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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 June 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from to
Commission File Number 000-32561
-------------------------------
Middlefield Banc Corp.
(Exact name of registrant as specified in its charter)
Ohio 34 - 1585111
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
15985 East High Street, Middlefield, Ohio 44062-0035
(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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). 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 August 11, 2003: 1,158,354
MIDDLEFIELD BANC CORP.
INDEX
Page
Number
-----------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of 3
June 30, 2003 and December 31, 2002
Consolidated Statement of Income (Unaudited)
for the Three and Six Months ended June 30, 2003
and 2002 4
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
for the Six Months ended June 30, 2003 5
Consolidated Statement of Cash Flows (Unaudited)
for the Six Months ended June 30, 2003 and 2002 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8 - K 17
SIGNATURES
MIDDLEFIELD BANC CORP.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
2003 2002
------------- -------------
ASSETS
Cash and due from banks $ 6,102,703 $ 1,775,324
Federal funds sold 8,235,000 350,000
------------- -------------
Cash and cash equivalents 14,337,703 2,125,324
Interest-bearing deposits in other institutions 574,402 571,969
Investment securities available for sale 37,241,937 35,917,057
Investment securities held to maturity (estimated
market value of $3,377,005 and $6,405,918) 3,265,946 6,242,095
Loans 182,418,551 174,943,131
Less allowance for loan losses 2,512,866 2,300,485
------------- -------------
Net loans 179,905,685 172,642,646
Premises and equipment 6,907,800 6,480,730
Bank-owned life insurance 5,068,286 --
Accrued interest and other assets 2,584,116 2,265,712
------------- -------------
TOTAL ASSETS $ 249,885,875 $ 226,245,533
============= =============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 29,595,597 26,610,912
Interest-bearing demand 8,230,978 7,216,385
Money market 12,865,490 10,660,657
Savings 54,867,549 49,277,572
Time 100,556,018 93,618,968
------------- -------------
Total deposits 206,115,632 187,384,494
Short-term borrowings 399,176 785,778
Other borrowings 19,993,950 15,690,053
Accrued interest and other liabilities 667,174 638,800
------------- -------------
TOTAL LIABILITIES 227,175,932 204,499,125
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized,
1,213,255 and 1,209,123 shares issued 8,006,055 7,883,155
Retained earnings 15,856,470 15,051,110
Accumulated other comprehensive income 592,327 475,428
Treasury stock, at cost (55,309 and 52,578 shares) (1,744,909) (1,663,285)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 22,709,943 21,746,408
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 249,885,875 $ 226,245,533
============= =============
See accompanying notes to unaudited consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
INTEREST INCOME
Interest and fees on loans $3,209,192 $3,078,538 $6,339,180 $6,078,155
Interest-bearing deposits in 4,719 13,627 11,820 30,063
other institutions
Federal funds sold 9,906 9,407 19,213 25,060
Investment securities:
Taxable interest 275,853 284,413 584,461 559,850
Tax-exempt interest 113,502 101,085 233,092 210,616
Dividends on FHLB stock 12,926 12,070 25,855 21,719
---------- ---------- ---------- ----------
Total interest income 3,626,098 3,499,140 7,213,621 6,925,463
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 1,236,828 1,356,054 2,482,187 2,744,626
Short-term borrowings 1,049 2,274 3,339 3,546
Other borrowings 212,803 153,932 416,187 300,156
---------- ---------- ---------- ----------
Total interest expense 1,450,680 1,512,260 2,901,713 3,048,328
---------- ---------- ---------- ----------
NET INTEREST INCOME 2,175,418 1,986,880 4,311,908 3,877,135
Provision for loan losses 105,000 75,000 210,000 150,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,070,418 1,911,880 4,101,908 3,727,135
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 251,910 244,138 490,561 467,048
Investment securities gains, net -- -- 542 --
Other income 106,191 39,577 143,577 77,744
---------- ---------- ---------- ----------
Total noninterest income 358,101 283,715 634,680 544,792
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 810,919 659,858 1,457,390 1,251,923
Occupancy expense 106,492 87,960 205,044 175,202
Equipment expense 57,586 81,167 137,612 164,375
Data processing costs 70,958 84,163 187,430 169,131
Ohio state franchise tax 75,000 67,500 150,050 135,050
Other expense 492,253 365,023 786,440 709,413
---------- ---------- ---------- ----------
Total noninterest expense 1,613,208 1,345,671 2,923,966 2,605,094
---------- ---------- ---------- ----------
Income before income taxes 815,311 849,924 1,812,622 1,666,833
Income taxes 200,363 278,000 544,928 546,000
---------- ---------- ---------- ----------
