a recurring basis.

 

(Dollar amounts in thousands)

    
  

Subordinated debt

 

Balance as of January 1, 2022

 $12,200 

Transfers into Level III (1)

  500 

Transfers out of Level III (1)

  (3,750)

Net unrealized holding gain on available-for-sale investment securities

  (213)

Balance as of December 31, 2022

 $8,737 

 

(1) Transfers between hierarchy levels are based on the availability of sufficient observable inputs to meet Level II versus Level III criteria. The level designation of each financial instrument is reassessed at the end of each period.

 

The following tables present the assets measured on a non-recurring basis on the Consolidated Balance Sheet at their fair value by level within the fair value hierarchy. Collateral-dependent impaired loans are carried at fair value if they have been charged down to fair value or if a specific valuation allowance has been established. A new cost basis is established when a property is initially recorded in OREO. OREO properties are carried at fair value if a devaluation has been taken to the property’s value after the initial measurement. No such devaluation occurred during the year ended December 31, 2021.

 

      

December 31, 2022

     
                 
  

Level I

  

Level II

  

Level III

  

Total

 

(Dollar amounts in thousands)

                

Assets measured on a non-recurring basis:

                

Impaired loans

 $-  $-  $1,143  $1,143 

Other real estate owned

  -   -   5,792   5,792 
                 

 

      

December 31, 2021

     
                 
  

Level I

  

Level II

  

Level III

  

Total

 

(Dollar amounts in thousands)

                

Assets measured on a non-recurring basis:

                

Impaired loans

 $-  $-  $4,162  $4,162 

 

Impaired Loans – The Company has measured impairment on collateral-dependent impaired loans generally based on the fair value of the loan’s collateral. Fair value is usually determined based on independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management estimates expected costs to sell the property, which are also included in the net realizable value. If the fair value of the collateral-dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses, or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the above table as a Level III measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the above table as it is not currently being carried at its fair value. The fair values in the preceding tables include estimated selling costs of $688,000 and $901,000 on December 31, 2022, and 2021, respectively.

 

38
 
 

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

 

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

 

  

Quantitative Information about Level III Fair Value Measurements

 

(Dollar amounts in thousands)

           
  

Fair Value Estimate

 Valuation Techniques Unobservable Input Range (Weighted Average) 

December 31, 2022

           

Impaired loans

 $1,143 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

  12.0% 
            

Other real estate owned

 $5,792 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

  8.4% 

 

 

  

Quantitative Information about Level III Fair Value Measurements

 

(Dollar amounts in thousands)

    

 

 

 

 

 

 
  

Fair Value Estimate

 Valuation Techniques Unobservable Input  Range (Weighted Average)   

December 31, 2021

             

Impaired loans

 $4,162 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

  25.0%to72.2%(36.6%)

 

 

 

(1)

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

 

(2)

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

 

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

 

  

December 31, 2022

 
  

Carrying

              

Total

 
  

Value

  

Level I

  

Level II

  

Level III

  

Fair Value

 
  

(in thousands)

 

Financial assets:

                    

Net loans

 $1,338,434  $-  $-  $1,298,814  $1,298,814 
                     

Financial liabilities:

                    

Deposits

 $1,402,019  $1,163,999  $-  $231,218  $1,395,217 

Other borrowings

  12,059   -   -   12,059   12,059 

 

  

December 31, 2021

 
  

Carrying

              

Total

 
  

Value

  

Level I

  

Level II

  

Level III

  

Fair Value

 
  

(in thousands)

 

Financial assets:

                    

Loans held for sale

 $1,051  $-  $1,051  $-  $1,051 

Net loans

  967,349   -   -   961,645   961,645 
                     

Financial liabilities:

                    

Deposits

 $1,166,610  $967,885  $-  $199,503  $1,167,388 

Other borrowings

  12,901   -   -   12,901   12,901 

 

Included within other borrowings is an $8.2 million note payable, which matures in December 2037.  These borrowings were used to form a special purpose entity (“Entity”) to issue $8.0 million of floating rate, obligated mandatorily redeemable securities.   The rate adjusts quarterly, equal to LIBOR plus 1.67%.     The borrowing is a floating rate instrument and any difference between the cost and fair value are insignificant. 

 

39
 
 

In addition to the financial instruments included in the above tables, cash and equivalents, bank-owned life insurance, Federal Home Loan Bank stock, accrued interest receivable, FHLB advances, and accrued interest payable, are carried at cost, which approximates the fair value of the instruments.

 

 

19.

ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The following table presents the changes in accumulated other comprehensive loss by component net of tax:

 

  

Unrealized gains/(losses) on

 
  

available-for-sale

 

(Dollars in thousands)

 

securities (a)

 
     

Balance as of December 31, 2020

 $4,284 

Other comprehensive loss

  (822)

Balance at December 31, 2021

 $3,462 
     

Balance as of December 31, 2021

 $3,462 

Other comprehensive loss

  (25,606)

Balance at December 31, 2022

 $(22,144)

 

 

(a)

All amounts are net of tax. Amounts in parentheses indicate debits to accumulated other comprehensive income.

 

No unrealized gains or losses on available-for-sale securities were reclassified out of accumulated other comprehensive income for the years ended December 31, 2022, or 2021.

 

 

20.

PARENT COMPANY

 

Following are condensed financial statements for the Company.

 

CONDENSED BALANCE SHEET

 

(Dollar amounts in thousands)

 

December 31,

 
  

2022

  

2021

 

ASSETS

        

Cash and due from banks

 $201  $805 

Equity securities, at fair value

  645   818 

Investment in nonbank subsidiary

  1   1 

Investment in subsidiary bank

  202,887   150,588 

Other assets

  2,984   1,371 
         

TOTAL ASSETS

 $206,718  $153,583 
         

LIABILITIES

        

Trust preferred debt

 $8,248  $8,248 

Other liabilities

  779   - 

TOTAL LIABILITIES

  9,027   8,248 
         

STOCKHOLDERS' EQUITY

  197,691   145,335 
         

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $206,718  $153,583 

 

40
 
 

CONDENSED STATEMENT OF COMPREHENSIVE (LOSS) INCOME

 

  

Year Ended December 31,

 

(Dollar amounts in thousands)

 

2022

  

2021

 
         

INCOME

        

Dividends from subsidiary bank

 $15,500  $18,600 

(Loss) gain on equity securities

  (173)  209 

Other

  7   5 

Total income

  15,334   18,814 
         

EXPENSES

        

Interest expense

  288   151 

Salaries and employee benefits

  667   842 

Ohio state franchise tax

  1,157   1,144 

Other

  3,434   742 

Total expenses

  5,546   2,879 
         

Income before income tax benefit

  9,788   15,935 
         

Income tax benefit

  (1,024)  (560)
         

Income before equity in undistributed net income of subsidiaries

  10,812   16,495 
         

Equity in undistributed net income of subsidiaries

  4,861   2,138 
         

NET INCOME

 $15,673  $18,633 
         

Comprehensive (loss) income

 $(9,933) $17,811 

 

 

CONDENSED STATEMENT OF CASH FLOWS

 

  

Year Ended December 31,

 

(Dollar amounts in thousands)

 

2022

  

2021

 
         

OPERATING ACTIVITIES

        

Net income

 $15,673  $18,633 

Adjustments to reconcile net income to net cash provided by operating activities:

        

Equity in undistributed net income of Subsidiaries

  (4,861)  (2,138)

Stock-based compensation

  307   398 

Loss (gain) on equity securities

  173   (209)

Other, net

  (297)  (664)

Net cash provided by operating activities

  10,995   16,020 
         

INVESTING ACTIVITIES

        

Acquisition, net of cash paid

  10   - 
         

FINANCING ACTIVITIES

        
Stock options exercised  -   94 

Repurchase of treasury shares

  (6,119)  (12,291)

Cash dividends

  (5,490)  (4,240)

Net cash used in financing activities

  (11,609)  (16,437)
         

Decrease in cash

  (604)  (417)
         

CASH AT BEGINNING OF YEAR

  805   1,222 
         

CASH AT END OF YEAR

 $201  $805 
         

SUPPLEMENTAL INFORMATION

        

Common stock issued in business acquisition

 $73,265  $- 

 

41
 
 
 

21.

