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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20552
FORM 10 - Q
[X] QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2002
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from to
Commission File Number 33-23094
-------------------------------
Middlefield Banc Corp.
(Exact name of registrant as specified in its charter)
Ohio 34 - 1585111
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
15985 East High Street, Middlefield, Ohio 44062-9263
(Address of principal executive offices)
(440) 632-1666
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or 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 No X
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
Class: Common Stock, without par value
Outstanding at November 11, 2002: 1,156,579
MIDDLEFIELD BANC CORP.
INDEX
Page
Number
----------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of 3
September 30, 2002 and December 31, 2001
Consolidated Statement of Income (Unaudited)
for the Nine and Three Months ended September 30, 2002
and 2001 4
Consolidated Statement of Changes in Stockholders' Equity (Unaudited) 5
Consolidated Statement of Cash Flows (Unaudited)
for the Nine Months ended September 30, 2002 and 2001 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Default Upon Senior Securities 21
Item 4. Submissions of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8 - K 21
SIGNATURES
MIDDLEFIELD BANC CORP.
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30, December 31,
2002 2001
-------------- -------------
ASSETS
Cash and due from banks $ 4,846,689 $ 3,443,435
Federal funds sold 4,600,000 2,450,000
-------------- --------------
Cash and cash equivalents 9,446,689 5,893,435
Interest-bearing deposits in other institutions 571,007 1,240,207
Investment securities available for sale 31,961,166 21,179,786
Investment securities held to maturity (estimated
market value of $7,501,461 and $10,471,978)) 7,288,573 10,229,068
Loans 169,158,698 152,828,355
Less allowance for loan losses 2,226,813 2,062,252
-------------- --------------
Net loans 166,931,885 150,766,103
Premises and equipment 6,330,353 6,244,797
Accrued interest and other assets 2,313,795 2,304,568
-------------- --------------
TOTAL ASSETS $ 224,843,468 $ 197,857,964
============== ==============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 25,583,496 $ 24,952,407
Interest-bearing demand 7,505,711 6,523,152
Money market 9,969,689 7,940,807
Savings 47,372,399 41,518,906
Time 95,651,563 86,447,456
-------------- --------------
Total deposits 186,082,858 167,382,728
Short-term borrowings 2,435,515 660,678
Other borrowings 14,325,124 9,301,334
Accrued interest and other liabilities 771,896 726,417
-------------- --------------
TOTAL LIABILITIES 203,615,393 178,071,157
-------------- --------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized,
1,206,921 and 1,203,633 shares issued 7,820,001 6,287,011
Retained earnings 14,541,705 14,842,519
Accumulated other comprehensive income 465,684 133,717
Treasury stock, at cost (50,342 and 45,722 shares) (1,599,315) (1,476,440)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 21,228,075 19,786,807
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 224,843,468 $ 197,857,964
============== ==============
See accompanying notes to unaudited consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
2002 2001 2002 2001
----------------- ----------------- ----------------- -----------------
INTEREST INCOME
Interest and fees on loans $ 9,204,917 $ 8,818,686 $ 3,126,762 $ 3,047,283
Interest-bearing deposits in
other institutions 42,562 47,801 12,499 18,612
Federal funds sold 48,796 114,668 23,736 17,786
Investment securities:
Taxable interest 901,560 939,442 319,991 314,326
Tax-exempt interest 313,239 349,574 102,623 110,104
----------------- ----------------- ----------------- -----------------
Total interest income 10,511,074 10,270,171 3,585,611 3,508,111
------------------------------------ ------------------------------------
INTEREST EXPENSE
Deposits 4,155,138 4,694,735 1,410,512 1,595,269
Short-term borrowings 9,323 13,000 5,777 3,897
Other borrowings 474,594 403,752 174,438 131,544
----------------- ----------------- ----------------- -----------------
Total interest expense 4,639,055 5,111,487 1,590,727 1,730,710
----------------- ----------------- ----------------- -----------------
NET INTEREST INCOME 5,872,019 5,158,684 1,994,884 1,777,401
Provision for loan losses 225,000 125,000 75,000 45,000
----------------- ----------------- ----------------- -----------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,647,019 5,033,684 1,919,884 1,732,401
----------------- ----------------- ----------------- -----------------
NONINTEREST INCOME
Service charges on deposit accounts 712,391 688,038 245,343 232,378
Investment securities gains, net - 97,807 - 97,807
Other income 117,900 106,387 40,156 35,607
----------------- ----------------- ----------------- -----------------
Total noninterest income 830,291 892,232 285,499 365,792
----------------- ----------------- ----------------- -----------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,877,547 1,693,834 625,624 543,803
Occupancy expense 260,498 216,996 85,296 68,784
Equipment expense 256,487 221,199 92,112 79,397
Data processing costs 256,359 211,367 87,228 72,314
Ohio state franchise tax 202,550 180,050 67,500 60,000
Other expense 1,019,679 954,065 310,266 325,679
----------------- ----------------- ----------------- -----------------
Total noninterest expense 3,873,120 3,477,511 1,268,026 1,149,977
----------------- ----------------- ----------------- -----------------
