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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 March 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from to
Commission File Number 33-23094
-------------------------------
Middlefield Banc Corp.
(Exact name of registrant as specified in its charter)
Ohio
(State or other jurisdiction of 34 -1585111
incorporation or organization) (IRS Employer Identification No.)
15985 East High Street, Middlefield, Ohio 44062-9263
(Address of principal executive offices)
(440) 632-1666
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [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 May 6, 2004: 1,283,054
MIDDLEFIELD BANC CORP.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of
March 31, 2004 and December 31, 2003 3
Consolidated Statement of Income (Unaudited)
for the Three Months ended March 31, 2004
and 2003 4
Consolidated Statement of Changes in Stockholders'
Equity (Unaudited) 5
Consolidated Statement of Cash Flows (Unaudited)
for the Three Months ended March 31, 2004 and 2003 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 19
Item 3. Default Upon Senior Securities 19
Item 4. Submissions of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8 - K 19
SIGNATURES
MIDDLEFIELD BANC CORP.
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31
2004 2003
------------ ------------
ASSETS
Cash and due from banks $ 2,894,259 $ 3,956,453
Federal funds sold 5,505,000 930,000
------------ ------------
Cash and cash equivalents 8,399,259 4,886,453
Interest-bearing deposits in other institutions 539,429 539,147
Investment securities available for sale 49,233,341 49,966,511
Investment securities held to maturity (estimated
market value of $1,359,894 and $4,913,502) 1,312,121 1,858,904
Loans 201,925,285 192,880,153
Less allowance for loan losses 2,545,450 2,521,270
------------ ------------
Net loans 199,379,835 190,358,883
Premises and equipment 6,706,848 6,807,930
Bank-owned life insurance 5,269,381 5,202,385
Accrued interest and other assets 2,668,560 2,749,235
------------ ------------
TOTAL ASSETS $273,508,774 $262,369,448
============ ============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 29,889,636 29,423,027
Interest-bearing demand 9,588,145 7,369,754
Money market 15,809,319 15,708,932
Savings 71,017,095 69,570,895
Time 102,178,414 97,767,302
------------ ------------
Total deposits 228,482,609 219,839,910
Short-term borrowings 436 444,819
Other borrowings 19,727,567 17,665,661
Accrued interest and other liabilities 957,511 914,744
------------ ------------
TOTAL LIABILITIES 249,168,123 238,865,134
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized,
1,282,732 and 1,279,128 shares issued 10,153,493 10,038,156
Retained earnings 15,514,124 15,085,868
Accumulated other comprehensive income 417,943 125,199
Treasury stock, at cost 55,309 shares (1,744,909) (1,744,909)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 24,340,651 23,504,314
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $273,508,774 $262,369,448
============ ============
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended
March 31,
2004 2003
------------ ------------
INTEREST INCOME
Interest and fees on loans $ 3,297,718 $ 3,129,988
Interest-bearing deposits in
other institutions 339 7,101
Federal funds sold 5,107 9,307
Investment securities:
Taxable interest 357,477 308,608
Tax-exempt interest 125,303 119,590
Dividends on FHLB stock 12,984 12,929
------------ ------------
Total interest income 3,798,928 3,587,523
------------ ------------
INTEREST EXPENSE
Deposits 1,187,799 1,245,359
Short-term borrowings 658 2,290
Other borrowings 194,614 203,384
------------ ------------
Total interest expense 1,383,071 1,451,033
------------ ------------
NET INTEREST INCOME 2,415,857 2,136,490
Provision for loan losses 30,000 105,000
------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,385,857 2,031,490
------------ ------------
NONINTEREST INCOME
Service charges on deposit accounts 281,479 238,651
Investment securities gains - 542
Earnings on bank-owned life insurance 66,996 -
Other income 48,244 37,386
------------ ------------
Total noninterest income 396,719 276,579
------------ ------------
NONINTEREST EXPENSE
Salaries and employee benefits 920,803 646,471
Occupancy expense 144,481 98,552
Equipment expense 93,986 80,026
Data processing costs 129,345 116,472
Ohio state franchise tax 82,500 75,050
Other expense 410,203 294,187
------------ ------------
Total noninterest expense 1,781,318 1,310,758
------------ ------------
Income before income taxes 1,001,258 997,311
Income taxes 316,000 344,565
------------ ------------
NET INCOME $ 685,258 $ 652,746
============ ============
EARNINGS PER SHARE
Basic $ 0.56 $ 0.53
Diluted 0.56 0.53
DIVIDENDS DECLARED PER SHARE $ 0.21 $ 0.20
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, 2003 $ 10,038,156 $15,085,868 $ 125,199 $(1,744,909) $ 23,504,314
Net income 685,258 685,258 $ 685,258
Other comprehensive income:
Unrealized gain on available for sale
securities net of taxes of $150,808 292,744 292,744 292,744
-------------
Comprehensive income $ 978,002
=============
Common stock issued 67,335 67,335
Dividend reinvestment plan 48,002 48,002
Cash dividends ($0.21 per share) (257,002) (257,002)
------------ ----------- ------------- ----------- -------------
Balance, March 31, 2004 $ 10,153,493 $15,514,124 $ 417,943 $(1,744,909) $ 24,340,651
============ =========== ============= =========== =============
See accompanying notes to unaudited consolidated financial statements.