BUSINESS ACQUISITION

 

In the second quarter of 2022, the Company announced the signing of a definitive merger agreement to acquire 100% of the outstanding equity interest of Liberty for stock. Liberty was an Ohio bank holding company whose national bank subsidiary, Liberty National Bank, operated six offices in Central and Northwest Ohio.

 

The transaction closed on December 1, 2022, with Liberty National Bank merging into Middlefield Bank, with Middlefield Bank as the surviving entity. The acquisition established the Company’s presence in Hardin, Logan, Franklin, and Union Counties.

 

Under the terms of the merger agreement, Liberty shareholders received 2.752 shares of the Company’s common stock in exchange for each share of Liberty common stock they owned immediately before the merger. The Company issued 2.6 million shares of its common stock in the merger and the aggregate merger consideration was approximately $73.3 million. Upon closing, Liberty National Bank was merged into MBC, and its six full-service bank offices, in Ada and Kenton in Hardin County, in Bellefontaine and Bellefontaine South in Logan County, in Marysville in Union County, and in Westerville in Franklin County, became offices of MBC.

 

The Company accounted for the Liberty acquisition using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair value on the acquisition date, in accordance with purchase accounting. The Company relied on the income approach to estimate the value of the loans.  The loans’ underlying characteristics (account types, remaining terms (in months), annual interest rates or coupons, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures and remaining balance) were considered.  Various assumptions were applied regarding credit, interest, and prepayment risks for the loans based on loan types, payment types and fixed or variable classifications. Due to the timing of the merger, the estimated fair value measurements remain preliminary. Management will continue to review the estimated fair values and expects to finalize its analysis of the acquired assets and assumed liabilities in the transaction within one year of the merger.  As the Company finalizes its analysis of these assets, there may be adjustments to the recorded carrying values. Any adjustments to carrying values will be recorded in goodwill. The calculation of goodwill is subject to change for up to one year after closing date of the transaction as additional information relative to closing date estimates and uncertainties becomes available.

 

The Company also recorded an identifiable intangible asset representing the core deposit base of Liberty. The discounted cash flow method was used in valuing this intangible. This method is based upon the principle of future benefits; economic value is based on anticipated future benefits as measured by cash flows expected to occur in the future. The estimated future cash flows are converted to a value indicator by determining the present value of the cash flows using a discount rate. The discount rate is based upon the nature of the business, the level of risk, and the expected stability of the estimated future cash flows. The higher the risk, the higher the discount rate, and the lower the value indicator.

 

Time deposit fair values were estimated using an income approach. The methodology entailed discounting the contractual cash flows of the instruments over their remaining contractual lives at prevailing market rates. Interest and principal payments were projected for each category of CDs over the period from the valuation date to the maturity dates. These payments represent future cash flows to be paid to depositors until maturity. Using appropriate market interest rates for each category of CDs, the future cash flows were discounted to their present value equivalents.

 

42
 
 

The following table summarizes the purchase of Liberty as of December 1, 2022: 

 

(In Thousands, Except Per Share Data)

        

Purchase Price Consideration in Common Stock

        

Middlefield Banc Corp. shares issued

  2,561,513     

Value assigned to Middlefield Banc Corp. common shares

 $28.60     

Purchase price assigned to Liberty common shares exchanged for

      73,259 

Purchase Price Consideration in Cash

        

Cash paid in lieu of fractional shares

      6 

Total Purchase Price

      73,265 

Net Assets Acquired:

        

Liberty shareholders equity

 $49,041     

Adjustments to reflect assets acquired at fair value:

        

Loans

        

Allowance for loan loss

  4,497     

Loans - interest rate

  646     

Loans - general credit

  (3,433)    

Core deposit intangible

  6,669     

Investments

  (1,461)    

Mortgage servicing rights

  830     

Other

  94     

Adjustments to reflect liabilities acquired at fair value:

        

Time deposits

  (228)    

Deferred taxes

  (54)    

Total net assets acquired

      56,601 

Goodwill resulting from merger

     $16,664 

 

The following condensed statement reflects the amounts recognized as of the acquisition date for each major class of asset acquired and liability assumed, at fair value:

 

(In Thousands)

        

Total purchase price

     $73,265 

Assets (liabilities) acquired:

        

Net assets acquired:

        

Cash

  18,406     

Loans and loans held for sale

  312,618     

Investments

  57,907     

Premises and equipment, net

  6,087     

Accrued interest receivable

  1,563     

Bank-owned life insurance

  16,290     

Core deposit intangible

  6,670     

Mortgage servicing rights

  1,680     

Other assets

  3,111     

Time deposits

  (69,278)    

Non-time deposits

  (294,684)    

Accrued interest payable

  (246)    

Other liabilities

  (3,523)    

Total net assets acquired

      56,601 

Goodwill resulting from the Liberty merger

     $16,664 

 

Middlefield recorded goodwill and intangibles associated with the purchase of Liberty totaling $16.7 million. Goodwill is not amortized, but is periodically evaluated for impairment. Middlefield Bank did not recognize any impairment during the year ended December 31, 2022.

 

Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. During the year ended December 31, 2022, no such adjustments were recorded. The identifiable intangible assets consist of a core deposit intangible which is being amortized over the estimated useful life of 10 years. The gross carrying amount of the core deposit intangible acquired in the Liberty merger that closed in 2022 was $6.7 million at December 31, 2022 with $63,000 accumulated amortization as of that date.

 

43
 
 

As of December 31, 2022, the current year and estimated future amortization expense for the core deposit intangible associated with this merger is as follows:

 

(In Thousands)

    

Remaining 2023

 $763 

2024

  750 

2025

  734 

2026

  714 

2027

  691 

Thereafter

  2,954 
  $6,606 

 

The Company incurred $2.4 million in merger expenses, which were recognized in noninterest expense within the Consolidated Statement of Income for the year ended December 31, 2022.

 

Results of operations for Liberty prior to the acquisition date are not included in the Consolidated Statement of Income for the year ended December 31, 2022. The results of activities from the former Liberty operations that are included in the Consolidated Statement of Income from the date of acquisition through December 31, 2022 are broken out in the following table:

 

  

Actual from Acquisition Date

Through December 31, 2022

 
  

(in thousands)

 
     

Net interest income

 $1,366 

Noninterest income

 $117 

Net income

 $867 

 

The table below presents unaudited pro forma information as if the acquisition of Liberty had occurred on January 1, 2021. The unaudited pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, and the related income tax effects. The pro forma information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates, and accordingly, does not attempt to predict or suggest future results. Merger and acquisition integration costs and amortization of fair value adjustments are included in the amounts below.

 

  

Pro Formas

 
  

Twelve-month period ended December 31,

 
  

2022

  

2021

 
  

(in thousands, except per share data)

 
         

Net interest income

 $63,277  $63,770 

Noninterest income

  10,151   9,779 

Net income

 $21,142  $16,297 

Pro forma earnings per share:

        

Basic

 $3.51  $1.86 

Diluted

 $3.50  $1.86 

 

Pro Forma net income was reduced by $8.5 million for the year ended December 31, 2021 for additional estimated nonrecurring merger expenses and increased by $8.5 million for the year ended December 31, 2022 to reflect the removal of merger expenses incurred for the year ended December 31, 2022 but reflected in the pro-forma net income as of December 31, 2021.

 

44
 
 
 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This information should be read in conjunction with the consolidated financial statements and accompanying notes to the financial statements.

