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, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from to
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Commission File Number 33-23094
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Middlefield Banc Corp.
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(Exact name of registrant as specified in its charter)
Ohio 34 - 1585111
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
15985 East High Street, Middlefield, Ohio 44062-9263
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(Address of principal executive offices)
(440) 632-1666
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(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes No X
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
Class: Common Stock, without par value
Outstanding at November 9, 2001: 1,102,954
MIDDLEFIELD BANC CORP.
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of
September 30, 2001 and December 31, 2000 3
Consolidated Statement of Income (Unaudited)
for the Nine and Three Months ended September 30,
2001 and 2000 4
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited) 5
Consolidated Statement of Cash Flows (Unaudited)
for the Nine Months ended September 30, 2001 and 2000 6
Notes to Unaudited Consolidated Financial Statements 7 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 - 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Default Upon Senior Securities 20
Item 4. Submissions of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8 - K 20 - 21
SIGNATURES 22
MIDDLEFIELD BANC CORP.
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30 December 31,
2001 2000
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ASSETS
Cash and due from banks $ 4,429,131 $ 3,574,875
Federal funds sold 1,920,000 1,265,000
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Cash and cash equivalents 6,349,131 4,839,875
Interest-bearing deposits in other institutions 890,198 984,441
Investment securities available for sale 17,514,223 11,868,337
Investment securities held to maturity (estimated
market value of $11,310,338 and $17,942,255) 11,006,296 17,942,310
Loans 149,438,223 135,304,215
Less allowance for loan losses 2,048,027 2,037,322
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Net loans 147,390,196 133,266,893
Premises and equipment 6,000,927 5,432,472
Accrued interest and other assets 2,430,127 2,154,485
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TOTAL ASSETS $ 191,581,098 $ 176,488,813
============= =============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 24,149,286 $ 23,155,904
Interest-bearing demand 6,803,635 6,116,094
Money market 7,461,686 9,127,760
Savings 36,548,244 32,260,775
Time 86,075,193 76,505,513
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Total deposits 161,038,044 147,166,046
Short-term borrowings 713,523 543,222
Other borrowings 9,349,450 9,861,596
Accrued interest and other liabilities 840,317 674,587
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TOTAL LIABILITIES 171,941,334 158,245,451
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STOCKHOLDERS' EQUITY
Common stock, no par value; 5,000,000 shares authorized,
1,148,676 shares issued 6,287,011 6,287,011
Retained earnings 14,569,319 13,343,980
Accumulated other comprehensive income 259,874 88,811
Treasury stock, at cost (45,722 shares) (1,476,440) (1,476,440)
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TOTAL STOCKHOLDERS' EQUITY 19,639,764 18,243,362
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 191,581,098 $ 176,488,813
============= =============
See accompanying notes to unaudited consolidated financial statements.