Income before income taxes 2,604,190 2,448,405 937,357 948,216
Income taxes 844,000 759,826 298,000 288,326
----------------- ----------------- ----------------- -----------------
NET INCOME $ 1,760,190 $ 1,688,579 $ 639,357 $ 659,890
================= ================= ================= =================
EARNINGS PER SHARE
Basic $ 1.52 1.46 $ 0.55 0.57
Diluted 1.52 1.46 0.55 0.57
See accompanying notes to unaudited consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Other Total
Common Retained Comprehensive Treasury Stockholders' Comprehensive
Stock Earnings Income Stock Equity Income
----------- ------------ --------------- ------------ --------------- ---------------
Balance, December 31, 2001 $ 6,287,011 $ 14,842,519 $ 133,717 $ (1,476,440) $ 19,786,807
Net income 1,760,190 1,760,190 $ 1,760,190
Other comprehensive income:
Unrealized gain on available for sale
securities net of taxes of $171,013 331,967 331,967 331,967
---------------
Comprehensive income $ 2,092,157
===============
Exercise of stock options 18,960 18,960
Purchase of treasury stock (140,100) (140,100)
Sale of treasury stock 795 17,225 18,020
Stock dividend 1,429,662 (1,434,607) (4,945)
Dividend reinvestment plan 83,573 (83,573) -
Cash dividends ($.54 per share) (542,824) (542,824)
----------- ------------ --------------- ------------ ---------------
Balance, September 30, 2002 $ 7,820,001 $ 14,541,705 $ 465,684 $ (1,599,315) $ 21,228,075
=========== ============ =============== ============ ===============
See accompanying notes to unaudited consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2002 2001
--------------- -----------------
OPERATING ACTIVITIES
Net income $ 1,760,190 $ 1,688,579
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 225,000 125,000
Depreciation and amortization 255,338 222,843
Amortization of premium and
discount on investment securities 95,846 45,704
Amortization of net deferred loan costs (fees) (169,445) (13,193)
Investment security gains - (97,807)
Increase in accrued interest receivable (54,453) (44,762)
Increase (decrease) in accrued interest payable (78,092) 148,030
Other, net 172,784 (176,503)
--------------- ----------------
Net cash provided by operating activities 2,207,168 1,897,891
--------------- ----------------
INVESTING ACTIVITIES
Decrease in interest-bearing deposits in
other institutions, net 669,200 94,243
Investment securities available for sale:
Proceeds from repayments and maturities 4,956,718 3,530,734
Proceeds from sales - 2,092,981
Purchases (15,310,163) (10,913,812)
Investment securities held to maturity:
Proceeds from repayments and maturities 2,919,694 6,891,514
Increase in loans, net (16,221,337) (14,235,110)
Purchase of Federal Home Loan Bank Stock (175,000) (124,800)
Purchase of premises and equipment (340,894) (791,298)
--------------- ----------------
Net cash used for investing activities (23,501,782) (13,455,548)
--------------- ----------------
FINANCING ACTIVITIES
Net increase in deposits 18,700,130 13,871,998
Increase in short-term borrowings, net 1,774,837 170,301
Repayment of other borrowings (536,210) (512,146)
Proceeds from other borrowings 5,560,000 -
Exercise of stock options 18,960 -
Purchase of treasury stock (140,100) -
Sale of treasury stock 18,020 -
Cash dividends (547,769) (463,240)
--------------- ----------------
Net cash provided by financing activities 24,847,868 13,066,913
--------------- ----------------
Increase in cash and cash equivalents 3,553,254 1,509,256
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 5,893,435 4,839,875
--------------- ----------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 9,446,689 $ 6,349,131
=============== ================
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings $ 4,717,147 $ 4,963,457
Income taxes 434,000 660,000
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. ("Middlefield")
includes its wholly-owned subsidiary, The Middlefield Banking Company (the
"Bank"). All significant intercompany items have been eliminated.
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and the instructions for Form 10-Q and Article 10
of Regulation S-X. In Management's opinion, the financial statements include all
adjustments, consisting of normal recurring adjustments, that Middlefield
considers necessary to fairly state Middlefield's financial position and the
results of operations and cash flows. The balance sheet at December 31, 2001,
has been derived from the audited financial statements at that date but does not
include all of the necessary informational disclosures and footnotes as required
by accounting principles generally accepted in the United States of America. The
accompanying financial statements should be read in conjunction with the
financial statements and notes thereto included with Middlefield's Form 10-K
(File No. 33-23094). The results of Middlefield's operations for any interim
period are not necessarily indicative of the results of Middlefield's operations
for any other interim period or for a full fiscal year.
NOTE 2 - EARNINGS PER SHARE
Middlefield provides dual presentation of Basic and Diluted earnings per share.
Basic earnings per share utilizes net income as reported as the numerator and
the actual average shares outstanding as the denominator. Diluted earnings per
share includes any dilutive effects of options, warrants, and convertible
securities.
There are no convertible securities that would affect the numerator in
calculating basic and diluted earnings per share; therefore, net income as
presented on the Consolidated Statement of Income will be used as the numerator.