 

This Management’s Discussion and Analysis section of the Annual Report contains forward-looking statements. Forward-looking statements are based on a variety of estimates and assumptions. The estimates and assumptions involve judgments about a number of things, including future economic, competitive, and financial market conditions and future business decisions. These matters are inherently subject to significant business, economic, and competitive uncertainties, all of which are difficult to predict and many of which are beyond the Company's control. Although the Company believes its estimates and assumptions are reasonable, actual results could vary materially from those shown. Inclusion of forward-looking information does not constitute a representation by the Company or any other person that the indicated results will be achieved. Investors are cautioned not to place undue reliance on forward-looking information.

 

These forward-looking statements may involve significant risks and uncertainties. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results in these forward-looking statements.

 

Overview

 

During 2022, the Company reported net income of $15.7 million, or $2.59 per diluted share, compared with $18.6 million, or $3.00 per diluted share, in 2021. The Company’s return on average assets for 2022 and 2021 was 1.17% and 1.36%, respectively, while the Company’s return on average equity was 11.25% and 12.74%, respectively.

 

Highlights of the Company’s performance in 2022 (on a year-over-year basis unless noted) include the following:

 

 

●

Returned $11.6 million of capital to shareholders through cash dividends and the repurchase of 229,420 shares at an average price of $26.67 per share
 

●

Net income was $15.7 million, or $2.59 per diluted share, compared to $18.6 million, or $3.00 per diluted share
 

●

Non-GAAP (1)  net income, adjusted for certain one-time items and expenses associated with the Liberty Bancshares, Inc. merger, was $18.3 million, or $3.03 per diluted share, compared to $18.5 million, or $2.98 per diluted share
 

●

Non-GAAP(1) ROAE and ROATE, adjusted for certain one-time items and expenses associated with the Liberty Bancshares, Inc. merger, was 13.15% and 15.12%, respectively, compared to 12.67% and 14.29%, respectively
 

●

Twelve-month pre-tax income benefited from $1.2 million of net fees associated with the Paycheck Protection Program (“PPP”), compared to $4.6 million in the 2021 full year
 

●

Net interest margin improved by 30 basis points to 4.08%, compared to 3.78%
 

●

Total loans were $1.35 billion, compared to $981.7 million at December 31, 2021
 

●

Total loans increased organically by $91.4 million, or 9.6% from December 31, 2021, without the impact of PPP loan forgiveness and the Liberty Bancshares, Inc. merger
 

●

Strong asset quality with nonperforming loans to total loans of 0.16%, compared to 0.49%
 

●

Allowance for loan losses was 1.07% of total loans, compared to 1.46%
 

(1)

A reconciliation of non-GAAP financial measures can be found in the following tables.

 

Reconciliation of Net Income, Less Merger and Certain Items  

For the Twelve Months Ended

  
                 
   

December 31,

   

December 31,

 
   

2022

    

2021

  
                 

Net Income

   $ 15,673     $ 18,633  

Acquisition related costs- after tax

     1,882       -  

Net costs of other real estate owned - after tax (2)

     755       (108 )

Net Income- Adjusted

   $ 18,310     $ 18,525  
                 

Diluted EPS excluding merger and one-time items

   $ 3.03     $ 2.98  

Return on average assets excluding merger and one-time items (annualized)

     1.37 %     1.35 %

Return on average equity excluding merger and one-time items (annualized)

     13.15 %     12.67 %

Return on average tangible common equity excluding merger and one-time items (annualized)

     15.12 %     14.29 %

 

 

(2)

This includes OREO writedowns, gross OREO expenses, and gross rental income earned on OREO.

 

45
 

 

Critical Accounting Policies

 

Allowance for loan and lease losses. Arriving at an appropriate level of allowance for loan and lease losses involves a high degree of judgment. The Company’s allowance for loan and lease losses provides for probable losses based upon evaluations of known and inherent risks in the loan portfolio.

 

Management uses historical information to assess the adequacy of the allowance for loan and lease losses as well as the prevailing business environment, which is affected by changing economic conditions and various external factors and which may impact the portfolio in ways currently unforeseen. The allowance is increased by provisions for loan losses and recoveries of loans previously charged off and reduced by loans charged off. For a complete discussion of the Company’s methodology of assessing the adequacy of the reserve for loan losses, refer to Note 1 of “Notes to Consolidated Financial Statements” of this Annual Report.

 

Valuation of Securities. Investment securities are classified as held to maturity or available for sale on the date of purchase. Only those securities classified as held to maturity are reported at amortized cost. Available-for-sale securities are reported at fair value with unrealized gains and losses included in accumulated other comprehensive (loss) income, net of related deferred income taxes, on the Consolidated Balance Sheet. The majority of the Company’s securities are valued based on prices compiled by third-party vendors using observable market data. However, particular securities are less actively traded and do not always have quoted market prices. The determination of fair value for less actively traded securities, therefore, requires judgment, with such determination requiring benchmarking to similar instruments or analyzing default and recovery rates. Examples include certain collateralized mortgage and debt obligations and high-yield debt securities. Realized securities gains or losses are reported within noninterest income in the Consolidated Statement of Income. The cost of securities sold is based on the specific identification method.

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least quarterly and more frequently when economic or market conditions warrant such an evaluation. Investments in debt securities are generally evaluated for OTTI under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320, Investments — Debt and Equity Securities. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, whether the market decline was affected by macroeconomic conditions, and whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies or U.S. government-sponsored enterprises, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

 

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security, or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and the investment’s fair value at the balance sheet date. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income or loss. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

 

Debt securities issued by state and political subdivisions and mortgage-backed securities in government-sponsored entities accounted for 81.7% of the total available-for-sale portfolio as of December 31, 2022, 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 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.
 

●

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.

 

Refer to Note 4 in the consolidated financial statements.

 

46
 

 

Loans Held for Sale

 

The Bank originates residential loans secured by first-lien mortgages on one-to-four family residential properties located within its market area for either portfolio or sale into the secondary market. At origination, a determination is made whether a loan will be held in the Bank’s portfolio or is intended for sale in the secondary market. Mortgage loans held for sale are recorded at the lower of the aggregate cost or fair value. The Bank recognizes gains and losses on sales of the loans held for sale when the sale is completed. In addition to interest earned on loans and income recognized on the sale of loans, the Bank receives fees for servicing loans that it has sold.

 

Income Taxes

 

The Company estimates income tax expense based on amounts expected to be owed to the various tax jurisdictions in which the Company conducts business. Quarterly, management assesses the reasonableness of the Company’s effective tax rate based on management’s current estimate of the amount and components of net income, tax credits, and the applicable statutory tax rates expected for the entire year. The estimated income tax expense is recorded in the Consolidated Statement of Income.

 

Deferred income tax assets and liabilities are determined using the balance sheet method and are reported in accrued taxes, interest, and expenses in the Consolidated Balance Sheet. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities and recognizes enacted changes in tax rates and laws. Deferred tax assets are recognized to the extent they exist and are subject to a valuation allowance based on management’s judgment that realization is more likely than not.

 

Accrued taxes represent the net estimated amount due to taxing jurisdictions and are reported in accrued taxes, interest, and expenses in the Consolidated Balance Sheet. The Company evaluates and assesses the relative risks and appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent, and other information and maintains tax accruals consistent with management’s evaluation of these relative risks and merits. Changes to the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities, and changes to statutory, judicial and regulatory guidance that impact the relative risks of tax positions. When they occur, these changes can affect deferred taxes and accrued taxes as well as the current period’s income tax expense and can be significant to the Company's operating results.

 

Goodwill and Other Intangible Assets

 

Goodwill is the excess of the purchase price over the fair value of the assets acquired in connection with business acquisitions accounted for as purchases. Other intangible assets consist of branch acquisition core deposit premiums. The Company is required to perform an annual impairment test by calculating the fair value of the reporting unit and comparing it against the reporting unit's carrying amount.  If the fair value is less than the carrying value, an expense may be required to write down the goodwill to the proper carrying value. 

