UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

	X☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended ~~September 30, 2019~~March 31, 2020

	☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from ___________ to ___________

Commission File Number 001-36613

Middlefield Banc Corp.
(Exact Name of Registrant as Specified in its Charter)

Ohio		34-1585111
State or Other Jurisdiction of		I.R.S. Employer Identification No.
Incorporation or Organization

15985 East High Street, Middlefield, Ohio		44062-0035
Address of Principal Executive Offices		Zip Code

	440-632-1666
Registrant’s Telephone Number, Including Area Code


Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Securities Registered Pursuant to Section 12(b) of The Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, Without Par Value

MBCN

The NASDAQ Stock Market, LLC

(NASDAQ Capital Market)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes X☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer ☐	Accelerated filer X☒
	Non-accelerated filer ☐	Smaller reporting company X☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No X☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Outstanding at ~~November 5, 2019: 3,211,713~~May 6, 2020: 6,369,467

MIDDLEFIELD BANC CORP.

INDEX

Part I – Financial Information

Item 1.	Financial Statements (unaudited)

	Consolidated Balance Sheet as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019	3

	Consolidated Statement of Income for the Three ~~and Nine~~ Months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	4

	Consolidated Statement of Comprehensive Income for the Three ~~and Nine~~ Months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	5

	Consolidated Statement of Changes in Stockholders' Equity for the Three Months March 31, 2020 and ~~Nine Months ended September 30,~~ 2019 ~~and 2018~~	6

	Consolidated Statement of Cash Flows for the ~~Nine~~Three Months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	87


	Notes to Unaudited Consolidated Financial Statements	109

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3231

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4240

Item 4.	Controls and Procedures	4341

Part II – Other Information

Item 1.	Legal Proceedings	4442

Item 1a.	Risk Factors	4442

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4443

Item 3.	Defaults by the Company on its Senior Securities	4443

Item 4.	Mine Safety Disclosures	4443

Item 5.	Other Information	44

Item 6.	Exhibits and Reports on Form 8-K	4544

Signatures		5049

Exhibit 31.1

Exhibit 31.2

Exhibit 32

MIDDLEFIELD BANC CORP.

CONSOLIDATED BALANCE SHEET

(Dollar amounts in thousands, except share data)

(Unaudited)

	September 30,			December 31,			March 31,			December 31,
	2019			2018			2020			2019

ASSETS
Cash and due from banks	$	118,956		$	107,933		$	53,533		$	35,113
Federal funds sold		1,069			-			1,800			-
Cash and cash equivalents		120,025			107,933			55,333			35,113
Equity securities, at fair value		628			616			550			710
Investment securities available for sale, at fair value		105,041			98,322			102,959			105,733
Loans held for sale		791			597			513			1,220
Loans		999,282			992,109
Less allowance for loan and lease losses		7,001			7,428
Loans:
Commercial real estate:
Owner occupied								113,272			102,386
Non-owner occupied								292,775			302,180
Multifamily								52,276			62,028
Residential real estate								233,900			234,798
Commercial and industrial								106,797			89,527
Home equity lines of credit								114,933			112,248
Construction and other								71,186			66,680
Consumer installment								12,861			14,411
Total loans								998,000			984,258
Less: allowance for loan and lease losses								9,244			6,768
Net loans		992,281			984,681			988,756			977,490
Premises and equipment, net		17,182			13,003			17,653			17,874
Goodwill		15,071			15,071			15,071			15,071
Core deposit intangibles		2,141			2,397			1,973			2,056
Bank-owned life insurance		16,403			16,080			16,618			16,511
Accrued interest receivable and other assets		11,015			9,698			14,513			10,697

TOTAL ASSETS	$	1,280,578		$	1,248,398		$	1,213,939		$	1,182,475

LIABILITIES
Deposits:
Noninterest-bearing demand	$	199,235		$	203,410		$	206,372		$	191,370
Interest-bearing demand		107,033			92,104			125,184			107,844
Money market		155,419			196,685			156,556			160,826
Savings		182,005			222,954			175,468			192,003
Time		390,721			300,914			340,130			368,800
Total deposits		1,034,413			1,016,067			1,003,710			1,020,843
Short-term borrowings:
Federal funds purchased		-			398			-			75
Federal Home Loan Bank advances		92,000			90,000			60,000			5,000
Total short-term borrowings		92,000			90,398			60,000			5,075
Other borrowings		12,359			8,803			12,662			12,750
Accrued interest payable and other liabilities		5,893			4,840			4,880			6,032
TOTAL LIABILITIES		1,144,665			1,120,108			1,081,252			1,044,700

STOCKHOLDERS' EQUITY
Common stock, no par value; 10,000,000 shares authorized, 3,647,146 and 3,630,497 shares issued; 3,211,565 and 3,244,332 shares outstanding		86,617			85,925
Common stock, no par value; 10,000,000 shares authorized, 7,298,829 and 7,294,792 shares issued; 6,369,467 and 6,423,630 shares outstanding								86,722			86,617
Retained earnings		62,886			56,037			65,140			65,063
Accumulated other comprehensive income (loss)		2,157			(154	)
Treasury stock, at cost; 435,581 and 386,165 shares		(15,747	)		(13,518	)
Accumulated other comprehensive (loss) income								(2,237	)		1,842
Treasury stock, at cost; 929,362 and 871,162 shares								(16,938	)		(15,747	)
TOTAL STOCKHOLDERS' EQUITY		135,913			128,290			132,687			137,775

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,280,578		$	1,248,398		$	1,213,939		$	1,182,475

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF INCOME

(Dollar amounts in thousands, except per share data)

(Unaudited)

	Three Months Ended					Nine Months Ended				Three Months Ended
	September 30,					September 30,				March 31,
	2019			2018		2019		2018		2020			2019
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	12,804		$	11,821	$	37,998	$	34,109	$	12,078		$	12,488
Interest-earning deposits in other institutions		193			178		549		412		94			187
Federal funds sold		24			8		56		29		21			7
Investment securities:
Taxable interest		206			167		599		506		157			179
Tax-exempt interest		613			598		1,731		1,673		629			565
Dividends on stock		45			57		156		169		30			58
Total interest and dividend income		13,885			12,829		41,089		36,898		13,009			13,484

INTEREST EXPENSE
Deposits		3,173			2,178		9,395		5,803		2,865			2,945
Short-term borrowings		42			296		334		764		35			213
Other borrowings		92			104		283		344		76			96
Total interest expense		3,307			2,578		10,012		6,911		2,976			3,254

NET INTEREST INCOME		10,578			10,251		31,077		29,987		10,033			10,230

Provision for loan losses		80			210		430		630		2,740			240

NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES		10,498			10,041		30,647		29,357
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES											7,293			9,990

NONINTEREST INCOME
Service charges on deposit accounts		571			491		1,609		1,416		553			508
Investment securities gains on sale, net		4			-		194		-
(Loss) gain on equity securities		(32	)		15		12		46		(160	)		58
Earnings on bank-owned life insurance		109			108		323		318		107			105
Gain on sale of loans		128			43		285		164		114			59
Other income		325			291		1,113		807		460			402
Total noninterest income		1,105			948		3,536		2,751		1,074			1,132

NONINTEREST EXPENSE
Salaries and employee benefits		4,272			3,839		12,474		11,684		3,524			4,124
Occupancy expense		535			460		1,584		1,468		550			553
Equipment expense		244			262		770		696		273			235
Data processing costs		580			481		1,594		1,360		666			465
Ohio state franchise tax		262			244		782		603		268			259
Federal deposit insurance expense		-			150		230		450		123			130
Professional fees		401			346		1,235		1,118		349			431
Advertising expense		202			236		605		694		209			203
Software amortization expense		182			155		479		460		141			145
Core deposit intangible amortization		86			87		256		265		83			85
Other expense		909			832		2,646		2,702		1,066			870
Total noninterest expense		7,673			7,092		22,655		21,500		7,252			7,500

Income before income taxes		3,930			3,897		11,528		10,608		1,115			3,622
Income taxes		661			593		1,958		1,602		74			611

NET INCOME	$	3,269		$	3,304	$	9,570	$	9,006	$	1,041		$	3,011

EARNINGS PER SHARE
Basic	$	1.01		$	1.02	$	2.95	$	2.79	$	0.16		$	0.46
Diluted	$	1.01		$	1.02	$	2.94	$	2.78	$	0.16		$	0.46

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Dollar amounts in thousands)

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2019

2018

2019

2018

Net income
$ 3,269 $ 3,304 $ 9,570 $ 9,006

Other comprehensive income (loss):

Net unrealized holding gain (loss) on available-for-sale investment securities
883 (1,297 ) 3,011 (3,282 )
Tax effect
(100 ) 272 (547 ) 689

Reclassification adjustment for investment securities gains included in net income
(4 ) - (194 ) -
Tax effect
1 - 41 -

Total other comprehensive income (loss)
780 (1,025 ) 2,311 (2,593 )

Comprehensive income
$ 4,049 $ 2,279 $ 11,881 $ 6,413

	Three Months Ended
	March 31,
	2020			2019

Net income	$	1,041		$	3,011

Other comprehensive (loss) income:
Net unrealized holding (loss) gain on available-for-sale investment securities		(5,163	)		1,006
Tax effect		1,084			(211	)

Total other comprehensive (loss) income		(4,079	)		795

Comprehensive (loss) income	$	(3,038	)	$	3,806

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollar amounts in thousands, except share and per share data)

(Unaudited)

Accumulated

Other

Total

Common Stock

Retained

Comprehensive

Treasury

Stockholders'

Shares

Amount

Earnings

Income

Stock

Equity

Balance, June 30, 2019
3,646,497 $ 86,590 $ 60,517 $ 1,377 $ (14,224 ) $ 134,260

Net income
3,269 3,269
Other comprehensive income
780 780
Dividend reinvestment and purchase plan
649 27 27
Treasury shares acquired (31,669)
(1,523 ) (1,523 )
Cash dividends ($0.28 per share)
(900 ) (900 )

Balance, September 30, 2019
3,647,146 $ 86,617 $ 62,886 $ 2,157 $ (15,747 ) $ 135,913

								Accumulated
								Other						Total
	Common Stock				Retained			Comprehensive			Treasury			Stockholders'
	Shares		Amount		Earnings			Income (Loss)			Stock			Equity

Balance, December 31, 2019		7,294,792	$	86,617	$	65,063		$	1,842		$	(15,747	)	$	137,775

Net income						1,041									1,041
Other comprehensive loss									(4,079	)					(4,079	)
Stock-based compensation, net		4,037		105											105
Treasury shares acquired (58,200 shares)												(1,191	)		(1,191	)
Cash dividends ($0.15 per share)						(964	)								(964	)

Balance, March 31, 2020		7,298,829	$	86,722	$	65,140		$	(2,237	)	$	(16,938	)	$	132,687

Accumulated

Other

Total

Common Stock

Retained

Comprehensive

Treasury

Stockholders'

Shares

Amount

Earnings

Loss

Stock

Equity

Balance, June 30, 2018
3,619,843 $ 85,544 $ 51,121 $ (431 ) $ (13,518 ) $ 122,716

Net income
3,304 3,304
Other comprehensive loss
(1,025 ) (1,025 )
Dividend reinvestment and purchase plan
2,861 140 140
Stock options exercised
150 3 3
Cash dividends ($0.28 per share)
(905 ) (905 )

Balance, September 30, 2018
3,622,854 $ 85,687 $ 53,520 $ (1,456 ) $ (13,518 ) $ 124,233

~~(continued on following page)~~

~~See accompanying notes to unaudited consolidated financial statements.~~

~~MIDDLEFIELD BANC CORP.~~

~~CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY~~

~~(Dollar amounts in thousands, except share and per share data)~~

~~(Unaudited, continued from previous page)~~

Accumulated

Other

Total

Common Stock

Retained

Comprehensive

Treasury

Stockholders'

Shares

Amount

Earnings

Income (Loss)

Stock

Equity

Balance, December 31, 2018
3,630,497 $ 85,925 $ 56,037 $ (154 ) $ (13,518 ) $ 128,290

Net income
9,570 9,570
Other comprehensive income
2,311 2,311
Dividend reinvestment and purchase plan
8,933 372 372
Stock options exercised
200 4 4
Stock-based compensation, net
7,516 316 316
Treasury shares acquired (49,416)
(2,229 ) (2,229 )
Cash dividends ($0.84 per share)
(2,721 ) (2,721 )

Balance, September 30, 2019
3,647,146 $ 86,617 $ 62,886 $ 2,157 $ (15,747 ) $ 135,913

Accumulated

Other

Total

Common Stock

Retained

Comprehensive

Treasury

Stockholders'

Shares

Amount

Earnings

Income (Loss)

Stock

Equity

Balance, December 31, 2017
3,603,881 $ 84,859 $ 47,431 $ 1,091 $ (13,518 ) $ 119,863

Change in accounting principle for adoption of ASU 2016-01
141 (141 ) -
Change in accounting principle for adoption of ASU 2018-02
(187 ) 187 -
Net income
9,006 9,006
Other comprehensive loss
(2,593 ) (2,593 )
Dividend reinvestment and purchase plan
8,763 441 441
Stock options exercised
4,650 107 107
Stock-based compensation, net
5,560 280 280
Cash dividends ($0.89 per share)
(2,871 ) (2,871 )

Balance, September 30, 2018
3,622,854 $ 85,687 $ 53,520 $ (1,456 ) $ (13,518 ) $ 124,233

								Accumulated
								Other						Total
	Common Stock				Retained			Comprehensive			Treasury			Stockholders'
	Shares		Amount		Earnings			Income (Loss)			Stock			Equity

Balance, December 31, 2018		7,260,994	$	85,925	$	56,037		$	(154	)	$	(13,518	)	$	128,290

Net income						3,011									3,011
Other comprehensive income									795						795
Dividend reinvestment and purchase plan		9,044		196											196
Stock-based compensation, net		15,032		316											316
Cash dividends ($0.14 per share)						(909	)								(909	)

Balance, March 31, 2019		7,285,070	$	86,437	$	58,139		$	641		$	(13,518	)	$	131,699

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollar amounts in thousands)

(Unaudited)

	Nine Months Ended						Three Months Ended
	September 30,						March 31,
	2019			2018			2020			2019
OPERATING ACTIVITIES
Net income	$	9,570		$	9,006		$	1,041		$	3,011
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		430			630			2,740			240
Investment securities gains on sale, net		(194	)		-
Gain on equity securities		(12	)		(46	)
Loss (gain) on equity securities								160			(58	)
Depreciation and amortization of premises and equipment, net		778			694			306			259
Software amortization expense		479			460			141			145
Financing lease amortization expense		264			-			99			69
Amortization of premium and discount on investment securities, net		240			317			84			94
Accretion of deferred loan fees, net		(557	)		(690	)		(255	)		(259	)
Amortization of core deposit intangibles		256			265			83			85
Stock-based compensation expense		366			360
Stock-based compensation (income) expense, net								(302	)		186
Restricted stock cash portion								-			(44	)
Origination of loans held for sale		(12,845	)		(9,588	)		(3,232	)		(2,556	)
Proceeds from sale of loans		12,936			9,290			4,053			1,960
Gain on sale of loans		(285	)		(164	)		(114	)		(37	)
Earnings on bank-owned life insurance		(323	)		(318	)		(107	)		(105	)
Deferred income tax		117			184			(308	)		295
Net (gain) loss on other real estate owned		(123	)		5
Net gain on other real estate owned								-			(43	)
Increase in accrued interest receivable		(51	)		(445	)		(195	)		(200	)
Increase in accrued interest payable		276			126			63			192
Other, net		(1,609	)		(1,721	)		(1,277	)		(2,553	)
Net cash provided by operating activities		9,713			8,365			2,980			681

INVESTING ACTIVITIES
Investment securities available for sale:
Proceeds from repayments and maturities		8,571			4,340			2,779			3,799
Proceeds from sale of securities		12,325			-
Purchases		(24,844	)		(12,998	)		(5,252	)		(2,679	)
Increase in loans, net		(7,529	)		(49,467	)		(14,052	)		(12,616	)
Proceeds from the sale of other real estate owned		360			26			-			225
Purchase of premises and equipment		(1,420	)		(1,843	)		(184	)		(295	)
Purchase of restricted stock		(169	)		(90	)		(1,600	)		-
Net cash used in investing activities		(12,706	)		(60,032	)		(18,309	)		(11,566	)

FINANCING ACTIVITIES
Net increase in deposits		18,346			135,567
Increase (decrease) in short-term borrowings, net		1,602			(19,403	)
Repayment of other borrowings		(245	)		(20,109	)
Restricted stock cash portion		(44	)		-
Stock options exercised		4			107
Net (decrease) increase in deposits								(17,133	)		24,164
Increase in short-term borrowings, net								54,925			602
Net repayment of other borrowings								(88	)		(56	)
Proceeds from dividend reinvestment and purchase plan		372			441			-			196
Repurchase of treasury shares		(2,229	)		-			(1,191	)		-
Cash dividends		(2,721	)		(2,871	)		(964	)		(909	)
Net cash provided by financing activities		15,085			93,732			35,549			23,997

Increase in cash and cash equivalents		12,092			42,065			20,220			13,112

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		107,933			39,886			35,113			107,933

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	120,025		$	81,951		$	55,333		$	121,045

See accompanying notes to unaudited consolidated financial statements.

	Nine Months Ended						Three Months Ended
	September 30,						March 31,
	2019			2018			2020		2019
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings	$	9,736		$	6,785		$	2,913	$	3,062
Income taxes		2,180			1,675

Noncash operating transactions:
Operating lease assets added to other, net	$	(1,071	)	$	-		$	-	$	(2,101	)
Operating lease liabilities added to other, net		1,071			-			-		2,101
Noncash investing transactions:
Transfers from loans to other real estate owned	$	56		$	76		$	301	$	38
Transfer of equity securities from investment securities available for sale, at fair value		-			(625	)
Finance lease assets added to premises and equipment		(3,801	)		-			-		(2,771	)
Noncash financing transactions:
Finance lease liabilities added to borrowed funds	$	3,801		$	-		$	-	$	2,771

See accompanying notes to unaudited consolidated financial statements.