The following tables set forth the composition of the weighted-average common
shares (denominator) used in the basic and diluted earnings per share
computation.
For the Nine For the Three
Months Ended Months Ended
Sept 30, Sept 30,
2002 2001 2002 2001
------------- ------------ ------------ ---------------
Weighted average common shares
outstanding 1,204,407 1,206,110 1,204,917 1,206,110
Average treasury stock shares
(46,737) (45,722) (48,736) (45,722)
------------- ------------ ------------ ---------------
Weighted average common shares and
common stock equivalents used to
calculate basic earnings per sha re 1,157,670 1,160,388 1,156,181 1,160,388
============= ============ ============ ===============
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share
1,580 1,450 3,096 546
------------- ------------ ------------ ---------------
Weighted average common shares and
common stock equivalents used
to calculate diluted earnings per share 1,159,250 1,161,838 1,159,277 1,160,934
============= ============ ============ ===============
Options to purchase 9,975 shares of common stock at prices from $31.00 to $31.75
per share were outstanding during all periods of 2002 and 2001 but were not
included in the computation of diluted EPS because to do so would have been
anti-dilutive.
NOTE 3 - COMPREHENSIVE INCOME
The components of comprehensive income consist exclusively of unrealized gains
and losses on available for sale securities. For the three months ended
September 30, 2002, this activity is shown under the heading Comprehensive
Income as presented in the Consolidated Statement of Changes in Stockholders'
Equity (Unaudited). For the nine months ended September 30, 2001, comprehensive
income totaled $1,859,642. For the
three months ended September 30, 2002 and 2001, comprehensive income totaled
$812,641 and $727,403, respectively.
NOTE 4- STOCK DIVIDEND
The Board of Directors approved a five percent stock dividend to stockholders of
record as of June 1, 2002 payable June 14, 2002. As a result of the dividend,
54,997 additional shares of the Middlefield's common stock were issued, common
stock was increased by $1,429,662 and retained earnings decreased by $1,434,607.
Fractional shares paid were paid in cash. All average shares outstanding and all
per share amounts included in the financial statements are based on the
increased number of shares after giving retroactive effect to the stock
dividend.
NOTE 5- RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (FAS) No. 141, Business Combinations,
effective for all business combinations initiated after September 30, 2001, as
well as all business combinations accounted for by the purchase method that are
completed after September 30, 2001. The new statement requires that the purchase
method of accounting be used for all business combinations and prohibits the use
of the pooling-of-interests method. FAS No. 141 also specifies criteria which
must be met for intangible assets acquired in a purchase method business
combination to be recognized and reported apart from goodwill. The adoption of
FAS No. 141 did not have a material effect on Middlefield's financial position
or results of operations.
On January 1, 2002, Middlefield adopted FAS No. 142, Goodwill and Other
Intangible Assets, effective for fiscal years beginning after December 15, 2001.
This statement changes the accounting for goodwill from an amortization method
to an impairment-only approach. Thus, amortization of goodwill, including
goodwill recorded in past business combinations, will cease upon adoption of
this statement. However, this new statement did not amend FAS No. 72, Accounting
for Certain Acquisitions of Banking or Thrift Institutions, which requires
recognition and amortization of unidentified intangible assets relating to the
acquisition of financial institutions or branches thereof. The FASB has
undertaken a limited scope project to reconsider the provisions of FAS No. 72 in
2002 and has issued an exposure draft of a proposed statement, Acquisitions of
Certain Financial Institutions, that would remove acquisitions of financial
institutions from the scope of FAS No. 72. The adoption of this proposed
statement would require all goodwill originating from acquisitions that meet the
definition of a business combination as defined in Emerging Issues Task Force
Issue ("EITF") No. 98-3 to be discontinued. The adoption of FAS No. 142 did not
have a material effect on Middlefield's financial position or results of
operations.
In August 2001, the FASB issued FAS No. 143, Accounting for Asset Retirement
Obligations, which requires that the fair value of a liability be recognized
when incurred
for the retirement of a long-lived asset and the value of the asset be increased
by that amount. The statement also requires that the liability be maintained at
its present value in subsequent periods and outlines certain disclosures for
such obligations. The new statement takes effect for fiscal years beginning
after September 15, 2002. The adoption of this statement, which is effective
January 1, 2003, is not expected to have a material effect on Middlefield's
financial statements.
On January 1, 2002, Middlefield adopted FAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. FAS 144 supercedes FAS 121 and
applies to all long-lived assets (including discontinued operations) and
consequently amends APB Opinion No. 30, Reporting Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business. FAS 144
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. The adoption of FAS
No. 144 did not have a material effect on Middlefield's financial statements.
In April 2002, the FASB issued FAS No. 145, Recission of FASB Statement No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. FAS
No. 145 rescinds FAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion 30 will now be used to classify those gains and losses. This
statement also amends FASB FAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. This
statement also makes technical corrections to existing pronouncements, which are
not substantive but in some cases may change accounting practice. FAS No. 145 is
effective for transactions occurring after May 15, 2002. The adoption of FAS No.