 

Changes in Financial Condition

 

General The Company’s total assets increased $356.7 million or 26.8% to $1.69 billion on December 31, 2022, from $1.33 billion on December 31, 2021. This increase was primarily due to an increase in net loans of $371.2 million largely due to the Liberty merger, which was partially offset by a decrease in cash of $65.7 million.

 

On December 1, 2022, the Company completed its acquisition of Liberty pursuant to a previously announced definitive merger agreement. Under the terms of the merger agreement, Liberty shareholders received 2.752 shares of the Company’s common stock in exchange for each share of Liberty common stock they owned immediately before the merger. Middlefield issued 2.6 million shares of its common stock in the merger and the aggregate merger consideration was approximately $73.3 million.

 

Cash and cash equivalents Cash and due from banks and federal funds sold represent cash and cash equivalents, which decreased $65.7 million or 55.0% to $53.8 million on December 31, 2022, from $119.5 million on December 31, 2021. Deposits from customers into savings and checking accounts, loan and security repayments, and proceeds from borrowed funds typically increase these accounts. Decreases result from customer withdrawals, new loan originations, security purchases, and repayments of borrowed funds. The decrease in cash and cash equivalents since December 31, 2021, was primarily due to a decrease in deposits, an increase in loan fundings, partially offset by an increase in short-term borrowings.

 

Investment securities Management's objective in structuring the portfolio is to maintain a prudent level of liquidity while providing an acceptable rate of return without sacrificing asset quality. The balance of available-for-sale investment securities decreased $5.2 million, or 3.1%, compared to 2021. Securities purchased were $32.3 million. The Company sold the entire $57.9 million investment portfolio acquired in the Liberty Bancshares merger. These securities were acquired at fair value and then sold. Therefore, there were no realized gains or losses recognized during the year ended December 31, 2022.

 

47
 

 

The municipal bond portfolio totaled $127.3 million or 77.2% of the Company's total investment portfolio on December 31, 2022. Periodically, management reviews the entire municipal bond portfolio to assess credit quality. Each security held in this portfolio is evaluated on attributes that have historically influenced default incidences in the municipal market, such as sector, security, impairment filing, timeliness of disclosure, external credit assessment(s), credit spread, state, vintage, and underwriter. These investments have historically proven to have extremely low credit risk.

 

On December 31, 2022, the Company held $30.2 million of subordinated debt in other banks compared to $32.5 million on December 31, 2021. The average yield on this portfolio was 4.79% on December 31, 2022 and 2021

 

Loans receivable The loans receivable category consists primarily of single-family mortgage loans used to purchase or refinance personal residences located within the Company’s market area, commercial and industrial loans, home equity lines of credit, and commercial real estate loans used to finance properties that are used in the borrowers’ businesses, or to finance investor-owned rental properties, and, to a lesser extent, construction and consumer loans. The portfolio is well dispersed geographically. The following table summarizes fluctuation within the primary segments of the loan portfolio (dollars in thousands):

 

   

2022

    

2021

    

$ change

    

% change

  
                                 

Commercial real estate:

                                

Owner occupied

   $ 191,748     $ 111,470       80,278       72.0 %

Non-owner occupied

     380,580       283,618       96,962       34.2 %

Multifamily

     58,251       31,189       27,062       86.8 %

Residential real estate

     296,308       240,089       56,219       23.4 %

Commercial and industrial

     195,602       148,812       46,790       31.4 %

Home equity lines of credit

     128,065       104,355       23,710       22.7 %

Construction and other

     94,199       54,148       40,051       74.0 %

Consumer installment

     8,119       8,010       109       1.4 %

Total loans

     1,352,872       981,691       371,181       37.8 %

Less: Allowance for loan and lease losses

     (14,438 )     (14,342 )     (96 )     0.7 %
                                 

Net loans

   $ 1,338,434     $ 967,349       371,085       38.4 %

 

Net loans increased $371.1 million or 38.4% to $1.34 billion on December 31, 2022, from $967.3 million on December 31, 2021. The increase was due to the acquisition of $312.7 million in loans as part of the Liberty merger, coupled with strong organic loan growth of $55.9 million.

 

The product mix in the loan portfolio consists of CRE non-owner occupied loans equaling 28.1% of total loans, residential real estate loans 21.9%, commercial and industrial loans 14.5%, HELOC loans 9.5%, CRE owner-occupied loans 14.2%, construction and other loans 7.0%, CRE multifamily loans 4.3%, and consumer installment loans 0.6%, at December 31, 2022 compared with 28.9%, 24.5%, 15.2%, 10.6%, 11.3%, 5.5%, 3.2%, and 0.8%, respectively, at December 31, 2021.

 

Loans contributed 88.4% of total interest income in 2022 and 91.5% in 2021. The loan portfolio yield of 4.79% in 2022 was 34 basis points higher than the average yield for total interest-earning assets. Management recognizes that while the loan portfolio holds some of the Company’s highest-yielding assets, it is inherently the riskiest portfolio. Accordingly, management balances credit risk versus return with conservative credit standards. Management has developed and maintains comprehensive underwriting guidelines and a loan review function that monitors credits during and after approval. Management follows additional procedures to obtain current borrower financial information annually throughout the life of the loan obligation.

 

To minimize risks associated with changes in the borrower’s future repayment capacity, the Company generally requires scheduled periodic principal and interest payments on all types of loans and normally requires collateral.

 

The Company expects loan growth to be minimal but will not lower the conservative credit standards to increase loan originations in a slowing economy. The Company remains committed to sound underwriting practices without sacrificing asset quality and avoiding exposure to unnecessary risk that could weaken the portfolio.

 

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. According to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions that have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions that are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management concerning their commercial real estate portfolios and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans. On December 31, 2022, non-owner-occupied commercial real estate loans (including construction, land, and land development loans) represented 266.5% of total risk-based capital. Construction, land, and land development loans represent 47.1% of total risk-based capital. Management has extensive experience in commercial real estate lending and has implemented and continues to maintain heightened risk management procedures and robust underwriting criteria for its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows owing to interest rate increases and declines in net operating income.

 

48
 

 

Nevertheless, we may be required to maintain higher levels of capital due to our commercial real estate concentrations, which could require us to obtain additional capital, and may adversely affect shareholder returns. The Company has a comprehensive capital planning policy, including pro forma projections and stress testing. The Board of Directors has established internal minimum targets for regulatory capital ratios that are more than well-capitalized ratios.

 

Other real estate owned (“OREO”). OREO decreased $1.2 million from December 31, 2021, to $5.8 million on December 31, 2022 due to $1.2 million in write-downs for the twelve months ended December 31, 2022. As of December 31, 2022, the Company held one commercial property with a carrying amount of $5.8 million and one residential mortgage with a carrying amount of $28,000 in OREO. As of December 31, 2021, the Company held one commercial property with a carrying amount of $7.0 million in OREO.

 

Restricted stock. The Company’s investment in FHLB’s restricted stock increased $1.4 million, or 31.3%, to $5.8 million on December 31, 2022, compared to $4.4 million on December 31, 2021. The increase was primarily due to the merger.

 

Premises and equipment, net. The Company’s net premises and equipment increased $4.7 million, or 27.1%, to $22.0 million at December 31, 2022, compared to $17.3 million at December 31, 2021. This increase was primarily due to the acquisition of $6.1 million in fixed assets as part of the Liberty merger, $884,000 in purchases of fixed assets, partially offset by $1.3 million in depreciation.

 

Goodwill and other intangibles. The carrying value of goodwill was $31.7 million on December 31, 2022 compared to $15.1 million on December 31, 2021. The carrying value of core deposit intangibles was $7.7 million on December 31, 2022 compared to $1.4 million on December 31, 2021. In 2022, the Company recorded net increases in goodwill and core deposit intangibles of $16.6 million and $6.3 million, respectively. These increases are the direct result of the Liberty merger that closed on December 1, 2022.