MIDDLEFIELD BANC CORP.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The consolidated financial statements of Middlefield Banc Corp. ("Company") include its bank subsidiary, The Middlefield Banking Company (“MBC” or “Middlefield Bank”), and a nonbank asset resolution subsidiary EMORECO, Inc. The consolidated financial statements also include the accounts of MBC’s subsidiary, Middlefield Investments, Inc. (MI), established March 13, 2019. All significant inter-company items have been eliminated.

The unaudited condensed consolidated financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, ~~2018.~~2019. The interim consolidated financial statements include all adjustments (consisting of only normal recurring items) that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of operations for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year.

Recently ~~Adopted Accounting Pronouncements –~~

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases (Topic 842)~~. The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which (a) the lease term is 12 months or less and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. On January 1, 2019, the Company adopted ASU 2016-02 which resulted in the recording of finance lease assets and liabilities of $3.8 million and operating lease assets and liabilities of $1.1 million on the Consolidated Balance Sheet. See Note 9 to the financial statements.

~~Recently~~ Issued Accounting Pronouncements –

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial ~~Instruments~~ Instruments(“CECL”), which changes the impairment model for most financial assets. This Update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the Update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ~~ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018.~~ With certain exceptions, transition to the new requirements will be through a ~~cumulative effect~~cumulative-effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. ~~On October 16,~~In November 2019, the FASB ~~voted to defer~~issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date of ASU 2016-13 for ~~ASC 326, Financial Instruments – Credit Losses, for~~SEC filers that are eligible to be smaller reporting companies, non-SEC filers, and all other companies, to fiscal years beginning after December 15, 2022, ~~and~~including interim periods within those fiscal years. Management will continue to monitor model output throughout the deferral period.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The ~~final~~effective dates in this Update are the same as those applicable for ASU 2019-10. The Company is currently evaluating the impact the adoption of the standard will have on the Company's financial position or results of operations.

In January 2020, the FASB issued ASU 2020-2, Financial Instruments – Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842), February 2020, to add and amend SEC paragraphs in the Accounting Standards Codification to reflect the issuance of SEC Staff Accounting Bulletin No. 119, related to the new credit losses standard, and comments by the SEC staff related to the revised effective date of the new leases standard. This ASU is ~~expected to be issued in mid-November.~~effective upon issuance. The ~~CECL model has been completed and runs concurrently with~~Company is currently evaluating the ~~existing incurred loss model each month. Management continues monitoring model output, with final assumption changes expected to be made in~~impact the ~~fourth quarter.~~adoption of the standard will have on the Company's financial position or results of operations.

In March 2020, the FASB issued ASU 2020-3,Codification Improvements to Financial Instruments. This ASU was issued to improve and clarify various financial instruments topics, including the current expected credit losses (CECL) standard issued in 2016. The ASU includes seven issues that describe the areas of improvement and the related amendments to GAAP; they are intended to make the standards easier to understand and apply and to eliminate inconsistencies, and they are narrow in scope and are not expected to significantly change practice for most entities. Among its provisions, the ASU clarifies that all entities, other than public business entities that elected the fair value option, are required to provide certain fair value disclosures under ASC 825, Financial Instruments, in both interim and annual financial statements. It also clarifies that the contractual term of a net investment in a lease under Topic 842 should be the contractual term used to measure expected credit losses under Topic 326. Amendments related to ASU 2019-04 are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is not permitted before an entity’s adoption of ASU 2016-01. Amendments related to ASU 2016-13 for entities that have not yet adopted that guidance are effective upon adoption of the amendments in ASU 2016-13. Early adoption is not permitted before an entity’s adoption of ASU 2016-13. Amendments related to ASU 2016-13 for entities that have adopted that guidance are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Other amendments are effective upon issuance of this ASU. The Company is currently evaluating the impact the adoption of the standard will have on the Company's financial position or results of operations.

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.

NOTE 2 – REVENUE RECOGNITION

In accordance with ASC 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, gains on the sale of loans, and BOLI income, are not within the scope of ASC 606. These revenue sources cumulatively comprise ~~92.2%~~91.8% 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 cancelled at any time by either the Company or the deposit customer. Revenue from these transactions is recognized on a monthly basis 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 completion of the requested service/transaction.

Gains (losses) on sale of other real estate owned (“OREO”) – Gains and losses are recognized at the completion of 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 include transfer of the property title, physical possession of the asset, and the buyer obtaining 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 and the payment terms, that the contract has a true 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.

The following table depicts the disaggregation of revenue derived from contracts with customers to depict the nature, amount, timing, and uncertainty of revenue and cash ~~flows:~~flows for the three months ended March 31,

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
Noninterest Income		2019		2018		2019		2018			2020			2019
(Dollar amounts in thousands)

Service charges on deposit accounts:
Overdraft fees	$	201		$	207	$	639	$	597		$	190		$	248
ATM banking fees		255			219		690		634			210			194
Service charges and other fees		115			65		280		185			153			66
Investment securities gains on sale, net ^(a)		4			-		194		-
(Loss) gain on equity securities ^(a)		(32	)		15		12		46			(160	)		58
Earnings on bank-owned life insurance^(a)		109			108		323		318			107			105
Gain on sale of loans ^(a)		128			43		285		164			114			59
Revenue from investment services												131			138
Other income		325			291		1,113		807			329			264
Total noninterest income	$	1,105		$	948	$	3,536	$	2,751		$	1,074		$	1,132

Net gain (loss) on other real estate owned	$	17		$	-	$	123	$	(5	)
Net gain on other real estate owned											$	-		$	43

(a) Not within scope of ASC 606

NOTE 3 - STOCK-BASED COMPENSATION

The Company had no nonvested stock options outstanding as of ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.

Stock option activity during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 is as follows:

Weighted-

average

Exercise Price

Shares

Per Share

Outstanding, January 1, 2019
7,450 $ 17.55
Exercised
(200 ) 17.55

Outstanding, September 30, 2019
7,250 $ 17.55

Exercisable, September 30, 2019
7,250 $ 17.55

				Weighted-
				average
				Exercise Price
	Shares			Per Share

Outstanding, January 1, 2020		14,500		$	8.78
Exercised		(1,000	)		8.78

Outstanding, March 31, 2020		13,500		$	8.78

Exercisable, March 31, 2020		13,500		$	8.78

The following table presents the activity during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 related to awards of restricted stock:

Weighted-

average

Grant Date Fair

Units

Value Per Unit

Nonvested at January 1, 2019
21,175 $ 41.95
Granted
14,565 41.90
Vested
(4,970 ) 32.40
Nonvested at September 30, 2019
30,770 $ 43.48

Expected to vest as of September 30, 2019
6,253 $ 39.58

			Weighted-
			average
			Grant Date Fair
	Units		Value Per Unit

Nonvested at January 1, 2020		61,040	$	21.73
Granted		23,648		26.09
Nonvested at March 31, 2020		84,688	$	22.94

Expected to vest as of March 31, 2020		1,000	$	22.65

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

Share-based compensation expense of ~~$180,000~~($408,000) and $90,000 was recognized for the three-month periods ended ~~September 30,~~March 31, 2020 and 2019, respectively. The expense recorded as of March 31, 2020 is the result of the decrease in the market valuations of the plans. Vesting of shares under the plan is contingent on a combination of service period and ~~2018, respectively. Share-based~~a performance condition tied to the total shareholder return on the Company’s stock. Due to the change in market conditions during the quarter ended March 31, 2020, there was a significant decrease in the probability of the achievement of the performance condition which resulted in a decrease in the liability related to the Plan and a reversal of compensation ~~expense of $270,000 and $226,000 was recognized for the nine-month periods ended September 30, 2019 and 2018, respectively.~~expense. Since the shares of restricted stock are historically paid out at the vesting date in a combination of shares and cash, the Company has recorded a liability related to this plan which totals ~~$416,000~~$287,000 and ~~$351,000~~$236,000 at ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. When the shares vest, the amount distributed in shares is transferred to common stock and the remainder is distributed in cash.

Total unrecognized stock compensation cost related to nonvested share-based compensation on restricted stock as of ~~September 30, 2019~~March 31, 2020 totals ~~$354,000,~~$219,000, of which ~~$63,000~~$94,000 is estimated for the rest of ~~2019, $139,000 for~~ 2020, ~~$131,000~~$88,000 for 2021, $34,000 for 2022, and ~~$21,000~~$4,000 for ~~2022.~~2023.

~~NOTE~~NOTE 4 - EARNINGS PER SHARE

The Company provides 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 Three						For the Nine
	Months Ended						Months Ended						For the Three
	September 30, 2019						September 30, 2019						Months Ended
													March 31,
	2019			2018			2019			2018			2020			2019

Weighted-average common shares issued		3,647,007			3,620,558			3,641,904			3,613,010			7,298,740			7,270,608

Average treasury stock shares		(417,878	)		(386,165	)		(398,803	)		(386,165	)		(881,631	)		(772,330	)

Weighted-average common shares and common stock equivalents used to calculate basic earnings per share		3,229,129			3,234,393			3,243,101			3,226,845			6,417,109			6,498,278

Additional common stock equivalents (stock options and restricted stock) used to calculate diluted earnings per share		10,404			13,933			10,318			15,454			12,334			12,290

Weighted-average common shares and common stock equivalents used to calculate diluted earnings per share		3,239,533			3,248,326			3,253,419			3,242,299			6,429,443			6,510,568

Options to purchase ~~7,250~~13,500 shares of common stock at ~~$17.55~~$8.78 per share, were outstanding during the three ~~and nine~~ months ended ~~September 30, 2019.~~March 31, 2020. Also outstanding were ~~30,770~~84,688 shares of restricted stock. None of the outstanding options or restricted stock were anti-dilutive.

Options to purchase ~~13,600~~14,900 shares of common stock at ~~prices ranging from $17.55 to $23.00,~~$8.78 per share, were outstanding during the three ~~and nine~~ months ended ~~September 30, 2018.~~March 31, 2019. Also outstanding were ~~20,425~~61,334 shares of restricted stock. None of the outstanding options or restricted stock were anti-dilutive.

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. When treasury shares are sold or reissued subsequently, the amount received is recognized as an increase in equity and the resulting surplus or deficit on the transaction is presented within the share premium. The reserve for the Company’s treasury shares comprises the cost of the Company’s shares held by the Company. As of ~~September 30, 2019,~~March 31, 2020, the Company held ~~435,581~~929,362 of the Company’s shares, which is an increase of ~~31,669~~58,200 for the ~~quarter, and 49,416 for the nine~~three months ended ~~September 30, 2019,~~March 31, 2020, from the ~~386,165~~871,162 shares held as of December 31, ~~2018.~~2019.

NOTE 5 - FAIR VALUE MEASUREMENTS

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

Level I:

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

Level II:

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

Level III:

Assets and liabilities that have little to no pricing 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.

			September 30, 2019								March 31, 2020
(Dollar amounts in thousands)	Level I		Level II		Level III		Total		Level I		Level II		Level III		Total
Assets measured on a recurring basis:
U.S. government agency securities	$	-	$	1,999	$	-	$	1,999
Subordinated debt		-		4,150		-		4,150	$	-	$	4,221	$	-	$	4,221
Obligations of states and political subdivisions		-		79,641		-		79,641		-		81,256		-		81,256
Mortgage-backed securities in government-sponsored entities		-		19,251		-		19,251		-		17,482		-		17,482
Total debt securities		-		105,041		-		105,041		-		102,959		-		102,959
Equity securities in financial institutions		628		-		-		628		550		-		-		550
Total	$	628	$	105,041	$	-	$	105,669	$	550	$	102,959	$	-	$	103,509

			December 31, 2018								December 31, 2019
(Dollar amounts in thousands)	Level I		Level II		Level III		Total		Level I		Level II		Level III		Total
Assets measured on a recurring basis:
U.S. government agency securities	$	-	$	7,471	$	-	$	7,471
Subordinated debt									$	-	$	4,126	$	-	$	4,126
Obligations of states and political subdivisions		-		73,093		-		73,093		-		82,977		-		82,977
Mortgage-backed securities in government-sponsored entities		-		17,758		-		17,758		-		18,630		-		18,630
Total debt securities		-		98,322		-		98,322		-		105,733		-		105,733
Equity securities in financial institutions		616		-		-		616		710		-		-		710
Total	$	616	$	98,322	$	-	$	98,938	$	710	$	105,733	$	-	$	106,443

Investment Securities Available for Sale - The Company obtains fair values from an independent pricing service 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).

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 tables present the assets measured on a nonrecurring 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 at the time 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 at initial foreclosure or subsequent to the initial measurement. No such devaluation occurred in the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020.

			September 30, 2019								March 31, 2020
(Dollar amounts in thousands)	Level I		Level II		Level III		Total		Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	-	$	-	$	5,058	$	5,058	$	-	$	-	$	4,566	$	4,566

			December 31, 2018								December 31, 2019
(Dollar amounts in thousands)	Level I		Level II		Level III		Total		Level I		Level II		Level III		Total
Assets measured on a non-recurring basis:
Impaired loans	$	-	$	-	$	1,075	$	1,075	$	-	$	-	$	5,166	$	5,166

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 generally determined based upon 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 makes estimates about 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 above table exclude estimated selling costs of $2.0 million and ~~$492,000~~$2.1 million as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring 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)

Range (Weighted

Fair Value Estimate

Valuation Techniques

Unobservable Input

Range (Weighted Average)

Fair Value Estimate

Valuation Techniques

Unobservable Input

Average)

September 30, 2019

March 31, 2020

Impaired loans

5,058

Appraisal of collateral (1)

Appraisal adjustments (2)

40.3%

55.6%

(54.4%)

4,566

Appraisal of collateral (1)

Appraisal adjustments (2)

35.4%

49.5%

(36.2%)

Quantitative Information about Level III Fair Value Measurements

(Dollar amounts in thousands)

Range (Weighted

Fair Value Estimate

Valuation Techniques

Unobservable Input

Range (Weighted Average)

Fair Value Estimate

Valuation Techniques

Unobservable Input

Average)

December 31, 2018

December 31, 2019

Impaired loans

1,075

Appraisal of collateral (1)

Appraisal adjustments (2)

100.0%

(40.6%)

5,166

Appraisal of collateral (1)

Appraisal adjustments (2)

40.3%

47.4%

(41.8%)

(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:

	September 30, 2019										March 31, 2020
	Carrying								Total		Carrying								Total
	Value		Level I		Level II		Level III		Fair Value		Value		Level I		Level II		Level III		Fair Value
	(Dollar amounts in thousands)										(Dollar amounts in thousands)
Financial assets:
Cash and cash equivalents	$	120,025	$	120,025	$	-	$	-	$	120,025	$	55,333	$	55,333	$	-	$	-	$	55,333
Loans held for sale		791		-		791		-		791		513		-		513		-		513
Net loans		992,281		-		-		988,336		988,336		988,756		-		-		983,780		983,780
Bank-owned life insurance		16,403		16,403		-		-		16,403		16,618		16,618		-		-		16,618
Federal Home Loan Bank stock		3,848		3,848		-		-		3,848		5,448		5,448		-		-		5,448
Accrued interest receivable		3,684		3,684		-		-		3,684		3,666		3,666		-		-		3,666

Financial liabilities:
Deposits	$	1,034,413	$	643,692	$	-	$	393,068	$	1,036,760	$	1,003,710	$	663,580	$	-	$	346,386	$	1,009,966
Short-term borrowings		92,000		92,000		-		-		92,000		60,000		60,000		-		-		60,000
Other borrowings		12,359		-		-		12,405		12,405		12,662		-		-		12,706		12,706
Accrued interest payable		1,020		1,020		-		-		1,020		980		980		-		-		980

	December 31, 2018										December 31, 2019
	Carrying								Total		Carrying								Total
	Value		Level I		Level II		Level III		Fair Value		Value		Level I		Level II		Level III		Fair Value
	(Dollar amounts in thousands)										(Dollar amounts in thousands)
Financial assets:
Cash and cash equivalents	$	107,933	$	107,933	$	-	$	-	$	107,933	$	35,113	$	35,113	$	-	$	-	$	35,113
Loans held for sale		597		-		597		-		597		1,220		-		1,220		-		1,220
Net loans		984,681		-		-		973,124		973,124		977,490		-		-		974,213		974,213
Bank-owned life insurance		16,080		16,080		-		-		16,080		16,511		16,511		-		-		16,511
Federal Home Loan Bank stock		3,679		3,679		-		-		3,679		3,848		3,848		-		-		3,848
Accrued interest receivable		3,633		3,633		-		-		3,633		3,471		3,471		-		-		3,471

Financial liabilities:
Deposits	$	1,016,067	$	715,153	$	-	$	298,891	$	1,014,044	$	1,020,843	$	652,043	$	-	$	371,193	$	1,023,236
Short-term borrowings		90,398		90,398		-		-		90,398		5,075		5,075		-		-		5,075
Other borrowings		8,803		-		-		8,827		8,827		12,750		-		-		12,783		12,783
Accrued interest payable		744		744		-		-		744		917		917		-		-		917

All financial instruments included in the above tables, with the exception of net loans, deposits, and other borrowings, are carried at cost, which approximates the fair value of the instrument.

NOTE 6 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the changes in accumulated other comprehensive income (loss) (“AOCI”) by component net of tax for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively:

(Dollars in thousands)
Accumulated Other
Comprehensive
Income (Loss)
(a)

Balance as of June 30, 2019
$ 1,377
Other comprehensive income
783
Amount reclassified from accumulated other comprehensive income
(3 )
Balance at September 30, 2019
$ 2,157

Balance as of December 31, 2018
$ (154 )
Other comprehensive income
2,464
Amount reclassified from accumulated other comprehensive income
(153 )
Balance at September 30, 2019
$ 2,157

(Dollars in thousands)
Accumulated Other
Comprehensive
Income (Loss)
(a)

Balance as of June 30, 2018
$ (431 )
Other comprehensive loss
(1,025 )
Balance at September 30, 2018
$ (1,456 )

Balance as of December 31, 2017
$ 1,091
Other comprehensive loss
(2,593 )
Change in accounting principle, ASC 2016-01 ^(b)
(141 )
Change in accounting principle, ASC 2018-02 ^(b)
187
Period change
(2,547 )
Balance at September 30, 2018
$ (1,456 )

(Dollars in thousands)	Unrealized gains/(losses) on available-for-sale securities (a)
Balance as of December 31, 2018	$	(154	)
Other comprehensive income		795
Balance at March 31, 2019	$	641

Balance as of December 31, 2019	$	1,842
Other comprehensive (loss)		(4,079	)
Balance at March 31, 2020	$	(2,237	)

(a)

All amounts are net of tax. Amounts in parentheses indicate debits to AOCI.

