United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended: December 31, 2001
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 (IRS Employer
of incorporation or organization) Identification No.)
15985 East High Street, Middlefield, Ohio 44062-9263
(440) 632-1666
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(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Securities registered pursuant to section 12(b) of the Act: none
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Securities registered pursuant to section 12(g) of the Act: common stock,
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without par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value on March 1, 2002 of common stock held by
non-affiliates of the registrant was approximately $27.5 million. As of March 1,
2002, there were 1,103,544 shares of common stock issued and outstanding.
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement for the 2002 Annual
Meeting of Shareholders are incorporated by reference in Part III of this
report.
Table of Contents
Page
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Part I
Item 1 Business............................................................... 1
Item 2 Properties............................................................. 23
Item 3 Legal Proceedings...................................................... 24
Item 4 Submission of Matters to a Vote of Security Holders.................... 24
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters................................................................ 24
Item 6 Selected Financial Data................................................ 25
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 26
Item 7A Quantitative and Qualitative Disclosures About Market Risk............. 37
Item 8 Financial Statements and Supplementary Data............................ 40
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 66
Part III
Item 10 Directors and Executive Officers of the Registrant..................... 66
Item 11 Executive Compensation................................................. 66
Item 12 Security Ownership of Certain Beneficial Owners and Management......... 67
Item 13 Certain Relationships and Related Transactions......................... 67
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K....... 67
Signatures.
** Incorporated by reference to the definitive proxy statement for the 2002
annual meeting of shareholders, which will be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 2001
i
Item 1 -- Business
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Middlefield Banc Corp. Incorporated in 1988 under the Ohio General
Corporation Law, Middlefield Banc Corp. is a one-bank holding company registered
under the Bank Holding Company Act of 1956. Its sole subsidiary is The
Middlefield Banking Company, an Ohio-chartered commercial bank that began
operations in 1901. The bank engages in a general commercial banking business in
northeastern Ohio. Our principal executive offices are located at 15985 East
High Street, Middlefield, Ohio 44062-9263, and our telephone number is (440)
632-1666.
Middlefield became the holding company for The Middlefield Banking Company
in 1988. The principal source of Middlefield's income and funds is earnings of
and dividends paid by The Middlefield Banking Company. Middlefield's business
currently is limited to acting as holding company for the bank. Middlefield
currently does not plan to engage in any nonbanking activities, although it may
do so as opportunities arise.
The Middlefield Banking Company. The Middlefield Banking Company was
chartered under Ohio law in 1901. The bank offers its customers a broad range of
banking services, including checking, savings, and negotiable order of
withdrawal (NOW) accounts; money market accounts; time certificates of deposit,
commercial loans, real estate loans, and various types of consumer loans; safe
deposit facilities, and travelers' checks. The bank offers online banking
services to individuals and online cash management services to business
customers through its website at www.middlefieldbank.com.
Engaged in a general commercial banking business in northeastern Ohio, the
bank offers commercial banking services principally to small and medium-sized
businesses, professionals and small business owners, and retail customers. The
bank has developed and continues to monitor and update a marketing program to
attract and retain consumer accounts, and to offer banking services and
facilities compatible with the needs of its customers.
The bank's loan products include operational and working capital loans;
loans to finance capital purchases; term business loans; residential
construction loans; selected guaranteed or subsidized loan programs for small
businesses; professional loans; residential mortgage and commercial mortgage
loans, and consumer installment loans to purchase automobiles, boats, and for
home improvement and other personal expenditures. Although the bank makes
agricultural loans, it currently has no significant agricultural loans.
Market Area. The Middlefield Banking Company's market area consists
principally of Geauga, Portage, Trumbull, and Ashtabula Counties. Benefitting
from the area's proximity both to Cleveland and Akron, population and income
levels have maintained steady growth over the years.
Competition. The banking industry has been changing for many reasons,
including continued consolidation within the banking industry, legislative and
regulatory changes, and advances in technology. To deliver banking products and
services more effectively and efficiently, banking institutions are opening
in-store branches, installing more automated teller machines (ATMs) and
investing in technology to permit telephone, personal computer, and internet
banking. While all banks are experiencing the effects of the changing
competitive and technological environment, the manner in which banks choose to
compete is increasing the gap between large national and super-regional banks,
on one hand, and community banks on the other. Large institutions are committed
to becoming national or regional "brand names," providing a broad selection of
products at low cost and with advanced technology, while community banks provide
most of the same products but with a commitment to personal service and with
local ties to the customers and communities they serve. The Middlefield Banking
Company seeks to take competitive advantage of its local orientation and
community banking
1
profile. It competes for loans principally through responsiveness to customers
and its ability to communicate effectively with them and understand and address
their needs. The bank competes for deposits principally by offering customers
personal attention, a variety of banking services, attractive rates, and
strategically located banking facilities. The bank seeks to provide high quality
banking service to professionals and small and mid-sized businesses, as well as
individuals, emphasizing quick and flexible responses to customer demands.
Lending -- Loan Portfolio Composition and Activity. The Middlefield Banking
Company makes residential mortgage and commercial mortgage loans, home equity
loans, secured and unsecured consumer installment loans, commercial and
industrial loans, and real estate construction loans for owner-occupied and
rental properties. The bank's loan policy aspires to a loan composition mix
consisting of approximately 60% to 70% residential real estate loans, 35% to 40%
commercial loans, consumer loans of 5% to 15%, and credit card accounts of up to
5%.