 

Goodwill is assessed annually for impairment and any such impairment is recognized in the period identified by a charge to earnings. The process of evaluating goodwill for impairment requires management to make significant estimates and judgments. The use of different estimates, judgments or approaches to estimate fair value could result in a different conclusion regarding impairment of goodwill. Each of the valuation methods used by the Company requires significant assumptions. Depending on the specific method, assumptions are made regarding growth rates, discount rates for cash flows, control premiums, and selected multiples. Changes to any of the assumptions could result in significantly different results. Based on the analysis, management has determined that there is no goodwill impairment as of December 31, 2022.

 

The Company also monitors the ongoing value of mortgage servicing rights (“MSR”). As of December 31, 2022, the Company recorded an increase in MSR of $1.5 million to $2.1 million on December 31, 2022, as compared to $542,000 as of December 31, 2021. This increase is a direct result of the Liberty merger that closed on December 1, 2022.

 

Bank-owned life insurance. BOLI increased by $16.8 million to $33.9 million as of December 31, 2022, from $17.1 million at the end of 2021 due to the merger.

 

Deposits. Interest-earning assets are generally funded by both interest-bearing and noninterest-bearing core deposits. Deposits are influenced by changes in interest rates, economic conditions, and competition from other banks. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which represented 95.6% of the Company’s total funding sources on December 31, 2022. The deposit base consists of demand deposits, savings, money market accounts, and time deposits. The following table summarizes fluctuation within the primary segments of the deposit portfolio (in thousands):

 

   

December 31,

     December 31,                  
   

2022

    

2021

    

$ change

    

% change

  
                                 

Noninterest-bearing demand

   $ 503,907     $ 334,171     $ 169,736       50.8 %

Interest-bearing demand

     164,677       196,308       (31,631 )     -16.1 %

Money market

     187,498       177,281       10,217       5.8 %

Savings

     307,917       260,125       47,792       18.4 %

Time

     238,020       198,725       39,295       19.8 %

Total deposits

   $ 1,402,019     $ 1,166,610     $ 235,409       20.2 %

 

49
 

 

Deposits increased $235.4 million or 20.2% to $1.40 billion on December 31, 2022, from $1.17 billion on December 31, 2021. The increase was due to the acquisition of $364.0 million in deposits as part of the Liberty merger, offset by a $128.6 million decrease in deposits.

 

Savings, money market deposits, and NOW accounts have been stable sources of funds, making up 47.1% of total deposits as of December 31, 2022. The Company uses specific non-core funding instruments to grow the balance sheet and maintain liquidity. These deposits, from either a broker or a listing service, were $5.0 million on December 31, 2022, compared to $15.1 million on December 31, 2021.

 

Borrowed funds. The Company uses short-term and long-term borrowings as another funding source for asset growth and liquidity needs. These borrowings primarily include advances from the FHLB, subordinated debt, short-term borrowings from other banks, and federal funds purchased. Short-term borrowings increased to $65.0 million as of December 31, 2022. Other borrowings were relatively unchanged at $12.1 million as of December 31, 2022 compared to $12.9 million at December 31, 2021.

 

In July 2017, the United Kingdom FCA, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. Subsequently, in November 2020, the FCA proposed end dates immediately following the December 31, 2021 publication for the one-week and two-month LIBOR settings, and the June 30, 2023 publication for other LIBOR tenors. The Company formed a special purpose entity to issue $8.0 million of floating rate mandatorily redeemable trust preferred securities (“TruPS”). The rate on the TruPS adjusts quarterly, equal to LIBOR plus 1.67%. The cessation of LIBOR quotes in 2023 will affect our TruPS. It is too early to predict whether a new rate index replacement will have a material impact on the Company’s financial statements.

 

Stockholders’ equity. The Company maintains a capital level that exceeds regulatory requirements as a margin of safety for its depositors and shareholders. All of the capital ratios exceeded the regulatory well-capitalized guidelines. Stockholders’ equity increased $52.4 million, or 36.0%, to $197.7 million on December 31, 2022, from $145.3 million on December 31, 2021. This increase was mostly the result of the $73.3 million increase in common stock due to the Liberty merger that closed in the fourth quarter and a $10.2 million increase in retained earnings due to year-to-date net income, less dividends paid. These increases were offset by a $25.6 million decrease in accumulated other comprehensive income due to fair value adjustments of available-for-sale securities, and the $6.1 million increase in treasury stock due to the Company repurchasing 229,420 of its outstanding shares during the twelve months ended December 31, 2022.

 

The Company's tangible book value per share, which is a non-GAAP financial measure, was $19.19 at December 31, 2022 compared to $21.88 at December 31, 2021. Tangible equity has declined due to unrealized losses of the Company’s available-for-sale investment securities portfolio. The market value decline was a result of the yield curve steepening caused by inflation and the tightening of monetary policy by the Federal Reserve Board beginning in March of 2022 and throughout the remaining months of 2022. Gross unrealized losses from available-for-sale investment securities were $28.0 million as of December 31, 2022, compared to unrealized gains of $4.4 million at December 31, 2021.

 

Reconciliation of Common Stockholders' Equity to Tangible Common Equity

  

For the Twelve Months Ended

  

(Dollar amounts in thousands)

  

December 31,

   

December 31,

 
   

2022

    

2021

  
                 

Stockholders' Equity (GAAP)

   $ 197,691     $ 145,335  

Less Goodwill and other intangibles

     39,436       16,474  

Tangible Common Equity (Non-GAAP)

   $ 158,255     $ 128,861  
                 

Shares outstanding

     8,245,235       5,888,737  

Tangible book value per share

   $ 19.19     $ 21.88  

 

50
 

 

Average Balance Sheet and Yield/Rate Analysis. The following table sets forth, for the periods indicated, information concerning the total dollar amounts of interest income from interest-earning assets and the resultant average yields, the total dollar amounts of interest expense on interest-bearing liabilities and the consequent average costs, net interest income, interest rate spread and the net interest margin earned on average interest-earning assets. For purposes of this table, average balances are calculated using monthly averages, and the average loan balances include nonaccrual loans and exclude the allowance for loan and lease losses, and interest income includes accretion of net deferred loan fees. Yields on tax-exempt securities and loans (tax-exempt for federal income tax purposes) are shown on a fully tax-equivalent basis utilizing a federal tax rate of 21% for the years ended December 31, 2022 and 2021. Yields and rates have been calculated on an annualized basis utilizing monthly interest amounts.

 

   

For the Twelve Months Ended December 31,

  
   

2022

    

2021

  
                                                 
   

Average

            

Average

    

Average

            

Average

  

(Dollar amounts in thousands)

  

Balance

    

Interest

    

Yield/Cost

    

Balance

    

Interest

    

Yield/Cost

  
                                                 

Interest-earning assets:

                                                

Loans receivable (3)

   $ 1,014,896     $ 48,513       4.79 %   $ 1,052,351     $ 47,896       4.56 %

Investment securities (3)

     174,514       5,518       3.73 %     142,705       4,244       3.45 %

Interest-earning deposits with other banks (4)

     67,030       875       1.31 %     97,417       195       0.20 %

Total interest-earning assets

     1,256,440       54,906       4.45 %     1,292,473       52,335       4.11 %

Noninterest-earning assets

     84,484                       78,802                  

Total assets

   $ 1,340,924                     $ 1,371,275                  

Interest-bearing liabilities:

                                                

Interest-bearing demand deposits

   $ 164,569       554       0.34 %   $ 212,063       274       0.13 %

Money market deposits

     174,377       1,055       0.61 %     186,009       869       0.47 %

Savings deposits

     259,225       527       0.20 %     255,267       162       0.06 %

Certificates of deposit

     188,617       1,882       1.00 %     231,662       2,608       1.13 %

Short-term borrowings

     8,576       307       3.58 %     85       -       0.00 %

Other borrowings

     12,626       404       3.20 %     13,313       282       2.12 %

Total interest-bearing liabilities

     807,990       4,729       0.59 %     898,399       4,195       0.47 %

Noninterest-bearing liabilities:

                                                

Noninterest-bearing demand deposits

     386,296                       320,104                  

Other liabilities

     7,368                       6,535                  

Stockholders' equity

     139,270                       146,237                  

Total liabilities and stockholders' equity

   $ 1,340,924                     $ 1,371,275                  

Net interest income

           $ 50,177                     $ 48,140          

Interest rate spread (1)

                     3.86 %                     3.64 %

Net interest margin (2)

                     4.08 %                     3.78 %

Ratio of average interest-earning assets to average interest-bearing liabilities

                     155.50 %                     143.86 %

 

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

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

(3) Tax-equivalent adjustments to calculate the yield on tax-exempt securities and loans were $1,046 and $752, for 2022 and 2021, respectively.