~~(b)~~

Reclassifications are the result of the adoption of ASUs 2016-01 and 2018-02 effective for the Company beginning January 1, 2018. The reclassifications are presented within the Consolidated Statement of Changes in Stockholders’ Equity for the affected transitional periods.

~~The following tables present significant~~There were no other reclassifications of amounts ~~reclassified~~ from ~~or to each component of AOCI:~~ accumulated other comprehensive income (loss) for the three months ended March 31, 2020 and 2019.

(Dollars in thousands)
Amounts Reclassified from Accumulated Other Comprehensive Income
For the Three Months Ended

Affected Line Item in
the Statement Where
Net Income is
Details about other comprehensive income

September 30, 2019

September 30, 2018

Presented
Unrealized gains on available-for-sale securities (a)

$ 4 $ -
Investment securities gains on sale, net
(1 ) -
Income taxes
$ 3 $ -

(Dollars in thousands)

Amount Reclassified from Accumulated Other Comprehensive Income
For the Nine Months Ended

Affected Line Item in
the Statement Where
Net Income is
Details about other comprehensive income

September 30, 2019

September 30, 2018

Presented
Unrealized gains on available-for-sale securities (a)

$ 194 $ -
Investment securities gains on sale, net
(41 ) -
Income taxes
$ 153 $ -

~~(a)~~

~~For unrealized gains on available-for-sale securities, amounts in parentheses indicate expenses and other amounts indicate income.~~

NOTE 7 – INVESTMENT AND EQUITY SECURITIES

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

	September 30, 2019									March 31, 2020
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
(Dollar amounts in thousands)	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value

U.S. government agency securities	$	2,000	$	-	$	(1	)	$	1,999
Subordinated debt		4,000		150		-			4,150	$	4,000	$	221	$	-		$	4,221
Obligations of states and political subdivisions:
Taxable		500		3		-			503		500		1		-			501
Tax-exempt		76,816		2,322		-			79,138		84,343		236		(3,824	)		80,755
Mortgage-backed securities in government-sponsored entities		19,102		267		(118	)		19,251		16,947		549		(14	)		17,482
Total	$	102,418	$	2,742	$	(119	)	$	105,041	$	105,790	$	1,007	$	(3,838	)	$	102,959

	December 31, 2018									December 31, 2019
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
(Dollar amounts in thousands)	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value

U.S. government agency securities	$	7,442	$	90	$	(61	)	$	7,471
Subordinated debt										$	4,000	$	126	$	-		$	4,126
Obligations of states and political subdivisions:
Taxable		502		10		-			512		500		1		-			501
Tax-exempt		72,387		667		(473	)		72,581		80,436		2,065		(25	)		82,476
Mortgage-backed securities in government-sponsored entities		18,185		88		(515	)		17,758		18,465		274		(109	)		18,630
Total	$	98,516	$	855	$	(1,049	)	$	98,322	$	103,401	$	2,466	$	(134	)	$	105,733

The Company recognized net (loss) gains on equity investments of ($~~32,000)~~160,000) and ~~$12,000,~~$58,000, respectively, for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019. ~~The Company recognized net gains on equity investments of $15,000 and $46,000, respectively, for the three and nine months ended September 30, 2018.~~ No net gains or losses on sold equity securities were realized during these periods.

The amortized cost and fair value of debt securities at ~~September 30, 2019,~~March 31, 2020, 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		Amortized		Fair
(Dollar amounts in thousands)	Cost		Value		Cost		Value

Due in one year or less	$	5,094	$	5,109	$	42	$	42
Due after one year through five years		1,276		1,296		1,316		1,328
Due after five years through ten years		15,267		15,592		17,965		18,255
Due after ten years		80,781		83,044		86,467		83,334
Total	$	102,418	$	105,041	$	105,790	$	102,959

~~Proceeds from~~There were no securities sold during the ~~sales of investment securities~~three months ended March 31, 2020 and ~~the gross realized gains and losses are as follows:~~2019, respectively.

(Dollar amounts in thousands)
For the Three Months
Ended September 30,

For the Nine Months
Ended September 30,

2019

2018

2019

2018

Proceeds from sales
$ 518 $ - $ 12,325 $ -
Gross realized gains
4 - 227 -
Gross realized losses
- - (33 ) -

Investment securities with an approximate carrying value of ~~$62.6~~$53.1 million and ~~$63.5~~$55.6 million at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, were pledged to secure deposits and for other purposes as required by law.

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.

	September 30, 2019														March 31, 2020
	Less than Twelve Months				Twelve Months or Greater					Total					Less than Twelve Months					Twelve Months or Greater					Total
			Gross				Gross					Gross					Gross					Gross					Gross
	Fair		Unrealized		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollar amounts in thousands)	Value		Losses		Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses

U.S. government agency securities	$	-	$	-	$	1,999	$	(1	)	$	1,999	$	(1	)
Obligations of states and political subdivisions:
Tax-exempt															$	51,663	$	(3,824	)	$	-	$	-		$	51,663	$	(3,824	)
Mortgage-backed securities in government-sponsored entities		-		-		9,275		(118	)		9,275		(118	)		-		-			2,539		(14	)		2,539		(14	)
Total	$	-	$	-	$	11,274	$	(119	)	$	11,274	$	(119	)	$	51,663	$	(3,824	)	$	2,539	$	(14	)	$	54,202	$	(3,838	)

	December 31, 2018															December 31, 2019
	Less than Twelve Months					Twelve Months or Greater					Total					Less than Twelve Months					Twelve Months or Greater					Total
			Gross					Gross					Gross					Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollar amounts in thousands)	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses

U.S. government agency securities	$	-	$	-		$	4,105	$	(61	)	$	4,105	$	(61	)
Obligations of states and political subdivisions:
Tax-exempt		20,451		(286	)		11,053		(187	)		31,504		(473	)	$	4,324	$	(25	)	$	-	$	-		$	4,324	$	(25	)
Mortgage-backed securities in government-sponsored entities		2,068		(9	)		12,257		(506	)		14,325		(515	)		1,409		(2	)		8,223		(107	)		9,632		(109	)
Total	$	22,519	$	(295	)	$	27,415	$	(754	)	$	49,934	$	(1,049	)	$	5,733	$	(27	)	$	8,223	$	(107	)	$	13,956	$	(134	)

There were 1486 securities considered temporarily impaired at ~~September 30, 2019.~~March 31, 2020.

On a quarterly basis, the Company performs an assessment to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment (“OTTI”). A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. The Company assesses whether the unrealized loss is other than temporary.

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

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

Debt securities issued by U.S. government agencies, U.S. government-sponsored enterprises, and state and political subdivisions accounted for 96% of the total available-for-sale portfolio as of ~~September 30, 2019~~March 31, 2020 and no credit losses are expected, given the explicit and implicit guarantees provided by the U.S. federal government and the lack of prolonged unrealized loss positions within the obligations of the state and political subdivisions security portfolio. The Company considers the following factors in determining whether a credit loss exists and the period over which the debt security is expected to recover:

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

For the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ there were no available-for-sale debt securities with an unrealized loss that suffered OTTI. Management does not believe any individual unrealized loss as of ~~September 30, 2019~~March 31, 2020 or December 31, ~~2018~~2019 represented an other-than-temporary impairment. The unrealized losses on debt securities are primarily the result of interest rate changes. These conditions will not prohibit the Company from receiving its contractual principal and interest payments on these debt securities. The fair value of these debt securities is expected to recover as payments are received on these securities and they approach maturity. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

NOTE 8 - LOANS AND RELATED ALLOWANCE FOR LOAN AND LEASE LOSSES

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

September 30,

December 31,

2019

2018

Commercial and industrial
$ 85,861 $ 83,857
Real estate - construction
57,564 56,731
Real estate - mortgage:

Residential
347,739 336,487
Commercial
492,914 498,247
Consumer installment
15,204 16,787
999,282 992,109
Less: Allowance for loan and lease losses
(7,001 ) (7,428 )

Net loans
$ 992,281 $ 984,681

~~The amounts above include deferred loan origination costs of $1.4 million and $1.6 million at September 30, 2019 and December 31, 2018.~~

The Company’s primary business activity is with customers located within its local Northeastern Ohio trade area, eastern Geauga County, and contiguous counties. The Company also serves the central Ohio market with offices in Dublin, Sunbury, Westerville, Powell, and ~~Powell,~~Plain City, Ohio. Commercial, residential, consumer, and agricultural loans are granted. Although the Company has a diversified loan portfolio, loans outstanding to individuals and businesses are dependent upon the local economic conditions in the Company’s immediate trade area.

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 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 collection of interest is doubtful. Interest payments received on nonaccrual loans are applied against the unpaid principal balance until accrual status is restored.

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

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

Real Estate - Mortgage

September 30, 2019

Commercial and
industrial

Real estate- construction

Residential

Commercial

Consumer
installment

Total

Loans:

Individually evaluated for impairment
$ 1,457 $ - $ 1,780 $ 11,261 $ 1 $ 14,499
Collectively evaluated for impairment
84,404 57,564 345,959 481,653 15,203 984,783
Total loans
$ 85,861 $ 57,564 $ 347,739 $ 492,914 $ 15,204 $ 999,282

March 31, 2020
Impairment Evaluation
	Individually		Collectively		Total Loans
Loans:
Commercial real estate:
Owner occupied	$	3,432	$	109,840	$	113,272
Non-owner occupied		7,043		285,732		292,775
Multifamily		-		52,276		52,276
Residential real estate		1,152		232,748		233,900
Commercial and industrial		911		105,886		106,797
Home equity lines of credit		347		114,586		114,933
Construction and other		-		71,186		71,186
Consumer installment		1		12,860		12,861
Total	$	12,886	$	985,114	$	998,000

Real Estate - Mortgage

December 31, 2018

Commercial and
industrial

Real estate- construction

Residential

Commercial

Consumer
installment

Total

Loans:

Individually evaluated for impairment
$ 2,570 $ - $ 1,970 $ 9,533 $ 2 $ 14,075
Collectively evaluated for impairment
81,287 56,731 334,517 488,714 16,785 978,034
Total loans
$ 83,857 $ 56,731 $ 336,487 $ 498,247 $ 16,787 $ 992,109

December 31, 2019
Impairment Evaluation
	Individually		Collectively		Total Loans
Loans:
Commercial real estate:
Owner occupied	$	3,474	$	98,912	$	102,386
Non-owner occupied		7,084		295,096		302,180
Multifamily		-		62,028		62,028
Residential real estate		1,278		233,520		234,798
Commercial and industrial		882		88,645		89,527
Home equity lines of credit		351		111,897		112,248
Construction and other		-		66,680		66,680
Consumer installment		1		14,410		14,411
Total	$	13,070	$	971,188	$	984,258

The amounts above include net deferred loan origination costs of $1.3 million at March 31, 2020 and December 31, 2019.

March 31, 2020
Ending Allowance Balance Attributable to Loans:
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total Allocation
Loans:
Commercial real estate:
Owner occupied	$	53	$	1,046	$	1,099
Non-owner occupied		1,095		3,269		4,364
Multifamily		-		386		386
Residential real estate		25		1,139		1,164
Commercial and industrial		3		713		716
Home equity lines of credit		40		1,200		1,240
Construction and other		-		254		254
Consumer installment		-		21		21
Total	$	1,216	$	8,028	$	9,244

Real Estate - Mortgage

September 30, 2019

Commercial
and industrial

Real estate-
construction

Residential

Commercial

Consumer
installment

Total

Allowance for loan and lease losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment
$ 3 $ - $ 33 $ 670 $ - $ 706
Collectively evaluated for impairment
386 99 1,640 4,046 124 6,295
Total ending allowance balance
$ 389 $ 99 $ 1,673 $ 4,716 $ 124 $ 7,001

Real Estate - Mortgage

December 31, 2018

Commercial
and industrial

Real estate-
construction

Residential

Commercial

Consumer
installment

Total

Allowance for loan and lease losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment
$ 667 $ - $ 43 $ 643 $ 1 $ 1,354
Collectively evaluated for impairment
302 100 1,538 4,008 126 6,074
Total ending allowance balance
$ 969 $ 100 $ 1,581 $ 4,651 $ 127 $ 7,428

December 31, 2019
Ending Allowance Balance Attributable to Loans:
	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total Allocation
Loans:
Commercial real estate:
Owner occupied	$	45	$	756	$	801
Non-owner occupied		582		2,800		3,382
Multifamily		-		340		340
Residential real estate		28		698		726
Commercial and industrial		3		453		456
Home equity lines of credit		2		930		932
Construction and other		-		103		103
Consumer installment		-		28		28
Total	$	660	$	6,108	$	6,768

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, Residential Real Estate (“RRE”), Commercial and Industrial (“C&I”), ~~Real Estate~~Home Equity Lines of Credit (“HELOC”), Construction ~~Real Estate - Mortgage which is further segmented into Residential~~ and ~~Commercial Real Estate~~Other (“~~CRE”~~COO”), and Consumer Installment Loans. The commercial real estate loan segments consist of loans made for the purpose of financing the activities of commercial real estate owners and operators. The residential real estate and HELOC loan segments consist of loans made for the purpose of financing the activities of residential homeowners. The C&I loan segment consists of loans made for the purpose of financing the activities of commercial customers. The residential mortgage loan segment consists of loans made for the purpose of financing the activities of residential homeowners. The commercial mortgage loan segment consists of loans made for the purpose of financing the activities of commercial real estate owners and operators. The consumer loan segment consists primarily of installment loans and overdraft lines of credit connected with customer deposit accounts. The increases in the allowance for loan loss for the Commercial Real Estate, Residential Real Estate, C&I, HELOC, and ~~Commercial mortgage~~Construction and other portfolios were partially offset by ~~decreases~~a decrease in the allowance for the ~~C&I, Real Estate Constructions, and~~ Consumer Installment portfolios.

Management evaluates individual loans in all of the commercial segments for possible impairment based on guidance established by the Board of Directors. Loans are considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in evaluating impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company does not separately evaluate individual consumer and residential mortgage loans for impairment, unless such loans are part of a larger relationship that is impaired, or the loan was modified in a troubled debt restructuring.

Once the determination has been made that a loan is impaired, the determination of whether a specific allocation of the allowance is necessary is measured by comparing the recorded investment in the loan to the fair value of the loan using one of the following 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 allocation of the allowance and whether a loan can be removed from impairment status is made on a quarterly basis. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.

The following 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):

September 30, 2019
March 31, 2020								March 31, 2020
Impaired Loans	Impaired Loans							Impaired Loans
		Recorded Investment		Unpaid Principal Balance		Related Allowance					Unpaid
									Recorded		Principal		Related
									Investment		Balance		Allowance
With no related allowance recorded:
Commercial real estate:
Owner occupied									$	1,749	$	1,749	$	-
Non-owner occupied										2,773		2,773		-
Residential real estate										636		699		-
Commercial and industrial		$	1,308	$	2,059	$	-			791		1,512		-
Real estate - mortgage:
Residential			1,126		1,406		-
Commercial			2,561		2,561		-
Home equity lines of credit										179		189		-
Consumer installment			1		1		-			1		1		-
Total		$	4,996	$	6,027	$	-		$	6,129	$	6,923	$	-

With an allowance recorded:
Commercial real estate:
Owner occupied									$	1,683	$	1,693	$	53
Non-owner occupied										4,270		4,270		1,095
Residential real estate										516		567		25
Commercial and industrial		$	149	$	149	$	3			120		120		3
Real estate - mortgage:
Residential			654		703		33
Commercial			8,700		8,710		670
Home equity lines of credit										168		168		40
Total		$	9,503	$	9,562	$	706		$	6,757	$	6,818	$	1,216

Total:
Commercial real estate:
Owner occupied									$	3,432	$	3,442	$	53
Non-owner occupied										7,043		7,043		1,095
Residential real estate										1,152		1,266		25
Commercial and industrial		$	1,457	$	2,208	$	3			911		1,632		3
Real estate - mortgage:
Residential			1,780		2,109		33
Commercial			11,261		11,271		670
Home equity lines of credit										347		357		40
Consumer installment			1		1		-			1		1		-
Total		$	14,499	$	15,589	$	706		$	12,886	$	13,741	$	1,216

December 31, 2018
December 31, 2019								December 31, 2019
Impaired Loans	Impaired Loans							Impaired Loans
		Recorded		Unpaid Principal		Related					Unpaid
		Investment		Balance		Allowance			Recorded		Principal		Related
									Investment		Balance		Allowance
With no related allowance recorded:
Commercial real estate:
Owner occupied									$	1,772	$	1,772	$	-
Non-owner occupied										3,845		3,845		-
Residential real estate										759		829		-
Commercial and industrial		$	207	$	413	$	-			747		1,524		-
Real estate - mortgage:
Residential			1,306		1,462		-
Commercial			1,867		2,186		-
Home equity lines of credit										220		228		-
Consumer installment										1		1		-
Total		$	3,380	$	4,061	$	-		$	7,344	$	8,199	$	-

With an allowance recorded:
Commercial real estate:
Owner occupied									$	1,702	$	1,713	$	45
Non-owner occupied										3,239		3,239		582
Residential real estate										519		569		28
Commercial and industrial		$	2,363	$	3,013	$	667			135		135		3
Real estate - mortgage:
Residential			664		715		43
Commercial			7,666		7,676		643
Consumer installment			2		2		1
Home equity lines of credit										131		131		2
Total		$	10,695	$	11,406	$	1,354		$	5,726	$	5,787	$	660

Total:
Commercial real estate:
Owner occupied									$	3,474	$	3,485	$	45
Non-owner occupied										7,084		7,084		582
Residential real estate										1,278		1,398		28
Commercial and industrial		$	2,570	$	3,426	$	667			882		1,659		3
Real estate - mortgage:
Residential			1,970		2,177		43
Commercial			9,533		9,862		643
Home equity lines of credit										351		359		2
Consumer installment			2		2		1			1		1		-
Total		$	14,075	$	15,467	$	1,354		$	13,070	$	13,986	$	660

