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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, 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 X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-b2 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 November 10, 2003: 1,162,555
MIDDLEFIELD BANC CORP.
INDEX
Page
Number
----------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of
September 30, 2003 and December 31, 2002 3
Consolidated Statement of Income (Unaudited)
for the Three and Nine Months ended September 30, 2003
and 2002 4
Consolidated Statement of Changes in Stockholders' Equity (Unaudited)
for the Nine Months ended September 30, 2003 5
Consolidated Statement of Cash Flows (Unaudited)
for the Nine Months ended September 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 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission 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,
2003 2002
----------------- ----------------
ASSETS
Cash and due from banks $ 4,216,941 $ 1,775,324
Federal funds sold 2,430,000 350,000
---------------- ----------------
Cash and cash equivalents 6,646,941 2,125,324
Interest-bearing deposits in other institutions 537,618 571,969
Investment securities available for sale 49,911,627 35,917,057
Investment securities held to maturity (estimated
market value of $2,838,002 and $6,405,918) 2,764,706 6,242,095
Loans 188,947,859 174,943,131
Less allowance for loan losses 2,605,767 2,300,485
---------------- ----------------
Net loans 186,342,092 172,642,646
Premises and equipment 6,913,457 6,480,730
Bank-owned life insurance 5,135,305 --
Accrued interest and other assets 2,716,344 2,265,712
---------------- ----------------
TOTAL ASSETS $ 260,968,090 $ 226,245,533
================ ================
LIABILITIES
Deposits:
Noninterest-bearing demand $ 29,986,047 $ 26,610,912
Interest-bearing demand 8,145,802 7,216,385
Money market 14,603,908 10,660,657
Savings 64,722,200 49,277,572
Time 101,612,252 93,618,968
---------------- ----------------
Total deposits 219,070,209 187,384,494
Short-term borrowings 399,176 785,778
Other borrowings 17,863,260 15,690,053
Accrued interest and other liabilities 655,461 638,800
---------------- ----------------
TOTAL LIABILITIES 237,988,106 204,499,125
---------------- ----------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized,
1,217,514 and 1,209,123 shares issued 8,134,763 7,883,155
Retained earnings 16,315,403 15,051,110
Accumulated other comprehensive income 274,727 475,428
Treasury stock, at cost (55,309 and 52,578 shares) (1,744,909) (1,663,285)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 22,979,984 21,746,408
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 260,968,090 $ 226,245,533
================ ================
See accompanying notes to unaudited consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------- -------------- ------------- --------------
INTEREST INCOME
Interest and fees on loans $ 3,270,175 $ 3,126,762 $ 9,609,355 $ 9,204,917
Interest-bearing deposits in
other institutions 3,850 12,499 15,670 42,562
Federal funds sold 20,837 23,736 40,050 48,796
Investment securities:
Taxable interest 270,921 311,893 855,382 867,607
Tax-exempt interest 121,503 102,623 354,595 313,239
Dividends on FHLB stock 12,987 8,098 38,842 33,953
--------------- ------------ ------------ -------------
Total interest income 3,700,273 3,585,611 10,913,894 10,511,074
--------------- ------------ ------------ -------------
INTEREST EXPENSE
Deposits 1,227,318 1,410,512 3,709,505 4,155,138
Short-term borrowings 366 5,777 3,705 9,323
Other borrowings 202,388 174,438 618,575 474,594
--------------- ------------ ------------ -------------
Total interest expense 1,430,071 1,590,727 4,331,784 4,639,055
--------------- ------------ ------------ -------------
NET INTEREST INCOME 2,270,202 1,994,884 6,582,110 5,872,019
Provision for loan losses 105,000 75,000 315,000 225,000
--------------- ------------ ------------ -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,165,202 1,919,884 6,267,110 5,647,019
--------------- ------------ ------------ -------------
NONINTEREST INCOME
Service charges on deposit accounts 269,757 245,343 760,318 712,391
Investment securities gains - - 542 -
Earnings on bank-owned
life insurance 67,037 - 135,305 -
Other income 38,570 40,156 113,879 117,900
--------------- ------------ ------------ -------------
Total noninterest income 375,364 285,499 1,010,044 830,291
--------------- ------------ ------------ -------------
NONINTEREST EXPENSE
Salaries and employee benefits 829,874 625,624 2,287,264 1,877,547
Occupancy expense 105,248 85,296 310,292 260,498
Equipment expense 89,649 92,112 227,261 256,487
Data processing costs 93,601 87,228 281,031 256,359
Ohio state franchise tax 75,000 67,500 225,050 202,550
Other expense 399,007 310,266 1,185,447 1,019,679
--------------- ------------ ------------ -------------
Total noninterest expense 1,592,379 1,268,026 4,516,345 3,873,120
--------------- ------------ ------------ -------------
Income before income taxes 948,187 937,357 2,760,809 2,604,190
Income taxes 246,000 298,000 790,928 844,000
--------------- ------------ ------------ -------------
NET INCOME $ 702,187 $ 639,357 $ 1,969,881 $ 1,760,190
=============== ============ ============ =============
EARNINGS PER SHARE
Basic $ 0.61 $ 0.55 $ 1.70 $ 1.52
Diluted 0.60 0.55 1.70 1.52
DIVIDENDS DECLARED PER SHARE 0.21 0.19 0.61 0.55
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 1,969,881 1,969,881 $ 1,969,881
Other comprehensive income:
Unrealized loss on available
for sale securities, net
of reclassification
adjustment, net of tax
benefit of $103,391 (200,701) (200,701) (200,701)
------------