(4) Includes dividends received on restricted stock.

 

 

51
 

 

Interest Rates and Interest Differential

 

   

2022 versus 2021

    

2021 versus 2020

  
                                                 
   

Increase (decrease) due to

    

Increase (decrease) due to

  

(Dollars in thousands)

  

Volume

    

Rate

    

Total

    

Volume

    

Rate

    

Total

  
                                                 

Interest-earning assets:

                                                

Loans receivable

   $ (1,708 )   $ 2,325     $ 617     $ (1,247 )   $ 140     $ (1,107 )

Investment securities

     1,097       177       1,274       1,207       (344 )     863  

Interest-bearing deposits with other banks

     (61 )     741       680       186       (245 )     (59 )

Total interest-earning assets

     (672 )     3,243       2,571       146       (449 )     (303 )
                                                 
                                                 

Interest-bearing liabilities:

                                                

Interest-bearing demand deposits

     (62 )     342       280       206       (377 )     (171 )

Money market deposits

     (55 )     241       186       117       (749 )     (632 )

Savings deposits

     2       363       365       107       (455 )     (348 )

Certificates of deposit

     (486 )     (240 )     (726 )     (2,170 )     (1,728 )     (3,898 )

Short-term borrowings

     -       307       307       (79 )     -       (79 )

Other borrowings

     (15 )     137       122       (31 )     104       73  

Total interest-bearing liabilities

     (616 )     1,150       534       (1,850 )     (3,205 )     (5,055 )
                                                 
                                                 

Net interest income

   $ (56 )   $ 2,093     $ 2,037     $ 1,996     $ 2,756     $ 4,752  

 

The following table sets forth consolidated selected financial highlights for periods ended December 31:

 

(Dollars in thousands)

  

2022

    

2021

  
                 

Average total assets

   $ 1,340,924     $ 1,371,275  
                 

Average shareholders' equity

   $ 139,270     $ 146,237  
                 

Net income

   $ 15,673     $ 18,633  
                 

Cash dividends declared per share

   $ 0.81     $ 0.69  
                 

Return on average total assets

     1.17 %     1.36 %
                 

Return on average shareholders' equity

     11.25 %     12.74 %
                 

Dividend payout ratio (1)

     37.23 %     22.76 %
                 

Average shareholders' equity to average assets

     10.39 %     10.66 %

 

(1) Cash dividends declared on common shares divided by net income

 

52
 

 

Allowance for Loan and Lease Losses. The allowance for loan and lease losses (“ALLL”) represents the amount management estimates to be adequate to provide for probable losses inherent in the loan portfolio as of the balance sheet date. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The ALLL is established through a provision for loan losses charged to operations. The provision is based on management's periodic evaluation of the adequacy of the ALLL, taking into account the overall risk characteristics of the various portfolio segments, the Company's loan loss experience, the impact of economic conditions on borrowers, and other relevant factors. The estimates used to determine the adequacy of the ALLL, including the amounts and timing of future cash flows expected on impaired loans, are particularly susceptible to significant changes in the near term. The total ALLL combines a specific allowance for identified problem loans and a general allowance for homogeneous loan pools.

 

The allowance for loan and lease loss balance as of December 31, 2022, totaled $14.4 million, representing a $96,000 increase from the end of 2021. There was no provision for loan losses in 2022, which represented a decrease of $700,000 compared to the provision for loan losses in 2021. During 2022, net recoveries decreased by $87,000 to $96,000 in net recoveries compared to $183,000 in net recoveries in 2021.

 

The specific allowance incorporates the results of measuring impaired loans. The allowance formula is calculated by applying loss factors to outstanding loans by type, excluding loans for which a specific allowance has been determined. Loss factors are based on management's determination of the amounts necessary for concentrations and changes in mix and volume of the loan portfolio, and consideration of historical loss experience.

 

The non-specific allowance is determined based upon management's evaluation of existing economic and business conditions affecting the key lending areas of the Company and other conditions, such as new loan products, credit quality trends, collateral values, unique industry conditions within portfolio segments that existed as of the balance sheet date, and the impact of those conditions on the collectability of the loan portfolio. Management reviews these conditions quarterly. The non-specific allowance is subject to a higher degree of uncertainty because it considers risk factors that may not be reflected in the historical loss factors.

 

Although management uses the best information available to determine the adequacy of the ALLL on December 31, 2022, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making the initial determinations. A downturn in the local economy could result in increased levels of nonperforming assets and charge-offs, increased loan loss provisions, and reductions in income. See Notes 5 for further discussion on the bank’s ALLL assessment. Additionally, as an integral part of the examination process, bank regulatory agencies periodically review a bank’s ALLL. The banking agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available at the time of their examination.

 

The following table sets forth information concerning the Company's credit ratios for the periods presented:

 

   

For the Years Ended

  
   

December 31,

  
   

2022

    

2021

  

(Dollars in Thousands)

                

Ratio of allowance for loan and lease losses to loans outstanding at end of period

     1.07 %     1.46 %

Net (recoveries) charge-offs to average loans

     -0.01 %     -0.02 %

Nonperforming loans/total loans

     0.16 %     0.49 %

Allowance for loan losses/nonperforming loans

     683.94 %     295.16 %

 

53
 

 

The following table illustrates the net charge-offs to average loans ratio for each loan category for each reported period:

 

   

At December 31,

  
    2022     2021  
   

Average Loan

Balance

    

Net

(recoveries)

charge-offs

    

Net

(recoveries)

charge-offs to

average loans

    

Average Loan

Balance

    

Net

(recoveries)

charge-offs

    

Net

(recoveries)

charge-offs to

average loans

  

(Dollars in Thousands)

                                                

Type of Loans:

                                                

Commercial real estate:

                                                

Owner occupied

   $ 131,817     $ (5 )     (0.00

)%

   $ 108,269     $ (45 )     (0.04

)%

Non-owner occupied

     288,744       127       0.04       299,212       175       0.06  

Multifamily

     38,882       -       0.00       35,696       -          

Residential real estate

     233,186       (61 )     (0.03 )     239,193       -       0.00  

Commercial and industrial

     149,726       (272 )     (0.18 )     192,156       (193 )     (0.10 )

Home equity lines of credit

     101,039       25       0.02       109,433       (56 )     (0.05 )

Construction and other

     64,490       -       0.00       59,395       (46 )     (0.08 )

Consumer installment

     7,012       90       1.28       8,997       (18 )     (0.20 )
                                                 

Total

   $ 1,014,896     $ (96 )     (0.01

)%

   $ 1,052,351     $ (183 )     (0.02

)%

 

Refer to Note 5 in the consolidated financial statements.

 

The following table illustrates the allocation of the Company's allowance for loan losses for each loan category for each reported period. The allowance allocation to each category is not necessarily indicative of a future loss in a particular category. It does not restrict our use of the allowance to absorb losses in other loan categories.