The tables above include troubled debt restructuring totaling $3.6 million as of ~~September 30, 2019~~March 31, 2020 and ~~$4.4 million as of~~ December 31, ~~2018.~~2019. The amounts allocated within the allowance for losses for troubled debt restructurings was ~~$40,000~~$70,000 and ~~$459,000~~$33,000 at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

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

For the Three Months Ended
September 30, 2019

For the Nine Months Ended
September 30, 2019

Average
Recorded
Investment

Interest
Income
Recognized

Average
Recorded
Investment

Interest
Income
Recognized

Commercial and industrial
$ 1,786 $ 20 $ 1,992 $ 44
Real estate - construction
- - 810 -
Real estate - mortgage:

Residential
1,782 14 1,847 38
Commercial
11,344 95 10,317 286
Consumer installment
2 - 2 -
Total
$ 14,914 $ 129 $ 14,968 $ 368

For the Three Months Ended
September 30, 2018

For the Nine Months Ended
September 30, 2018

Average
Recorded
Investment

Interest
Income
Recognized

Average
Recorded
Investment

Interest
Income
Recognized

Commercial and industrial
$ 2,984 $ 32 $ 4,620 $ 100
Real estate - construction
- - 11 -
Real estate - mortgage:

Residential
2,574 18 2,672 49
Commercial
6,132 50 6,123 151
Consumer installment
3 - 3 -
Total
$ 11,693 $ 100 $ 13,429 $ 300

	For the Three Months Ended March 31, 2020				For the Three Months Ended March 31, 2019
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Commercial real estate:
Owner occupied	$	3,453	$	33	$	4,235	$	46
Non-owner occupied		7,064		49		5,057		52
Residential real estate		1,215		11		1,795		11
Commercial and industrial		897		10		2,198		30
Home equity lines of credit		349		2		118		1
Construction and other		-		-		1,620		45
Consumer installment		1		-		2		-
Total	$	12,979	$	105	$	15,025	$	185

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 have potential weaknesses, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan-rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as payment delinquency, 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 $500,000 or greater. Confirmation of the appropriate risk grade is included in the review on an ongoing basis. The Company engages an external consultant to conduct loan reviews on a semiannual basis. Generally, the external consultant reviews commercial relationships greater than $250,000 and criticized relationships greater than $150,000. Detailed reviews, including plans for resolution, are performed on criticized loans on at least a quarterly basis. Loans in the Special Mention and Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The primary risk of commercial and industrial loans is related to deterioration in the cash flow of the business that may result in the liquidation of the business assets securing the loan. C&I loans are, by nature, secured by less substantial collateral than real estate-secured loans. The primary risk of real estate construction loans is potential delays and disputes during the completion process. The primary risk of residential real estate loans is current economic uncertainties along with the slow recovery in the housing market. The primary risk of commercial real estate loans is loss of income of the owner or occupier of the property and the inability of the market to sustain rent levels. Consumer installment loans historically have experienced higher delinquency rates. Consumer installments are typically secured by less substantial collateral than other types of credits.

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

Special

Total

September 30, 2019

Pass

Mention

Substandard

Doubtful

Loans

Commercial and industrial
$ 78,163 $ 4,585 $ 3,113 $ - $ 85,861
Real estate - construction
57,564 - - - 57,564
Real estate - mortgage:

Residential
342,571 989 4,179 - 347,739
Commercial
474,166 7,043 11,705 - 492,914
Consumer installment
15,195 - 9 - 15,204
Total
$ 967,659 $ 12,617 $ 19,006 $ - $ 999,282

			Special						Total
March 31, 2020	Pass		Mention		Substandard		Doubtful		Loans

Commercial real estate:
Owner occupied	$	106,356	$	3,938	$	2,978	$	-	$	113,272
Non-owner occupied		275,603		3,375		13,797		-		292,775
Multifamily		40,685		-		11,591		-		52,276
Residential real estate		231,140		414		2,346		-		233,900
Commercial and industrial		101,055		3,956		1,786		-		106,797
Home equity lines of credit		113,675		-		1,258		-		114,933
Construction and other		71,186		-		-		-		71,186
Consumer installment		12,853		-		8		-		12,861
Total	$	952,553	$	11,683	$	33,764	$	-	$	998,000

Special

Total

December 31, 2018

Pass

Mention

Substandard

Doubtful

Loans

Commercial and industrial
$ 77,002 $ 4,572 $ 2,283 $ - $ 83,857
Real estate - construction
55,397 1,334 - - 56,731
Real estate - mortgage:

Residential
332,475 553 3,459 - 336,487
Commercial
483,516 6,617 8,114 - 498,247
Consumer installment
16,776 - 11 - 16,787
Total
$ 965,166 $ 13,076 $ 13,867 $ - $ 992,109

			Special						Total
December 31, 2019	Pass		Mention		Substandard		Doubtful		Loans

Commercial real estate:
Owner occupied	$	95,518	$	3,951	$	2,917	$	-	$	102,386
Non-owner occupied		292,192		3,038		6,950		-		302,180
Multifamily		62,028		-		-		-		62,028
Residential real estate		231,633		420		2,745		-		234,798
Commercial and industrial		84,136		3,619		1,772		-		89,527
Home equity lines of credit		111,354		-		894		-		112,248
Construction and other		66,680		-		-		-		66,680
Consumer installment		14,398		-		13		-		14,411
Total	$	957,939	$	11,028	$	15,291	$	-	$	984,258

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due.

Nonperforming assets are nonaccrual loans including nonaccrual troubled debt restructurings (“TDR”), loans 90 days or more past due, ~~EMORECO assets,~~ other real estate owned, and repossessed assets. A loan is classified as nonaccrual when, in the opinion of management, there are serious doubts about collectability of interest and principal. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, the borrower’s financial condition is such that collection of principal and interest is doubtful. Payments received on nonaccrual loans are applied against the principal balance.

The following tables present the aging of the recorded investment in past-due loans by class of loans (in thousands):

30-59 Days

60-89 Days

90 Days+

Total

Total

September 30, 2019

Current

Past Due

Past Due

Past Due

Past Due

Loans

Commercial and industrial
$ 84,689 $ 623 $ 190 $ 359 $ 1,172 $ 85,861
Real estate - construction
57,564 - - - - 57,564
Real estate - mortgage:

Residential
343,400 1,813 358 2,168 4,339 347,739
Commercial
486,821 1,796 8 4,289 6,093 492,914
Consumer installment
15,179 14 11 - 25 15,204
Total
$ 987,653 $ 4,246 $ 567 $ 6,816 $ 11,629 $ 999,282

			30-59 Days		60-89 Days		90 Days+		Total		Total
March 31, 2020	Current		Past Due		Past Due		Past Due		Past Due		Loans

Commercial real estate:
Owner occupied	$	112,222	$	-	$	-	$	1,050	$	1,050	$	113,272
Non-owner occupied		282,603		6,885		48		3,239		10,172		292,775
Multifamily		52,276		-		-		-		-		52,276
Residential real estate		230,471		2,577		462		390		3,429		233,900
Commercial and industrial		106,157		329		118		193		640		106,797
Home equity lines of credit		114,611		101		156		65		322		114,933
Construction and other		71,005		181		-		-		181		71,186
Consumer installment		12,576		37		22		226		285		12,861
Total	$	981,921	$	10,110	$	806	$	5,163	$	16,079	$	998,000

30-59 Days

60-89 Days

90 Days+

Total

Total

December 31, 2018

Current

Past Due

Past Due

Past Due

Past Due

Loans

Commercial and industrial
$ 82,770 $ 288 $ 213 $ 586 $ 1,087 $ 83,857
Real estate - construction
56,731 - - - - 56,731
Real estate - mortgage:

Residential
331,379 2,612 1,083 1,413 5,108 336,487
Commercial
496,597 664 - 986 1,650 498,247
Consumer installment
16,768 19 - - 19 16,787
Total
$ 984,245 $ 3,583 $ 1,296 $ 2,985 $ 7,864 $ 992,109

			30-59 Days		60-89 Days		90 Days+		Total		Total
December 31, 2019	Current		Past Due		Past Due		Past Due		Past Due		Loans

Commercial real estate:
Owner occupied	$	101,264	$	64	$	-	$	1,058	$	1,122	$	102,386
Non-owner occupied		298,941		-		-		3,239		3,239		302,180
Multifamily		62,028		-		-		-		-		62,028
Residential real estate		232,518		1,439		34		807		2,280		234,798
Commercial and industrial		88,965		190		66		306		562		89,527
Home equity lines of credit		111,792		274		29		153		456		112,248
Construction and other		66,680		-		-		-		-		66,680
Consumer installment		13,378		622		216		195		1,033		14,411
Total	$	975,566	$	2,589	$	345	$	5,758	$	8,692	$	984,258

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):

September 30, 2019

Nonaccrual

90+ Days Past
Due and Accruing

Commercial and industrial
$ 868 $ -
Real estate - construction
- -
Real estate - mortgage:

Residential
4,732 -
Commercial
4,450 -
Consumer installment
3 -
Total
$ 10,053 $ -

			90+ Days Past Due
March 31, 2020	Nonaccrual		and Accruing

Commercial real estate:
Owner occupied	$	1,175	$	-
Non-owner occupied		3,287		-
Residential real estate		2,180		-
Commercial and industrial		835		-
Home equity lines of credit		699		-
Consumer installment		229		-
Total	$	8,405	$	-

December 31, 2018

Nonaccrual

90+ Days Past
Due and Accruing

Commercial and industrial
$ 996 $ 91
Real estate - construction
- -
Real estate - mortgage:

Residential
2,731 754
Commercial
2,864 100
Consumer installment
4 -
Total
$ 6,595 $ 945

			90+ Days Past Due
December 31, 2019	Nonaccrual		and Accruing

Commercial real estate:
Owner occupied	$	1,162	$	-
Non-owner occupied		3,289		-
Residential real estate		2,576		-
Commercial and industrial		946		-
Home equity lines of credit		709		-
Consumer installment		197		-
Total	$	8,879	$	-

Interest income that would have been recorded had these loans not been placed on nonaccrual status was ~~$295,000~~$100,000 for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~$456,000~~$342,000 for the year ended December 31, ~~2018.~~2019.

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 risk characteristics and credit quality of the loan portfolio, 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 analyses on TDRs, which may result 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 in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.

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 call code level. The historical charge-off factor was calculated using the last twelve consecutive historical quarters.

Management has identified a number of additional qualitative factors which it uses to supplement the historical charge-off factor because these factors are likely to 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 geographic standpoint.

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process in order 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 primary segments of the loan portfolio and the activity within those segments (in thousands):

Commercial
and industrial

Real estate-
construction

Real estate- residential mortgage

Real estate- commercial mortgage

Consumer
installment

Total

ALLL balance at December 31, 2018
$ 969 $ 100 $ 1,581 $ 4,651 $ 127 $ 7,428
Charge-offs
(393 ) - (517 ) (31 ) (110 ) (1,051 )
Recoveries
55 57 72 3 7 194
Provision
(242 ) (58 ) 537 93 100 430
ALLL balance at September 30, 2019
$ 389 $ 99 $ 1,673 $ 4,716 $ 124 $ 7,001

Commercial
and industrial

Real estate-
construction

Real estate- residential mortgage

Real estate- commercial mortgage

Consumer
installment

Total

ALLL balance at December 31, 2017
$ 999 $ 313 $ 1,760 $ 4,036 $ 82 $ 7,190
Charge-offs
(284 ) - (119 ) (111 ) (138 ) (652 )
Recoveries
167 46 76 - 37 326
Provision
274 (258 ) (12 ) 483 143 630
ALLL balance at September 30, 2018
$ 1,156 $ 101 $ 1,705 $ 4,408 $ 124 $ 7,494

Commercial
and industrial

Real estate-
construction

Real estate-
residential
mortgage

Real estate-
commercial
mortgage

Consumer
installment

Total

ALLL balance at June 30, 2019
$ 539 $ 90 $ 1,681 $ 4,875 $ 119 $ 7,304
Charge-offs
(38 ) - (378 ) - (22 ) (438 )
Recoveries
16 11 26 1 1 55
Provision
(128 ) (2 ) 344 (160 ) 26 80
ALLL balance at September 30, 2019
$ 389 $ 99 $ 1,673 $ 4,716 $ 124 $ 7,001

Commercial
and industrial

Real estate-
construction

Real estate-
residential
mortgage

Real estate-
commercial
mortgage

Consumer
installment

Total

ALLL balance at June 30, 2018
$ 1,180 $ 89 $ 1,743 $ 4,361 $ 129 $ 7,502
Charge-offs
(275 ) - (45 ) - (3 ) (323 )
Recoveries
28 28 47 - 2 105
Provision
223 (16 ) (40 ) 47 (4 ) 210
ALLL balance at September 30, 2018
$ 1,156 $ 101 $ 1,705 $ 4,408 $ 124 $ 7,494

	Allowance for Loan and Lease Losses
	Balance									Balance
	December 31, 2019		Charge-offs			Recoveries		Provision		March 31, 2020
Loans:
Commercial real estate:
Owner occupied	$	801	$	-		$	3	$	295	$	1,099
Non-owner occupied		3,382		-			74		908		4,364
Multifamily		340		-			-		46		386
Residential real estate		726		(46	)		29		455		1,164
Commercial and industrial		456		(61	)		109		212		716
Home equity lines of credit		932		(13	)		3		318		1,240
Construction and other		103		-			17		134		254
Consumer installment		28		(388	)		9		372		21
Total	$	6,768	$	(508	)	$	244	$	2,740	$	9,244

	Allowance for Loan and Lease Losses
	Balance										Balance
	December 31, 2018		Charge-offs			Recoveries		Provision			March 31, 2019
Loans:
Commercial real estate:
Owner occupied	$	1,315	$	(32	)	$	1	$	(454	)	$	830
Non-owner occupied		2,862		-			-		(5	)		2,857
Multifamily		474		-			-		18			492
Residential real estate		761		-			10		2			773
Commercial and industrial		969		(347	)		16		(52	)		586
Home equity lines of credit		820		(91	)		4		99			832
Construction and other		100		-			23		625			748
Consumer installment		127		(47	)		1		7			88
Total	$	7,428	$	(517	)	$	55	$	240		$	7,206

The provision fluctuations during the ~~nine-month~~three-month period ended ~~September 30,~~March 31, 2020 allocated to all loan categories are from an increase in qualitative factors, resulting in a $1.8 million increase, due to economic uncertainty. The provision also increased for the non-owner occupied portfolio because of the increase of a specific reserve for one relationship of $510,000 during the period.

The provision fluctuations during the three-month period ended March 31, 2019 allocated to:

●

commercial and industrial loans are due to the charge-off of a large relationship of $336,000 from a previous reserve of ~~$358,000 in the first quarter.~~$358,000.

●

~~residential portfolio~~construction and other loans are due to ~~charge-offs and portfolio growth~~the addition of a large loan requiring a reserve of $661,000.

●

owner occupied commercial real estate loans are due to the ~~reclassification~~payoff of one relationship that had a ~~large construction loan, with a first quarter~~previous reserve balance of ~~$661,000, to commercial real estate.~~$435,000.

~~The provision fluctuations during~~TDR describes loans on which the ~~three-month period ended September 30, 2019 allocated to:~~bank has granted concessions for reasons related to the customer’s financial difficulties. Such concessions may include one or more of the following:

●

~~commercial and industrial loans and commercial real estate loans are due~~reduction in the interest rate to ~~decreases in volume within these portfolios during the quarter.~~below market rates

●

~~residential portfolio are due to a strong growth in this portfolio during the quarter~~extension of repayment requirements beyond normal 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.

On April 7, 2020, federal banking regulators issued a revised interagency statement that included guidance on their approach for the accounting of loan modifications in light of the economic impact of the COVID-19 pandemic. The guidance interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs.

The following tables summarize troubled debt restructurings (in thousands):

For the Three Months Ended

September 30, 2019

Number of Contracts

Pre-Modification

Post-Modification

Term
Outstanding Recorded Outstanding Recorded
Troubled Debt Restructurings Modification
Other

Total
Investment Investment
Residential real estate
- 1 1 $ 38 $ 38

For the Nine Months Ended

September 30, 2019

Number of Contracts

Pre-Modification

Post-Modification

Term
Outstanding Recorded Outstanding Recorded
Troubled Debt Restructurings Modification
Other

Total
Investment Investment
Residential real estate
- 2 2 $ 123 $ 178

For the Three Months Ended

September 30, 2018

Number of Contracts

Pre-Modification

Post-Modification

Term
Outstanding Recorded Outstanding Recorded
Troubled Debt Restructurings Modification
Other

Total
Investment Investment
Residential real estate
1 - 1 $ 86 $ 86

	For the Nine Months Ended
	September 30, 2018										For the Three Months Ended
	Number of Contracts						Pre-Modification		Post-Modification		March 31, 2020
	Term						Outstanding Recorded		Outstanding Recorded		Number of Contracts						Pre-Modification		Post-Modification
Troubled Debt Restructurings	Modification		Other		Total		Investment		Investment		Term Modification		Other		Total		Outstanding Recorded Investment		Outstanding Recorded Investment
Residential real estate		2		2		4	$	261	$	261		2		-		2	$	42	$	42
Commercial and industrial												1		-		1		95		95

~~The following table summarizes TDR modifications within the previous 12 months for which there was a payment default~~There were no troubled debt restructurings during the ~~nine-month period~~three months ended ~~September 30, 2018 (in thousands):~~March 31, 2019.

For the Nine Months Ended

September 30, 2018

Troubled Debt Restructurings
subsequently defaulted

Number of
Contracts

Recorded
Investment

Residential real estate
1 $ 20

There were no subsequent defaults of troubled debt restructurings for the ~~three-month periods~~three months ended ~~September 30, 2019 and September 30, 2018, or for the nine-month period ended September 30, 2019.~~

~~NOTE 9 –~~ ~~LEASE~~ ~~COMMITMENTS~~

The Company leases six of its branch locations. As of September 30, 2019, net assets recorded under leases amounted to $4.5 million and have remaining lease terms of 1 year to 6 years. As of September 30, 2019, finance lease assets included in premises and equipment, net, totaled $3.5 million and operating lease assets included in accrued interest receivable and other assets on the Consolidated Balance Sheet totaled $943,000. As of September 30, 2019, finance lease obligations included in other borrowings totaled $3.6 million and operating lease obligations included in accrued interest payable and other liabilities on the Consolidated Balance Sheet totaled $945,000.