3
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans $ 8,818,686 $ 8,035,655 $ 3,047,283 $ 2,811,273
Interest-bearing deposits in
other institutions 47,801 77,867 18,612 17,639
Federal funds sold 114,668 57,338 17,786 30,288
Investment securities:
Taxable interest 939,442 889,596 314,325 281,825
Tax-exempt interest 349,574 399,188 110,105 126,791
----------- ----------- ----------- -----------
Total interest income 10,270,171 9,459,644 3,508,111 3,267,816
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 4,694,735 3,861,098 1,595,269 1,388,962
Short-term borrowings 13,000 53,737 3,897 23,919
Other borrowings 403,752 394,663 131,544 129,892
----------- ----------- ----------- -----------
Total interest expense 5,111,487 4,309,498 1,730,710 1,542,773
----------- ----------- ----------- -----------
NET INTEREST INCOME 5,158,684 5,150,146 1,777,401 1,725,043
Provision for loan losses 125,000 225,000 45,000 75,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,033,684 4,925,146 1,732,401 1,650,043
----------- ----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 688,038 593,480 232,378 209,406
Investment securities gains, net 97,807 886 97,807 886
Other income 106,387 97,102 35,608 36,946
----------- ----------- ----------- -----------
Total noninterest income 892,232 691,468 365,793 247,238
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits 1,693,834 1,633,886 543,803 535,514
Occupancy expense 216,996 242,722 68,784 79,668
Equipment expense 221,199 169,657 79,397 67,744
Data processing costs 211,367 184,189 72,315 58,491
Ohio state franchise tax 180,050 170,180 60,000 54,504
Other expense 954,065 814,332 325,679 276,463
----------- ----------- ----------- -----------
Total noninterest expense 3,477,511 3,214,966 1,149,978 1,072,384
----------- ----------- ----------- -----------
Income before income taxes 2,448,405 2,401,648 948,216 824,897
Income taxes 759,826 721,370 288,326 254,000
----------- ----------- ----------- -----------
NET INCOME $ 1,688,579 $ 1,680,278 $ 659,890 $ 570,897
=========== =========== =========== ===========
EARNINGS PER SHARE
Basic $ 1.53 $ 1.52 $ 0.60 $ 0.52
Diluted 1.53 1.52 0.60 0.52
See accompanying notes to unaudited consolidated financial statements.
4
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, 2000 $ 6,287,011 $ 13,343,980 $ 88,811 $ (1,476,440) $18,243,362
Net income 1,688,579 1,688,579 $ 1,688,579
Other comprehensive income:
Unrealized gain on available
for sale securities net of
taxes of $58,161 171,063 171,063 171,063
-----------
Comprehensive income $ 1,859,642
===========
Cash dividends ($.42 per share) (463,240) (463,240)
----------- ------------ --------- ------------ -----------
Balance, September 30, 2001 $ 6,287,011 $ 14,569,319 $ 259,874 $ (1,476,440) $19,639,764
=========== ============ ========= ============ ===========
See accompanying notes to unaudited consolidated financial statements.
5
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2001 2000
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OPERATING ACTIVITIES
Net income $ 1,688,579 $ 1,680,278
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 125,000 225,000
Depreciation and amortization 255,354 298,723
Investment security gains, net (97,807) (886)
Increase in accrued interest receivable (44,762) (75,688)
Increase in accrued interest payable 148,030 88,278
Other, net (176,503) (153,946)
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Net cash provided by operating activities 1,897,891 2,061,759
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INVESTING ACTIVITIES
Decrease in interest-bearing deposits in other
institutions, net 94,243 2,242,472
Investment securities available for sale:
Proceeds from repayments and maturities 3,530,734 1,200,000
Proceeds from sales 2,092,981 111,436
Purchases (10,913,812) (1,670,039)
Investment securities held to maturity:
Proceeds from repayments and maturities 6,891,514 2,477,012
Increase in loans, net (14,235,110) (11,613,003)
Purchase of Federal Home Loan Bank stock (124,800) (119,300)
Purchase of premises and equipment (791,298) (87,041)
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Net cash used for investing activities (13,455,548) (7,458,463)
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FINANCING ACTIVITIES
Net increase in deposits 13,871,998 11,909,744
Increase in short-term borrowings, net 170,301 (1,850,811)
Repayment of other borrowings (512,146) --
Proceeds from other borrowings -- 334,135
Purchase of treasury stock -- (1,311,050)
Sale of treasury stock -- 32,500
Cash dividends (463,240) (358,120)
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Net cash provided by financing activities 13,066,913 8,756,398
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Increase in cash and cash equivalents 1,509,256 3,359,694
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 4,839,875 3,210,556
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CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 6,349,131 $ 6,570,250
============ ============
SUPPLEMENTAL INFORMATION Cash paid during the year for:
Interest on deposits and borrowings $ 4,963,457 $ 4,221,220
Income taxes 660,000 787,000
See accompanying notes to unaudited consolidated financial statements.