 

   

At December 31,

  
   

2022

    

2021

  
           

Percent of

            

Percent of

  
           

Loans in Each

            

Loans in Each

  
           

Category to

            

Category to

  
   

Amount

    

Total Loans

    

Amount

    

Total Loans

  

(Dollars in Thousands)

                                
                                 

Type of Loans:

                                

Commercial real estate:

                                

Owner occupied

   $ 2,203       14.17

%

   $ 1,836       11.35

%

Non-owner occupied

     5,597       28.13       7,431       28.89  

Multifamily

     662       4.31       454       3.18  

Residential real estate

     2,047       21.90       1,740       24.46  

Commercial and industrial

     1,483       14.46       882       15.16  

Home equity lines of credit

     1,753       9.47       1,452       10.63  

Construction and other

     609       6.96       533       5.52  

Consumer installment

     84       0.60       14       0.82  
                                 

Total

   $ 14,438       100.0

%

   $ 14,342       100.0

%

 

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

 

Nonperforming loans exclude TDRs that perform according to their terms over a prescribed period. TDRs are those loans which the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. The Company has 23 TDRs accruing interest with a balance of $3.1 million as of December 31, 2022, compared to 24 TDRs with a balance of 1.7 million as of December 31, 2021. Nonperforming loans amounted to $2.1 million or 0.16% of total loans and $4.9 million or 0.49% of total loans on December 31, 2022, and December 31, 2021, respectively.

 

54
 

 

A significant factor in determining the appropriateness of the ALLL is the type of collateral that secures the loans. Although this does not insure against all losses, real estate collateral provides substantial recovery, even in a distressed sale and declining-value environment. The Bank’s objective is to work with the borrower to minimize the debt service burden and reduce the future loss exposure to the Company.

 

Accrual of interest is discontinued on a loan when management believes that the borrower's financial condition is such that collection of interest is doubtful after considering economic and business conditions. Payments received on nonaccrual loans are applied against principal according to management's assessment of collectability.

 

A loan is considered impaired when it is probable the borrower will not repay the loan according to the original contractual terms of the loan agreement, including all troubled debt restructurings. Management has determined that first mortgage loans on one-to-four family properties and all consumer loans represent large groups of smaller-balance, homogeneous loans to be collectively evaluated. Loans that experience insignificant payment delays, defined as 90 days or less, are generally not classified as impaired. A loan is not impaired during a delay in payment if the Company expects to collect all amounts due, including interest accrued at the contractual interest rate for the period of delay. Management evaluates all loans identified as impaired individually. The Company estimates credit losses on impaired loans based on the present value of expected cash flows or the fair value of the underlying collateral if loan repayment is expected to come from the sale or operation of the collateral. Impaired loans, or portions thereof, are charged off when it is determined a realized loss has occurred. An allowance for loan and lease loss is maintained for estimated losses until that time.

 

Interest income that would have been recorded had these loans not been placed on nonaccrual status was $125,000 in 2022 and $204,000 in 2021. Management is not aware of any trends or uncertainties related to any loans classified as doubtful or substandard that might have a material effect on earnings, liquidity, or capital resources.

 

Changes in Results of Operations

 

2022 Results Compared to 2021 Results

 

General The Company posted net income of $15.7 million, compared to $18.6 million for the year ended December 31, 2021. On a per-share basis, 2022 earnings were $2.59 per diluted share, representing a decrease from the $3.00 per diluted share for the year ended December 31, 2021. The return on average equity for the year ended December 31, 2022, was 11.25%, and the Company’s return on average assets was 1.17%, compared to 12.74% and 1.36%, respectively, for the year ended December 31, 2021. Non-GAAP net income, adjusted for certain one-time items and expenses associated with the merger, was $18.3 million, or $3.03 per diluted share for the 2022 twelve-month period, compared to $18.5 million, or $2.98 per diluted share for the same period last year. Non-GAAP return on average equity and return on average assets, adjusted one-time items and expenses associated with the merger, for the 2022 twelve-month period was 13.15% and 15.12%, respectively, compared to 12.65% and 14.27% for the same period in 2021, respectively.

 

Net interest income Net interest income, the Company’s largest revenue source, is the difference between interest income on earning assets and interest expense paid on liabilities. Net interest income is affected by the changes in interest rates and the composition of interest-earning assets and interest-bearing liabilities. Net interest income increased by $2.0 million in 2022 to $50.2 million compared to $48.1 million in 2021. This increase results from a $2.6 million increase in interest income, partially offset by a $534,000 increase in interest expense. Interest-earning assets averaged $1.26 billion during 2022, a year-over-year decrease of $36.0 million from $1.29 billion in 2021. The Company’s average interest-bearing liabilities decreased from $898.4 million in 2021 to $808.0 million in 2022. A key performance indicator, net interest margin, is net interest income as a percentage of total interest-earning assets. For 2022, the net interest margin, measured on a fully taxable-equivalent basis, increased to 4.08%, compared to 3.78% in 2021. The improvement in the net interest margin is attributable to a 34 basis point increase in the yield earned on total interest-earning assets, partially offset by a 12 basis point increase in the cost of interest-bearing liabilities for the year ended December 31, 2022.

 

The Company is in an asset-sensitive position. A rising interest rate environment should lead to an expansion of net interest margin as the Company’s interest-earning assets reprice faster than its interest-bearing liabilities.  Much of the Company’s asset sensitivity is due to commercial loans that have variable interest rates.  As part of the Company’s strategy, floor rates are used to protect the Company’s net interest margin in a declining interest rate environment.  As of December 31, 2022, nearly all loan contracts with floor rates exceed their contractual floor rates and are repricing accordingly with rising interest rates.  Although the Company expects to benefit from a rising interest rate environment, deposit pricing is expected to increase to maintain liquidity. The Liberty merger did not significantly change our interest-rate sensitivity position or outlook as Liberty’s and our balance sheets were similarly structured.

 

Interest and dividend income Interest and dividend income increased $2.6 million to $54.9 million for 2022, attributable to a $1.2 million increase in interest on investment securities and a $617,000 increase on interest and fees on loans. The average balance of investment securities increased by $31.8 million, or 22.3%, and the 3.73% yield on the investment portfolio increased by 28 basis points, from 3.45%, for the same period in the prior year. The primary driver for the increase in interest on loans was a 23 basis point increase in the yield earned on loans from 4.56% in 2021 to 4.79% in 2022. The average balance of loans receivable decreased by 37.5 million or 3.6% to $1.01 billion for the year ended December 31, 2022, compared to $1.05 billion for the year ended December 31, 2022. The decrease in the average loan balance for year ended December 31, 2022, is due in part to the forgiveness of PPP loans, partially offset by loan growth.

 

55
 

 

Interest expense Interest expense increased $534,000 or 12.7% to $4.7 million for 2022, compared with $4.2 million for 2021. This increase is attributable to an increase in interest expense on short-term borrowings and deposits of $307,000 and $105,000, respectively. The increase in short-term borrowings expense is a result of the Bank taking on FHLB advances in 2022, while there were no short-term borrowings during 2021. The increase in interest expense on deposits was due to a slight increase in the cost of deposits, which is expected to continue to trend upwards in the rising interest rate environment.

 

Provision for loan losses The provision for loan losses is an operating expense recorded to maintain the related balance sheet allowance for loan and lease losses at an amount considered adequate to cover probable losses incurred in the ordinary course of lending. There was no provision for loan losses for the year ended December 31, 2022, compared to $700,000 in 2021. The loan loss provision is based upon management's assessment of various factors, including types and amounts of nonperforming loans, historical loss experience, collectability of collateral values and guaranties, pending legal action for collection of loans and related guaranties, and current economic conditions. The loan loss provision reflects management's judgment of the current period cost-of-credit risk inherent in the loan portfolio. Although management believes the loan loss provision has been sufficient to maintain an adequate allowance for loan and lease losses, actual loan losses could exceed the amounts charged to operations.