Although Ohio bank law imposes no material restrictions on the kinds of
loans The Middlefield Banking Company may make, real estate-based lending has
historically been the bank's primary focus. For prudential reasons, the bank
avoids lending on the security of real estate located in regions with which the
bank is not familiar, and as a consequence almost all of the bank's real-estate
secured loans are secured by real property in northeastern Ohio. Ohio bank law
does restrict the amount of loans an Ohio-chartered bank such as The Middlefield
Banking Company may make, however, providing generally that loans and extensions
of credit to any one borrower may not exceed 15% of capital. An additional
margin of 10% of capital is allowed for loans fully secured by readily
marketable collateral. This 15% legal lending limit has not been a material
restriction on The Middlefield Banking Company's lending. The Middlefield
Banking Company can accommodate loan volumes exceeding the legal lending limit
by selling loan participations to other banks. The Middlefield Banking Company's
internal policy is to maintain its credit exposure to any one borrower at less
than $1.5 million, which is comfortably within the range of the bank's legal
lending limit. As of December 31, 2001, the bank's 15%-of-capital limit on loans
to a single borrower was approximately $3.0 million.
The bank offers specialized loans for business and commercial customers,
including equipment and inventory financing, real estate construction loans and
Small Business Administration loans for qualified businesses. A substantial
portion of the bank's commercial loans are designated as real estate loans for
regulatory reporting purposes because they are secured by mortgages on real
property. Loans of that type may be made for purpose of financing commercial
activities, such as accounts receivable, equipment purchases and leasing, but
they are secured by real estate to provide the bank with an extra measure of
security. Although these loans might be secured in whole or in part by real
estate, they are treated in the discussions to follow as commercial and
industrial loans. The bank's consumer installment loans include secured and
unsecured loans to individual borrowers for a variety of purposes, including
personal, home improvements, revolving credit lines, autos, boats, and
recreational vehicles.
The following table shows the composition of the loan portfolio in dollar
amounts and in percentages at December 31, 2001, 2000, and 1999, along with a
reconciliation to loans receivable, net.
Loan Portfolio Composition at December 31,
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(Dollars in thousands) 2001 2000 1999
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Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
Type of loan:
Commercial and industrial .... $ 28,313 18.53% $ 21,508 15.90% $ 18,587 15.33%
Real estate construction ..... 3,200 2.09 2,568 1.90 2,259 1.86
Mortgage:
2
Loan Portfolio Composition at December 31,
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(Dollars in thousands) 2001 2000 1999
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Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
Residential ............. 113,049 73.97 101,404 74.95 89,263 73.63
Commercial .............. 3,388 2.22 4,809 3.55 6,919 5.71
Consumer installment ......... 4,878 3.19 5,015 3.70 4,200 3.47
-------- ------- -------- ------- -------- -------
Total loans .................. 152,828 100.00% 135,304 100.00% 121,228 100.00%
======= ======= =======
Less:
Allowance for loan losses.. 2,062 2,037 1,756
-------- -------- --------
Net loans .................... $150,766 $133,267 $119,472
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Net loans as a percent of
total assets ................. 76.20% 75.51% 72.18%
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The following table presents maturity information for t he loan portfolio
at December 31, 2001. The table does not include prepayments or scheduled
principal repayments. All loans are shown as maturing based on contractual
maturities.
Loan Portfolio Maturity at December 31, 2001
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Commercial and Real Estate Mortgage Consumer Total
Industrial Construction ------------------------ Installment
(Dollars in thousands) Residential Commercial
-------------- ------------ ----------- ---------- ----------- --------
Amount due:
In one year or less *........ $ 9,663 $2,484 $ 18,844 $1,296 $1,568 $ 33,855
After one year through five
years......................... 11,175 180 59,891 1,114 2,610 74,970
After five years............. 7,475 536 34,314 978 700 44,003
------- ------ -------- ------ ------ --------
Total amount due...... $28,313 $3,200 $113,049 $3,388 $4,878 $152,828
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* Loans due on demand and overdrafts are included in the amount due in one
year or less. The Middlefield Banking Company has no loans without a stated
schedule of repayment or a stated maturity.
The following table shows the dollar amount of all loans due after December
31, 2002 that have pre-determined interest rates and the dollar amount of all
loans due after December 31, 2002 that have floating or adjustable rates
(Dollars in thousands) Fixed Rates Adjustable Rates Total
----------- ---------------- ---------
Commercial and industrial ......... $12,849 $ 5,801 $ 18,650
Real estate construction .......... 538 178 716
Mortgage:
Residential .............. 36,899 57,306 94,205
Commercial ............... 1,597 495 2,092
Consumer installment .............. 3,310 -- 3,310
------- ------- ---------
Total .................... $55,193 $63,780 $118,973
======= ======= =========
Residential Mortgage Loans. A significant portion of the bank's lending
consists of origination of conventional loans secured by 1-4 family real estate
located in Geauga, Portage, Trumbull, and Ashtabula Counties. These loans
approximated $113.0 million or 74.0% of the bank's total loan portfolio at
December 31, 2001.
3
The bank makes loans of up to 80% of the value of the real estate and
improvements securing a loan (the "loan-to-value" or "LTV" ratio) on 1-4 family
real estate. The bank generally does not lend in excess of 80% of the appraised
value or sales price (whichever is less) of the property unless additional
collateral is obtained, thereby lowering the total LTV. The bank offers
residential real estate loans with terms of up to 30 years.