6
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, 2000,
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 Amended Form
10 (File No. 33-23094). Certain amounts in the 2000 financial statements have
been reclassified to conform to 2001 presentation. 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. For the nine and three months ended September 30, 2001, the diluted
number of shares outstanding from employee stock options was 1,381 and 521,
respectively. There was no diluted effect for the nine or three months ended
September 30, 2000.
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, 2001, 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, 2000, comprehensive income
totaled $1,716,298. For the three months ended September 30, 2001 and 2000,
comprehensive income totaled $727,402 and $632,886, respectively.
7
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, Business Combinations, effective for
all business combinations initiated after June 30, 2001, as well as all business
combinations accounted for by the purchase method that are completed after June
30, 2001. The new statement requires that the purchase method of accounting be
used for all business combinations and prohibits the use of the
pooling-of-interests method. The adoption of Statement No. 141 is not expected
to have a material affect on Middlefield's financial position or results of
operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. The new statement changes the accounting for goodwill
from an amortization method to an impairment-only approach. Thus, amortization
of goodwill, including goodwill recorded in past business combinations, will
cease upon adoption of this Statement. The adoption of Statement No. 142 is not
expected to have a material affect on Middlefield's financial position or
results of operations.
NOTE 5 - INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market values of securities available for sale
are as follows:
2001
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Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
U.S. Government agency
securities $ 2,156,189 $ 86,568 $ -- $ 2,242,757
Obligations of states and
political subdivisions:
Taxable 1,408,186 28,188 -- 1,436,374
Tax-exempt 4,266,442 139,829 -- 4,406,271
Corporate securities 550,658 28,318 -- 578,976
Mortgage-backed securities 8,739,000 123,892 (13,047) 8,849,845
----------- ----------- ----------- -----------
Total $17,120,475 $ 406,795 $ (13,047) $17,514,223
=========== =========== =========== ===========
8
NOTE 5 - INVESTMENT SECURITIES AVAILABLE FOR SALE (Continued)
2000
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Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
U.S. Government agency
securities $ 3,990,419 $ 70,843 $ (1,419) $ 4,059,843
Obligations of states and
political subdivisions:
Taxable 1,458,400 11,744 (2,645) 1,467,499
Tax-exempt 3,685,472 42,258 (16,746) 3,710,984
Corporate securities 701,306 3,400 (2,800) 701,906
Mortgage-backed securities 1,898,177 29,928 -- 1,928,105
----------- ----------- ----------- -----------
Total $11,733,774 $ 158,173 $ (23,610) $11,868,337
=========== =========== =========== ===========
The amortized cost and estimated market value of debt securities at September
30, 2001, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
----------- -----------
Due in one year or less $ 2,550,848 $ 2,574,370
Due after one year through five years 5,561,590 5,783,505
Due after five years through ten years 1,483,786 1,555,758
Due after ten years 7,524,251 7,600,590
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Total $17,120,475 $17,514,223
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9
NOTE 6 - INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost and estimated market values of securities held to maturity
are as follows:
2001
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
Obligations of states and
political subdivisions:
Taxable $ 2,050,577 $ 73,694 $ -- $ 2,124,271
Tax-exempt 6,009,822 157,376 -- 6,167,198
Corporate securities 2,717,907 65,692 -- 2,783,599
Mortgage-backed securities 227,990 7,280 -- 235,270
----------- ----------- ------------ -----------
Total $11,006,296 $ 304,042 $ -- $11,310,338
=========== =========== ============ ===========
2000
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
U.S. Government agency
securities $ 1,899,752 $ -- $ (8,565) $ 1,891,187
Obligations of states and
political subdivisions:
Taxable 3,723,251 18,354 (19,685) 3,721,920
Tax-exempt 7,480,801 26,182 (7,420) 7,499,563
Corporate securities 4,525,466 7,829 (18,683) 4,514,612
Mortgage-backed securities 313,040 1,933 -- 314,973
----------- ----------- ----------- -----------
Total $17,942,310 $ 54,298 $ (54,353) $17,942,255
=========== =========== =========== ===========
10
NOTE 6 - INVESTMENT SECURITIES HELD TO MATURITY (Continued)
The amortized cost and estimated market value of debt securities at September
30, 2001, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
----------- -----------
Due in one year or less $ 3,421,750 $ 3,473,809
Due after one year through five years 7,115,489 7,353,191
Due after five years through ten years 141,067 149,098
Due after ten years 327,990 334,240
----------- -----------
Total $11,006,296 $11,310,338
=========== ===========
11
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 2001 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, 2001 and December 31, 2000.