 

The ratio of nonperforming loans to total loans was 0.16% on December 31, 2022, decreasing from 0.49% on December 31, 2021. The ratio of the allowance for loan and lease losses to total loans decreased to 1.07% of total loans on December 31, 2022, compared to 1.46% on December 31, 2021. The decrease in this ratio is directly attributable to the merger and the increase in period end loans. This ratio is expected to increase with the adoption of CECL. The Company remains confident in its conservative and disciplined approach to credit and risk management.

 

With the passage of the PPP, administered by the Small Business Administration (“SBA”), the Company has actively assisted its customers with applications for resources through the program. On December 31, 2022, the Company carried $229,000 of PPP loans classified as C&I loans for reporting purposes. Loans funded through the PPP program are fully guaranteed by the U.S. government. This guarantee exists at the inception of the loans and throughout the lives of the loans and was not entered into separately and apart from the loans.

 

Noninterest income Noninterest income decreased $503,000 or 5.9% to $6.7 million for 2022 compared to $7.2 million for 2021. This decrease resulted from gain on sale of loans and gain on equity securities, which decreased $1.2 million and $382,000, respectively. The decrease in gain on sale of loans, resulted from the decline in demand for residential refinances. The decrease in the gain on equity securities resulted from decreases in the stock price for the underlying securities. These decreases were partially offset by increases in gross rental income from an OREO property and service charges on deposit accounts of $771,000 and $425,000, respectively. The Company also recognized $707,000 in gross OREO expenses in 2022, which is included in noninterest expense in the Consolidated Statement of Income. Therefore, the net impact on the Consolidated Statement of Income for this OREO property was a $244,000 profit in 2022. The increase in service charges on deposit accounts was primarily due to an increase in checking account fees as a result of a new checking account program offered to customers.

 

Noninterest expense Operating expenses increased $6.0 million, or 18.9% to $38.0 million for 2022 compared to $31.9 million for 2021. The increase was primarily the result of a $2.4 million increase in merger-related costs, a $1.2 million increase in OREO writedowns, a $1.3 million increase in other expense, a $653,000 increase in gross OREO expenses, and a $403,000 increase in data processing and information technology costs. Gross OREO expenses of $707,000 primarily relate to rental expenses incurred on one commercial OREO property. The Company also recognized $951,000 in gross rental income from this OREO property in 2022, which is included in noninterest income in the Consolidated Statement of Income. Therefore, the net impact on the Consolidated Statement of Income for this OREO property was a $244,000 profit in 2022.

 

Provision for income taxes The provision for income taxes decreased by $845,000, or 20.8%, to $3.2 million for 2022 from $4.1 million for 2021. The Company’s effective federal income tax rate in 2022 was 17.0% compared to 17.9% in 2021. The decrease in the effective income tax rate year over year was a result of increases in tax-exempt income.

 

Asset and Liability Management

 

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

 

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

 

56
 

 

Interest Rate Sensitivity Simulation Analysis

 

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

 

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

 

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

 

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

 

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

 

The following table presents the simulated impact of a 200 basis point upward or 100 basis point downward shift of market interest rates on net interest income and the change in portfolio equity. This analysis was done assuming the interest-earning asset and interest-bearing liability levels at December 31, 2022, and December 31, 2021, remained constant. The impact of the market rate movements was developed by simulating the effects of rates changing gradually over one year from the December 31, 2022, and December 31, 2021 levels for net interest income and portfolio equity. The impact of market-rate movements was developed by simulating the effects of an immediate and permanent change in rates at December 31, 2022, and December 31, 2021, for portfolio equity:  

 

   

December 31, 2022

    

December 31, 2021

  

Change in Rates

  

% Change in NII

    

% Change in EVE

    

% Change in NII

    

% Change in EVE

  

+200bp

     (0.50

)%

     (2.80

)%

     2.40

%

     2.50

%

-100bp

     (0.30

)%

     (1.30

)%

     (1.40

)%

     (12.70

)%

 

Liquidity and Capital Resources

 

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

 

Liquidity is managed based on factors including core deposits as a percentage of total deposits, the degree of funding source diversification, the allocation and amount of deposits among deposit types, the short-term funding sources used to fund assets, the amount of non-deposit funding used to fund assets, the availability of unused funding sources, off-balance sheet obligations, the availability of assets readily converted to cash without undue loss, the amount of cash and liquid securities we hold, and the re-pricing characteristics and maturities of our assets when compared to the re-pricing characteristics of our liabilities and other factors.

 

The Company's liquid assets consist of cash and cash equivalents, including investments in very short-term investments (i.e., federal funds sold), equity securities, and investment securities classified as available for sale. The level of these assets is dependent on the Company's operating, investing, and financing activities during any given period. On December 31, 2022, cash and cash equivalents totaled $53.8 million or 3.2% of total assets, equity securities totaled $915,000 or 0.1% of total assets, and investment securities classified as available for sale totaled $165.0 million or 9.8% of total assets. Management believes that the company's liquidity needs are satisfied by the current balance of cash and cash equivalents, readily available access to traditional funding sources, FHLB advances, junior subordinated debt, brokered deposits, and the portion of the investment and loan portfolios that mature within one year. These sources of funds will enable the Company to meet cash obligations and off-balance sheet commitments as they come due.

 

57
 

 

Operating activities provided net cash of $18.4 million and $15.4 million for 2022 and 2021, respectively, generated principally from net income of $15.7 million and $18.6 million in these respective periods.

 

Investing activities used net cash of $8.7 million, which consisted primarily of an increase in loans of $55.9 million and investment purchases of $32.3 million. This was partially offset by investment sales of $57.9 million and $18.4 million in cash acquired in the merger. For the same period ended in 2021, investing activities provided net cash of $70.9 million, which consisted primarily of a decrease in loans of $127.3 million and investment repayments and maturities of $11.5 million. This was partially offset by investment purchases of $68.9 million.

 

Financing activities consist of the solicitation and repayment of customer deposits, borrowings and repayments, and the payment of dividends. During 2022, net cash used by financing activities totaled $75.4 million, principally derived from a decrease in deposits of $128.6 million, $6.1 million was a result of the repurchase of treasury shares, and $5.5 million was a result of the payment of dividends. The Company repurchased 229,420 of its outstanding shares during the twelve months ended December 31, 2022. These changes were partially offset by a $65.0 million increase in short-term borrowings. During 2021, net cash used by financing activities totaled $79.2 million, principally derived from a decrease in deposits of $58.6 million, and $12.3 million was a result of the repurchase of treasury shares.

 

Management monitors projected liquidity needs and determines the desired level based partly on the Company's commitment to making loans and management's assessment of the Company's ability to generate funds. As a result, the Company anticipates having sufficient liquidity to satisfy estimated short and long-term funding needs.

 

Capital Resources. The Company's primary source of capital is retained earnings. Historically, the Company has generated net retained income to support normal growth and expansion. Management has developed a capital planning policy to ensure regulatory compliance and capital adequacy for future expansion.

 

Registrant's Common Equity and Related Stockholder Matters

 

The Company had approximately 1,169 stockholders of record as of December 31, 2022. The Company’s common stock is traded and authorized for quotation on NASDAQ under the symbol “MBCN.” The Company currently expects consistency in the payout of future cash dividends.

 

58
 

 

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 5), or a combination of significant deficiencies, that results in there being more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by management or employees in the normal course by management or employees in the normal course of performing their assigned functions.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on this assessment, management believes that, as of December 31, 2022, the Company’s internal control over financial reporting was effective.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm because section 989G of the Dodd Frank Act exempts smaller reporting companies from the requirement of an attestation by registered public accountants concerning internal controls over financial reporting.

 

 

/s/ James R. Heslop, II

By: James R. Heslop, II         

Chief Executive Officer

(Principal Executive Officer)

 

Date: March 15, 2023

 

 

/s/ Donald L. Stacy

By: Donald L. Stacy

Treasurer

(Principal Financial & Accounting Officer)

 

Date: March 15, 2023

 

59