Before 1996, nearly all residential mortgage loans originated by the bank
were written on a balloon-note basis. During 1996, the bank began to originate
fixed-rate mortgage loans for maturities up to 20 years. In late 1998, the bank
began originating adjustable-rate mortgage loans and de-emphasized balloon-note
mortgages. Approximately 64.0% of the portfolio of conventional mortgage loans
secured by 1-4 family real estate at December 31, 2001 was adjustable rate. The
bank's mortgage loans are ordinarily retained in the loan portfolio. The bank's
residential mortgage loans have not been originated with loan documentation that
would permit their sale to Fannie Mae and Freddie Mac.
The bank's home equity loan policy generally allows for a loan of up to 85%
of a property's appraised value, less the principal balance of the outstanding
first mortgage loan. The bank's home equity loans generally have terms of 10
years.
At December 31, 2001, residential mortgage loans of approximately $216,000
were over 90 days delinquent or nonaccruing on that date, representing .19% of
the residential mortgage loan portfolio.
Commercial and Industrial Loans and Commercial Real Estate Loans. The
bank's commercial loan services include--
.. accounts receivable, inventory and . short-term notes
working capital loans . selected guaranteed or subsidized loan
.. renewable operating lines of credit programs for small businesses
.. loans to finance capital equipment . loans to professionals
.. term business loans . commercial real estate loans
Commercial real estate loans include commercial properties occupied by the
proprietor of the business conducted on the premises, and income-producing or
farm properties. Although the bank makes agricultural loans, it currently does
not have a significant amount of agricultural loans. The primary risks of
commercial real estate loans is loss of income of the owner or occupier of the
property and the inability of the market to sustain rent levels. Although
commercial and commercial real estate loans generally bear somewhat more risk
than single-family residential mortgage loans, commercial and commercial real
estate loans tend to be higher yielding, tend to have shorter terms and commonly
provide for interest-rate adjustments as prevailing rates change. Accordingly,
commercial and commercial real estate loans enhance a lender's interest rate
risk management and, in management's opinion, promote more rapid asset and
income growth than a loan portfolio comprised strictly of residential real
estate mortgage loans.
Although a risk of nonpayment exists for all loans, certain specific types
of risks are associated with various kinds of loans. One of the primary risks
associated with commercial loans is the possibility that the commercial borrower
will not generate income sufficient to repay the loan. The bank's loan policy
provides that commercial loan applications must be supported by documentation
indicating that there will be cash flow sufficient for the borrower to service
the proposed loan. Financial statements or tax returns for at least three years
must be submitted, and annual reviews are undertaken for loans of $1 million or
more. The fair market value of collateral for collateralized commercial loans
must exceed the bank's loan exposure. For this purpose fair market value is
determined by independent appraisal or by
4
the loan officer's estimate employing guidelines established by the loan policy.
Term loans not secured by real estate generally have terms of five years or
less, unless guaranteed by the U.S. Small Business Administration or other
governmental agency, and terms loans secured by collateral having a useful life
exceeding five years may have longer terms. The bank's loan policy allows for
terms of up to 15 years for loans secured by commercial real estate, and one
year for business lines of credit. The maximum loan-to-value ratio for
commercial real estate loans is 75% of the appraised value or cost, whichever is
less.
Real estate is commonly a material component of collateral for the bank's
loans, including commercial loans. Although the expected source of repayment of
these loans is generally the operations of the borrower's business or personal
income, real estate collateral provides an additional measure of security. Risks
associated with loans secured by real estate include fluctuating land values,
changing local economic conditions, changes in tax policies, and a concentration
of loans within a limited geographic area.
At December 31, 2001, commercial and commercial real estate loans totaled $
31.7 million, or 20.7% of the bank's total loan portfolio. There were commercial
and commercial real estate loans of approximately $57,000 that were over 90 days
delinquent or nonaccruing on that date, representing .18% of the commercial and
commercial real estate loan portfolio.
Real Estate Construction. The Middlefield Banking Company originates
several different types of loans that it categorizes as construction loans,
including--
. residential construction loans to borrowers who will occupy the
premises upon completion of construction,
. residential construction loans to builders,
. commercial construction loans, and
. real estate acquisition and development loans.
Because of the complex nature of construction lending, these loans are
generally recognized as having a higher degree of risk than other forms of real
estate lending. The bank's fixed-rate and adjustable-rate construction loans do
not provide for the same interest rate terms on the construction loan and on the
permanent mortgage loan that follows completion of the construction phase of the
loan. It is the norm for the bank to make residential construction loans without
an existing written commitment for permanent financing. The bank's loan policy
provides that the bank may make construction loans with terms of up to one year,
with a maximum loan-to-value ratio for residential construction of 80%.
At December 31, 2001, real estate construction loans totaled $3.2 million,
or 2.1% of the bank's total loan portfolio. There were no real estate
construction loans with outstanding balances more than 90 days delinquent or
nonaccruing.
Consumer Installment Loans. The bank's consumer installment loans include
secured and unsecured loans to individual borrowers for a variety of purposes,
including personal, home improvement, revolving credit lines, autos, boats, and
recreational vehicles. The bank does not currently do any indirect lending.
Unsecured consumer loans carry significantly higher interest rates than secured
loans. The bank maintains a higher loan loss allowance for consumer loans, while
maintaining strict credit guidelines when considering consumer loan
applications.