Total assets increased $15.0 million to $191.5 million at September 30, 2001
from $176.5 million at December 31, 2000. This increase primarily resulted from
an increase in net loans receivable of $14.1 million that was funded by an $13.9
million net increase in deposits.
Overall, total investment securities of $28.5 million at September 30, 2001
remained relatively unchanged from $29.8 million at December 31, 2000.
Management's focus on supplementing loan demand primarily by lengthening the
maturities of the investment portfolio through a net increase in higher
yielding, mortgage-backed securities of $6.8 million continues, although less
aggressively, in the third quarter reflecting the Nation's general economic
trends. This has resulted in a shift in the composition of the investment
securities portfolio at September 30, 2001, as mortgage-backed securities now
comprise 31.4% of the total portfolio as compared to 7.5% at December 31, 2000.
Furthermore, available for sale securities now comprise 61.4% of the investment
securities portfolio as compared to 41.3% at December 31, 2000.
12
Total loans increased to $149,400,000 at September 30, 2001 from $135,304,000 at
December 31, 2000. The increase in net loans receivable resulted from the
economic health of Middlefield's market area and the strategic, service-oriented
marketing approach taken by management to meet the lending needs of the area.
The majority of lending activity is predominately mortgage loans secured by
one-to-four family residential property. Such loans grew $8.8 million to $110.2
million at September 30, 2001. Management attributes the increases in
residential real estate properties to continued customer referrals and
Middlefield's overall relationship with its customers. Also impacted by the
local economic conditions were commercial and commercial real estate loans which
increased in total by $4.5 million to $30.8 million.
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, 2001,
Middlefield's allowance for loan losses remained relatively unchanged at $2.0
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.
Total deposits increased to $161.0 million at September 30, 2001 from $147.2
million at December 31, 2000. Growth was primarily concentrated in time and
savings deposits and resulted from continual marketing efforts by management.
Time deposits account for approximately 53.3% of the total deposit portfolio and
continue to be a dominant resource for funds.
Total stockholders' equity increased $1,396,000 to $19.6 million at September
30, 2001 due to net income of $1,689,000 and increases in accumulated other
comprehensive income of $171,000. These increases in stockholders' equity were
offset by dividend payments of $463,000. 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.
13
Comparison of Results of Operations for the Nine and Three Months Ended
September 30, 2001 and 2000.
Net income for the nine months ended September 30, 2001 of $1,689,000 increased
from $1,680,000 for the same period ended 2000. Basic and diluted earnings per
share increased to $1.53 per share in 2001 from $1.52 per share in 2000. Net
income for the three months ended September 30, 2001 of $660,000 increased from
$571,000 for the same period ended 2000.
Net interest income for the nine months ended September 30, 2001 increased
slightly to $5,159,000, compared to $5,151,000 for the same period ended 2000.
While both interest income and interest expense increased for the period,
interest income increased at a greater rate than interest expense. Interest
income for the first nine months of 2001 was influenced mainly by increases in
interest earned on loans receivable of $783,000 and federal funds sold of
$57,000, while offset by decreases in interest-bearing deposits in other
institutions of $30,000. The increases in interest income and expense were both
primarily driven by increases in the average balances of related
interest-earning assets and interest-bearing liabilities. The average balances
of loans receivable increased $14.1 million, or 11.2%, to $141.0 million as of
September 30, 2001, and resulted in an increase in interest-earning assets of
$15.8 million. Lessening the impact of the increase in volume of
interest-earning assets was a slight decline on the tax-equivalent yield on
interest earning assets to 7.91% for the nine months ended September 30, 2001
from 8.03% for the same period ended 2000. In addition, the average balance of
time deposits increased $13.6 million, or 19.9%, to $81.8 million as of
September 30, 2001, and resulted in an increase in interest-bearing liabilities
of $13.8 million. Middlefield's competitively priced deposit products and
continual marketing efforts contributed to the overall increase in the cost of
funds to 4.82% for the nine-month period ended September 30, 2001 from 4.50% for
the same period ended 2000.