Comprehensive income $ 1,769,180
============
Purchase of treasury stock (81,624) (81,624)
Exercise of stock options 9,350 9,350
Common stock issued 119,598 119,598
Dividend reinvestment plan 122,660 122,660
Cash dividends ($.61 per share) (705,588) (705,588)
------------ -------------- ------------- ------------ -------------
Balance, September 30, 2003 $ 8,134,763 $ 16,315,403 $ 274,727 $(1,744,909) $ 22,979,984
============ ============== ============= ============ =============
September 30,
2003
-------------
Components of comprehensive loss:
Change in net unrealized loss on
investment securities available for sale $ (201,059)
Realized gain included in net income,
net of taxes of $184 (358)
--------------
Total $ (200,701)
==============
See accompanying notes to unaudited consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2003 2002
-------------- --------------
OPERATING ACTIVITIES
Net income $ 1,969,881 $ 1,760,190
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 315,000 225,000
Depreciation and amortization 266,126 255,338
Amortization of premium and
discount on investment securities 202,506 95,846
Amortization of net deferred loan fees (88,621) (169,445)
Investment security gains (542) -
Earnings on bank-owned life insurance (135,305) -
Increase in accrued interest receivable (86,003) (54,453)
Decrease in accrued interest payable (50,794) (78,092)
Other, net (154,683) 172,784
-------------- --------------
Net cash provided by operating activities 2,237,565 2,207,168
-------------- --------------
INVESTING ACTIVITIES
Decrease in interest-bearing deposits in
other institutions, net 34,351 669,200
Investment securities available for sale:
Proceeds from repayments and maturities 11,966,385 4,956,718
Proceeds from the sale of securities 1,991,917 -
Purchases (28,446,539) (15,310,163)
Investment securities held to maturity:
Proceeds from repayments and maturities 3,465,000 2,919,694
Increase in loans, net (13,925,825) (16,221,337)
Purchase of Federal Home Loan Bank Stock (39,100) (175,000)
Purchase of bank-owned life insurance (5,000,000) -
Purchase of premises and equipment (698,853) (340,894)
-------------- --------------
Net cash used for investing activities (30,652,664) (23,501,782)
-------------- --------------
FINANCING ACTIVITIES
Net increase in deposits 31,685,715 18,700,130
Increase (decrease) in short-term borrowings, net (386,602) 1,774,837
Repayment of other borrowings (2,826,793) (536,210)
Proceeds from other borrowings 5,000,000 5,560,000
Exercise of stock options 9,350 18,960
Purchase treasury stock (81,624) (140,100)
Sale of treasury stock - 18,020
Common stock issued 119,598 -
Proceeds from dividend reinvestment 122,660 -
Cash dividends (705,588) (547,769)
-------------- --------------
Net cash provided by financing activities 32,936,716 24,847,868
-------------- --------------
Increase in cash and cash equivalents 4,521,617 30,995,606
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 2,125,324 5,893,435
-------------- -------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 6,646,941 $ 9,446,689
============== ==============
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings $ 4,382,578 $ 4,717,147
Income taxes 845,000 434,000
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 (Unaudited) 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 Nine
Months Ended Months Ended
September 30, September 30,
2003 2002 2003 2002
------------ -------------- ------------ ----------
Weighted average common shares
outstanding 1,214,280 1,204,917 1,211,798 1,204,407
Average treasury stock shares (55,309) (48,736) (54,673) (46,737)
------------- -------------- ------------ -----------
Weighted average common shares and
common stock equivalents used to
calculate basic earnings per share 1,158,971 1,156,181 1,157,125 1,157,670
============= ============== ============ ============
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 3,395 3,096 2,925 1,580
------------- -------------- ------------ -----------
Weighted average common shares and
common stock equivalents used
to calculate diluted earnings per share 1,162,366 1,159,277 1,160,050 1,159,250
============= ============== ============ ============
Options to purchase 9,975 shares of common stock at prices from $29.52 to $30.24
per share were only outstanding for all 2002 periods 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 nine months ended September
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 nine
months ended September 30, 2002, comprehensive income totaled $2,092,157. For
the three months ended September 30, 2003 and 2002, comprehensive income totaled
$384,587 and $812,461, 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 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 is effective for exit or disposal
activities initiated after December 31, 2002. The adoption of this statement did
not have a material effect on Middlefield'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 September 30, Nine Months Ended September 30,
2003 2002 2003 2002
----------------- ----------------- ----------------- -----------------
Net income, as reported: $ 702,187 $ 639,357 $ 1,969,881 $ 1,760,190
Less proforma expense related
to stock options 13,113 0 39,339 0
----------------- ----------------- ----------------- -----------------
Proforma net income $ 689,074 $ 639,357 $ 1,930,542 $ 1,760,190
================= ================= ================= =================
Basic net income per common share:
As reported $ 0.61 $ 0.55 $ 1.70 $ 1.52
Pro forma 0.59 0.55 1.67 1.52
Diluted net income per common share:
As reported 0.60 0.55 1.70 1.52
Pro forma 0.59 0.55 1.66 1.52
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.