~~On April 17, 2019, the Company purchased a building to relocate the Mantua branch which is and has been at a leased location as of September 30, 2019. The relocation is planned for~~March 31, 2020 and the Company entered into an amended lease agreement with the Mantua lessor which does not exceed 12 months. As such, the lease for the Mantua location is not considered a capitalized lease as of September 30,March 31, 2019.

~~Lease costs incurred are as follows:~~

For the Three

For the Nine

Months Ended

Months Ended

September 30, 2019

September 30, 2019

Lease Costs:

Finance lease cost:

Amortization of right-of-use asset
$ 91 $ 264
Interest Expense
31 100
Other
10 25
Operating lease cost
52 178
Total lease cost
$ 184 $ 567

~~The following table displays the weighted-average term and discount rates for both operating and finance leases outstanding as of September 30, 2019:~~

Operating

Finance

Weighted-average term (years)
1.9 4.6
Weighted-average discount rate
2.9 % 3.4 %

The following table displays the undiscounted cash flows due related to operating and finance leases as of September 30, 2019, along with a reconciliation to the discounted amount recorded on the September 30, 2019 balance sheet:

Operating

Finance

Undiscounted cash flows due within:

2019
$ 56 $ 100
2020
226 411
2021
210 424
2022
211 431
2023
211 431
2024 and thereafter
339 2,792
Total undiscounted cash flows
1,253 4,589

Impact of present value discount
(310 ) (1,051 )

Amount reported on balance sheet
$ 943 $ 3,538

On September 11, 2019, the Company entered into a lease agreement for a new branch to be located in Plain City, Ohio. The commencement date of the lease is November 1, 2019, and the estimated value of the related right-of-use asset and liability to be recorded at this time is $571,000. This lease is expected to be classified as a finance lease included in premises and equipment, net, on the Consolidated Balance Sheet. The Company has no other purchase obligations for leases executed but not yet recorded.

NOTE 109 – ~~SUBSEQUENT EVENT~~STOCK SPLIT DISCLOSURE

On October 9, 2019, the Board of Directors of Middlefield Banc Corp. authorized a two-for-one stock split. Each shareholder of record at the close of business on October 25, 2019, ~~will receive~~received one additional share for every outstanding share held on the record date. The additional shares ~~are payable~~were paid on November 8, 2019. As a result, ~~the number of outstanding shares~~all share and ~~treasury shares will increase to approximately 6.4 million shares and 871,000 shares, respectively. The basic~~ earnings per share ~~determined as~~information have been retroactively adjusted to reflect the stock split.

With respect to the March 31, 2020 and 2019 financial statements, the effect of ~~September 30,~~the stock split on March 31, 2019 amounts was recognized retroactively in the stockholders’ equity accounts in the Consolidated Balance Sheets, and in all share data in the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations. The effect of the stock split on per share amounts and weighted average common shares outstanding for the three months ended March 31, 2019 is ~~$2.95 per share, and would have been approximately $1.48 per share had this stock split occurred prior to September 30, 2019.~~as follows:

	For the three months ended
	March 31, 2019
Restated net income per common share - basic	$	0.46
Restated net income per common share - diluted	$	0.46
Restated weighted-average common shares issued		7,270,608
Restated average treasury stock shares		772,330
Restated average shares outstanding - basic		6,498,278
Restated stock options and restricted stock		12,290
Restated average shares outstanding - diluted		6,510,568
Restated period ending shares outstanding		6,512,740
Restated treasury shares outstanding		772,330

NOTE 10 – RISKS AND UNCERTAINTIES

COVID-19 Update

The following table provides information with respect to our commercial loans by type at March 31, 2020.

At Risk

Type	Number of Loans		Balance (in thousands)		% of Total Loans
Residential non-owner occupied		337	$	142,725		14.30	%
Retail		220		197,073		19.75	%
Restaurant/food service/bar		48		16,868		1.69	%
Hospitality and tourism		32		45,225		4.53	%
Self-storage facility		29		25,622		2.57	%
Other		121		14,218		1.42	%
Total		787	$	441,731		44.26	%

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provides over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”).

As a qualified SBA lender, we were automatically authorized to originate PPP loans.

An eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly payroll costs; or (2) $10.0 million. PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the remaining 25% of the loan proceeds used for other qualifying expenses.

As of May 3, 2020, we approved 1,048 applications for up to $138.1 million of loans under the PPP.

Since the opening of the PPP, several larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. Middlefield Bank may be exposed to the risk of similar litigation, from both customers and non-customers that approached the bank regarding PPP loans, regarding the process and procedures used in processing applications for the PPP. If any such litigation is filed against Middlefield Bank and is not resolved in a manner favorable to Middlefield Bank, it may result in significant financial liability or adversely affect Middlefield Bank’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of operations.

Middlefield Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by Middlefield Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by Middlefield Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from Middlefield Bank.

Owner-Occupied Residential Mortgage & Consumer Loans. For residential mortgage and consumer loans, CARES Act Section 4013 forbearance agreements are available to qualified borrowers. As of May 1, 2020, we received inquiries from 59 loan borrowers with aggregate outstanding loan balances of $7.8 million concerning the availability of some form of payment relief. Of these requests, there are no borrowers related to single-family non-owner-occupied loans. Due to the widespread impact of the State of Ohio Stay At Home order, we expect that additional residential loan borrowers will seek loan forbearance or loan modification agreements in the second quarter of 2020.

Deferrals

As of May 1, 2020, we received requests to modify 606 loans aggregating $333.2 million. As of April 21, 2020, we modified 252 loans aggregating $147.0 million primarily consisting of the deferral of principal and interest payments and the extension of the maturity date. The remaining modifications are in process and are expected to be completed.

Details with respect to actual loan modifications are as follows:

COVID-19 Loan Forbearance Programs. Section 4013 of the CARES Act provides that banks may elect not to categorize a loan modification as a TDR if the loan modification is (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date on which the national emergency concerning the novel coronavirus disease (COVID–19) outbreak declared by the President on March 13, 2020, under the National Emergencies Act terminates, or (B) December 31, 2020. According to the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) issued by the federal bank regulatory agencies on April 7, 2020, short-term loan modifications not otherwise eligible under Section 4013 that are made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. See Note 8 of the financial statements for additional disclosure of TDRs at March 31, 2020.

Type	Number of Loans		Balance (in thousands)		% of Total Loans
Residential non-owner occupied		9	$	2,297		0.23	%
Office		9		1,776		0.18	%
Retail		41		52,443		5.25	%
Restaurant/food service/bar		8		3,320		0.33	%
Hospitality and tourism		8		4,638		0.46	%
Other		113		42,547		4.26	%
Total		188	$	107,021		10.71	%

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

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

The information contained or incorporated by reference in this report on Form 10-Q contains forward-looking statements, including certain plans, expectations, goals, and projections, which are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those contained or implied by such statements for a variety of factors, including: changes in economic conditions; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the nature, extent, and timing of government actions and reforms; and extended disruption of vital ~~infrastructure.~~infrastructure and the potential impact of the COVID-19 pandemic. All forward-looking statements included in this report on Form 10-Q are based on information available at the time of the report. Middlefield Banc Corp. assumes no obligation to update any forward-looking statement.

CHANGES IN FINANCIAL CONDITION

General. The Company’s total assets ended the ~~September 30, 2019~~March 31, 2020 quarter at ~~$1.28~~$1.21 billion, an increase of ~~$32.2~~$31.5 million from December 31, ~~2018.~~2019. For the same time period, cash and cash equivalents increased ~~$12.1~~$20.2 million, or ~~11.2%~~57.6%, while net loans increased ~~$7.6~~$11.3 million, or ~~0.8%~~1.2%. Total liabilities increased ~~$24.6~~$36.6 million or ~~2.2%~~3.5%, while stockholders’ equity ~~increased $7.6~~decreased $5.1 million, or ~~5.9%~~3.7%.

Cash and cash equivalents. Cash and cash equivalents increased ~~$12.1~~$20.2 million, or ~~11.2%~~57.6%, to ~~$120.0~~$55.3 million at ~~September 30, 2019~~March 31, 2020 from ~~$107.9~~$35.1 million at December 31, ~~2018.~~2019. Deposits from customers into savings and checking accounts, loan and securities repayments, and proceeds from borrowed funds typically increase these accounts. Decreases result from customer withdrawals, new loan originations, purchases of investment securities and repayments of borrowed funds.

The Company will continue to hold elevated levels of cash and cash equivalents to meet the demands of customers during the economic downturn. The Company monitors cash and cash equivalents on a daily basis to ensure adequate liquidity positions are maintained. As of March 31, 2020, no material fluctuations in cash were noted.

Investment securities. Investment securities available for sale on ~~September 30, 2019~~March 31, 2020 totaled ~~$105.0~~$103.0 million, ~~an increase~~a decrease of ~~$6.7~~$2.8 million, or ~~6.8%~~2.6%, from ~~$98.3~~$105.7 million at December 31, ~~2018.~~2019. During this period, the Company recorded repayments, calls, and maturities of ~~$8.6~~$2.8 million and a net unrealized holding loss through AOCI of $5.2 million. Securities purchased were ~~$24.8~~$5.3 million, and there were no sales of securities ~~were $12.3 million.~~for the three months ended March 31, 2020. The Company recorded ~~$194,000~~$160,000 in ~~gains on sales of investment securities and $12,000 in gains~~losses on equity securities as of ~~September 30, 2019~~March 31, 2020 on the Company’s Consolidated Statement of Income and Consolidated Statement of Cash Flows. The ~~gain~~loss on equity securities is the result of remeasurements of fair value of the equity securities held during this ~~nine-month~~three-month period. Included in the Company’s available-for-sale investment securities as of ~~September 30, 2019~~March 31, 2020 is an investment in the subordinated debt of an Ohio-based community bank in the amount of $4.0 million at an annual interest rate of 6%.

Periodically, management reviews the entire municipal bond portfolio to assess credit quality. Each security held in this portfolio is assessed on attributes that have historically influenced default incidence in the municipal market, such as: sector, security, impairment filing, timeliness of disclosure, external credit assessment(s), credit spread, state, vintage, and underwriter. Municipal bonds compose 79% of the overall portfolio. While these investments have historically proven to have extremely low credit risk, the current economic environment may pose a threat to the cash flows of these governmental entities. The March 31, 2020 review shows portfolio credit quality to be strong with 99.5% of the portfolio having an assigned investment-grade rating or secured by an escrow of US government or agency securities. 80% of the portfolio is either pre-refunded or rated in the broad rating categories of AA or AAA. While not included in the assessment of the credit quality of portfolio holdings, 17.6% benefit from a bond insurance policy, which provides an additional layer of payment support for the securities.

Loans receivable. The loans receivable category consists primarily of single-family mortgage loans used to purchase or refinance personal residences located within the Company’s market area, commercial and industrial loans, home equity lines of credit, and commercial real estate loans used to finance properties that are used in the borrowers’ businesses, or to finance investor-owned rental properties, and, to a lesser extent, construction and consumer loans. The portfolio is well disbursed, geographically, with the ~~four~~five branches in the central Ohio market comprising ~~24.0%~~24.8% of the Company’s total loans. ~~Since December 31, 2017, however, 79.4% of all loan growth has come from the central Ohio footprint.~~ Net loans receivable increased ~~$7.6~~$11.3 million, or ~~0.8%~~1.2%, to ~~$992.3~~$988.8 million as of ~~September 30, 2019~~March 31, 2020 from ~~$984.7~~$977.5 million at December 31, ~~2018 due to loan growth targeted in the mid-single digits.~~2019. Included in the total increase for loans receivable were increases in the ~~residential real estate,~~ commercial and industrial, owner occupied, construction and ~~real estate-construction~~other, and home equity lines of credit portfolios of ~~$11.3~~$17.3 million, or ~~3.3%~~19.3%, ~~$2.0~~$10.9 million, or ~~2.4%~~10.6%, $4.5 million, or 6.8%, and ~~$833,000,~~$2.7 million, or ~~1.5%~~2.4%, respectively. This increase is net of decreases in the residential real estate, consumer installment, non-owner occupied, and ~~commercial real estate~~multifamily portfolios of $898,000, or 0.4%, $1.6 million, or ~~9.4%~~10.8%, $9.4 million, or 3.1%, and ~~$5.3~~$9.8 million, or ~~1.1%~~15.7%, respectively.

The Company’s Mortgage Banking operation generates loans for sale to the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Loans held for sale on ~~September 30, 2019~~March 31, 2020 totaled ~~$791,000, an increase~~$513,000, a decrease of ~~$194,000,~~$707,000, or ~~32.5%~~58.0%, from December 31, ~~2018.~~2019. This ~~increase~~decrease is the result of ~~more~~fewer saleable loans being ~~funded~~held at quarter end. The Company recorded proceeds from the sale of $4.1 million of these loans ~~of $12.9 million and $285,000~~for $114,000 in gains on sale of loans as of ~~September 30, 2019~~March 31, 2020 on the Company’s Consolidated Statement of Cash Flows.

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced growth in its commercial real estate portfolio in recent years. At ~~September 30, 2019~~March 31, 2020 non-owner-occupied commercial real estate loans (including construction, land and land development loans) represent ~~351.5%~~310.7% of total risk-based capital. Construction, land and land development loans represent ~~46.0%~~51.0% of total risk-based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, and strong underwriting criteria with respect to its commercial real estate portfolio. Loan monitoring practices include but are not limited to periodic stress testing analysis to evaluate changes to cash flows, owing to interest rate increases and declines in net operating income. Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentrations, which could require us to obtain additional capital, and may adversely affect shareholder returns. The Company has an extensive capital planning policy, which includes proforma projections including stress testing within which the Board of Directors has established internal minimum targets for regulatory capital ratios that are in excess of well-capitalized ratios.

The Company monitors daily fluctuations in unused commitments as a means of identifying potentially material drawdowns on existing lines of credit. At March 31, 2020, unused line of credit commitments increased $3.2 million from December 31, 2019.

Allowance for Loan and Lease Losses and Asset Quality. The allowance for loan and lease losses ~~decreased $427,000,~~increased $2.5 million, or ~~5.7%~~36.6%, to ~~$7.0~~$9.2 million at ~~September 30, 2019~~March 31, 2020 from ~~$7.4~~$6.8 million at December 31, ~~2018.~~2019. For the three months ended ~~September 30, 2019,~~March 31, 2020, net loan charge-offs totaled ~~$383,000,~~$264,000, or ~~0.15%~~0.11% of average loans, compared to net charge-offs of ~~$218,000,~~$462,000, or ~~0.09%~~0.19% of average loans, for the same period in ~~2018.~~2019. To maintain the allowance for loan and lease losses, the Company recorded a provision for loan loss of ~~$80,000~~$2.7 million in the three-month period ended September 30, 2019. For the nine months ended September 30, 2019, net loan charge-offs totaled $857,000, or 0.11% of average loans, compared to net charge-offs of $326,000, or 0.05%, for the same period in 2018. To maintain the allowance for loan and lease losses, the Company recorded a provision for loan loss of $430,000 in the nine-month period ended September 30, 2019. Also for this period, theMarch 31, 2020. The ratio of the allowance for loan and lease losses to nonperforming loans was ~~69.64%,~~109.98% for the three-month period ended March 31, 2020, compared to ~~102.83%~~68.81% for the same period in the prior year. This is due to ~~nonperforming~~an increase in impaired loans and the allowance being ~~well secured and not requiring specific reserves as of September 30, 2019. During~~adjusted to address the ~~nine months ended September 30, 2019, one central Ohio~~economic slowdown at March 31, 2020. See additional discussions on the provision for loan of $3.2 million negatively affected nonperforming loans. The reserve for this credit is $614,000. The issue is isolated to this particular borrower and it is not indicative of a trend in the market, portfolio, or an issue in underwriting. Offsetting this amount is a reserve reduction of $358,000 due to a charge off of $336,000, as well as a reserve reduction of $435,000 from the payoff of one impaired commercial real estate loan.losses section below.

Management analyzes the adequacy of the allowance for loan and lease losses regularly through reviews of the performance of the loan portfolio considering economic conditions, changes in interest rates and the effect of such changes on real estate values, and changes in the amount and composition of the loan portfolio. The allowance for loan and lease losses is a significant estimate that is particularly susceptible to changes in the near term. Management’s analysis includes a review of all loans designated as impaired, historical loan loss experience, the estimated fair value of the underlying collateral, economic conditions, current interest rates, trends in the borrower’s industry and other factors that management believes warrant recognition in providing for an appropriate allowance for loan and lease losses. Future additions or reductions to the allowance for loan and lease losses will be dependent on these factors. Additionally, the Company uses an outside party to conduct an independent review of commercial and commercial real estate loans that is designed to validate management conclusions of risk ratings and the appropriateness of the allowance allocated to these loans. The Company uses the results of this review to help determine the effectiveness of policies and procedures and to assess the adequacy of the allowance for loan and lease losses allocated to these types of loans. Management believes the allowance for loan and lease losses is appropriately stated at ~~September 30, 2019.~~March 31, 2020. Based on the variables involved and management’s judgments about uncertain outcomes, the determination of the allowance for loan and lease losses is considered a critical accounting policy.

Goodwill. The Company considers the negative economic impact resulting from the COVID-19 shutdowns to be a triggering event necessitating a mid-cycle analysis for impairment. Based on the analysis performed as of March 31, 2020, the Company determined that goodwill was not impaired.