Net interest income for the three months ended September 30, 2001 also increased
slightly to $1,777,000 compared to $1,725,000 for the same period ended 2000.
This increase also consisted primarily of an increase in interest earned on
loans receivable of $236,000, that resulted from an increase in the average
balances of the related interest-earning asset of $15.3 million. Increases in
interest expense of $188,000 for the three-months ended September 30, 2001
resulted primarily from an increase on interest incurred on deposits. This
fluctuation was the result of an increase in the average balance of time
deposits of $12.2 million coupled with an increase in the related cost of such
funds of 6 basis points to 4.77% for 2001 from 4.71% for 2000. These
competitively priced products were heavily marketed throughout Middlefield's
market area.
Total non-interest income for both the nine-months and three-months ended
September 30, 2001 increased $201,000 and $119,000, respectively, as compared to
the same period ended 2000. Noninterest income items are primarily comprised of
service charges and fees on deposit account activity, along with fee income
derived from other financial related services. Service fees on deposit accounts
increased $95,000 and $23,000, respectively, and have progressively increased as
the number of accounts and volume of
14
related transactions have increased. Furthermore, Middlefield recognized an
increase in gains on sales of investment securities of $97,000 in the third
quarter of 2001 as compared to the prior year quarter.
Total non-interest expenses increased $263,000 and $78,000 for the nine and
three-months ended September 30, 2001, respectively, as compared to the same
period ended 2000. Compensation and employee benefits increased $60,000 and
$8,000, respectively, primarily as a result of normal merit raises.
Additionally, occupancy and equipment expenses increased $26,000 for the
nine-months ended September 30, 2001, as compared to the same period ended 2000
as a result of added capital expenditures in prior years from building and
furnishing a new branch office in Garrettsville, and additional ATMs. As a
result of increased transaction activity from operating a larger organization,
data processing expenses increased $27,000 and $14,000 for the nine and three
month periods ended 2001 in comparison to the prior year periods. Other expenses
increased $140,000 and $49,000 for the nine and three month periods ended 2001
as compared to 2000, because of the marketing of the 100th anniversary of the
Bank, costs incurred with the addition of internet banking, and increased
professional fees associated with outside assistance in complying with the
increased levels of regulatory compliance of a publicly reported company.
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, 2001, cash and cash
equivalents totaled $6.3 million or 3.3% of total assets while investment
securities classified as available for sale totaled $17.5 million or 9.1% 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 $1.9 million and $2.0 million for the
nine-month periods ended September 30, 2001 and 2000, respectively, and were
generated principally from net income of $1.7 million for both periods.
15
Investing activities consist primarily of loan originations and repayments, and
investment purchases and maturities. These activities used $13.5 million in
funds during the first nine months of 2001, principally for the purchase of
investment securities and the net origination of loans. For the same period
ended 2000, investing activities used $7.4 million in funds, principally from
the net origination of loans. In 2000, these cash usages were offset somewhat by
an increase in net investment repayments and maturities coupled with a decline
in interest-bearing deposits in other institutions from maturities of
certificates of deposits.
Financing activities consist of the solicitation and repayment of customer
deposits, borrowings and repayments, treasury stock activity, and the payment of
dividends. During the nine months ended September 30, 2001, net cash provided by
financing activities totaled $13.1 million, principally derived from an increase
in deposit accounts in general, and time deposits specifically. During the same
period ended 2000, net cash provided by financing activities was $8.8 million,
and consisted of an increase in deposit accounts that was offset by the net
acquisition of treasury stock and the repayment of other borrowing.