The adoption of this statement did not have a material effect on Middlefield's
financial position or results of operations.
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 adoption of this statement did not have a material effect on
Middlefield's financial position or results of operations.
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 Middlefield'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. In October, 2003, the FASB decided to
defer to the fourth quarter from the third quarter the implementation date for
Interpretation No. 46. This deferral only applies to variable interest entities
that existed prior to February 1, 2003. The adoption of this interpretation has
not and is not expected to 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
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 September 30, 2003 and December 31, 2002.
Total assets increased $34.7 million to $261.0 million at September 30, 2003
from $226.2 million at December 31, 2002. This increase primarily resulted from
an increase in gross loans receivable of $14.0 million and investment securities
available for sale of $14.0
million that was funded by net increases in deposits and other borrowings of
$31.7 million and $2.2 million, respectively.
Cash and cash equivalents increased to $6.6 million at September 30, 2003 as
compared to $2.1 million at December 31, 2002. This increase is the result of
strong deposit growth that is temporarily invested in federal funds sold.
Investment securities available for sale increased to $49.9 million at September
30, 2003 from $35.9 million at December 31, 2002. Meanwhile, investment
securities held to maturity decreased to $2.8 million at September 30, 2003 from
$6.2 million at December 31, 2002. The net increase in the investment securities
portfolios was due to strong deposit growth during the year. As the
interest-bearing liabilities increased, they were primarily invested in
high-grade investment securities. Most of this investment occurred in
mortgage-backed securities and federal agencies.
Total loans increased to $188.9 million at September 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 $6.0 million, 3.2
million and $4.7 million, respectively, at September 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 September 30, 2003,
Middlefield's allowance for loan losses increased approximately $305,000 to $2.6
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 $219.1 million at September 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 $15.4 million and $8.2 million, respectively, during the
period.
Other borrowings increased to $17.9 million at September 30, 2003 from $15.7
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 $23.0 million at September 30, 2003 due
to net income of $1,970,000 that was offset partially by dividend payments of
$706,000 and an decrease in accumulated other comprehensive income of $201,000.
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 Nine and Three Months Ended
September 30, 2003 and 2002.
Middlefield recorded net income of $1,970,000 for the nine-month period ended
September 30, 2003 as compared to net income of $1,760,000 for the same period
ended September 30, 2002. This increase in net income was due to the significant
growth in net interest income of $710,000 and non-interest income of $180,000
while offset by increases in non-interest expense and the provision for loan
losses of $643,000 and $90,000 respectively. Basic and diluted earnings per
share increased to $1.70 per share for the nine months ended September 30, 2003
from $1.52 per share for the same period ended 2002. For the three months ended
September 30, 2003, Middlefield recorded net income of $702,000, or $.60 per
diluted share from $639,000 or $.55 per diluted share for the same period ended
September 30, 2002.