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31, March 31,
2004 2003
------------- -------------
OPERATING ACTIVITIES
Net income $ 685,258 $ 652,746
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 30,000 105,000
Depreciation and amortization 103,482 96,571
Amortization of premium and
discount on investment
securities 45,256 52,212
Amortization of net deferred loan costs (fees) 22,950 (17,220)
Investment security gains - (542)
Earnings on bank-owned life insurance (66,996) -
Increase in accrued interest receivable (140,501) (113,713)
Decrease in accrued interest payable (13,232) (39,616)
Other, net 152,790 137,068
------------- -------------
Net cash provided by operating activities 819,007 872,506
------------- -------------
INVESTING ACTIVITIES
Increase in interest-bearing deposits in
other institutions, net (282) (2,433)
Investment securities available for sale:
Proceeds from repayments and maturities 3,108,391 3,651,370
Proceeds from sales - 1,991,917
Purchases (1,980,145) (8,003,820)
Investment securities held to maturity:
Proceeds from repayments and maturities 550,000 1,449,805
Increase in loans, net (9,087,321) (4,488,756)
Purchase of bank-owned life insurance - (5,000,000)
Purchase of Federal Home Loan Bank stock (13,000) (14,100)
Purchase of premises and equipment (2,401) (335,910)
------------- -------------
Net cash used for investing activities (7,424,758) (10,751,927)
------------- -------------
FINANCING ACTIVITIES
Net increase in deposits 8,642,700 7,317,966
Increase in short-term borrowings, net (9,037) 1,603,798
Repayment of other borrowings (1,373,441) (507,138)
Proceeds from other borrowings 3,000,000 5,000,000
Purchase of treasury stock - (81,624)
Common stock issued 67,336 24,269
Proceeds from dividend reinvestment plan 48,001 36,792
Cash dividends (257,002) (231,309)
------------- -------------
Net cash provided by financing activities 10,118,557 13,162,754
------------- -------------
Increase in cash and cash equivalents 3,512,806 3,283,333
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 4,886,453 2,125,324
------------- -------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 8,399,259 $ 5,408,657
============= =============
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings $ 1,396,303 $ 1,490,649
Income taxes 280,000 50,000
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 inter-company 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, 2003,
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.
Stock-Based Compensation
The Company maintains a stock option plan for key officers, employees, and
non-employee directors. Had compensation expense for the stock option plans been
recognized in accordance with the fair value accounting provisions of FAS No.
123, Accounting for Stock-Based Compensation, net income applicable to common
stock, basic, and diluted net income per common share would have been as
follows:
Three Months Ended March 31,
2004 2003
---- ----
Net income, as reported: $ 685,258 $ 652,746
Less proforma expense related
to stock options 28,519 19,871
----------- -----------
Proforma net income $ 656,739 $ 632,875
=========== ===========
Basic net income per common share:
As reported $ 0.56 $ 0.53
Pro forma 0.54 0.52
Diluted net income per common share:
As reported $ 0.56 $ 0.53
Pro forma 0.53 0.52
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
Months Ended
March 31,
2004 2003
------------- -------------
Weighted average common shares
outstanding 1,279,762 1,267,630
Average treasury stock shares (55,309) (53,379)
------------ -----------
Weighted average common shares and
common stock equivalents used to
calculate basic earnings per share 1,224,453 1,214,251
============ ===========
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 6,816 2,151
------------ -----------
Weighted average common shares and
common stock equivalents used
to calculate diluted earnings per share 1,231,269 1,216,402
============ ===========
Options to purchase 10,462 shares of common stock at prices from $28.12 to
$28.80 per share were outstanding for the 2003 period but were not included in
the computation of diluted EPS because to do so would have been anti-dilutive.