145 did not have a material effect on Middlefield's financial position or
results of operations.
In July 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. This statement replaces
EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring). The new statement will be effective for exit or disposal
activities initiated after December 31, 2002, the adoption of which is not
expected to have a material effect on Middlefield's financial statements.
On October 1, 2002, the FASB issued FAS No. 147, Acquisitions of Certain
Financial Institutions, effective for all business combinations initiated after
October 1, 2002. This Statement addresses the financial accounting and reporting
for the acquisition of all or part of a financial institution, except for a
transaction between two or more mutual enterprises. This Statement removes
acquisitions of financial institutions, other than transactions between two or
more mutual enterprises, from the scope of FAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, and FASB
Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and
Loan Association or a Similar Institution Is Acquired in a Business Combination
Accounted for by the Purchase Method. The acquisition of all or part of a
financial institution that meets the definition of a business combination shall
be accounted for by the purchase method in accordance with FAS No. 141, Business
Combinations, and FAS No. 142, Goodwill and Other Intangible Assets. This
Statement also provides guidance on the accounting for the impairment or
disposal of acquired long-term customer-relationship intangible assets (such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets), including those acquired in transactions between two or more
mutual enterprises. The adoption of FAS No. 147 did not have a material effect
on Middlefield's financial position or results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002
(the Act), following an investigative order proposed by the SEC on chief
financial officers and chief executive officers of 947 large public companies on
June 27, 2002. Additional regulations are expected to be promulgated by the SEC.
As a result of the accounting restatements by large public companies, the
passage of the Act and regulations expected to be implemented by the SEC,
publicly-registered companies, such as Middlefield, will be subject to
additional and more cumbersome reporting regulations and disclosure. These new
regulations, which are intended to curtail corporate fraud, will require certain
officers to personally certify certain SEC filings and financial statements and
will require additional measures to be taken by our outside auditors, officers
and directors. The loss of investor confidence in the stock market and the new
laws and regulations will increase non-interest expenses of Middlefield and
could adversely affect the prices of publicly-traded stocks, such as
Middlefield.
The Private Securities Litigation Act of 1995 contains safe harbor provisions
regarding forward-looking statements. Forward-looking statements can be
identified by terminology such as "believes," "expects," "anticipates,"
"estimates," "intends," "should," "will," "plans," "potential" and similar
words. Forward-looking statements are also statements that are not statements of
historical fact. Forward-looking statements necessarily involve risks and
uncertainties. They are merely predictive or statements of probabilities,
involving known and unknown risks, uncertainties and other factors.
If one or more of these risks of uncertainties occurs or if the underlying
assumptions prove incorrect, actual results in 2002 and beyond could differ
materially from those expressed in or implied by the forward-looking statements.
Forward-looking statements are based upon a variety of estimates and
assumptions. The estimates and assumptions involve judgments about a number of
things, including future economic, competitive, and financial market conditions
and future business decisions.
These matters are inherently subject to significant business, economic and
competitive uncertainties, all of which are difficult to predict and many of
which are beyond Middlefield's control. Although Middlefield believes its
estimates and assumptions are reasonable, actual results could vary materially
from those shown. Inclusion of forward-looking information in this Form 10-Q
does not constitute a representation by Middlefield or any other person that the
indicated results will be achieved. Investors are cautioned not to place undue
reliance on forward-looking information.
Comparison of Financial Condition at September 30, 2002 and December 31, 2001.
Total assets increased $27.0 million to $224.8 million at September 30, 2002
from $197.9 million at December 31, 2001. This increase primarily resulted from
an increase in net loans receivable of $16.3 million, investment securities of
$7.8 million, and cash and cash equivalents of $3.6 million that was primarily
funded by net increases in deposits and borrowings of $18.7 million and $6.8
million, respectively.
Cash and cash equivalents increased to $9.4 million at September 30, 2002 as
compared to $5.9 million at December 31, 2001. This increase resulted from
temporary fluctuations with correspondent banks due to the timing of customer
activity.
Investment securities available for sale increased to $32.0 million at September
30, 2002 from $21.2 million at December 31, 2001. Meanwhile, investment
securities held to maturity decreased to $7.3 million at September 30, 2002 from
$10.2 million at December 31, 2001. The net increase in 2002 is primarily due to
investment purchases of $15.3 million primarily in mortgage-backed securities,
which was partially offset by investment calls and maturities of $7.9 million.
Purchases of mortgage-backed securities, which have all been classified as
available for sale, typically have maturities ranging from 15 to 30 years with
yields between 4.5% and 6.0%. Approximately half of the entire investment
securities portfolio is now comprised of mortgage-backed securities as compared
to 36% at December 31, 2001. Management was able to fund this growth with an
influx of deposits coupled with the reinvestment of called and matured
securities during the year.