NET INCOME $ 614,948 $ 571,924 $1,267,694 $1,120,833
========== ========== ========== ==========
EARNINGS PER SHARE
Basic $ 0.53 $ 0.49 $ 1.10 0.97
Diluted 0.53 0.49 1.09 0.97
DIVIDENDS DECLARED PER SHARE 0.20 0.18 0.40 0.35
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, 2002 $ 7,883,155 $ 15,051,110 $ 475,428 $ (1,663,285) $ 21,746,408
Net income 1,267,694 1,267,694 $1,267,694
Other comprehensive income:
Unrealized gain on available
for sale securities net of
taxes of $60,221 116,899 116,899 116,899
-----------
Comprehensive income $ 1,384,593
===========
Purchase of treasury stock (81,624) (81,624)
Common stock issued 48,404 48,404
Dividend reinvestment plan 74,496 74,496
Cash dividends ($.40 per share) (462,334) (462,334)
------------ --------------- ----------- ------------ -------------
Balance, June 30, 2003 $ 8,006,055 $ 15,856,470 $ 592,327 $ (1,744,909) $ 22,709,943
============ =============== =========== ============ =============
June 30,
Components of comprehensive income: 2003
-----------
Change in net unrealized gain on
investment securities available
for sale $ 117,257
Realized gain included in net income,
net of taxes of $184 (358)
-----------
Total $ 116,899
===========
See accompanying notes to unaudited consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net income $ 1,267,694 $ 1,120,833
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 210,000 150,000
Depreciation and amortization 170,193 162,392
Amortization of premium and
discount on investment securities 110,929 53,587
Amortization of net deferred loan costs (fees) (140,127) (121,255)
Investment security gains (542) --
Decrease (increase) in accrued interest receivable 56,459 (99,375)
Decrease in accrued interest payable (47,501) (91,871)
Other, net (332,709) (93,732)
------------ ------------
Net cash provided by operating activities 1,294,396 1,080,579
------------ ------------
INVESTING ACTIVITIES
Decrease (increase) in interest-bearing deposits in
other institutions, net (2,433) 91,141
Investment securities available for sale:
Proceeds from repayments and maturities 8,027,641 2,362,510
Proceeds from the sale of securities 1,991,917 --
Purchases (11,266,556) (6,405,134)
Investment securities held to maturity:
Proceeds from repayments and maturities 2,965,000 2,589,537
Increase in loans, net (7,332,912) (11,458,492)
Redemption (purchase) of Federal Home
Loan Bank Stock (26,500) 214,430
Purchase of bank-owned life insurance (5,068,286) --
Purchase of premises and equipment (597,263) (246,461)
------------ ------------
Net cash used for investing activities (11,309,392) (12,852,469)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 18,731,138 11,412,600
Increase (decrease) in short-term borrowings, net (386,602) 434,483
Repayment of other borrowings (696,103) (152,693)
Proceeds from other borrowings 5,000,000 4,000,000
Purchase of treasury stock (81,624) --
Exercise of stock options -- 18,960
Common stock issued 48,404 --
Proceeds from dividend reinvestment 74,496 --
Cash dividends (462,334) (416,583)
------------ ------------
Net cash provided by financing activities 22,227,375 15,296,767
Increase in cash and cash equivalents 12,212,379 3,524,877
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 2,125,324 5,893,435
------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 14,337,703 $ 9,418,312
============ ============
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings $ 2,949,214 $ 3,140,199
Income taxes 545,000 254,000
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, 2002,
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 Three For the Six
Months Ended Months Ended
June 30, June 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Weighted average common shares
outstanding 1,211,554 1,204,387 1,210,537 1,204,149
Average treasury stock shares (55,309) (45,722) (54,350) (45,722)
---------- ---------- ---------- ----------
Weighted average common shares and
common stock equivalents used to
calculate basic earnings per share 1,156,245 1,158,665 1,156,187 1,158,427
========== ========== ========== ==========
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 3,030 531 2,689 822
---------- ---------- ---------- ----------
Weighted average common shares and
common stock equivalents used
to calculate diluted earnings per share 1,159,275 1,159,196 1,158,876 1,159,249
========== ========== ========== ==========
Options to purchase 9,975 shares of common stock at prices from $29.52 to $30.24
per share were outstanding for all periods of 2003 and 2002, except for the
three month period ended June 30, 2003, but were not included in the computation
of diluted EPS because to do so would have been anti-dilutive. For the three
month period ended June 30, 2003, options to purchase 7,350 shares of common
stock at a price of $30.24 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 six months ended June 30,
2003, this activity is shown under the heading Comprehensive Income as presented
in the Consolidated Statement of Changes in Stockholders' Equity (Unaudited).