NOTE 3 - COMPREHENSIVE INCOME
The components of comprehensive income consist exclusively of unrealized gains
and losses on available for sale securities. For the three months ended March
31, 2004, this activity is shown under the heading Comprehensive Income as
presented in the
Consolidated Statement of Changes in Stockholders' Equity (Unaudited). For the
three months ended March 31, 2003, comprehensive income totaled $534,141.
MANAGEMENT'S DISCUSSION AND ANALYSIS
General
The following discusses the financial condition of the Company as of March 31,
2004, as compared to December 31, 2003 and the results of operations for the
three months ended March 31, 2004 compared to the same period in 2003. This
discussion should be read in conjunction with the interim condensed consolidated
financial statements and related footnotes included herein.
Business
Middlefield is an Ohio corporation organized to become the holding company of
The Middlefield Banking Company ("Bank"). The Bank is a state-chartered bank
located in Middlefield, Ohio. Middlefield and its subsidiary bank derive
substantially all of their income from banking and bank-related services,
including interest earnings on residential real estate, commercial mortgage,
commercial, and consumer financings as well as interest earnings on investment
securities and deposit services to its customers through six locations.
Forward Looking Statement
The Private Securities Litigation Reform 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 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 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.
Earning Assets - Loans
At March 31, 2004, gross loans were $201,925,000 compared to $192,880,000 at
year-end 2003, an increase of $9,045,000 or 4.7%. The increase in total
outstanding loans was the result of an increase in the commercial, home equity
and real estate portfolios. Management attributes the relatively significant
increase in loans to the general economic improvement in the lending markets
served.
Commercial loans comprised 27.5% of total loans at March 31, 2004 compared to
25.5% at December 31, 2003. Commercial loans have increased $5,679,000 or 10.21%
since December 31, 2003. The Company has originated these types of loans to
benefit from consistent economic growth inside the Company's primary market
area. The majority of these loans are secured by real estate holdings.
Real estate loans were 68.0% of total loans at March 31, 2004 and 69.5% at
year-end 2003. In dollar volume real estate loans increased 2.5% since December
31, 2003. Management's position is to focus on adjustable rate products as the
overall rate environment reaches historical low levels with the intent these
products will adjust as interest rates rise.
The allowance for loan losses represents the amount which management and the
Board of Directors estimates is adequate to provide for probable losses inherent
in the loan portfolio. The allowance balance and the provision charged to
expense are reviewed by management and the Board of Directors quarterly using a
risk evaluation model that considers borrowers' past due experience, economic
conditions and various other circumstances that are subject to change over time.
Management believes the current balance of the allowance for loan losses is
adequate to absorb probable incurred credit losses associated with the loan
portfolio. Net charge-offs for the three months ended March 31, 2004 were
$5,820, or less than .25%, of the beginning of the year balance in the allowance
for loan losses.
Earning Assets - Securities And Federal Funds Sold
The securities portfolio is comprised of U.S. Government agency-backed
securities, tax-exempt obligations of states and political subdivisions and
certain other investments. The Company does not hold any collateralized
mortgage-backed securities, other than those issued by U.S. government agencies,
or derivative securities. The quality rating of obligations of state and
political subdivisions within Ohio is no less than Aaa, Aa, A or BBB+, with all
out-of-state bonds rated at AAA. Board policy permits the purchase of certain
non-rated bonds of local schools, townships and municipalities, based on their
estimated levels of credit risk. Securities available for sale at March 31, 2004
decreased approximately $733,000, or 1.5% from year-end 2003 totals. Securities
held to maturity at March 31, 2004, decreased $546,000, or 29% compared to
year-end 2003 totals. The decline in the investment portfolio for the quarter,
was due to the funding needed to support the growth in the loan portfolio.