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, 2001, 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 17.34%, 16.09%, 10.28%, and the bank's were 16.72%, 15.46%,
9.96%, respectively, at September 30, 2001.
RISK ELEMENT
The table below presents information concerning nonperforming assets including
nonaccrual loans, renegotiated loans, loans 90 days or more past due, other real
estate loans, and repossessed assets. A loan is classified as nonaccrual when,
in the opinion of management, there are serious doubts about collectibility of
interest and principal. At the time the accrual of interest is discontinued,
future income is recognized only when cash is received. Renegotiated loans are
those loans which terms have been renegotiated to provide a reduction or
deferral of principal or interest as a result of the deterioration of the
borrower.
16
September 30, December 31,
2001 2000
------- -------
(Dollars in thousands)
Loans on nonaccrual basis $ -- $ --
Loans past due 90 days or more and still accruing 254 $ 5
------- -------
Total nonperforming loans $ 254 $ 5
------- -------
Nonperforming loans as a percent of total loans 0.17% -%
======= =======
Nonperforming assets as a percent of total assets 0.13% -%
======= =======
At September 30, 2001 and December 31, 2000, 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,
2001, impaired loans had no material effect on the Company's financial position
or results of operations.
During the nine-month period ended September 30, 2001, loans increased $14.1
million while nonperforming loans increase to a total of $254,000. The allowance
for loan losses increased slightly by $11,000 during this same period and
resulted in the percentage of allowance for loan losses to loans outstanding to
decline to 1.37% as compared to 1.51% at December 31, 2000. Nonperforming loans
are primarily made up of residential and commercial mortgages. The collateral
requirements on such loans reduce the risk of potential losses to an acceptable
level in management's opinion.
The allowance for loan losses represents the amount that management estimates is
adequate to provide for probable losses inherent in the loan portfolio, as of
the balance sheet date. The relationship between the allowance for loan losses
and outstanding loans is a function of the credit quality and known risk
attributed to the loan portfolio. The on-going loan review program and credit
approval process is used to determine the adequacy of the allowance for loan
losses.
17
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
18
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, 2001 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.
19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in rights of the Company's security holders
None
Item 3. Defaults by the Company on its senior securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included in this Report or
incorporated herein by reference:
3.1 Second Amended and Restated Articles of Incorporation of
Middlefield Banc Corp. *
3.2 Regulations of Middlefield Banc Corp. *
4 Specimen Stock Certificate *
10.1 1999 Stock Option Plan of Middlefield Banc Corp. *
10.2 Severance Agreement of President and Chief Executive
Officer *
10.3 Severance Agreement of Executive Vice President *
10.4 Federal Home Loan Bank of Cincinnati Agreement for
Advances and Security Agreement dated September 14,
2000 *
10.5 Collateral Assignment Split Dollar Agreement between the
President and Chief Executive Officer and The
Middlefield Banking Company *
21 Subsidiaries of Middlefield Banc Corp. *
99.1 Form of Indemnification Agreement with directors of
Middlefield Banc Corp. and executive officers of
Middlefield Banc Corp. and The Middlefield Banking
Compay *
99.2 Independent Accountants Report
20
* Incorporated by reference to the identically numbered exhibit
to the registration statement on Form 10 (File No. 033-23094)
filed on April 17, 2001 and subsequently amended on June 14,
2001.
(b) No reports on Form 8-K were filed by Middlefield Banc Corp.
during the quarter ended September 30, 2001.
21
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 13, 2001 By: /s/Thomas G. Caldwell
----------------------------------------
Thomas G. Caldwell
President and Chief Executive Officer
Date: November 13, 2001 By: /s/Donald L. Stacy
----------------------------------------
Donald L. Stacy
Principal Financial and Accounting
Officer
22