For the six months ended June 30, 2002, comprehensive income totaled $1,132,239.
For the three months ended June 30, 2003 and 2002, comprehensive income totaled
$850,452 and $789,583, respectively.
NOTE 4- RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 adoption of this
statement, which was effective January 1, 2003, did not have a material effect
on the Company'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 is effective for exit or disposal
activities initiated after December 31, 2002. The adoption of this statement did
not have a material effect on the Company's financial position or results of
operations.
On December 31, 2002, the FASB issued FAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which amends FAS No. 123, Accounting
for Stock-Based Compensation. FAS No. 148 amends the disclosure requirements of
FAS No. 123 to require more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. Under the provisions
of FAS No. 123, companies that adopted the preferable, fair value based method
were required to apply that method prospectively for new stock option awards.
This contributed to a "ramp-up" effect on stock-based compensation expense in
the first few years following adoption, which caused concern for companies and
investors because of the lack of consistency in reported results. To address
that concern, FAS No. 148 provides two additional methods of transition that
reflect an entity's full complement of stock-based compensation expense
immediately upon adoption, thereby eliminating the ramp-up effect. FAS No. 148
also improves the clarity and prominence of disclosures about the pro forma
effects of using the fair value based method of accounting for stock-based
compensation for all companies--regardless of the accounting method used--by
requiring that the data be presented more prominently and in a more
user-friendly format in the footnotes to the financial statements. In addition,
the statement improves the timeliness of those
disclosures by requiring that this information be included in interim as well as
annual financial statements. The transition guidance and annual disclosure
provisions of FAS No. 148 are effective for fiscal years ending after December
15, 2002, with earlier application permitted in certain circumstances. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. The
following table represents the effect on net income and earnings per share had
the stock-based employee compensation expense been recognized:
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income, as reported: $ 614,948 $ 571,953 $ 1,267,693 $ 1,120,833
Less proforma expense related
to stock options 13,113 0 26,226 0
------------- ------------- ------------- -------------
Proforma net income 601,835 571,953 1,241,467 1,120,833
============= ============= ============= =============
Basic net income per common share:
As reported $ 0.53 $ 0.49 $ 1.10 $ 0.97
Pro forma 0.52 0.49 1.07 0.97
Diluted net income per common share:
As reported $ 0.53 $ 0.49 $ 1.09 $ 0.97
Pro forma 0.52 0.49 1.07 0.97
In April, 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under FAS
No. 133. The amendments set forth in FAS No. 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. In particular, this statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in FAS No. 133. In addition, it clarifies when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. FAS No. 149 amends certain other existing pronouncements. Those
changes will result in more consistent reporting of contracts that are
derivatives in their
entirety or that contain embedded derivatives that warrant separate accounting.
This statement is effective for contracts entered into or modified after June
30, 2003, except as stated below and for hedging relationships designated after
June 30, 2003. The guidance should be applied prospectively. The provisions of
this statement that relate to FAS No. 133 Implementation Issues that have been
effective for fiscal quarters that began prior to June 15, 2003, should continue
to be applied in accordance with their respective effective dates. In addition,
certain provisions relating to forward purchases or sales of when-issued
securities or other securities that do not yet exist, should be applied to
existing contracts as well as new contracts entered into after June 30, 2003.
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Such instruments may have
been previously classified as equity. This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company does not anticipate that adoption of this standard will have a
significant effect on its reported equity.
