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Note 20 - Business Acquisition | 12 Months Ended
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Dec. 31, 2018
Notes to Financial Statements |
Business Combination Disclosure [Text Block] |
20. | BUSINESS ACQUISITION
In the second quarter of 2016, the Company announced the signing of a definitive merger agreement to acquire 100% of the outstanding equity interest of Liberty for cash and stock. Liberty was an Ohio bank that conducted its business from a main office in Beachwood, Ohio with branches in Twinsburg and Solon, Ohio. The transaction closed on January 12, 2017, with Liberty having been merged into Middlefield Bank, with Middlefield Bank as the surviving entity. The acquisition established the Company’s presence in Cuyahoga and Summit Counties. Under the terms of the merger agreement, the Company acquired all of the outstanding shares of Liberty for a total purchase price of $42.2 million. As a result of the acquisition, the Company issued 544,610 common shares and $21.2 million in cash to the former shareholders of Liberty. The shares were issued with a value of $38.55 per share, which was the closing price of the Company’s stock on January 12, 2017. Prior to the acquisition the Company had a previously held equity interest in Liberty which was re-measured at fair value on the acquisition date and resulted in a gain of $488,000, which was recorded in the investment securities gains – net line on the Consolidated Statement of Income for the year ended December 31, 2017. The acquired assets and assumed liabilities were measured at estimated fair values. The Company relied on the income approach to estimate the value of the loans. The loans’ underlying characteristics (account types, remaining terms (in months), annual interest rates or coupons, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures and remaining balance) were considered. Various assumptions were applied regarding credit, interest, and prepayment risks for the loans based on loan types, payment types and fixed or variable classifications. The Company also recorded an identifiable intangible asset representing the core deposit base of Liberty. The discounted cash flow method was used in valuing this intangible. This method is based upon the principle of future benefits; economic value is based on anticipated future benefits as measured by cash flows expected to occur in the future. The estimated future cash flows are converted to a value indicator by determining the present value of the cash flows using a discount rate. The discount rate is based upon the nature of the business, the level of risk, and the expected stability of the estimated future cash flows. The higher the risk, the higher the discount rate, and the lower the value indicator. Time deposit fair values were estimated using an income approach. The methodology entailed discounting the contractual cash flows of the instruments over their remaining contractual lives at prevailing market rates. Interest and principal payments were projected for each category of CDs over the period from the valuation date to the maturity dates. These payments represent future cash flows to be paid to depositors until maturity. Using appropriate market interest rates for each category of CDs, the future cash flows were discounted to their present value equivalents. The market interest rates were selected based on peer rates in Ohio from Bankrate as of the valuation date. The following table summarizes the purchase of Liberty as of January 12, 2017:
(In Thousands, Except Per Share Data) |  |  |  |  |  |  |  |
Purchase Price Consideration in Common Stock |  |  |  |  |  |  |  |
Middlefield Banc Corp. shares issued |  |  | 544,610 |  |  |  |  |
Value assigned to Middlefield Banc Corp. common shares |  | $ | 38.55 |  |  |  |  |
Purchase price assigned to Liberty common shares exchanged for |  |  |  |  |  |  | 20,995 |
Middlefield Banc Corp. shares |  |  |  |  |  |  |  |
Purchase Price Consideration in Cash |  |  |  |  |  |  |  |
Purchase price assigned to Liberty common shares exchanged for cash |  |  |  |  |  |  | 21,173 |
Total Purchase Price |  |  |  |  |  |  | 42,168 |
Previously held equity interest in Liberty |  |  |  |  |  |  | 1,068 |
Net Assets Acquired: |  |  |  |  |  |  |  |
Liberty shareholders equity |  | $ | 30,474 |  |  |  |  |
Adjustments to reflect assets acquired at fair value: |  |  |  |  |  |  |  |
Loans |  |  |  |  |  |  |  |
Allowance for loan loss |  |  | 3,257 |  |  |  |  |
Loans - interest rate |  |  | 578 |  |  |  |  |
Loans - general credit |  |  | (2,161 | ) |  |  |  |
Core deposit intangible |  |  | 3,087 |  |  |  |  |