Total loans increased to $169.2 million at September 30, 2002 from $152.8
million at December 31, 2001. The increase in net loans receivable resulted from
the economic health of Middlefield's market area and the strategic,
service-oriented marketing approach taken by management to meet the lending
needs of the area. The majority of the increased lending activity is
predominately residential mortgage and commercial real estate loans. Such loans
grew $10.2 million and $6.3 million, respectively, at September 30, 2002. In
general, real estate lending accounts for approximately 80% of Middlefield's
loan portfolio. The increased lending is attributed to continued customer
referrals and Middlefield's overall relationship with its customers. This growth
was primarily funded with deposit growth coupled with a series of borrowings
with the Federal Home Loan Bank ("FHLB").
The allowance for loan losses represents the amount that management estimates is
adequate to provide for probable losses inherent in the loan portfolio, as of
the balance sheet date. Accordingly, all loan losses are charged to the
allowance, and all recoveries are credited to it. At September 30, 2002,
Middlefield's allowance for loan losses increased approximately $165,000 to $2.2
million. The allowance for loan losses is established through a provision for
loan losses, which is charged to operations. The provision is based on
management's periodic evaluation of the adequacy of the allowance for loan
losses, taking into account the overall risk characteristics of the various
portfolio segments, past experience with losses, the impact of economic
conditions on borrowers, and other relevant factors. The estimates used to
determine the adequacy of the allowance for loan losses, including the amounts
and timing of future cash flows expected on impaired loans, are particularly
susceptible to significant change in the near term. The total allowance for loan
losses is a combination of a specific allowance for identified problem loans, a
formula allowance, and an unallocated allowance.
As the primary source of funds, aggregate deposits of $186.1 million increased
$18.7 million or 11.2% compared to December 31, 2001. Growth was primarily
concentrated in time deposits, savings and money market accounts and resulted
from the continual marketing efforts by management, as well as customer
preferences to readily accessible deposit products. Such accounts grew by $9.2
million, $5.9 million and $2.0 million, respectively, during the period.
Other borrowings increased to $14.3 million at September 30, 2002 from $9.3
million at December 31, 2001. This increase was the result of an additional $5.6
million in Federal Home Loan Bank borrowings to be repaid over a ten-year
period. As noted previously, the proceeds from these borrowings were used to
supplement the funding of loan demand.
Total stockholders' equity increased to $21.2 million at September 30, 2002 due
to net income of $1,760,000 that was offset partially by dividend payments of
$543,000 and an increase in accumulated other comprehensive income of $332,000.
Accumulated other comprehensive income increased as a result of changes in the
net unrealized gain on investment securities available for sale due to
fluctuations in interest rates. Because of interest rate volatility, accumulated
other comprehensive income could materially fluctuate for each interim period
and year-end period depending on economic and interest rate conditions.
Middlefield declared a 5.0% stock dividend during the period that resulted in a
transfer between retained earnings and common stock of approximately $1.4
million. In September 2002, Middlefield's dividend reinvestment plan was
initiated to promote long-term ownership by investors with the proceeds from
such purchases being used for general corporate purposes. In addition, future
dividend policies will be determined by the Board of Directors in light of the
earnings and financial condition of Middlefield, including applicable
governmental regulations and policies.
Comparison of Results of Operations for the Nine and Three Months Ended
September 30, 2002 and 2001.
Middlefield recorded net income of $1,760,000 for the nine month period ended
September 30, 2002 as compared to net income of $1,689,000 for the same period
ended September 30, 2001. This increase in net income was due to the significant
growth in net interest income of $713,000 while offset by increases in
noninterest expense and the provision for loan losses of $396,000 and $100,000
respectively. Basic and diluted earnings per share increased to $1.52 per share
for the nine months ended September 30, 2002 from $1.46 per share for the same
period ended 2001. For the three months ended September 30, 2002, Middlefield
recorded net income of $639,000, or $.55 per share as compared to $660,000 or
$.57 per share for the same period ended September 30, 2001.
Net interest income for the nine months ended September 30, 2002 increased to
$5,872,000, compared to $5,159,000 for the same period ended 2001. Interest
income for the first nine months of 2002 was $10,511,000 as compared to
$10,270,000 for the same period ended 2001. This increase of $241,000 was
influenced primarily by an increase in interest earned on loans receivable of
$386,000, while offset by decreases in interest earned on investment securities
and federal funds sold of $74,000 and $66,000, respectively. Although
Middlefield intentionally caused a decrease to its interest rate yields,
interest income was driven by increases in average balances of interest-earning
assets. The average balance of loans receivable increased $20.1 million to
$161.1 million during 2002, as compared to $141.0 million for the 2001 period.
The tax-equivalent yield on interest earning assets decreased to 7.09% for the
nine months ended 2002 from 7.91% for same period ended 2001, and primarily
resulted from a 118 basis point and 72 basis point decrease in investment
securities and loans receivable, respectively. During 2002, $7.9 million in
called, matured, and repayed investment securities were reinvested at
substantially lower rates. The lower interest rate environment resulted during
2001, when interest rates were driven downward by an aggressive rate reduction
policy by the Federal Reserve Board.