According to the bank's loan policy, consumer loans secured by collateral
other than real estate generally may have terms of up to five years, and
unsecured consumer loans may have terms up to two and one-half years. Real
estate security generally is required for consumer loans having terms exceeding
five years.
5
At December 31, 2001, the bank had approximately $4.9 million in its
consumer installment loan portfolio, representing 3.2% of total loans. Consumer
installment loans of approximately $20,000 were over 90 days delinquent or
nonaccruing on that date, representing .4% of the installment loan portfolio.
Loan Solicitation and Processing. Loan originations are developed from a
number of sources, including continuing business with depositors, other
borrowers and real estate builders, solicitations by bank personnel and walk-in
customers.
When a loan request is made, the bank reviews the application, credit
bureau reports, property appraisals or evaluations, financial information,
verifications of income, and other documentation concerning the creditworthiness
of the borrower, as applicable to each loan type. The bank's underwriting
guidelines are set by senior management and approved by the board. The loan
policy specifies each individual officer's loan approval authority, including
residential mortgage loans up to $200,000 for the Executive Vice President and
the Senior Retail Lender, and secured commercial loans up to $150,000 for the
Executive Vice President and the Senior Commercial Lender. Loans exceeding an
individual officer's approval authority are submitted to a committee consisting
of loan officers, which has authority to approve loans up to $250,000. The full
board acts as a loan committee for loans exceeding that amount.
Income from Lending Activities. The bank earns interest and fee income from
its lending activities. Net of origination costs, loan origination fees are
amortized over the life of a loan. The bank also receives loan fees related to
existing loans, including late charges. Income from loan origination and
commitment fees and discounts varies with the volume and type of loans and
commitments made and with competitive and economic conditions. Note 1 to the
Consolidated Financial Statements included herein contains a discussion of the
manner in which loan fees and income are recognized for financial reporting
purposes.
Nonperforming Loans. Late charges on residential mortgages and consumer
loans are assessed if a payment is not received by the due date plus a grace
period. When an advanced stage of delinquency appears on a single-family loan
and if repayment cannot be expected within a reasonable time or a repayment
agreement is not entered into, a required notice of foreclosure or repossession
proceedings may be prepared by the bank's attorney and delivered to the borrower
so that foreclosure proceedings may be initiated promptly, if necessary. The
bank also collects late charges on commercial loans.
When the bank acquires real estate through foreclosure, voluntary deed, or
similar means, it is classified as "other real estate owned" until it is sold.
When property is acquired in this manner, it is recorded at the lower of cost
(the unpaid principal balance at the date of acquisition) or fair value. Any
subsequent write-down is charged to expense. All costs incurred from the date of
acquisition to maintain the property are expensed. "Other real estate owned" is
appraised during the foreclosure process, before acquisition. Losses are
recognized for the amount by which the book value of the related mortgage loan
exceeds the estimated net realizable value of the property.
The bank undertakes regular review of the loan portfolio to assess its
risks, particularly the risks associated with the commercial loan portfolio.
This includes annual review of every commercial loan representing credit
exposure of $150,000 or more. An independent certified public accounting firm
performs semi-annual loan reviews for the bank.
Classified Assets. FDIC regulations governing classification of assets
require nonmember commercial banks -- including The Middlefield Banking Company
-- to classify their own assets and to establish appropriate general and
specific allowances for losses, subject to FDIC review. The regulations
6
are designed to encourage management to evaluate assets on a case-by-case basis,
discouraging automatic classifications. Under this classification system,
problem assets of insured institutions are classified as "substandard,"
"doubtful," or "loss." An asset is considered "substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Substandard assets include those
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Assets classified as
"doubtful" have all the weaknesses inherent in those classified substandard,
with the added characteristic that the weaknesses make collection of principal
in full -- on the basis of currently existing facts, conditions, and values --
highly questionable and improbable. Assets classified as "loss" are those
considered uncollectible and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted.
Assets that do not expose the bank to risk sufficient to warrant classification
in one of the above categories, but that possess some weakness, are required to
be designated "special mention" by management.
When an insured institution classifies assets as either "substandard" or
"doubtful," it may establish allowances for loan losses in an amount deemed
prudent by management. When an insured institution classifies assets as "loss,"
it is required either to establish an allowance for losses equal to 100% of that
portion of the assets so classified or to charge off that amount. An
FDIC-insured institution's determination about classification of its assets and
the amount of its allowances is subject to review by the FDIC, which may order
the establishment of additional loss allowances. Management also employs an
independent third party to semi-annually review and validate the internal loan
review process and loan classifications. As of December 31, 2001, 2000, and 1999
classified assets were as follows:
Classified Assets at December 31,
------------------------------------------------------------------
2001 2000 1999
-------------------- -------------------- --------------------
Percent of Percent of Percent of
(Dollars in thousands) Amount total loans Amount total loans Amount total loans
------ ----------- ------ ----------- ------ -----------
Classified loans:
Special mention ....... $4,254 $2.78% $4,663 3.45% $2,353 1.94%
Substandard ........... 2,067 1.35% 1,784 1.32% 1,445 1.19%
Doubtful .............. 290 .19% 188 0.14% 310 0.26%
Loss .................. -- --% -- --% -- --%
------ ----- ------ ---- ------ ----
Total ........... $6,611 $4.33% $6,635 4.91% $4,108 3.39%
====== ===== ====== ==== ====== ====
Investments. Investment securities provide a return on residual funds after
lending activities. Investments may be in federal funds sold, corporate
securities, U.S. Government and agency obligations, state and local government
obligations and government-guaranteed, mortgage-backed securities. The bank
generally does not invest in securities that are rated less than investment
grade by a nationally recognized statistical rating organization. Ohio bank law
prescribes the kinds of investments an Ohio-chartered bank may make. Permitted
investments include local, state, and federal government securities,
mortgage-backed securities, and securities of federal government agencies. An
Ohio-chartered bank also may invest up to 10% of its assets in corporate debt
and equity securities, or a higher percentage in certain circumstances. Similar
to the legal lending limit on loans to any one borrower, Ohio bank law also
limits to 15% of capital the amount an Ohio-chartered bank may invest in the
securities of any one issuer, other than local, state, and federal government
and federal government agency issuers and mortgage-backed securities issuers.