In November, 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. This interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. This interpretation
clarifies that a guarantor is required to disclose (a) the nature of the
guarantee, including the approximate term of the guarantee, how the guarantee
arose, and the events or circumstances that would require the guarantor to
perform under the guarantee; (b) the maximum potential amount of future payments
under the guarantee; (c) the carrying amount of the liability, if any, for the
guarantor's obligations under the guarantee; and (d) the nature and extent of
any recourse provisions or available collateral that would enable the guarantor
to recover the amounts paid under the guarantee. This interpretation also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the obligations it has undertaken in issuing the
guarantee, including its ongoing obligation to stand ready to perform over the
term of the guarantee in the event that the specified triggering events or
conditions occur. The objective of the initial measurement of that liability is
the fair value of the guarantee at its inception. The initial recognition and
initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of this interpretation did
not have a material effect on the Company's financial position or results of
operations.
In January, 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, in an effort to expand upon and strengthen existing
accounting guidance that addresses when a company should include in its
financial statements the assets,
liabilities and activities of another entity. The objective of this
interpretation is not to restrict the use of variable interest entities but to
improve financial reporting by companies involved with variable interest
entities. Until now, one company generally has included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. This interpretation changes that by requiring a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. The
consolidation requirements of this interpretation apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The adoption of this interpretation
has not and is not expected to have a material effect on the Company's financial
position or results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
- -------
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 2003 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 June 30, 2003 and December 31, 2002.
- -------------------------------------------------------------------------
Total assets increased $23.6 million to $249.9 million at June 30, 2003 from
$226.2 million at December 31, 2002. This increase primarily resulted from an
increase in net loans receivable of $7.3 million and cash and cash equivalents
of $12.2 million that was funded by net increases in deposits and borrowings of
$18.7 million and $3.9 million, respectively.
Cash and cash equivalents increased to $14.3 million at June 30, 2003 as
compared to $2.1 million at December 31, 2002. This increase was the result of
strong deposit growth which were temporarily invested in federal funds sold.
Investment securities available for sale increased to $37.2 million at June 30,
2003 from $35.9 million at December 31, 2002. Meanwhile, investment securities
held to maturity decreased to $3.3 million at June 30, 2003 from $6.2 million at
December 31, 2002. The net decrease in the investment securities portfolios was
due to called and matured securities during the year.
Total loans increased to $182.4 million at June 30, 2003 from $175.0 million at
December 31, 2002. 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 increased lending activity was divided among home equity, residential
mortgage and commercial loans. Such loans grew $3.5 million, $2.0 million and
$2.2 million, respectively, at June 30, 2003. The increased lending is
attributed to continued customer referrals and Middlefield's overall
relationship with its customers.
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 June 30, 2003,
Middlefield's allowance for loan losses increased approximately $212,000 to $2.5
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.
During the first quarter of 2003, Middlefield purchased $5,000,000 in bank-owned
life insurance in order to generate nontaxable earnings that will offset the
cost of certain employee benefit plans.
Total deposits increased to $206.1 million at June 30, 2003 from $187.4 million
at December 31, 2002. Growth was primarily concentrated in savings and demand
deposits and resulted from the continual marketing efforts by management, as
well as customer preferences to readily accessible deposit products. Such
accounts grew by $5.6 million and $6.9 million, respectively, during the period.
Other borrowings increased to $20.0 million at June 30, 2003 from $15.75 million
at December 31, 2002. This increase was the result of an additional $4.3 million
in Federal Home Loan Bank borrowings to be repaid over a ten-year period. As
noted previously, the proceeds from this borrowing were used to fund loan
demand.
Total stockholders' equity increased to $22.7 million at June 30, 2003 due to
net income of $1,268,000 that was offset partially by dividend payments of
$462,000 and an increase in accumulated other comprehensive income of $117,000.
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. 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 Six and Three Months Ended June 30,
- -------------------------------------------------------------------------------
2003 and 2002.
- --------------
Middlefield recorded net income of $1,268,000 for the six-month period ended
June 30, 2003 as compared to net income of $1,121,000 for the same period ended
June 30, 2002. This increase in net income was due to the significant growth in
net interest income of $435,000 while offset by increases in non-interest
expense and the provision for loan losses of $319,000 and $60,000 respectively.