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

	Asset Quality History															Asset Quality History

(Dollar amounts in thousands)	September 30, 2019			June 30, 2019			March 31, 2019			December 31, 2018			September 30, 2018			March 31, 2020			December 31, 2019			September 30, 2019			June 30, 2019			March 31, 2019

Nonperforming loans	$	10,053		$	10,729		$	10,472		$	7,540		$	7,288		$	8,405		$	8,879		$	10,053		$	10,729		$	10,472
Other real estate owned		89			89												456			155			89			89			126

Nonperforming assets	$	10,142		$	10,818		$	10,598		$	7,810		$	7,545		$	8,861		$	9,034		$	10,142		$	10,818		$	10,598

Allowance for loan and lease losses		7,001			7,304			7,206			7,428			7,494			9,244			6,768			7,001			7,304			7,206

Ratios:
Nonperforming loans to total loans		1.01	%		1.07	%		1.04	%		0.76	%		0.75	%		0.84	%		0.90	%		1.01	%		1.07	%		1.04	%
Nonperforming assets to total assets		0.79	%		0.84	%		0.83	%		0.63	%		0.63	%		0.73	%		0.76	%		0.79	%		0.84	%		0.83	%
Allowance for loan and lease losses to total loans		0.70	%		0.73	%		0.72	%		0.75	%		0.77	%		0.93	%		0.69	%		0.70	%		0.73	%		0.72	%
Allowance for loan and lease losses to nonperforming loans		69.64	%		68.08	%		68.81	%		98.51	%		102.83	%		109.98	%		76.22	%		69.64	%		68.08	%		68.81	%

Nonperforming loans exclude TDRs that are performing in accordance with their terms over a prescribed period of time. TDRs are those loans which the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that the Company would not otherwise consider. The Company has 26 TDRs accruing interest with a balance of ~~$3.0~~$2.9 million as of ~~September 30, 2019.~~March 31, 2020. A TDR that yields a market interest rate at the time of restructuring and is in compliance with its modified terms is no longer reported as a TDR in calendar years after the year in which the restructuring took place. To be in compliance with its modified terms, a loan that is a TDR must not be in nonaccrual status and must be current or less than 30 days past due on its contractual principal and interest payments under the modified repayment terms. Nonperforming loans secured by real estate totaled ~~$9.2~~$7.4 million as of ~~September 30, 2019, an increase~~March 31, 2020, a decrease of ~~$3.6 million~~$451,000 from ~~$5.6~~$7.8 million at December 31, ~~2018.~~2019.

A major factor in determining the appropriateness of the allowance for loan and lease losses is the type of collateral which secures the loans. Of the total nonperforming loans at ~~September 30, 2019, 91.9%~~March 31, 2020, 87.9% were secured by real estate. Although this does not insure against all losses, real estate typically provides for at least partial recovery, even in a distressed-sale and declining-value environment. The Company’s objective is to minimize the future loss exposure of the Company.

The allowance for loan and lease losses to total loans ratio ~~decreased~~increased from ~~0.75%~~0.69% as of December 31, ~~2018~~2019 to ~~0.70%~~0.93% as of ~~September 30, 2019.~~March 31, 2020.

Deposits. The Company considers various sources when evaluating funding needs, including but not limited to deposits, which are a significant source of funds, totaling ~~$1.03~~$1.00 billion or ~~90.8%~~95.4% of the Company’s total average funding sources at ~~September 30, 2019.~~March 31, 2020. Total deposits ~~increased $18.3~~decreased $17.1 million, or ~~1.8%~~1.7%, at ~~September 30, 2019~~March 31, 2020 from $1.02 billion at December 31, ~~2018.~~2019. The total ~~increase~~decrease in deposits is the net of increases in ~~time and~~ interest-bearing demand deposits, and noninterest-bearing demand deposits of ~~$89.8~~$17.3 million, or ~~29.8%~~16.1%, and ~~$14.9~~$15.0 million, or ~~16.2%~~7.8%, respectively, and decreases in ~~noninterest-bearing demand~~money market deposits, savings, and ~~money market~~time deposits of ~~$4.2~~$4.3 million, or ~~2.1%~~2.7%, ~~$40.9~~$16.5 million, or ~~18.4%~~8.6%, and ~~$41.3~~$28.7 million, or ~~21.0%~~7.8%, respectively, at ~~September 30, 2019.~~March 31, 2020. The Company uses certain non-core funding instruments in order to grow the balance sheet and maintain liquidity. These deposits, either from a broker or a listing service, were ~~$144.4~~$25.1 million at ~~September 30, 2019,~~March 31, 2020, as compared to ~~$148.8~~$117.1 million at December 31, ~~2018. The expansion of net interest margin in the third quarter of 2019 is largely the result of the use of these deposits.~~2019.

Borrowed funds. The Company uses short-term and long-term borrowings as another source of funding for asset growth and liquidity needs. These borrowings primarily include FHLB advances, junior subordinated debt, short-term borrowings from other banks, and federal funds purchased. Short-term borrowings increased ~~$1.6~~$54.9 million ~~or 1.8%,~~ to ~~$92.0~~$60.0 million as of ~~September 30, 2019.~~March 31, 2020 as a result of a strategic shift to reprice funding at lower rates. Other borrowings ~~increased $3.6 million,~~decreased $88,000, or ~~40.4%~~0.7%, to ~~$12.4~~$12.7 million as of ~~September 30, 2019~~March 31, 2020 from ~~$8.8~~$12.8 million as of December 31, ~~2018. This increase is mainly due to the adoption of ASU 2016-02, “~~~~Leases (Topic 842)~~” effective January 1, 2019, which resulted in the recording of financial lease liabilities in the amount of $2.7 million (see Note 9). This quarter, the Company tested its ability to shift off balance sheet liquidity to the balance sheet by borrowing an advance of $80.0 million for one day.2019.

Stockholders’ equity. Stockholders’ equity ~~increased $7.6~~decreased $5.1 million, or ~~5.9%~~3.7%, to ~~$135.9~~$132.7 million at ~~September 30, 2019~~March 31, 2020 from ~~$128.3~~$137.8 million at December 31, ~~2018.~~2019. This ~~growth~~decrease was the result of ~~increases~~decreases in ~~retained earnings,~~ AOCI ~~and common stock~~ of ~~$6.8~~$4.1 million, ~~$2.3 million,~~dividends paid of $964,000, and ~~$692,000, respectively. This increase is net of~~ an increase in treasury stock of ~~$2.2~~$1.2 million, or ~~16.5%~~7.6% to ~~$15.7~~$16.9 million as of ~~September 30, 2019,~~March 31, 2020, from ~~$13.5~~$15.7 million as of December 31, ~~2018.~~2019. The ~~change in retained earnings is due to the year-to-date net income offset by dividends paid, the~~ change in AOCI is due to fair value adjustments of available-for-sale securities, ~~the change in common stock is due to regular stock grants and dividend reinvestment and purchase plan distributions,~~ and the change in treasury stock is due to the Company repurchasing ~~49,416~~58,200 of its outstanding shares during the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020.

The Company suspended its stock repurchase program as a result of the economic slowdown and the focus on capital preservation. The suspension will continue until economic clarity arises and the Company is certain it is the best use of capital.

RESULTS OF OPERATIONS

General. Net income for the three months ended ~~September 30, 2019,~~March 31, 2020, was ~~$3.3~~$1.0 million, a ~~$35,000,~~$2.0 million, or ~~1.1%~~65.4%, decrease from the amount earned during the same period in ~~2018.~~2019. Diluted earnings per share for the quarter decreased to ~~$1.01,~~$0.16, compared to ~~$1.02~~$0.46 from the same period in 2018. Net income for the nine months ended September 30, 2019, was $9.6 million, a $564,000, or 6.3%, increase from the amount earned during the same period in 2018. Diluted earnings per share for this nine-month period increased to $2.94, compared to $2.78 for the same period in 2018.2019.

The Company’s annualized return on average assets (“ROA”) and return on average equity (“ROE”) for the quarter were ~~1.07%~~0.35% and ~~9.41%~~3.01%, respectively, compared with ~~1.13%~~1.01% and ~~10.33%~~9.36% for the same period in ~~2018. The Company’s ROA and ROE for the nine-month period were 1.06% and 9.52%, respectively, compared with 1.06% and 9.73% for the same period in 2018.~~2019.

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

Net interest income for the three months ended ~~September 30, 2019~~March 31, 2020 totaled ~~$10.6~~$10.0 million, ~~an increase~~a decrease of ~~3.2%~~1.9% from that reported in the comparable period of ~~2018.~~2019. The net interest margin was ~~3.72%~~3.63% for the ~~third~~first quarter of ~~2019, no change~~2020, a decrease from the ~~3.72%~~3.69% reported for the same quarter of 2018. Net interest income for the nine months ended September 30, 2019 totaled $31.1 million, an increase of 3.6% from that reported in the comparable period of 2018. The net interest margin was 3.69% for the nine-month period ended September 30, 2019, down from the 3.77% reported for the comparable period of 2018.2019. The decline in the net interest margin is attributable to a 3912 basis ~~points increase~~point decrease in ~~total interest bearing liabilities partially offset by~~loans receivable yield combined with an ~~increase~~average balance decline of ~~24 basis points~~$16.3 million in the ~~yield on total interest earning assets for the nine-month period ended September 30, 2019. Net~~same category. The Company’s net interest margin ~~continues~~may be subject to ~~compare favorably to peer and strengthened in the three months ended September 30, 2019,~~further decline as a result of ~~deposits repricing~~the abrupt decrease in interest rates during the first quarter of 2020, the reduced interest income on floating-rate commercial loans, and the business disruptions caused by the COVID-19 pandemic. As the Company is in an asset-sensitive position, reductions in market interest rates have a negative impact on margin as the Company’s interest-earning assets reprice faster than ~~assets.~~its interest-bearing liabilities. Much of our asset-sensitivity is due to commercial and consumer loans that have variable interest rates. Both loan types have floor rates. The benefit of these floors will become more evident in future quarters if the Federal Reserve maintains short-term interest rates at the low level established in March 2020. Yields on interest-earning deposits with other banks decreased 86 basis points leading to a $107,000 decline in interest income. The $475,000 decrease in interest income was partially offset by a $278,000 decrease in interest expense.

Interest and dividend income. Interest and dividend income ~~increased $1.1 million,~~decreased $475,000, or ~~8.2%~~3.5%, for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to the same period in the prior year. This is mainly attributable to ~~an increase~~a decrease in interest and fees on loans of $983,000. Interest and dividend income increased $4.2 million, or 11.4%, for the nine months ended September 30, 2019, compared to the same period in the prior year. This is mainly attributable to an increase in interest and fees on loans of $3.9 million.$410,000.

Interest and fees earned on loans receivable ~~increased $983,000,~~decreased $410,000, or ~~8.3%~~3.3%, for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to the same period in the prior year. This is attributable to ~~an increase~~a decrease in average loan balances of ~~$38.6~~$16.3 million, accompanied by a 2012 basis point ~~increase~~decrease in the average yield to 5.09%. Interest and fees earned on loans receivable increased $3.9 million, or 11.4%, for the nine months ended September 30, 2019, compared to the same period in the prior year. This is attributable to an increase in average loan balances of $59.8 million, accompanied by a 23 basis point increase in the average yield to 5.08%4.95%.

Net interest earned on securities increased by ~~$54,000~~$42,000 for the three months ended ~~September 30, 2019~~March 31, 2020 when compared to the same period in the prior year. The average balance of investment securities increased ~~$4.4~~$8.4 million, or ~~4.3%~~8.6%, while the ~~3.80%~~3.62% yield on the investment portfolio ~~increased~~decreased by 1310 basis points, from ~~3.67%~~3.72%, for the same period in the prior year. ~~Net interest earned on securities increased by $151,000~~

Interest expense. Interest expense decreased $278,000, or 8.5%, for the ~~nine~~three months ended ~~September 30, 2019 when~~March 31, 2020, compared to the same period in the prior year. The average balance of investment securities increased $4.2 million, or 4.4%, while the 3.80% yield on the investment portfolio increased by 13 basis points, from 3.67%, for the same period in the prior year.

~~Interest expense.~~ ~~Interest expense increased $729,000, or 28.3%, for the three months ended September 30, 2019, compared to the same period in the prior year. The increase~~decrease is attributable to ~~increases~~decreases in the average balances of money market deposits and short-term borrowings of $36.2 million, or 18.7%, and $20.6 million, or 58.2%, respectively. It is further attributable to a 31 basis point decrease in savings cost. This decrease was partially offset by an increase in the average balances of certificates of ~~deposit, money market deposits and interest-bearing demand~~ deposits of ~~$103.1~~$53.6 million, or 35.4%, $10.0 million, or 6.8%, and $3.6 million, or 3.6%, respectively. This increase was accompanied by increases in costs of 115, 44, 34, and 2 basis points for the average balances of short-term borrowings, money market deposits, certificates of deposit, and interest-bearing demand deposits, respectively. The overall increase in deposits was utilized to pay down short-term borrowings, the average balance of which decreased by $51.2 million, or 90.9%16.7%. Interest expense increased $3.1 million, or 44.9%, for the nine months ended September 30, 2019, compared to the same period in the prior year. The increase is attributable to increases in the average balances of certificates of deposit, money market deposits, and interest-bearing demand deposits of $91.4 million, or 33.0%, $24.1 million, or 16.5%, and $5.0 million, or 5.3%, respectively. This increase was accompanied by increases in costs of 58, 55, 47, 37, 14, and 3 basis points for the average balances of money market deposits, short-term borrowings, certificates of deposit, other borrowings, savings deposits, and interest-bearing demand deposits, respectively. The overall increase in deposits was utilized to pay down short-term borrowings and other borrowings, the average balance of which decreased by $34.9 million, or 66.0%, and $5.2 million, or 28.3%, respectively.

Provision for loan losses. The provision for loan losses represents the charge to income necessary to adjust the allowance for loan and lease losses to an amount that represents management’s assessment of the estimated probable incurred credit losses inherent in the loan portfolio. Each quarter, management performs a review of estimated probable incurred credit losses in the loan portfolio. Based on this review, a provision for loan losses of ~~$80,000~~$2.7 million was recorded for the quarter ended ~~September 30, 2019, a decrease~~March 31, 2020, an increase of ~~$130,000, or 61.9%,~~$2.5 million from the quarter ended ~~September 30, 2018. A~~March 31, 2019. The Company remains confident in the conservative and disciplined approach to credit and risk management, however, the economic challenges caused by the COVID-19 crisis has an immediate impact on credit quality.

Macroeconomic trends have yet to fully capture the impact of the COVID-19 crisis, but underlying economic weaknesses existed on March 31, 2020. While management expects remaining 2020 provisions to be higher than historical levels, we do not anticipate provisions to be at the level seen in the first quarter.

At March 31, 2020, we considered the effect of the economic shutdown to combat COVID-19 on our borrowers and local economy. Although stimulus and mitigation efforts are expected to reduce the impact, we believe a 20 basis point downgrade to the economic qualitative factor was warranted. Most of the increased provision ~~for loan losses~~is the result of ~~$430,000 was recorded~~increases to the current economic condition’s qualitative factors. The impact of those increases for the ~~nine-month period~~three months ended ~~September 30, 2019, a decrease of $200,000, or 31.7%, from the same period in 2018.~~ March 31, 2020 is (in thousands):

Commercial real estate:
Owner occupied	$	197
Non-owner occupied		515
Multifamily		87
Residential real estate		453
Commercial and industrial		206
Home equity lines of credit		228
Construction and other		142
Consumer installment		8
Total	$	1,836

Nonperforming loans were ~~$10.0~~$8.4 million, or ~~1.01%~~0.84%, of total loans at ~~September 30, 2019~~March 31, 2020 compared with ~~$7.3~~$10.5 million, or ~~0.75%~~1.04%, at ~~September 30, 2018.~~March 31, 2019. For the three months ended ~~September 30, 2019,~~March 31, 2020, net loan charge-offs totaled $383,000, or 0.15% of average loans, compared to net charge-offs of $218,000, or 0.09% of average loans, for the third quarter of 2018. For the nine months ended September 30, 2019, net loan charge-offs totaled $857,000,$264,000, or 0.11% of average loans, compared to net charge-offs of ~~$326,000,~~$462,000, or ~~0.05%,~~0.19% of average loans, for the ~~same period in 2018.~~first quarter of 2019.

Noninterest income. Noninterest income ~~increased $157,000,~~decreased $58,000, or ~~16.6%~~5.1%, for the three months ended ~~September 30, 2019~~March 31, 2020 over the comparable ~~2018~~2019 period. This ~~increase~~decrease was the result of ~~increases~~a loss on equity securities of $160,000 (see Note 7), which was partially offset by an increase in gains on sale of loans and in ~~service charges on deposit accounts~~other income of ~~$85,000,~~$55,000, or ~~197.7%~~93.2%, and ~~$80,000,~~$58,000, or ~~16.3%~~14.4%, respectively. The increase in gains on sale of loans is due to an increase in saleable loans being sold during the quarter, and the increase in ~~service charges on deposit accounts~~other income is due to an increase in fees assessed for statement printing services. Noninterest income increased $785,000, or 28.5%, for the nine months ended September 30, 2019 over the comparable 2018 period. This increase was the result of an increase in other income, investment securities gains on sale, and service charges on deposit accounts of $306,000, $194,000, and $193,000, respectively. The increase in other income is due to increases in revenue from investment services and income received from recoveries on ~~acquired~~ student loans.

Noninterest expense. Noninterest expense of ~~$7.7~~$7.3 million for the ~~third~~first quarter ~~2019~~2020 was ~~8.2%~~3.3%, or ~~$581,000, higher~~$248,000, lower than the ~~third~~first quarter of ~~2018. Salaries and employee benefits and data~~2019. Data processing costs and other expense increased ~~$433,000,~~$201,000, or ~~11.3%~~43.2%, and ~~$99,000,~~$196,000, or ~~20.6%~~22.5%, respectively. These increases were offset by a decrease in federal deposit insurance expense of $150,000, or 100.0%. The salary increase is mostly due to annual pay adjustments and an increase in employees. The increase in data processing costs is due to new and increased costs of processing agreements. The decrease in federal deposit insurance is due to the Company being determined to be eligible for small bank assessment credits. Noninterest expense of $22.7 million for the nine-month period ended September 30, 2019 was 5.4%, or $1.2 million, higher than the same period in 2018. Salariessalaries and employee benefits ~~data processing costs, and Ohio state franchise tax, increased $790,000,~~of $600,000, or 6.8%, $234,000, or 17.2%, and $179,000, or 29.7%, respectively. These increases were offset by decreases in federal deposit insurance expense and advertising expense of $220,000, or 48.9%, and $89,000, or 12.8%, respectively. The salary increase is mostly due to annual pay adjustments and an increase in employees.14.5%. The increase in data processing costs is due to new and increased costs of processing agreements, and the increase in ~~Ohio state franchise tax~~other expense is due to increases in miscellaneous loan expenses, sundry gains and losses, and no offsetting gains on sales of OREO properties. The decrease in salary expense is due to the ~~increase~~valuation adjustment for share-based compensation liability (see Note 3), as well as a decrease in ~~the Company’s franchise value.~~ profit sharing expense recorded.