These Ohio bank law provisions have not been a material constraint upon the
bank's investment activities.
7
All securities-related activity is reported to the bank's board of
directors. General changes in investment strategy are required to be reviewed
and approved by the board. Senior management can purchase and sell securities in
accordance with the bank's stated investment policy.
Management determines the appropriate classification of securities at the
time of purchase. If management has the intent and the bank has the ability at
the time of purchase to hold a security until maturity or on a long-term basis,
the security is classified as held-to-maturity and is reflected on the balance
sheet at historical cost. Securities to be held for indefinite periods and not
intended to be held to maturity or on a long-term basis are classified as
available-for-sale. Available-for-sale securities are reflected on the balance
sheet at their market value.
8
The following table sets forth the amortized cost and estimated market
value of the bank's investment portfolio at the dates indicated.
Investment Portfolio Amortized Cost and Estimated Value at December 31,
-----------------------------------------------------------------------
2001
-----------------------------------------------------------------------
Gross Gross
(Dollars in thousands) Amortizd unrealized unrealized Estimated
cost gains losses market value
-------- ---------- ---------- ------------
Available for Sale:
U.S. Treasury securities ............ $ -- $ -- $ -- $ --
U.S. Government agency
securities ......................... 2,153 60 -- 2,213
Obligations of states and
political subdivisions:
Taxable ........................... 1,411 17 (3) 1,425
Tax-exempt ........................ 5,822 108 (15) 5,915
Corporate securities ................ 550 26 -- 576
Mortgage-backed securities .......... 11,041 70 (60) 11,051
------- ---- ---- -------
Total ..................... $20,977 $281 $(78) $21,180
------- ---- ---- -------
Held to Maturity:
U.S. Government agency
securities ......................... $ -- $ -- $ -- $ --
Obligations of states and
political subdivisions:
Taxable ........................... 2,255 58 -- 2,313
Tax-exempt ........................ 5,562 120 -- 5,682
Corporate securities ................ 2,213 60 -- 2,273
Mortgage-backed securities .......... 199 5 -- 204
------- ---- ---- -------
Total ..................... $10,229 $243 $ -- $10,472
------- ---- ---- -------
Total Investment Securities ......... $31,206 $524 $(78) $31,652
======= ==== ==== =======
Investment Portfolio Amortized Cost and Estimated Value at December 31,
-------------------------------------------------------------------------------------------------
2000 1999
----------------------------------------------- -----------------------------------------------
Gross Gross Estimated Gross Gross Estimated
(Dollars in thousands) Amortized unrealized unrealized market Amortized unrealized unrealized market
cost gains losses value cost gains losses value
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
Available for Sale:
U.S. Treasury securities...... $ -- $ -- $ -- $ -- $ 500 $-- $ -- $ 500
U.S. Government agency
securities .................. 3,990 71 (1) 4,060 3,985 -- (45) 3,940
Obligations of states and
political subdivisions:
Taxable .................... 1,458 12 (3) 1,467 957 6 (14) 949
Tax-exempt ................. 3,685 42 (17) 3,710 3,550 5 (71) 3,484
Corporate securities ......... 701 3 (3) 701 952 -- (18) 934
Mortgage-backed securities ... 1,898 30 -- 1,928 -- -- -- --
------- ----- --- ------ ------- --- ---- -------
Total .............. $11,732 $158 $(24) $11,866 $ 9,944 $11 $(148) $ 9,807
------- ----- --- ------ ------- --- ---- -------
Held to Maturity:
U.S. Government agency
securities .................. $ 1,900 $ -- $ (9) $ 1,891 $ 3,031 $-- $ (72) $ 2,959
Obligations of states and
political subdivisions:
Taxable .................... 3,723 18 (20) 3,721 3,994 3 (90) 3907
Tax-exempt ................. 7,481 26 (7) 7,500 9,275 18 (58) 9,235
Corporate securities ......... 4,525 8 (19) 4,514 5,721 1 (94) 5,619
Mortgage-backed securities ... 313 2 -- 315 -- -- -- --
------- ----- --- ------ ------- --- ---- -------
Total .............. $17,942 $ 54 $(55) $17,941 $22,012 $22 $(314) $21,720
------- ----- --- ------ ------- --- ---- -------
Total Investment Securities... $29,674 $212 $(79) $29,807 $31,956 $33 $(462) $31,527
======= ==== ==== ======= ======= === ===== =======
9
The contractual maturity of investment securities at December 31, 2001 is
shown below. Expected maturities of investment securities could differ from
contractual maturities because the borrower, or issuer, could have the right to
call or prepay obligations with or without call or prepayment penalties.