Interest expense decreased $472,000 for the nine months ended September 30, 2002
to $4,639,000 from $5,111,000 for the same period ended 2001. Interest expense
incurred on deposits decreased $540,000 for the nine months ended September 30,
2002 as compared to the same period ended 2001 and was partially offset by an
increase in interest expense on borrowings of $67,000. This was primarily
attributable to a declining interest rate environment which resulted in the cost
of funds decreasing to 3.78% for the nine months ended September 30, 2002 from
4.82% for the same period 2001. Offsetting the declining rates was an increase
in the average balance of interest-bearing liabilities of $22.0 million to
$163.5 million for the nine months ended September 30, 2002. In particular, the
average balance of savings and certificates of deposits increased $10.9 million
and $6.4 million, respectively. As noted previously, such increases were the
result of the competitively priced products being marketed throughout
Middlefield's market area.
Net interest income for the three months ended September 30, 2002 increased to
$1,995,000, compared to $1,777,000 for the same period ended 2001. Interest
income for the three months ended September 30, 2002 increased $77,000 primarily
due to interest earned on loans. The average balance of loans receivable
increased $20.8 million to
$167.5 million during 2002, as compared to $146.7 million for the 2001 period.
The tax-equivalent yield on interest earning assets decreased to 6.90% for the
three months ended September 30, 2002 from 7.88% for same period ended 2001, and
primarily resulted from a 152 basis point and 84 basis point decrease in
investment securities and loans receivable, respectively. As noted previously,
the Federal Reserve Board adopted a policy of aggressive interest rate reduction
in 2001 that resulted in this adverse impact on the yield on earning assets.
Meanwhile, an overall decrease in interest expense was primarily the effect of a
declining cost of funds for the three months ended September 30, 2002 to 3.72%
from 4.77% for the same period ended 2001. This was offset somewhat by an
increase in the average balance of interest bearing liabilities of $25.8
million. As noted above, the competitive pricing strategy of Middlefield has
contributed to these increases in deposit balances. The result of this activity
was a decline of $185,000 in interest incurred on deposits which was partially
offset by an increase in interest incurred on borrowings of $45,000.
Total noninterest income, exclusive of investment security gains of $98,000, for
the nine and three months ended September 30, 2002 remained relatively unchanged
from 2001. Noninterest income items are primarily comprised of service charges
and fees on deposit account activity, along with fee income derived from other
financial related services.
Total noninterest expenses increased $396,000 and $118,000 for the nine and
three months ended September 30, 2002, respectively, as compared to the same
period ended 2001. Compensation and employee benefits increased $184,000 and
$82,000, respectively, primarily as a result of normal merit raises. Occupancy
and equipment expenses increased $79,000 and $29,000, respectively, as a result
of added capital expenditures in prior years, in particular the Chardon branch
which became operational in 2001. As a result of increased transaction activity
from operating a larger organization, data processing expenses increased $45,000
and $15,000, respectively, during 2002 as compared to 2001. In addition, all
other expenses increased $104,000 and $10,000, respectively, as a result of
costs incurred for professional fees associated with outside assistance in
complying with the increased levels of regulatory compliance of a publicly
reported company, outsourcing certain services previously performed internally,
and as previously noted an increase in expenses incurred as a result of
operating a larger organization. Middlefield has also purchased land for
expansion of a new branch network in early 2003, and anticipates incurring
additional capital and operational expenditures in the next twelve months.
LIQUIDITY
Liquidity management for Middlefield is measured and monitored on both a
short-and long-term basis, thereby allowing management to better understand and
react to emerging balance sheet trends. After assessing actual and projected
cash flow needs, management seeks to obtain funding at the most economical cost
to Middlefield. Both short-and long-term liquidity needs are addressed by
maturities and sales of investment securities, loan
payments and maturities, and liquidating money market investments such as
federal funds sold. The use of these resources, in conjunction with access to
credit, provide the core ingredients to meet depositor, borrower, and creditor
needs.
Middlefield's liquid assets consist of cash and cash equivalents, which include
investments in very short-term investments (i.e., federal funds sold), and
investment securities classified as available for sale. The level of these
assets is dependent on Middlefield's operating, investing, and financing
activities during any given period. At September 30, 2002, cash and cash
equivalents totaled $9.4 million or 4.2% of total assets while investment
securities classified as available for sale totaled $32.0 million or 14.2% of
total assets. Management believes that the liquidity needs of Middlefield are
satisfied by the current balance of cash and cash equivalents, readily available
access to traditional funding sources, FHLB advances, and the portion of the
investment and loan portfolios that mature within one year. These sources of
funds will enable Middlefield to meet cash obligations and off-balance sheet
commitments as they come due.
Operating activities provided net cash of $2.3 million and $1.9 million for the
nine month periods ended September 30, 2002 and 2001, respectively, and were
generated principally from net income of approximately $1.8 million and $1.7
million, respectively, for both periods.
Investing activities used $23.6 million and $13.5 million in funds during the
nine months of 2002 and 2001, respectively. These cash usages primarily
consisted of loan originations of $16.3 million and $14.2 million, respectively,
as well as investment purchases of $15.3 million and $10.9 million,
respectively. Partially offsetting the usage of investment activities is $7.9
million and $12.5 million, respectively, of proceeds from investment security
gains, maturities, and repayments.