Sources Of Funds - Deposits
The Company's primary source of funds is core deposits from retail and business
customers. These core deposits include all categories of interest-bearing and
noninterest-bearing deposits, excluding certificates of deposit greater than
$100,000. For the period ended March 31, 2004, total core deposits increased
approximately $8,224,000 or 4.09% primarily from an increase in interest bearing
demand deposits and savings accounts.
The Company has a strong deposit base from public agencies, including local
school districts, city and township municipalities, and others that may tend to
be more seasonal in nature resulting from the receipt and disbursement of state
and federal grants. These entities have maintained fairly static balances with
the Company due to various funding and disbursement timeframes.
Certificates of deposit greater than $100,000 are not considered part of core
deposits and as such are used to balance rate sensitivity as a tool of funds
management. At March 31, 2004 certificates of deposit greater than $100,000
increased $515,000 or 2.66% from year-end 2003 totals.
Sources Of Funds - Securities Sold Under Agreements To Repurchase And Other
Borrowings
Other interest-bearing liabilities include securities sold under agreements to
repurchase, sweep accounts, federal funds purchased, Treasury, Tax & Loan notes
payable and Federal Home Loan Bank ("FHLB") advances. In the first three months
of 2004, the Company continued to utilize the FHLB programs to manage interest
rate risk and liquidity positions. Total other borrowings increased $1,618,000,
or 8.9% from year-end 2003 totals.
Results Of Operations For Three Months Ended March 31, 2004
Net Income
Basic and diluted earnings per share for the three months ended March 31, 2004
totaled $0.56, compared with $0.53 for the three months ended March 31, 2003, an
increase of 5.7%. In dollars, net income increased 4.98% for the three months
ended March 31, 2004, compared to the same quarter in 2003.
Net Interest Income
Net interest income, by definition, is the difference between interest income
generated on interest-earning assets and the interest expense incurred on
interest-bearing liabilities. Various factors contribute to changes in net
interest income, including volumes, interest rates and the composition or mix of
interest-earning assets in relation to interest-bearing
liabilities. Net interest income increased $279,367 for the three months ended
March 31, 2004 compared to the same period in 2003. This resulted from growth in
earning assets but was partially offset by a decrease in the net interest
margin.
Total interest income for the three months ended March 31, 2004 was $3,799,000
compared to $3,588,000 for the same period in 2003. Total interest income
increased $211,000, or 5.9%. The increase can be attributed to the growth of the
loan portfolio that was 13% larger than during the same period in 2003.
Total interest expense for the three months ended March 31, 2004 when compared
to the same three-month period ended March 31, 2003, decreased 4.7%, or $68,000.
The decrease can be attributed to the overall lower interest rate environment
that currently exists.
Management has been proactive in lowering deposit product interest rates and has
relied less on certificates of deposits to fund asset growth.
Provision For Loan Losses
The total provision for loan losses was $30,000 for the three months ended March
31, 2004 compared to $105,000 for the same period in 2003. At March 31, 2004,
Middlefield's allowance for loan losses increased to $2,545,000 from $2,521,000
at December 31, 2003, and now represents 1.3% of the gross loan portfolio as
compared to 1.4% for the previous period. 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, taking into account the overall risk characteristics of the
various portfolio segments, the bank's loan loss experience, 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.
Noninterest Income
Total non-interest income is made up of bank related fees and service charges,
as well as other income producing services provided, ATM income, early
redemption penalties for certificates of deposit, safe deposit rental income,
internet bank service fees and other miscellaneous items. Noninterest income for
the three months ended March 31, 2004 was $397,000 compared to $277,000 for the
same three-month period ended March 31, 2003, an increase of approximately 43.4%
or $120,000. The Company invested in Bank Owned Life Insurance on March 27,
2003. For the three months ended March 31, 2004 the Company has recognized
$67,000 of income related to this product. The earnings from this investment are
reflected in the Company's non-interest income. An increase in fee
income from deposit accounts also contributed significantly to 2004's increased
non-interest income. Deposit account service fees have progressively increased
as the number of accounts and volume of related transactions have increased.
Noninterest Expense
Non-interest expense for the 2004 first quarter was $1,781,000, up 35.9% from
the $1,310,000 recorded in the first quarter of 2003. $274,000 of this increase
of $470,000 was in employee compensation and benefit expense. This was the
result of increased staffing, higher payroll and health insurance costs, and
additional pay periods within the quarter. Reflected within the increased
staffing costs, as well as increased occupancy and other costs, is the operation
of the bank's Orwell office, which opened in April 2003.