Provision for income taxes. The Company recognized ~~$661,000~~$74,000 in income tax expense, which reflected an effective tax rate of ~~16.8%~~6.6% for the three months ended ~~September 30, 2019,~~March 31, 2020, as compared to ~~$593,000~~$611,000 with an effective tax rate of ~~15.2%~~16.9% for the comparable ~~2018 period. The Company recognized $2.0 million in income tax expense, which reflected an effective tax rate of 17.0% for the nine months ended September 30,~~ 2019 ~~as compared to $1.6 million with an effective tax rate of 15.1% for the comparable 2018~~ period.

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

	For the Three Months Ended September 30,														For the Three Months Ended March 31,
	2019							2018							2020							2019

	Average				Average			Average				Average			Average				Average			Average				Average
(Dollars in thousands)	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost
Interest-earning assets:
Loans receivable ⁽³⁾	$	998,183	$	12,804		5.09	%	$	959,576	$	11,821		4.89	%	$	984,034	$	12,078		4.95	%	$	1,000,343	$	12,488		5.07	%
Investment securities ⁽³⁾		104,878		819		3.80	%		100,518		765		3.67	%		105,894		786		3.62	%		97,484		744		3.72	%
Interest-earning deposits with other banks⁽⁴⁾		44,925		262		2.31	%		49,517		243		1.95	%		41,717		145		1.40	%		45,283		252		2.26	%
Total interest-earning assets		1,147,986		13,885		4.86	%		1,109,611		12,829		4.65	%		1,131,645		13,009		4.69	%		1,143,110		13,484		4.84	%
Noninterest-earning assets		60,261							53,237							65,003							60,576
Total assets	$	1,208,247						$	1,162,848						$	1,196,648						$	1,203,686
Interest-bearing liabilities:
Interest-bearing demand deposits	$	104,212	$	103		0.39	%	$	100,605	$	94		0.37	%	$	113,691	$	119		0.42	%	$	96,402	$	72		0.30	%
Money market deposits		157,691		568		1.43	%		147,702		367		0.99	%		158,008		552		1.41	%		194,236		755		1.58	%
Savings deposits		196,187		337		0.68	%		214,300		366		0.68	%		183,137		226		0.50	%		207,848		417		0.81	%
Certificates of deposit		394,381		2,165		2.18	%		291,251		1,351		1.84	%		373,866		1,968		2.12	%		320,243		1,701		2.15	%
Short-term borrowings		5,156		42		3.23	%		56,348		296		2.08	%		14,808		35		0.95	%		35,390		213		2.44	%
Other borrowings		12,397		92		2.94	%		12,512		104		3.30	%		12,703		76		2.41	%		13,447		96		2.90	%
Total interest-bearing liabilities		870,024		3,307		1.51	%		822,718		2,578		1.24	%		856,213		2,976		1.40	%		867,566		3,254		1.52	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		197,015						$	210,746							195,411							198,286
Other liabilities		3,365							2,519							5,816							7,384
Stockholders' equity		137,843							126,865							139,208							130,450
Total liabilities and stockholders' equity	$	1,208,247						$	1,162,848						$	1,196,648						$	1,203,686
Net interest income			$	10,578						$	10,251						$	10,033						$	10,230
Interest rate spread ⁽¹⁾						3.35	%						3.41	%						3.29	%						3.32	%
Net interest margin ⁽²⁾						3.72	%						3.72	%						3.63	%						3.69	%
Ratio of average interest-earning assets to average interest-bearing liabilities						131.95	%						134.87	%						132.17	%						131.76	%

(1) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(2) Net interest margin represents net interest income as a percentage of average interest-earning assets.
(3) Tax-equivalent adjustments to calculate the yield on tax-exempt securities and loans were ~~$185~~$189 and ~~$164~~$170 for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively.
(4) Includes dividends received on restricted stock.

Analysis of Changes in Net Interest Income. The following table analyzes the changes in interest income and interest expense, between the three-month periods ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Company’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior period rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances.

	2019 versus 2018									2020 versus 2019

	Increase (decrease) due to									Increase (decrease) due to
(Dollars in thousands)	Volume			Rate			Total			Volume			Rate			Total

Interest-earning assets:
Loans receivable	$	476		$	507		$	983		$	(206	)	$	(204	)	$	(410	)
Investment securities		40			14			54			78			(36	)		42
Interest-earning deposits with other banks		(23	)		42			19			(20	)		(87	)		(107	)
Total interest-earning assets		493			563			1,056			(148	)		(327	)		(475	)


Interest-bearing liabilities:
Interest-bearing demand deposits		3			6			9			13			34			47
Money market deposits		25			176			201			(142	)		(61	)		(203	)
Savings deposits		(31	)		2			(29	)		(50	)		(141	)		(191	)
Certificates of deposit		478			336			814			287			(20	)		267
Short-term borrowings		(269	)		15			(254	)		(125	)		(53	)		(178	)
Other borrowings		(1	)		(11	)		(12	)		(5	)		(15	)		(20	)
Total interest-bearing liabilities		205			524			729			(22	)		(256	)		(278	)


Net interest income	$	288		$	39		$	327		$	(126	)	$	(71	)	$	(197	)

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

For the Nine Months Ended September 30,

2019

2018

Average

Average

Average

Average

(Dollars in thousands)

Balance

Interest

Yield/Cost

Balance

Interest

Yield/Cost

Interest-earning assets:

Loans receivable ⁽³⁾
$ 1,000,291 $ 37,998 5.08 % $ 940,468 $ 34,109 4.85 %
Investment securities ⁽³⁾
100,461 2,330 3.80 % 96,222 2,179 3.67 %
Interest-earning deposits with other banks ⁽⁴⁾
44,985 761 2.26 % 44,207 610 1.84 %
Total interest-earning assets
1,145,737 41,089 4.86 % 1,080,897 36,898 4.62 %
Noninterest-earning assets
60,695 53,388
Total assets
$ 1,206,432 $ 1,134,285
Interest-bearing liabilities:

Interest-bearing demand deposits
$ 100,822 $ 263 0.35 % $ 95,784 $ 231 0.32 %
Money market deposits
170,544 1,880 1.47 % 146,420 981 0.90 %
Savings deposits
199,829 1,090 0.73 % 215,165 941 0.58 %
Certificates of deposit
368,540 6,162 2.24 % 277,145 3,650 1.76 %
Short-term borrowings
17,967 334 2.49 % 52,893 764 1.93 %
Other borrowings
13,114 283 2.89 % 18,282 344 2.52 %
Total interest-bearing liabilities
870,816 10,012 1.54 % 805,689 6,911 1.15 %
Noninterest-bearing liabilities:

Noninterest-bearing demand deposits
196,871 201,994
Other liabilities
4,369 2,904
Stockholders' equity
134,376 123,698
Total liabilities and stockholders' equity
$ 1,206,432 $ 1,134,285
Net interest income
$ 31,077 $ 29,987
Interest rate spread ⁽¹⁾
3.32 % 3.47 %
Net interest margin ⁽²⁾
3.69 % 3.77 %
Ratio of average interest-earning assets to average interest-bearing liabilities
131.57 % 134.16 %

~~(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 $523 and $461 for the nine months ended September 30, 2019 and 2018, respectively.~~

~~(4) Includes dividends received on restricted stock.~~

~~Analysis of Changes in Net Interest Income.~~ The following table analyzes the changes in interest income and interest expense, between the nine-month periods ended September 30, 2019 and 2018, in terms of: (1) changes in volume of interest-earning assets and interest-bearing liabilities and (2) changes in yields and rates. The table reflects the extent to which changes in the Company’s interest income and interest expense are attributable to changes in rate (change in rate multiplied by prior period volume), changes in volume (changes in volume multiplied by prior period rate) and changes attributable to the combined impact of volume/rate (change in rate multiplied by change in volume). The changes attributable to the combined impact of volume/rate are allocated on a consistent basis between the volume and rate variances.

2019 versus 2018

Increase (decrease) due to

(Dollars in thousands)

Volume

Rate

Total

Interest-earning assets:

Loans receivable
$ 2,170 $ 1,719 $ 3,889
Investment securities
116 35 151
Interest-earning deposits with other banks
11 140 151
Total interest-earning assets
2,297 1,894 4,191

Interest-bearing liabilities:

Interest-bearing demand deposits
12 20 32
Money market deposits
162 737 899
Savings deposits
(67 ) 216 149
Certificates of deposit
1,204 1,308 2,512
Short-term borrowings
(504 ) 74 (430 )
Other borrowings
(97 ) 36 (61 )
Total interest-bearing liabilities
710 2,391 3,101

Net interest income
$ 1,587 $ (497 ) $ 1,090

LIQUIDITY

Management's objective in managing liquidity is maintaining the ability to continue meeting the cash flow needs of banking customers, such as borrowings or deposit withdrawals, as well as the Company’s own financial commitments. The principal sources of liquidity are net income, loan payments, maturing and principal reductions on securities and sales of securities available for sale, federal funds sold and cash and deposits with banks. The Company ~~introduced~~offers a ~~new~~ line of retail deposit products ~~during the second quarter of 2019. These products were~~ created to more closely align with customer expectations while expanding the Company’s core funding base. Along with its liquid assets, the Company has additional sources of liquidity available to ensure that adequate funds are available as needed. These include, but are not limited to, the purchase of federal funds, the ability to borrow funds under line of credit agreements with correspondent banks and a borrowing agreement with the Federal Home Loan Bank of Cincinnati, and the adjustment of interest rates to obtain depositors. Management believes the Company has the capital adequacy, profitability and reputation to meet the current and projected needs of its customers.

At March 31, 2020, additional borrowing capacity at the FHLB was $222.4 million, as compared to $273.4 million at December 31, 2020. This decrease was the result of shifting funding sources from wholesale to FHLB, as the former grew more expensive in the first quarter of the year. For the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, wholesale funding decreased $92.0 million. The Company has additional assets to collateralize with the FHLB if the need for increased capacity arises. The Company also has the option of borrowing from the Federal Reserve discount window with any assets not currently pledged elsewhere. Management believes that the combination of high levels of potentially liquid assets, cash flows from operations, and additional borrowing capacity provided Middlefield Bank with strong liquidity as of March 31, 2020. Management plans to continually monitor liquidity in future periods to look for signs of stress resulting from the COVID-19 pandemic.

For the three months ended March 31, 2020, the adjustments to reconcile net income to net cash from operating activities consisted mainly of depreciation and amortization of premises and equipment and software, the provision for loan losses, net amortization of securities, earnings on bank-owned life insurance, accretion of net deferred loan fees, and net changes in other assets and liabilities. For a more detailed illustration of sources and uses of cash, refer to the Condensed Consolidated Statements of Cash Flows.

INFLATION

Substantially all of the Company's assets and liabilities relate to banking activities and are monetary in nature. The consolidated financial statements and related financial data are presented in accordance with GAAP. GAAP currently requires the Company to measure the financial position and results of operations in terms of historical dollars, with the exception of securities available for sale, impaired loans and other real estate loans that are measured at fair value. Changes in the value of money due to rising inflation can cause purchasing power loss.

Management's opinion is that movements in interest rates affect the financial condition and results of operations to a greater degree than changes in the rate of inflation. It should be noted that interest rates and inflation do affect each other, but do not always move in correlation with each other. The Company's ability to match the interest sensitivity of its financial assets to the interest sensitivity of its liabilities in its asset/liability management may tend to minimize the effect of changes in interest rates on the Company's performance.

REGULATORY MATTERS

The Company is subject to the regulatory requirements of the Federal Reserve System as a bank holding company. The bank subsidiary is subject to regulations of the Federal Deposit Insurance Corporation (“FDIC”) and the Ohio Division of Financial Institutions.

The Federal Reserve Board and the FDIC have extensive authority to prevent and to remedy unsafe and unsound practices and violations of applicable laws and regulations by institutions and holding companies. The agencies may assess civil money penalties, issue cease-and-desist or removal orders, seek injunctions, and publicly disclose those actions. In addition, the Ohio Division of Financial Institutions possesses enforcement powers to address violations of Ohio banking law by Ohio-chartered banks.

REGULATORY CAPITAL REQUIREMENTS

Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank and thrift holding companies. The net unrealized gain or loss on available-for-sale securities is generally not included in computing regulatory capital. In order to avoid limitations on capital distributions, including dividend payments, Middlefield Bank and the Company must each hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The implementation of the capital ratio buffer began January 1, 2016 at the 0.625% level and has been fully phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1, 2019). Within the tabular presentation that follows is the adequately capitalized ratio plus capital conservation buffer that includes the fully phased-in 2.50% buffer.

Middlefield Bank and the Company met each of the well-capitalized ratio guidelines at ~~September 30, 2019.~~March 31, 2020. The following table indicates the capital ratios for Middlefield Bank and Company at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.

	As of September 30, 2019												As of March 31, 2020
	Leverage			Tier 1 Risk Based			Common Equity Tier 1			Total Risk Based			Leverage			Tier 1 Risk Based			Common Equity Tier 1			Total Risk Based
The Middlefield Banking Company		9.97	%		11.68	%		11.68	%		12.37	%		10.53	%		12.18	%		12.18	%		13.09	%
Middlefield Banc Corp.		10.46	%		12.24	%		11.45	%		12.93	%		10.22	%		12.38	%		11.59	%		13.29	%
Adequately capitalized ratio		4.00	%		6.00	%		4.50	%		8.00	%		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	%		4.00	%		8.50	%		7.00	%		10.50	%
Well-capitalized ratio (Bank only)		5.00	%		8.00	%		6.50	%		10.00	%		5.00	%		8.00	%		6.50	%		10.00	%

	As of December 31, 2019
	Leverage			Tier 1 Risk Based			Common Equity Tier 1			Total Risk Based
The Middlefield Banking Company		10.35	%		12.12	%		12.12	%		12.79	%
Middlefield Banc Corp.		10.23	%		12.56	%		11.77	%		13.23	%
Adequately capitalized ratio		4.00	%		6.00	%		4.50	%		8.00	%
Adequately capitalized ratio plus fully phased-in capital conservation buffer		4.00	%		8.50	%		7.00	%		10.50	%
Well-capitalized ratio (Bank only)		5.00	%		8.00	%		6.50	%		10.00	%

As of December 31, 2018

Leverage

Tier 1 Risk
Based

Common
Equity Tier 1

Total Risk
Based

The Middlefield Banking Company
9.60 % 11.09 % 11.09 % 11.83 %
Middlefield Banc Corp.
10.26 % 11.83 % 11.03 % 12.57 %
Adequately capitalized ratio
4.00 % 6.00 % 4.50 % 8.00 %
Adequately capitalized ratio plus fully phased-in capital conservation buffer
4.00 % 8.50 % 7.00 % 10.50 %
Well-capitalized ratio (Bank only)
5.00 % 8.00 % 6.50 % 10.00 %

While we believe that Middlefield Bank is well prepared to weather the COVID-19 global pandemic, Middlefield Bank’s regulatory capital ratios could be adversely affected by credit losses and other adverse consequences associated with the pandemic.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

ASSET AND LIABILITY MANAGEMENT

The primary objective of the Company’s asset and liability management function is to maximize the Company’s net interest income while simultaneously 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 re-pricing or maturity of interest-earning assets and the re-pricing or maturity of 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 Board of Directors of the Company continues to believe in a strong asset/liability management process in order 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 various asset and liability management policies and strategies.

Interest Rate Sensitivity Simulation Analysis

The Company engages an external consultant to facilitate income simulation modeling on a quarterly basis. 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 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 taking certain long-term shock rates into consideration. 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 ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 remained constant. The impact of the market rate movements was developed by simulating the effects of rates changing gradually over a one-year period from the ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 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 ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 for portfolio equity:

September 30, 2019

December 31, 2018

Change in Rates

% Change in NII

% Change in EVE

% Change in NII

% Change in EVE

+200bp
0.10
%
22.80
%
(0.12
%)
12.40
%
-100bp
(1.50
%)
(26.90
%)
(1.56
%)
(17.20
%)

	March 31, 2020						December 31, 2019
Change in Rates	% Change in NII			% Change in EVE			% Change in NII			% Change in EVE
+200bp		(0.50	)%		4.80	%		0.20	%		6.20	%
-100bp		0.90	%		(13.70	)%		(0.60	)%		(9.40	)%

CRITICAL ACCOUNTING ESTIMATES

The Company’s critical accounting estimates involving the more significant judgments and assumptions used in the preparation of the consolidated financial statements as of ~~September 30, 2019,~~March 31, 2020, have remained unchanged from December 31, ~~2018.~~2019.

Item 4. Controls and Procedures

Controls and Procedures Disclosure

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in internal control or in other factors that could significantly affect the Company’s internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

A material weakness is a significant deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 2), 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 of performing their assigned functions.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company and MBC may be involved in litigation relating to claims arising out of their normal course of business. Currently, the Company and MBC are not involved in any legal proceedings the outcome of which, in management’s opinion, would be material to their financial condition or results of operations.

Item 1a. ~~There are no~~Risk Factors

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material ~~changes~~updates and additions to the risk factors ~~set forth~~previously disclosed in ~~Part I, Item 1A, “Risk Factors,” of the Company’s~~our Annual

Report on Form 10-K for the fiscal year ended December 31, ~~2018. Please refer~~2019 as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that ~~section for disclosures regarding~~we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

~~risks~~

The economic impact of the novel COVID-19 outbreak could adversely affect our financial condition and ~~uncertainties~~results of operations.