Financing activities consist of the solicitation and repayment of customer
deposits, and borrowings and repayment. During the nine months ended September
30, 2002, net cash provided by financing activities totaled $24.8 million,
principally derived from an increase in deposit accounts in general, and savings
deposits specifically. Also contributing to this influx of cash was proceeds
from total borrowings of $7.3 million. During the same period ended 2001, net
cash provided by financing activities was $13.1 million, and consisted almost
entirely of an increase in deposit accounts.
Liquidity may be adversely affected by unexpected deposit outflows, excessive
interest rates paid by competitors, and similar matters. Management monitors
projected liquidity needs and determines the level desirable, based in part on
the bank's commitment to make loans, as well as management's assessment of
Middlefield's ability to generate funds. Middlefield anticipates it will have
sufficient liquidity available to meet estimated short-term and long-term
funding needs.
CAPITAL RESOURCES
Middlefield is subject to federal regulations that impose certain minimum
capital requirements. Management monitors both Middlefield's and the Bank's
Total risk-based, Tier I risk-based and Tier I leverage capital ratios in order
to assess compliance with regulatory guidelines. At September 30, 2002, both
Middlefield and the Bank exceeded the minimum risk-based and leverage capital
ratio requirements. Middlefield's Total risk-based, Tier I risk-based and Tier I
leverage ratios were 16.99%, 15.73%, 9.48%, and the bank's were 16.14%, 14.89%,
9.23%, respectively, at September 30, 2002.
RISK ELEMENT
The table below presents information concerning nonperforming assets including
nonaccrual loans, renegotiated loans, loans 90 days or more past due, other real
estate loans, and repossessed assets. A loan is classified as nonaccrual when,
in the opinion of management, there are serious doubts about collectibility of
interest and principal. At the time the accrual of interest is discontinued,
future income is recognized only when cash is received. Renegotiated loans are
those loans which terms have been renegotiated to provide a reduction or
deferral of principal or interest as a result of the deterioration of the
borrower.
September 30, December 31,
2002 2001
---- ----
(Dollars in thousands)
Loans on nonaccrual basis $334 $ --
Loans past due 90 days or more and still accruing 156 254
---- -----
Total nonperforming loans $490 $ 254
---- -----
Nonperforming loans as a percent of total loans 0.29% 0.17%
==== =====
Nonperforming assets as a percent of total assets 0.22% 0.13%
==== =====
At September 30, 2002 and December 31, 2001, no real estate or other assets were
held as foreclosed or repossessed property.
Management monitors impaired loans on a continual basis. As of September 30,
2002, impaired loans had no material effect on the Middlefield's financial
position or results of operations.
During the nine month period ended September 30, 2002, loans increased $16.4
million while nonperforming loans increased to a total of $236,000. The
allowance for loan losses increased $165,000 during this same period while the
resulting percentage of allowance for loan losses to loans outstanding declined
to 1.32% as compared to 1.35% at December 31, 2001. Nonperforming loans are
primarily made up of residential and
commercial mortgages. The collateral requirements on such loans reduce the risk
of potential losses to an acceptable level in management's opinion.
The allowance for loan losses represents the amount that management estimates is
adequate to provide for probable losses inherent in the loan portfolio, as of
the balance sheet date. The relationship between the allowance for loan losses
and outstanding loans is a function of the credit quality and known risk
attributed to the loan portfolio. The on-going loan review program and credit
approval process is used to determine the adequacy of the allowance for loan
losses.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Like other financial institutions, the bank is subject to interest rate risk.
The bank's interest-earning assets could mature or reprice more rapidly than or
on a different basis from its interest-bearing liabilities (primarily borrowings
and deposits with short- and medium-term maturities) in a period of declining
interest rates. Although having assets that mature or reprice more frequently on
average than liabilities will be beneficial in times of rising interest rates,
that asset/liability structure will result in lower net interest income in
periods of declining interest rates.
Interest rate sensitivity, or interest rate risk, relates to the effect of
changing interest rates on net interest income. Interest-earning assets with
interest rates tied to the prime rate for example, or that mature in relatively
short periods of time, are considered interest-rate sensitive. Interest-bearing
liabilities with interest rates that can be repriced in a discretionary manner,
or that mature in relatively short periods of time, are also considered
interest-rate sensitive. The differences between interest-sensitive assets and
interest-sensitive liabilities over various time horizons are commonly referred
to as sensitivity gaps. As interest rates change, a sensitivity gap will have
either a favorable effect or an adverse effect on net interest income. A
negative gap -- with liabilities repricing more rapidly than assets -- generally
should have a favorable effect when interest rates are falling, and an adverse
effect when rates are rising. A positive gap -- with assets repricing more
rapidly than liabilities -- generally should have the opposite effect: an
adverse effect when rates are falling and a favorable effect when rates are
rising.
Middlefield and the bank have no financial instruments entered into for trading
purposes. Interest rates change daily on federal funds purchased and sold.
Federal funds are therefore the most sensitive to the market and have the most
stable fair values. Loans and deposits tied to indices such as the prime rate or
federal discount rate are also market sensitive, with stable fair values. The
least sensitive instruments include long-term, fixed-rate loans and securities
and fixed-rate savings deposits, which have the least stable fair value.