Basic and diluted earnings per share increased to $1.10 and $1.09 per share for
the six months ended June 30, 2003 from $.97 per share for the same period ended
2002. For the three months ended June 30, 2003, Middlefield recorded net income
of $615,000, or $.53 per share from $572,000 or $.49 per share for the same
period ended June 30, 2002.
Net interest income for the six months ended June 30, 2003 increased to
$4,312,000 compared to $3,877,000 for the same period ended 2002. Interest
income for the first six months of 2003 was $7,214,000 as compared to $6,925,000
for the same period ended 2002. This increase of $288,000 was influenced
primarily by an increase in interest earned on loans receivable of $261,000,
along with an increase in interest earned on investment securities and FHLB
dividends of $47,000 and $4,000, respectively. Interest income was primarily
driven by increases in average balances of interest-earning assets. The average
balance of loans receivable increased $20.9 million to $178.8 million during
2003, as compared to $157.9 million for the 2002 period. The tax-equivalent
yield on
interest earning assets decreased to 6.51% for the six months ended 2003 from
7.21% for same period ended 2002, and primarily resulted from a 61 basis point
and 114 basis point decrease in loans receivable and investment securities,
respectively. Over the past two years, the Federal Reserve Board adopted a
policy of aggressive interest rate reduction that resulted in this adverse
impact on the yield on earning assets.
Interest expense decreased $147,000 for the six months ended June 30, 2003 to
$2,902,000 from $3,048,000 for the same period ended 2002. Interest expense
incurred on deposits decreased $262,000 for the six months ended June 30, 2003
as compared to the same period ended 2002. This was primarily attributable to a
declining interest rate environment which resulted in the cost of funds
decreasing to 3.08% for the six months ended June 30, 2003 from 3.84% for the
same period 2002. Offsetting the declining rates was an increase in the average
balance of interest-bearing liabilities of $29.8 million to $188.6 million for
the six months ended June 30, 2003. In particular, the average balance of
savings and certificates of deposits increased $7.2 million and $9.5 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 June 30, 2003 increased to
$2,175,000, compared to $1,987,000 for the same period ended 2002. Interest
income for the three months ending June 30, 2003 increased 3.63% due to
fluctuations within the earning asset mix. This resulted in increases in
interest earned on loans of $131,000 that were partially offset by reductions to
interest earned on interest bearing deposits in other institutions of $8,000.
The average balance of loans receivable increased $19.5 million to $180.5
million during 2003, as compared to $160.9 million for the 2002 period. The
tax-equivalent yield on interest earning assets decreased to 6.50% for the three
months ended June 30, 2003 from 7.17% for same period ended 2002, and primarily
resulted from a 119 basis point and 54 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 over the
past few years that resulted in this adverse impact on the yield on earning
assets. Meanwhile, the decrease in interest expense was primarily the effect of
a declining cost of funds for the three months ended June 30, 2003 to 3.01% from
3.92% for the same period ended 2002. These reductions that resulted in a
$62,000 decline in interest incurred on deposits were offset somewhat by an
increase in the average balance of interest bearing liabilities of $38.1
million. As noted above, the competitive pricing strategy of Middlefield has
contributed to these increases in deposit balances.
Total non-interest income for the six and three months ending June 30, 2003
increased by $90,000 and $74,000 respectively. Non-interest 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 non-interest expenses increased $319,000 and $268,000 for the six and
three months ended June 30, 2003, respectively, as compared to the same period
ended 2002. Compensation and employee benefits increased $205,000 and $151,000,
respectively, primarily as a result of normal merit raises and the addition of a
new branch location.
Occupancy expenses increased $30,000 and $19,000, respectively, as a result of
added capital expenditures, in particular the Orwell branch which became
operational in 2003. As a result of increased transaction activity from
operating a larger organization, data processing expenses increased $18,000
during 2003 as compared to 2002. In addition, other expenses increased $77,000
and $127,000, respectively. The increase primarily reflects the addition of a
new office, as well as the introduction of a new logo and marketing image for
the company and its subsidiary.
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 June 30, 2003, cash and cash equivalents
totaled $14.3 million or 5.7% of total assets while investment securities
classified as available for sale totaled $37.2 million or 15.0% 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 $1.3 million and $1.1 million for the
six-month periods ended June 30, 2003 and 2002, respectively, and were generated
principally from net income.