December 31, 2001
------------------------------------------------------------------------------
One year or less More than one to five years More than five to ten years
------------------ --------------------------- ---------------------------
Carrying Average Carrying Carrying
value yield value Average yield value Average yield
-------- ------- -------- ---------------- -------- ----------------
U.S. Government agency
securities ................... $ -- --% $ 1,708 5.90% -- --%
Obligations of states and
political subdivisions:
Taxable ................... 1,639 5.70 2,042 5.75 -- --
Tax-exempt ................ 4,236 5.10 6,262 4.42 878 5.20
Corporate securities ......... 905 6.80 1,884 6.65 -- --
Mortgage-backed securities ... -- -- 647 5.13 -- --
------ ------- ----
Total ........................ $6,780 5.47% $12,543 5.21% $878 5.20%
====== ==== ======= ==== ==== ====
December 31, 2001
----------------------------------------------------------------
More than ten years Total investment securities and mortgage-
backed securities
-------------------- -----------------------------------------
Carrying Average Carrying
value yield value Average yield Market value
-------- --------- -------- ------------- --------------
U.S. Government agency
securities ....................... $ 506 7.07% $ 2,214 6.17% $ 2,213
Obligations of states and
political subdivisions:
Taxable ....................... -- -- 3,681 4.75 3,738
Tax-exempt .................... 100 6.50 11,476 5.73 11,597
Corporate securities ............. -- -- 2,789 6.70 2,850
Mortgage-backed securities ....... 10,602 6.06 11,249 6.00 11,254
------- ------- -------
Total ............................ $11,208 6.11% $31,409 5.83% $31,652
======= ==== ======= ==== =======
10
As of December 31, 2001, the bank also held 10,560 shares of $100 par value
Federal Home Loan Bank of Cincinnati stock, which are restricted securities.
FHLB stock represents an equity interest in the FHLB, but it does not have a
readily determinable market value. The stock can be sold at its par value only,
and only to the FHLB or to another member institution. Member institutions are
required to maintain a minimum stock investment in the FHLB, based on total
assets, total mortgages, and total mortgage-backed securities. The bank's
minimum investment in FHLB stock at December 31, 2001 was approximately
$1,056,000.
Sources of Funds -- Deposit Accounts. Deposit accounts are a major source
of funds for the bank. The bank offers a number of deposit products to attract
both commercial and regular consumer checking and savings customers, including
regular and money market savings accounts, NOW accounts, and a variety of
fixed-maturity, fixed-rate certificates with maturities ranging from seven days
to 60 months. These accounts earn interest at rates established by management
based on competitive market factors and management's desire to increase certain
types or maturities of deposit liabilities. The bank also provides travelers'
checks, official checks, money orders, ATM services, and IRA accounts.
The following table shows the amount of time deposits of $100,000 or more
as of December 31, 2001, including certificates of deposit, by time remaining
until maturity.
(Dollars in thousands) Maturity of Time Deposits of $100,000 or
More at December 31, 2001
----------------------------------------
Time Remaining to Maturity Amount Percent of Total
------------------------------------ ---------------- -------------------
Three months or less ............... $ 3,337 21%
Over three through 12 months ....... 4,632 29
Over 12 months ..................... 7,897 50
------- ---
Total ......................... $15,866 100%
======= ===
Borrowings. Deposits and repayment of loan principal are the bank's primary
sources of funds for lending activities and other general business purposes.
However, when the supply of lendable funds or funds available for general
business purposes cannot satisfy the demand for loans or general business
purposes, the bank can obtain funds from the FHLB of Cincinnati. In addition to
borrowing from the FHLB on a term-loan basis, the bank has a line of credit with
the FHLB that allows the bank to borrow in an amount up to 10.0 % of the bank's
total assets. Interest and principal are payable monthly, and the line of credit
is secured by a blanket pledge collateral agreement. At December 31, 2001, the
bank had $9.3 million of FHLB borrowings outstanding. Middlefield also has
access to credit through the Federal Reserve Bank of Cleveland and other funding
sources.
The outstanding balances and related information about short-term
borrowings, which includes securities sold under agreements to repurchase and
federal funds purchased, are summarized as follows:
2001 2000 1999
-------- ---------- ----------
Balance at year end ...................... $660,678 $ 543,222 $2,507,670
Average balance outstanding .............. 637,106 1,059,042 143,438
Maximum month-end balance ................ 833,008 3,581,491 2,507,670
Weighted-average rate at year end ........ 0.79% 5.43% 4.75%
Weighted average rate during the year .... 2.42% 6.05% 5.87%
Personnel. As of December 31, 2001 Middlefield and the bank had 66
full-time equivalent employees. None of the employees is represented by a
collective bargaining group. Management considers its relations with employees
to be excellent.
11
Supervision and Regulation
The following discussion of bank supervision and regulation is qualified in
its entirety by reference to the statutory and regulatory provisions discussed.
Changes in applicable law or in the policies of various regulatory authorities
could affect materially the business and prospects of Middlefield and the bank.
Middlefield is a bank holding company within the meaning of the Bank
Holding Company Act of 1956. As such, Middlefield is subject to regulation,
supervision, and examination by the Board of Governors of the Federal Reserve
System, acting primarily through the Federal Reserve Bank of Cleveland.