Management of maturity distributions of assets and liabilities between these
extremes is as important as the balances maintained. Management of maturity
distributions involves matching interest rate maturities as well as principal
maturities, and it influences net interest income significantly. In periods of
rapidly changing interest rates, a negative or positive gap can cause major
fluctuations in net interest income and
earnings. Managing asset and liability sensitivities to enhance growth
regardless of changes in market conditions is one of the objectives of the
bank's asset/liability management strategy.
Evaluating the bank's exposure to changes in interest rates is the
responsibility of the Asset/Liability Committee, a committee of bank directors
and officers. The Asset/Liability Committee assesses both the adequacy of the
management process used to control interest rate risk and the quantitative level
of exposure, ensuring that appropriate policies, procedures, management
information systems and internal controls are in place to maintain interest rate
risk at appropriate levels. Evaluating the quantitative level of interest rate
risk exposure requires assessment of existing and potential effects of changes
in interest rates on the bank's financial condition, including capital adequacy,
earnings, liquidity and asset quality.
The bank uses an asset/liability model to support its balance sheet strategies.
Gap analysis, one of the methods used by management to analyze interest rate
risk, does not necessarily show the precise impact of specific interest rate
movements on Middlefield's net interest income because the re-pricing of certain
assets and liabilities is discretionary and is subject to competitive and other
pressures. In addition, assets and liabilities within the same period may, in
fact, be repaid at different times and at different rate levels. Middlefield has
not experienced the kind of earnings volatility that might be indicated from gap
analysis.
Middlefield's use of a simulation model to better measure the impact of interest
rate changes on net interest income is incorporated into the risk management
process to effectively identify, measure, and monitor Middlefield's risk
exposure. Interest rate simulations using a variety of assumptions are employed
by Middlefield to evaluate its interest rate risk exposure. A shock analysis at
September 30, 2002 indicated that a 200 basis point movement in interest rates
in either direction would have had a minor impact on Middlefield's anticipated
net interest income and the market value of assets and liabilities over the next
12 months, well within Middlefield's ability to manage effectively.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their evaluation
as of a date within 90 days of the filing date of this Quarterly Report on Form
10-QSB, the Registrant's principal executive officer and principal financial
officer have concluded that the Registrant's disclosure controls and procedures
(as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act
of 1934 (the "Exchange Act")) are 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.
(b) Changes in internal controls. There were no significant changes in the
Registrant's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in rights of the Company's security holders
None
Item 3. Defaults by the Company on its senior securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included in this Report or
incorporated herein by reference:
3.1 Second Amended and Restated Articles of Incorporation
of Middlefield Banc Corp. *
3.2 Regulations of Middlefield Banc Corp. *
4 Specimen Stock Certificate *
10.1 1999 Stock Option Plan of Middlefield Banc Corp. *
10.2 Severance Agreement of President and Chief Executive
Officer *
10.3 Severance Agreement of Executive Vice President *
10.4 Federal Home Loan Bank of Cincinnati Agreement for
Advances and Security Agreement dated September 14,
2000 *
10.5 Collateral Assignment Split Dollar Agreement between
the President and Chief Executive Officer and The
Middlefield Banking Company *
21 Subsidiaries of Middlefield Banc Corp. *
99.1 Form of Indemnification Agreement with directors of
Middlefield Banc Corp. and executive officers of
Middlefield Banc Corp. and The Middlefield Banking
Compay *
99.2 Independent Accountants Report
99.3 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act 0f 2002.
* Incorporated by reference to the identically numbered exhibit
to the December 31, 2001 Form 10-K (File No. 033-23094) filed
with the SEC on March 28, 2002.
(b) ) Reports on Form 8-K.
On July 10, 2002, a Form 8-K (Items 5 and 7) was filed with
the Securities and Exchange Commission to disclose the
Company's press release announcing that the authorization to
repurchase up to 4.99% of Middlefield Banc Corp.'s
outstanding common stock.
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 12, 2002 By: /s/ Thomas G. Caldwell
----------------------------------------
Thomas G. Caldwell
President and Chief Executive Officer
Date: November 12, 2002 By: /s/ Donald L. Stacy
----------------------------------------
Donald L. Stacy
Principal Financial and Accounting
Officer
CERTIFICATION
Pursuant to Section 302 of the Securities Exchange Act of 1934
I, Thomas G. Caldwell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Middlefield Banc Corp.
("the Registrant").
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report ("the Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit committee
of Registrant's board of directors (or persons fulfilling the equivalent
function):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the issuer's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: 11/12/02 /s/ Thomas G. Caldwell
----------------------
Thomas G. Caldwell.
President
CERTIFICATION
Pursuant to Section 302 of the Securities Exchange Act of 1934
I, Donald L. Stacy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Middlefield Banc Corp.
("the Registrant").
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report ("the Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit committee
of Registrant's board of directors (or persons fulfilling the equivalent
function):
(a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the issuer's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: 11/12/02 ` s/s Donald L. Stacy
--------------------
Donald L. Stacy
Principal Financial and Accounting
Officer