Investing activities used $11.3 million and $12.9 million in funds during the
six months of 2003 and 2002, respectively. These cash usages primarily consisted
of loan originations of $7.3 million and $11.5 million, respectively. In 2003,
the Company purchased bank-owned life insurance of approximately $5.0 million.
Financing activities consist of the solicitation and repayment of customer
deposits, and borrowings and repayment of borrowings. During the six months
ended June 30, 2003, net cash provided by financing activities was $22.2
million, and consisted of an increase in deposits of $18.7 million and
additional borrowings of $5,000,000. During the same period ended 2002, net cash
provided by financing activities totaled $15.3 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 borrowings of $4.0 million.
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 June 30, 2003, 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 15.93%, 14.67%, 9.17%, and the bank's were 15.52%, 14.26%,
8.91%, respectively, at June 30, 2002.
RISK ELEMENT
The table below presents information concerning non-performing assets including
non-accrual loans, renegotiated loans, loans 90 days or more past due, other
real estate loans, and repossessed assets. A loan is classified as non-accrual
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.
June 30, December 31,
2003 2002
---- ----
(Dollars in thousands)
Loans on nonaccrual basis $510 $357
Loans past due 90 days or more and still accruing 196 181
---- ----
Total nonperforming loans $706 $538
---- ----
Nonperforming loans as a percent of total loans 0.28% 0.31%
==== ====
Nonperforming assets as a percent of total assets 0.39% 0.24%
==== ====
At June 30, 2003 and December 31, 2002, no real estate or other assets were held
as foreclosed or repossessed property.
Management monitors impaired loans on a continual basis. As of June 30, 2003,
impaired loans had no material effect on the Company's financial position or
results of operations.
During the six month period ended June 30, 2003, loans increased $7.5 million
while non-performing loans decreased to a total of $704,000. The allowance for
loan losses increased $212,000 during this same period and the resulting
percentage of allowance for loan losses to loans outstanding increased to 1.38%
as compared to 1.31% at December 31, 2002. Non-performing 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
June 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 4. 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-Q, 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 Middlefield 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
The following represents the results of matters submitted to a
vote of the stockholders at the annual meeting held on May 14,
2003:
(a) The following Class III directors were elected to a three year term
expiring in 2006:
Name SHARES FOR SHARES WITHHELD
- ---- ---------- ---------------
George Hasman 919,519 5,375
James R. Heslop II 919,486 5,375
Martin S. Paul 952,832 5,375
Directors whose terms continued through the 2003 annual meeting include:
Thomas G. Caldwell
Richard T Coyne
Frances H. Frank
Thomas C. Halstead
Donald D. Hunter
Donald E. Villers
(b) The recommendation of the Board of Directors to ratify the appointment of
S. R. Snodgrass, A.C. as the Company's independent auditors, as described
in the Proxy Statement for the Annual Meeting, was approved with 958,284
shares in favor, and 964 shares against, and 500 shares abstaining.
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 *
21 Subsidiaries of Middlefield Banc Corp. *
31 Certification Pursuant to Section 302 of the Securities
Exchange Act of 1934 - Thomas G. Caldwell
31.1 Certification Pursuant to Section 302 of the Securities
Exchange Act of 1934 - Donald L. Stacy
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act 0f 2002.
99.1 Form of Indemnification Agreement with directors of
Middlefield Banc Corp. and executive officers of Middlefield
Banc Corp. and The Middlefield Banking Company *
99.2 Independent Accountants Report
* 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 that were filed with or furnished to the
SEC after March 31, 2003 as follows:
(1) On May 16, 2003 a copy of Middlefield's May 15, 2003
press release reporting the results of the 2003 annual
meeting and declaration of a cash dividend was furnished
as a Form 8-K exhibit, and
(2) On July 18, 2003 a copy of Middlefield's July 17, 2003
press release reporting second quarter financial results
was furnished as a Form 8-K exhibit.
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: August 13, 2003 By: /s/Thomas G. Caldwell
----------------------------------------
Thomas G. Caldwell
President and Chief Executive Officer
Date: August 13, 2003 By: /s/Donald L. Stacy
----------------------------------------
Donald L. Stacy
Principal Financial and Accounting Officer