Capital Resources
Internal capital growth, through the retention of earnings, is the primary means
of maintaining capital adequacy for the Company. Shareholders' equity at March
31, 2004, totaled $24,340,651 compared to $23,504,314 at December 31, 2003, a
3.6% increase. Total shareholders' equity in relation to total assets was 8.90%
at March 31, 2004 compared to 8.96% at December 31, 2003.
The Company has a Dividend Reinvestment Plan ("The Plan") for shareholders under
which the Company's common stock will be purchased by the Plan for participants
with automatically reinvested dividends. The Plan does not represent a change in
the Company's dividend policy or a guarantee of future dividends.
The Company is subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities and
certain off-balance sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings and other factors and
the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the Banks' operations.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion and plans for capital restoration are required.
The minimum requirements are:
TOTAL TIER 1 TIER 1
CAPITAL TO CAPITAL TO CAPITAL TO
RISK-WEIGHTED RISK-WEIGHTED AVERAGE
ASSETS ASSETS ASSETS
----------------- ----------------- --------------
Well capitalized 10.00% 6.00% 5.00%
Adequately capitalized 8.00% 4.00% 4.00%
The following table illustrates the Company's risk-weighted capital ratios at
March 31, 2004:
MARCH 31,
(in thousands) 2004
---------
Tier 1 capital $ 23,923
Total risk-based capital $ 26,041
Risk-weighted assets $169,061
Average total assets $264,980
Tier 1 capital to average assets 9.03%
Tier 1 risk-based capital ratio 14.15%
Total risk-based capital ratio 15.40%
Non-Performing Loans
The table below presents information concerning nonperforming assets including
nonaccrual loans, renegotiated loans, loans 90 days or more past due, other real
estate loans, and repossessed assets. A loan is classified as nonaccrual when,
in the opinion of management, there are serious doubts about collectibility of
interest and principal. At the time the accrual of interest is discontinued,
future income is recognized only when cash is received. Renegotiated loans are
those loans which terms have been renegotiated to provide a reduction or
deferral of principal or interest as a result of the deterioration of the
borrower.
March 31, December 31,
2004 2003
---- ----
(Dollars in thousands)
Loans on nonaccrual basis $263 $372
Loans past due 90 days or more and still accruing 516 137
---- ----
Total nonperforming loans $779 $509
---- ----
Nonperforming loans as a percent of total loans 0.38% 0.26%
==== ====
Nonperforming assets as a percent of total assets 0.28% 0.19%
==== ====
At March 31, 200443 and December 31, 2003, no real estate or other assets were
held as foreclosed or repossessed property.
Management monitors impaired loans on a continual basis. As of March 31, 2004,
impaired loans had no material effect on the Middlefield's financial position or
results of operations.
Liquidity
Management's objective in managing liquidity is maintaining the ability to
continue meeting the cash flow needs of its customers, such as borrowings or
deposit withdrawals, as well as its own financial commitments. The principal
sources of liquidity are net income, loan payments, maturing securities and
sales of securities available for sale, federal funds sold and cash and deposits
with banks. Along with its liquid assets, the Company has additional sources of
liquidity available to ensure that adequate funds are available as needed. These
include, but are not limited to, the purchase of federal funds, the ability to
borrow funds under line of credit agreements with correspondent banks and a
borrowing agreement with the Federal Home Loan Bank of Cincinnati, Ohio and the
adjustment of interest rates to obtain depositors. Management feels that it has
the capital adequacy, profitability and reputation to meet the current and
projected needs of its customers.
For the three months ended March 31, 2004, the adjustments to reconcile net
income to net cash from operating activities consisted mainly of depreciation
and amortization of premises and equipment and intangibles, the provision for
loan losses, net amortization of securities and net changes in other assets and
liabilities. Changes in cash and cash equivalents are detailed on the
consolidated statements of cash flows.
Inflation
Substantially all of the Company's assets and liabilities relate to banking
activities and are monetary in nature. The consolidated financial statements and
related financial data are presented in accordance with GAAP in the United
States of America (GAAP). GAAP currently requires the Company to measure the
financial position and results of operations in terms of historical dollars,
with the exception of securities available for sale, impaired loans and other
real estate loans that are measured at fair value. Changes in the value of money
due to rising inflation can cause purchasing power loss.