Other |  |  | 254 |  |  |  |  |
Adjustments to reflect liabilities acquired at fair value: |  |  |  |  |  |  |  |
Time deposits |  |  | (141 | ) |  |  |  |
Deferred taxes |  |  | (906 | ) |  |  |  |
Change in control |  |  | (1,718 | ) |  |  |  |
Total net assets acquired |  |  |  |  |  |  | 32,724 |
Goodwill resulting from merger |  |  |  |  |  | $ | 10,512 |
The following condensed statement reflects the amounts recognized as of the acquisition date for each major class of asset acquired and liability assumed, at fair value:
(In Thousands) |  |  |  |  |  |  |  |
Total purchase price |  |  |  |  |  | $ | 42,168 |
Previously held equity interest in Liberty |  |  |  |  |  |  | 1,068 |
Assets (liabilities) acquired: |  |  |  |  |  |  |  |
Net assets acquired: |  |  |  |  |  |  |  |
Cash |  |  | 26,604 |  |  |  |  |
Loans and loans held for sale |  |  | 201,341 |  |  |  |  |
Premises and equipment, net |  |  | 325 |  |  |  |  |
Accrued interest receivable |  |  | 440 |  |  |  |  |
Bank-owned life insurance |  |  | 1,681 |  |  |  |  |
Core deposit intangible |  |  | 3,087 |  |  |  |  |
Other assets |  |  | 997 |  |  |  |  |
Time deposits |  |  | (30,744 | ) |  |  |  |
Non-time deposits |  |  | (167,300 | ) |  |  |  |
Accrued interest payable |  |  | (47 | ) |  |  |  |
Deferred taxes |  |  | (906 | ) |  |  |  |
Other liabilities |  |  | (2,754 | ) |  |  |  |
Total net assets acquired |  |  |  |  |  |  | 32,724 |
Goodwill resulting from the Liberty merger |  |  |  |  |  | $ | 10,512 |
Middlefield recorded goodwill and intangibles associated with the purchase of Liberty totaling $10.5 million. Goodwill is not amortized, but is periodically evaluated for impairment. Middlefield Bank did not recognize any impairment during the years ended December 31, 2018 or 2017. Management made adjustments to goodwill in 2017 subsequent to the acquisition of $575,000 due to refinements in a purchase accounting adjustment. Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. During the year ended December 31, 2017, no such adjustments were recorded. The identifiable intangible assets consist of a core deposit intangible which is being amortized over the estimated useful life. The gross carrying amount of the core deposit intangible was at December 31, 2018 was $2.4 million with $690,000 accumulated amortization as of that date. The gross carrying amount of the core deposit intangible was at December 31, 2017 was $2.7 million with $342,000 accumulated amortization as of that date. As of December 31, 2018, the current year and estimated future amortization expense for the core deposit intangible is as follows:
Remaining | 2019 |  | $ | 341 |
| 2020 |  |  | 332 |
| 2021 |  |  | 321 |
| 2022 |  |  | 309 |
| 2023 |  |  | 296 |
| Thereafter |  |  | 798 |
| Total |  | $ | 2,397 |
Results of operations for Liberty prior to the acquisition date are not included in the Consolidated Statement of Income for the year ended December 31, 2017. The results of activities from the former Liberty operations that are included in the Consolidated Statement of Income from the date of acquisition through December 31, 2017 are broken out in the following table:
|  | Actual from Acquisition Date Through December 31, 2017 |
|  | (in thousands) |
Net interest income |  | $ | 10,354 |
Noninterest income |  | $ | 744 |
Net income |  | $ | 2,625 |
The table below presents unaudited pro forma information as of December 31, 2017, as if the acquisition of Liberty had occurred on January 1, 2017. This table, compared to the audited information as of December 31, 2018, was prepared for comparative purposes only and was not indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of 2017, nor was it indicative of future results. Furthermore, the unaudited pro forma information did not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings as a result of the integration and consolidation of the acquisition. Merger and acquisition integration costs and amortization of fair value adjustments were included in the 2017 amounts below.
|  | Twelve-month period ended December 31, |
|  |  |  |  |  | (Unaudited) |
|  | 2018 |  |  | 2017 |
|  | (in thousands, except per share data) |
Net interest income |  | $ | 40,448 |  |  | $ | 37,646 |
Noninterest income |  |  | 3,728 |  |  |  | 4,920 |
Net income |  | $ | 12,431 |  |  | $ | 8,438 |
Pro forma earnings per share: |  |  |  |  |  |  |  |
Basic |  | $ | 3.85 |  |  | $ | 2.79 |
Diluted |  | $ | 3.83 |  |  | $ | 2.77 |
Included in the above net income amount for the twelve months ended December 31, 2017 is $1.1 million of non-recurring merger expenses.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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