Middlefield is required to file annual reports and other information with the
Federal Reserve. The Middlefield Banking Company is an Ohio-chartered commercial
bank. As a state-chartered, nonmember bank, the bank is primarily regulated by
the FDIC and by the Ohio Division of Financial Institutions.
Middlefield and the bank are subject to federal banking laws, and the bank
is subject also to Ohio bank law. These federal and state laws are intended to
protect depositors, not stockholders. Federal and state laws applicable to
holding companies and their financial institution subsidiaries regulate the
range of permissible business activities, investments, reserves against
deposits, capital levels, lending activities and practices, the nature and
amount of collateral for loans, establishment of branches, mergers, dividends,
and a variety of other important matters. The bank is subject to detailed,
complex, and sometimes overlapping federal and state statutes and regulations
affecting routine banking operations. These statutes and regulations include but
are not limited to state usury and consumer credit laws, the Truth-in-Lending
Act and Regulation Z, the Equal Credit Opportunity Act and Regulation B, the
Fair Credit Reporting Act, the Truth in Savings Act, and the Community
Reinvestment Act. The bank must comply with Federal Reserve Board regulations
requiring depository institutions to maintain reserves against their transaction
accounts (principally NOW and regular checking accounts). Because required
reserves are commonly maintained in the form of vault cash or in a
noninterest-bearing account (or pass-through account) at a Federal Reserve Bank,
the effect of the reserve requirement is to reduce an institution's earning
assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991 expanded
significantly the authority of federal agencies to regulate the activities of
federally chartered and state-chartered financial institutions and their holding
companies. The Federal Reserve Board and the FDIC have extensive authority to
prevent and to remedy unsafe and unsound practices and violations of applicable
laws and regulations by institutions and holding companies. The agencies may
assess civil money penalties, issue cease-and-desist or removal orders, seek
injunctions, and publicly disclose those actions. In addition, the Ohio Division
of Financial Institutions possesses enforcement powers to address violations of
Ohio banking law by Ohio-chartered banks.
Regulation of Bank Holding Companies -- Bank and Bank Holding Company
Acquisitions. The Bank Holding Company Act requires every bank holding company
to obtain approval of the Federal Reserve before --
. directly or indirectly acquiring ownership or control of any voting
shares of another bank or bank holding company, if after the
acquisition the acquiring company would own or control more than 5% of
the shares of the other bank or bank holding company (unless the
acquiring company already owns or controls a majority of the shares),
. acquiring all or substantially all of the assets of another bank, or
. merging or consolidating with another bank holding company.
12
The Federal Reserve will not approve an acquisition, merger, or
consolidation that would have a substantially anticompetitive result, unless the
anticompetitive effects of the proposed transaction are clearly outweighed by a
greater public interest in satisfying the convenience and needs of the community
to be served. The Federal Reserve also considers capital adequacy and other
financial and managerial factors in its review of acquisitions and mergers.
Additionally, the Bank Holding Company Act, the Change in Bank Control Act
and the Federal Reserve Board's Regulation Y require advance approval of the
Federal Reserve to acquire "control" of a bank holding company. Control is
conclusively presumed to exist if an individual or company acquires 25% or more
of a class of voting securities of the bank holding company. If the holding
company has securities registered under Section 12 of the Securities Exchange
Act of 1934, as Middlefield does, or if no other person owns a greater
percentage of the class of voting securities, control is rebuttably presumed to
exist if a person acquires 10% or more, but less than 25%, of any class of
voting securities. Approval of the Ohio Division of Financial Institutions is
also necessary to acquire control of an Ohio-chartered bank.
Nonbanking Activities. With some exceptions, the Bank Holding Company Act
has for many years also prohibited a bank holding company from acquiring or
retaining direct or indirect ownership or control of more than 5% of the voting
shares of any company that is not a bank or bank holding company, or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve non-bank activities that, by
statute or by Federal Reserve Board regulation or order, are held to be closely
related to the business of banking or of managing or controlling banks. In
making its determination that a particular activity is closely related to the
business of banking, the Federal Reserve considers whether the performance of
the activities by a bank holding company can be expected to produce benefits to
the public -- such as greater convenience, increased competition, or gains in
efficiency in resources -- that will outweigh the risks of possible adverse
effects such as decreased or unfair competition, conflicts of interest, or
unsound banking practices. Some of the activities determined by Federal Reserve
Board regulation to be closely related to the business of banking are: making or
servicing loans or leases; engaging in insurance and discount brokerage
activities; owning thrift institutions; performing data processing services;
acting as a fiduciary or investment or financial advisor; and making investments
in corporations or projects designed primarily to promote community welfare.
Financial Holding Companies. On November 12, 1999 the Gramm-Leach-Bliley
Act became law, repealing much of the 1933 Glass-Steagall Act's separation of
the commercial and investment banking industries. The Gramm-Leach-Bliley Act
expands the range of nonbanking activities a bank holding company may engage in,
while preserving existing authority for bank holding companies to engage in
activities that are closely related to banking. The new legislation creates a
new category of holding company called a "financial holding company." Financial
holding companies may engage in any activity that is --
. financial in nature or incidental to that financial activity, or
. complementary to a financial activity and that does not pose a
substantial risk to the safety and soundness of depository
institutions or the financial system generally.
Activities that are financial in nature include--
. acting as principal, agent, or broker for insurance,
. underwriting, dealing in, or making a market in securities, and
13
. providing financial and investment advice.