Net interest income for the nine months ended September 30, 2003 increased to
$6,582,000 compared to $5,872,000 for the same period ended 2002. Interest
income for the first nine months of 2003 was $10,914,000 as compared to
$10,511,000 for the same period ended 2002. This increase of $403,000 was
influenced primarily by an increase in interest earned on loans receivable of
$404,000. Interest income was primarily driven by increases in average balances
of interest-earning assets. The balance of loans receivable increased $20.0
million to $181.2 million during 2003, as compared to $161.1 million for the
2002 period. The tax-equivalent yield on interest earning assets decreased to
6.42% for the nine months ended 2003 from 7.09% for same period ended 2002, and
primarily resulted from a 55 basis point and 105 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 $307,000 for the nine months ended September 30, 2003
to $4,332,000 from $4,639,000 for the same period ended 2002. Interest expense
incurred on deposits decreased $446,000 for the nine months ended September 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 2.98% for the nine months ended September 30, 2003 from 3.78% for
the same period 2002. Offsetting the declining rates was an increase in the
average balance of interest-bearing liabilities of $30.3 million to $193.8
million for the nine months ended September 30, 2003. In particular, the average
balance of savings and certificates of deposits increased $9.5 million and $9.3
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, 2003 increased to
$2,270,000, compared to $1,995,000 for the same period ended 2002. Interest
income for the three months ending September 30, 2003 increased 3.2% due to
fluctuations within the earning asset mix. This resulted in increases in
interest earned on loans of $143,000 that were partially offset by reductions to
interest earned on investments of $22,000. The average balance of loans
receivable increased $15.9 million to $183.3 million during 2003, as compared to
$167.5 million for the 2002 period. The tax-equivalent yield on interest earning
assets decreased to 6.31% for the three months ended September 30, 2003 from
6.90% for same period ended 2002, and primarily resulted from a 97 basis point
and 33 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 September 30, 2003 to 2.81% from 3.72% for the same period
ended 2002. These reductions that resulted in a $183,000 decline in interest
incurred on deposits that were offset somewhat by an increase in the average
balance of interest bearing liabilities of $33.0 million. As noted above, the
competitive pricing strategy of Middlefield has contributed to these increases
in deposit balances.
Total non-interest income for the nine and three months ending September 30,
2003 as compared to the same 2002 period, increased by $180,000 and $90,000
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. The reason for the growth of this category was
due to earnings from Bank owned life insurance that was purchased at the end of
March.
Total non-interest expenses increased $643,000 and $324,000 for the nine and
three months ended September 30, 2003, respectively, as compared to the same
period ended 2002. Compensation and employee benefits increased $410,000 and
$204,000,
respectively, primarily as a result of normal merit raises and the addition of a
new branch location. Occupancy expenses increased $50,000 and $20,000,
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 $25,000 and $6,000, respectively, during 2003 as compared to
2002. In addition, other expenses increased $166,000 and $89,000, respectively.
The increase primarily reflects the addition of a new office, as well as the
introduction of a new logo and marketing image for Middlefield 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 September 30, 2003, cash and cash
equivalents totaled $6.6 million or 2.55% of total assets while investment
securities classified as available for sale totaled $49.9 million or 19.1% 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 $2.4 million and $2.2 million for the
nine-month periods ended September 30, 2003 and 2002, respectively, and were
generated principally from net income.
Investing activities used $30.8 million and $23.5 million in funds during the
nine month period ended September 30, 2003 and 2002, respectively. These cash
usages primarily consisted of investment purchases of $28.4 million and $15.3
million, and loan originations of $13.9 million and $16.2 million for 2003 and
2002, respectively. In 2003, the Middlefield purchased bank-owned life insurance
of approximately $5.0 million. Offsetting these usages were proceeds from
repayments and maturities of investment securities of $15.4 million and $7.9
million for 2003 and 2002, respectively.
Financing activities consist of the solicitation and repayment of customer
deposits, and borrowings and repayment. During the nine months ended September
30, 2003, net cash
provided by financing activities was $32.9 million, and consisted of an increase
in deposits of $31.7 million and additional borrowings of $5,000,000. Offsetting
these amounts was repayments of borrowings of $3.2 million. During the same
period ended 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
during 2002 was proceeds from borrowings of $7.3 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 September 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 14.82%, 13.57%, 8.88% and the bank's were 14.32%, 13.07%,
8.57%, respectively, at September 30, 2003.
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.
September 30, December 31,
2003 2002
------------- ------------
(Dollars in thousands)
Loans on nonaccrual basis $ 334 $ 357
Loans past due 90 days or more and still
accruing 302 181
------------ ------------
Total nonperforming loans $ 636 $ 538
------------ ------------
Nonperforming loans as a percent of total loans 0.34% 0.31%
============ ============
Nonperforming assets as a percent of total assets 0.24% 0.24%
============ ============
At September 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 September 30,
2003, impaired loans had no material effect on the Middlefield's financial
position or results of operations.
During the nine month period ended September 30, 2003, loans increased $14.0
million while non-performing loans increased to a total of $98,000. The
allowance for loan losses increased $305,000 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
September 30, 2003 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
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 *
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.
On October 24, 2003, a Form 8-K (Item 12) was filed with the Securities
and Exchange Commission to report earnings for the third quarter and
year to date ended September 30, 2003.
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 10, 2003 By: /s/Thomas G. Caldwell
----------------------------------------
Thomas G. Caldwell
President and Chief Executive Officer
Date: November 10, 2003 By: /s/Donald L. Stacy
----------------------------------------
Donald L. Stacy
Principal Financial and Accounting Officer