In December 2019, a novel coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, more than 26 million people have filed claims for unemployment. In response to the COVID-19 outbreak, the Federal Reserve Board has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are encouraging lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and issued guidance providing relief from reporting loan classifications due to modifications related to the ~~Company’s~~COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

●

demand for our products and services may decline, making it difficult to increase our assets and income;

●

if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, nonperforming assets, and foreclosures may increase, resulting in increased loan charge-offs and additions to loan loss reserves and reduced income;

●

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

●

our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

●

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

●

as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

●

a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;

●

we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and

●

Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs for bank failures.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Details of repurchases of Company common stock during the ~~third~~first quarter of ~~2019~~2020 are included in the following table:

2019 period
In thousands, except per share data
Total shares purchased Average price paid per share
Total shares purchased as
part of a publicly announced
program (a)

Maximum number of shares
that may yet be purchased
under the program

July 1-31
- $ - - 132,253
August 1-31
31,669 $ 48.04 31,669 100,584
September 1-30
- $ - - 100,584
Total
31,669 $ 48.04

2020 period	Total shares				Total shares purchased as part of a publicly announced		Maximum number of shares that may yet be purchased
In thousands, except per share data	purchased		Average price paid per share		program (a)		under the program

January 1-31		-	$	-		-		100,584
February 1-29		-	$	-		-		100,584
March 1-31		58,200	$	20.41		58,200		42,384
Total		58,200	$	20.41

(a)

On April 16, 2019, the Company announced that the Board of Directors approved a ~~new~~ share repurchase program under which the Company is authorized to repurchase up to 150,000 shares of its common stock in the open market or in privately negotiated transactions, subject to market and other conditions (the “Program”). The Program ~~may be modified,~~was suspended or terminated by the Company at any time. Repurchases are made in open market or privately negotiated transactions and the timing and exact amount of common stock repurchases will depend on a number of factors including, among others, market and general economic conditions, regulatory capital considerations, alternative uses of capital, the potential impact on our credit ratings, and contractual and regulatory limitations, including the results of the supervisory assessment of capital adequacy and capital planning processes undertaken by the Federal Reserve as part of the Comprehensive Capital Analysis and Review process.effective March 26, 2020.

Item 3. Defaults by the Company on its Senior Securities

None

Item 4. Mine Safety Disclosures

N/A

Item 5. Other information

None

Item 6. Exhibits

Exhibit list for Middlefield Banc Corp.’s Form 10-Q Quarterly Report for the Period Ended ~~September~~ 30~~, 2019~~March 31, 2020

Exhibit Number	Description	Location
3.1	Second Amended and Restated Articles of Incorporation of Middlefield Banc Corp., as amended	Incorporated by reference to Exhibit 3.1 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2005, filed on March 29, 2006

3.2	Regulations of Middlefield Banc Corp.	Incorporated by reference to Exhibit 3.2 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001

4	Specimen stock certificate	Incorporated by reference to Exhibit 4 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001

4.1	Amended and Restated Trust Agreement, dated as of December 21, 2006, between Middlefield Banc Corp., as Depositor, Wilmington Trust Company, as Property trustee, Wilmington Trust Company, as Delaware Trustee, and Administrative Trustees	Incorporated by reference to Exhibit 4.1 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006

4.2	Junior Subordinated Indenture, dated as of December 21, 2006, between Middlefield Banc Corp. and Wilmington Trust Company	Incorporated by reference to Exhibit 4.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006

4.3	Guarantee Agreement, dated as of December 21, 2006, between Middlefield Banc Corp. and Wilmington Trust Company	Incorporated by reference to Exhibit 4.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on December 27, 2006

10.1.0*	2017 Omnibus Equity Plan	Incorporated by reference to Middlefield Banc Corp.’s definitive proxy statement for the 2017 Annual Meeting of Shareholders, Appendix A, filed on April 4, 2017

10.1.1*	2007 Omnibus Equity Plan	Incorporated by reference to Middlefield Banc Corp.’s definitive proxy statement for the 2008 Annual Meeting of Shareholders, Appendix A, filed on April 7, 2008

10.2*	Change in Control Agreement between Middlefield Banc Corp. and Thomas G. Caldwell	Incorporated by reference to Exhibit 10.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019

10.3*
10.3*	Change in Control Agreement between Middlefield Banc Corp. and James R. Heslop, II		Incorporated by reference to Exhibit 10.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019


10.4	Federal Home Loan Bank of Cincinnati Agreement for Advances and Security Agreement dated September 14, 2000	Incorporated by reference to Exhibit 10.4 of Middlefield Banc Corp.’s registration statement on Form 10 filed on April 17, 2001

10.4.1*	Severance Agreement between Middlefield Banc Corp. and Teresa M. Hetrick, dated January 7, 2008	Incorporated by reference to Exhibit 10.4.1 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

10.4.2*	Change in Control Agreement between Middlefield Banc Corp. and Charles O. Moore	Incorporated by reference to Exhibit 10.4.2 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019

10.4.3*	Change in Control Agreement between Middlefield Banc Corp. and Donald L. Stacy	Incorporated by reference to Exhibit 10.4.3 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019

10.4.4*	Severance Agreement between Middlefield Banc Corp. and Alfred F. Thompson Jr., dated January 7, 2008	Incorporated by reference to Exhibit 10.4.4 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

10.4.5*	Change in Control Agreement between Middlefield Banc Corp. and Michael L. Allen	Incorporated by reference to Exhibit 10.4.5 of Middlefield Banc Corp.’s Form 10-Q Current Report filed ~~herewith~~on November 5, 2019

10.4.6*	Change in Control Agreement between Middlefield Banc Corp. and John D. Lane	Incorporated by reference to Exhibit 10.4.6 of Middlefield Banc Corp.’s Form 10-Q Current Report filed ~~herewith~~on November 5, 2019

10.5	[reserved]


10.6*	Amended Director Retirement Agreement with Richard T. Coyne	Incorporated by reference to Exhibit 10.6 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

10.7*	Amended Director Retirement Agreement with Frances H. Frank	Incorporated by reference to Exhibit 10.7 of Middlefield Banc Corp.’s Form 8-K Current Report filed on January 9, 2008

10.8*10.8	[reserved]

10.9*10.9	[reserved]

10.10*10.1	[reserved]

10.11*
10.11*	Director Retirement Agreement with Martin S. Paul		Incorporated by reference to Exhibit 10.11 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2001, filed on March 28, 2002


10.12*10.12	[reserved]

10.13*10.13	[reserved]

10.14*	Executive Survivor Income Agreement (aka DBO agreement [death benefit only]) with Donald L. Stacy	Incorporated by reference to Exhibit 10.14 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.15*	DBO Agreement with Jay P. Giles	Incorporated by reference to Exhibit 10.15 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.16*	DBO Agreement with Alfred F. Thompson Jr.	Incorporated by reference to Exhibit 10.16 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.17*	DBO Agreement with Teresa M. Hetrick	Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.18 *	Executive Deferred Compensation Agreement with Jay P. Giles	Incorporated by reference to Exhibit 10.18 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2011, filed on March 20, 2012

10.19	[reserved]

10.20*	DBO Agreement with James R. Heslop, II	Incorporated by reference to Exhibit 10.20 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.21*	DBO Agreement with Thomas G. Caldwell	Incorporated by reference to Exhibit 10.21 of Middlefield Banc Corp.’s Annual Report on Form 10-K for the Year Ended December 31, 2003, filed on March 30, 2004

10.22*	Annual Incentive Plan	Incorporated by reference to Exhibit 10.22 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 12, 2019

10.22.1
10.22.1*	[reserved]

10.23**		Amended Executive Deferred Compensation Agreement with Thomas G. Caldwell	Incorporated by reference to Exhibit 10.23 of Middlefield Banc Corp.’s Annual Report on Form ~~8-K Current Report~~10-K for the Year Ended December 31, 2019, filed on ~~May 9, 2008~~March 4, 2020


10.24**	Amended Executive Deferred Compensation Agreement with James R. Heslop, II	Incorporated by reference to Exhibit 10.24 of Middlefield Banc Corp.’s Annual Report on Form ~~8-K Current Report~~10-K for the Year Ended December 31, 2019, filed on ~~May 9, 2008~~March 4, 2020

10.25**	Amended Executive Deferred Compensation Agreement with Donald L. Stacy	Incorporated by reference to Exhibit 10.25 of Middlefield Banc Corp.’s Annual Report on Form ~~8-K Current Report~~10-K for the Year Ended December 31, 2019, filed on ~~May 9, 2008~~March 4, 2020

10.26**	Executive Variable Benefit Deferred Compensation Agreement with James R. Heslop, II	Incorporated by reference to Exhibit 10.26 of Middlefield Banc Corp.’s Annual Report on Form ~~8-K Current Report~~10-K for the Year Ended December 31, 2019, filed on ~~July 11, 2018~~March 4, 2020

10.27**	Executive Variable Benefit Deferred Compensation Agreement with Donald L. Stacy	Incorporated by reference to Exhibit 10.27 of Middlefield Banc Corp.’s Annual Report on Form ~~8-K Current Report~~10-K for the Year Ended December 31, 2019, filed on ~~July 11, 2018~~March 4, 2020

10.28**	Executive Deferred Compensation Agreement with Charles O. Moore	Incorporated by reference to Exhibit 10.28 of Middlefield Banc Corp.’s Annual Report on Form ~~10-Q Current Report~~10-K for the Year Ended December 31, 2019, filed on ~~August 7, 2018~~March 4, 2020

10.29*	Form of conditional stock award under the 2007 Omnibus Equity Plan	Incorporated by reference to Exhibit 10.29 of Middlefield Banc Corp.’s Form 8-K Current Report filed on March 4, 2016

10.29.1	Form of conditional stock award under the 2017 Omnibus Equity Plan	Incorporated by reference to Exhibit 10.29 of Middlefield Banc Corp.’s Form 8-K Current Report filed on July 24, 2017

10.30**	Executive Deferred Compensation Agreement with Michael L. Allen	Incorporated by reference to Exhibit 10.30 of Middlefield Banc Corp.’s Form 10-Q Current Report filed on May 7, 2019

10.31**	Executive Deferred Compensation Agreement with John D. Lane	Incorporated by reference to Exhibit 10.31 of Middlefield Banc Corp.’s Form 10-Q Current Report filed on May 7, 2019

31.1	Rule 13a-14(a) certification of Chief Executive Officer	filed herewith

31.2	Rule 13a-14(a) certification of Chief Financial Officer	filed herewith

32	Rule 13a-14(b) certification	filed herewith

99.1
~~99.1~~	Form of Indemnification Agreement with directors of Middlefield Banc Corp. and with executive officers of Middlefield Banc Corp. and The Middlefield Banking Company		Incorporated by reference to Exhibit 99.1 of Middlefield Banc Corp.’s registration statement on Form 10, Amendment No. 1, filed on June 14, 2001


101.INS***	XBRL Instance	furnished herewith

101.SCH***	XBRL Taxonomy Extension Schema	furnished herewith

101.CAL***	XBRL Taxonomy Extension Calculation	furnished herewith

101.DEF***	XBRL Taxonomy Extension Definition	furnished herewith

101.LAB***	XBRL Taxonomy Extension Labels	furnished herewith

101.PRE***	XBRL Taxonomy Extension Presentation	furnished herewith

* management contract or compensatory plan or arrangement

** management contract or compensatory plan or arrangement, a schedule has been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be provided on a supplemental basis to the Securities and Exchange Commission upon request

*** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned and hereunto duly authorized.

	~~MIDDLEFIELD BANC CORP.~~
~~Date: November 5, 2019~~	MIDDLEFIELD BANC CORP.	~~By: /s/Thomas G. Caldwell~~


	~~Thomas G. Caldwell~~ ~~President and Chief Executive Officer~~

~~Date: November 5, 2019~~
Date: May 6, 2020	By: /s/~~Donald L. Stacy~~ Thomas G. Caldwell


	Thomas G. Caldwell

	President and Chief Executive Officer






Date: May 6, 2020	By: /s/Donald L. Stacy


	Donald L. Stacy

	Principal Financial and Accounting Officer

(Dollars in thousands)	Accumulated Other Comprehensive Income (Loss) (a)
Balance as of June 30, 2019	$	1,377
Other comprehensive income		783
Amount reclassified from accumulated other comprehensive income		(3	)
Balance at September 30, 2019	$	2,157


Balance as of December 31, 2018	$	(154	)
Other comprehensive income		2,464
Amount reclassified from accumulated other comprehensive income		(153	)
Balance at September 30, 2019	$	2,157

(Dollars in thousands)	Accumulated Other Comprehensive Income (Loss) (a)
Balance as of June 30, 2018	$	(431	)
Other comprehensive loss		(1,025	)
Balance at September 30, 2018	$	(1,456	)


Balance as of December 31, 2017	$	1,091
Other comprehensive loss		(2,593	)
Change in accounting principle, ASC 2016-01 ^(b)		(141	)
Change in accounting principle, ASC 2018-02 ^(b)		187
Period change		(2,547	)
Balance at September 30, 2018	$	(1,456	)

(Dollars in thousands)	Amounts Reclassified from Accumulated Other Comprehensive Income For the Three Months Ended					Affected Line Item in the Statement Where Net Income is
Details about other comprehensive income	September 30, 2019			September 30, 2018		Presented
Unrealized gains on available-for-sale securities (a)
	$	4		$	-	Investment securities gains on sale, net
		(1	)		-	Income taxes
	$	3		$	-

(Dollar amounts in thousands)	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019			2018
Proceeds from sales	$	518	$	-	$	12,325		$	-
Gross realized gains		4		-		227			-
Gross realized losses		-		-		(33	)		-

					Real Estate - Mortgage
September 30, 2019	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Loans:
Individually evaluated for impairment	$	1,457	$	-	$	1,780	$	11,261	$	1	$	14,499
Collectively evaluated for impairment		84,404		57,564		345,959		481,653		15,203		984,783
Total loans	$	85,861	$	57,564	$	347,739	$	492,914	$	15,204	$	999,282

					Real Estate - Mortgage
September 30, 2019	Commercial and industrial		Real estate- construction		Residential		Commercial		Consumer installment		Total
Allowance for loan and lease losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	3	$	-	$	33	$	670	$	-	$	706
Collectively evaluated for impairment		386		99		1,640		4,046		124		6,295
Total ending allowance balance	$	389	$	99	$	1,673	$	4,716	$	124	$	7,001

	For the Three Months Ended September 30, 2019				For the Nine Months Ended September 30, 2019
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

Commercial and industrial	$	1,786	$	20	$	1,992	$	44
Real estate - construction		-		-		810		-
Real estate - mortgage:
Residential		1,782		14		1,847		38
Commercial		11,344		95		10,317		286
Consumer installment		2		-		2		-
Total	$	14,914	$	129	$	14,968	$	368

September 30, 2019	Nonaccrual		90+ Days Past Due and Accruing

Commercial and industrial	$	868	$	-
Real estate - construction		-		-
Real estate - mortgage:
Residential		4,732		-
Commercial		4,450		-
Consumer installment		3		-
Total	$	10,053	$	-

	Commercial and industrial			Real estate- construction			Real estate- residential mortgage			Real estate- commercial mortgage			Consumer installment			Total
ALLL balance at December 31, 2018	$	969		$	100		$	1,581		$	4,651		$	127		$	7,428
Charge-offs		(393	)		-			(517	)		(31	)		(110	)		(1,051	)
Recoveries		55			57			72			3			7			194
Provision		(242	)		(58	)		537			93			100			430
ALLL balance at September 30, 2019	$	389		$	99		$	1,673		$	4,716		$	124		$	7,001

	Commercial and industrial			Real estate- construction			Real estate- residential mortgage			Real estate- commercial mortgage			Consumer installment			Total
ALLL balance at June 30, 2019	$	539		$	90		$	1,681		$	4,875		$	119		$	7,304
Charge-offs		(38	)		-			(378	)		-			(22	)		(438	)
Recoveries		16			11			26			1			1			55
Provision		(128	)		(2	)		344			(160	)		26			80
ALLL balance at September 30, 2019	$	389		$	99		$	1,673		$	4,716		$	124		$	7,001

	For the Nine Months Ended
	September 30, 2018
Troubled Debt Restructurings subsequently defaulted	Number of Contracts		Recorded Investment
Residential real estate		1	$	20

	Operating			Finance
Weighted-average term (years)		1.9			4.6
Weighted-average discount rate		2.9	%		3.4	%

	Operating			Finance
Undiscounted cash flows due within:
2019	$	56		$	100
2020		226			411
2021		210			424
2022		211			431
2023		211			431
2024 and thereafter		339			2,792
Total undiscounted cash flows		1,253			4,589

Impact of present value discount		(310	)		(1,051	)

Amount reported on balance sheet	$	943		$	3,538

	For the Nine Months Ended September 30,
	2019							2018

	Average				Average			Average				Average
(Dollars in thousands)	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost
Interest-earning assets:
Loans receivable ⁽³⁾	$	1,000,291	$	37,998		5.08	%	$	940,468	$	34,109		4.85	%
Investment securities ⁽³⁾		100,461		2,330		3.80	%		96,222		2,179		3.67	%
Interest-earning deposits with other banks ⁽⁴⁾		44,985		761		2.26	%		44,207		610		1.84	%
Total interest-earning assets		1,145,737		41,089		4.86	%		1,080,897		36,898		4.62	%
Noninterest-earning assets		60,695							53,388
Total assets	$	1,206,432						$	1,134,285
Interest-bearing liabilities:
Interest-bearing demand deposits	$	100,822	$	263		0.35	%	$	95,784	$	231		0.32	%
Money market deposits		170,544		1,880		1.47	%		146,420		981		0.90	%
Savings deposits		199,829		1,090		0.73	%		215,165		941		0.58	%
Certificates of deposit		368,540		6,162		2.24	%		277,145		3,650		1.76	%
Short-term borrowings		17,967		334		2.49	%		52,893		764		1.93	%
Other borrowings		13,114		283		2.89	%		18,282		344		2.52	%
Total interest-bearing liabilities		870,816		10,012		1.54	%		805,689		6,911		1.15	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits		196,871							201,994
Other liabilities		4,369							2,904
Stockholders' equity		134,376							123,698
Total liabilities and stockholders' equity	$	1,206,432						$	1,134,285
Net interest income			$	31,077						$	29,987
Interest rate spread ⁽¹⁾						3.32	%						3.47	%
Net interest margin ⁽²⁾						3.69	%						3.77	%
Ratio of average interest-earning assets to average interest-bearing liabilities						131.57	%						134.16	%

	As of December 31, 2018
	Leverage			Tier 1 Risk Based			Common Equity Tier 1			Total Risk Based
The Middlefield Banking Company		9.60	%		11.09	%		11.09	%		11.83	%
Middlefield Banc Corp.		10.26	%		11.83	%		11.03	%		12.57	%
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	%

2019 period In thousands, except per share data	Total shares purchased		Average price paid per share		Total shares purchased as part of a publicly announced program (a)		Maximum number of shares that may yet be purchased under the program

July 1-31		-	$	-		-		132,253
August 1-31		31,669	$	48.04		31,669		100,584
September 1-30		-	$	-		-		100,584
Total		31,669	$	48.04