Management's opinion is that movements in interest rates affect the financial
condition and results of operations to a greater degree than changes in the rate
of inflation. It should
be noted that interest rates and inflation do effect each other, but do not
always move in correlation with each other. The Company's ability to match the
interest sensitivity of its financial assets to the interest sensitivity of its
liabilities in its asset/liability management may tend to minimize the effect of
changes in interest rates on the Company's performance.
Regulatory Matters
The Company is subject to the regulatory requirements of The Federal Reserve
System as a multi-bank holding company. The affiliate bank is subject to
regulations of the Federal Deposit Insurance Corporation (FDIC) and the State of
Ohio, Division of Financial Institutions.
Quantitative and Qualitative Disclosures about Market Risk
The Bank measures interest-rate risk from the perspectives of earnings at risk
and value at risk. The primary purpose of both the loan and investment
portfolios is the generation of income, but if credit risk is the principal
focus of risk analysis in the loan portfolio, interest-rate risk is the
principal focus in the investment portfolio. Because of the greater liquidity of
the investment portfolio, it is the vehicle for managing interest-rate risk in
the entire balance sheet. The Bank manages interest rate risk position using
simulation analysis of net interest income over a one-year period. The Bank also
calculates the effect of an instantaneous change in market interest rates on the
economic value of equity or net portfolio value. Once these analyses are
complete, management reviews the results, with an emphasis on the
income-simulation results for purposes of managing interest-rate risk. The rate
sensitivity position is managed to avoid wide swings in net interest margins.
Measurement and identification of current and potential interest rate risk
exposures is conducted quarterly, with reporting and monitoring also occurring
quarterly. The Bank applies interest rate shocks to its financial instruments up
and down 200 basis points.
The following table presents an analysis of the potential sensitivity of the
Bank's annual net interest income and present value of the Bank's financial
instruments to sudden and sustained increase and decrease of 200 basis point
change in market interest rates:
MAXIMUM CHANGE
2004 GUIDELINES
One Year Net interest Income Change
+200 Basis Points 13% (10)%
- -200 Basis Points (16)% (10)%
Net Present Value of Equity Change
+200 Basis Points 6% (20)%
- -200 Basis Points (13)% (20)%
The projected volatility of net interest income in a -200 basis points change in
market
rates for the 1st quarter of 2004 falls outside the Board of Directors
guidelines. With rates at historic lows it is unlikely that the market can
decline 200BP so the potential interest rate risk exposure is considered
minimal.
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 Severance Agreement of Vice President *
10.5 Federal Home Loan Bank of Cincinnati Agreement for
Advances and Security Agreement dated September 14,
2000
10.7 Director Retirement Agreement with Richard T. Coyne *
10.8 Director Retirement Agreement with Francis H. Frank *
10.9 Director Retirement Agreement with Thomas C. Halstead *
10.10 Director Retirement Agreement with George F. Hasman *
10.11 Director Retirement Agreement with Donald D. Hunter *
10.12 Director Retirement Agreement with Martin S. Paul *
10.13 Director Retirement Agreement with Donald E. Villers *
10.14 DBO Agreement with Donald L. Stacy **
10.15 DBO Agreement with Jay P. Giles **
10.16 DBO Agreement with Alfred S. Thompson, Jr. **
10.17 DBO Agreement with Nancy C. Snow **
10.18 DBO Agreement with Teresa M. Hetrick **
10.19 DBO Agreement with Jack L. Lester **
10.20 DBO Agreement with James R. Heslop, II **
10.21 DBO Agreement with Thomas G. Caldwell **
31.1 Certification Pursuant to Section 302 of the
Securities Exchange Act of 1934 - Thomas G. Caldwell
31.2 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 of 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.
** Incorporated by reference to the identically numbered exhibit to the
December 31, 2003 Form 10-K filed with the SEC on March 30, 2004.
(b) ) Reports on Form 8-K.
On April 23, 2004, a Form 8-K (Item 12) was filed with the Securities
and Exchange Commission to report earnings for the first quarter ended
March 31, 2004.
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: May 10, 2004 By: /s/Thomas G. Caldwell
----------------------------------------
Thomas G. Caldwell
President and Chief Executive Officer
Date: May 10, 2004 By: /s/Donald L. Stacy
----------------------------------------
Donald L. Stacy
Principal Financial and Accounting Officer