The Federal Reserve Board and the Secretary of the Treasury have authority
to decide that other activities are also financial in nature or incidental to
financial activity, taking into account changes in technology, changes in the
banking marketplace, competition for banking services, and so on. A bank holding
company cannot be a financial holding company unless it satisfies the following
criteria:
1) all of the depository institution subsidiaries must be well
capitalized and well managed,
2) the holding company must file with the Federal Reserve a declaration
that it elects to be a financial holding company to engage in
activities that would not have been permissible before the
Gramm-Leach-Bliley Act, and
3) all of the depository institution subsidiaries must have a Community
Reinvestment Act rating of "satisfactory" or better.
Middlefield is engaged solely in activities that were permissible for a
bank holding company before enactment of the Gramm-Leach-Bliley Act. Although
Middlefield has become a financial holding company, Middlefield has no immediate
plans to use the expanded authority to engage in activities other than those in
which it is currently engaged.
Holding Company Capital and Source of Strength. The Federal Reserve
considers the adequacy of a bank holding company's capital on essentially the
same risk-adjusted basis as capital adequacy is determined by the FDIC at the
bank subsidiary level. In general, bank holding companies are required to
maintain a minimum ratio of total capital to risk-weighted assets of 8% and Tier
1 capital -- consisting principally of stockholders' equity -- of at least 4%.
Bank holding companies are also subject to a leverage ratio requirement. The
minimum required leverage ratio for the very highest rated companies is 3%, but
as a practical matter the minimum required leverage ratio for most bank holding
companies is 4% or higher. It is also Federal Reserve Board policy that bank
holding companies serve as a source of strength for their subsidiary banking
institutions.
Under Bank Holding Company Act section 5(e), the Federal Reserve Board may
require a bank holding company to terminate any activity or relinquish control
of a nonbank subsidiary if the Federal Reserve Board determines that the
activity or control constitutes a serious risk to the financial safety,
soundness or stability of a subsidiary bank. And with the Federal Deposit
Insurance Corporation Improvement Act of 1991's addition of the prompt
corrective action provisions to the Federal Deposit Insurance Act, section
38(f)(2)(I) of the Federal Deposit Insurance Act now provides that a federal
bank regulatory authority may require a bank holding company to divest itself of
an undercapitalized bank subsidiary if the agency determines that divestiture
will improve the bank's financial condition and prospects.
Federal Deposit Insurance. The FDIC insures deposits of banks, savings
banks, and savings associations, and it safeguards the safety and soundness of
the banking industry. Two separate insurance funds are maintained and
administered by the FDIC. In general, bank deposits are insured through the Bank
Insurance Fund. Deposits in savings associations are insured through the Savings
Association Insurance Fund.
As an FDIC member institution, deposits in the bank are insured to a
maximum of $100,000 per depositor. The banks are required to pay semiannual
deposit insurance premium assessments to the FDIC. In general terms, each
institution is assessed insurance premiums according to how much risk to the
insurance fund the institution represents. Well-capitalized institutions with
few supervisory concerns are
14
assessed lower premiums than other institutions. The premium range is currently
from $0.00 for the highest-rated institutions to $0.27 per $100 of domestic
deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, order, or
any condition imposed in writing by, or written agreement with, the FDIC. The
FDIC also may suspend deposit insurance temporarily during the hearing process
for a permanent termination of insurance if the institution has no tangible
capital.
Interstate Banking and Branching. In 1994 the Riegle-Neal Interstate
Banking and Branching Efficiency Act eased restrictions on interstate banking.
The Riegle-Neal Act allows the Federal Reserve to approve an application by an
adequately capitalized and adequately managed bank holding company to acquire a
bank located in a state other than the acquiring company's home state, without
regard to whether the transaction is prohibited by the laws of any state. The
Federal Reserve may not approve acquisition of a bank that has not been in
existence for the minimum time period (up to five years) specified by the
statutory law of the acquired, or "target," bank's state. The Riegle-Neal Act
also prohibits the Federal Reserve from approving an application if the
applicant (and its depository institution affiliates) controls or would control
more than 10% of the insured deposits in the United States or 30% or more of the
deposits in the target bank's home state or in any state in which the target
bank maintains a branch. The Riegle-Neal Act does not affect the authority of
states to limit the percentage of total insured deposits in the state that may
be held or controlled by a bank or bank holding company if the limitation does
not discriminate against out-of-state banks or bank holding companies.
Individual states may also waive the 30% statewide concentration limit contained
in the Riegle-Neal Act.
Branching between states may be accomplished by merging commonly controlled
banks located in different states into one legal entity. Branching may also be
accomplished by establishing de novo branches or acquiring branches in another
state. Under section 24(j) of the Federal Deposit Insurance Act, a branch of a
bank operating out-of-state -- in a "host state" -- is subject to the law of the
host state regarding community reinvestment, fair lending, consumer protection,
and establishment of branches. The Riegle-Neal Act authorizes the FDIC to
approve interstate branching de novo by state-chartered banks solely in states
that specifically allow it. Ohio bank law allows de novo branching in Ohio by an
out-of-state bank. The FDIC has adopted regulations under the Riegle-Neal Act to
prohibit an out-of-state bank from using the new interstate branching authority
primarily for the purpose of deposit production. These regulations include
guidelines to ensure that interstate branches operated by an out-of-state bank
in a host state are reasonably helping to satisfy the credit needs of the
communities served by the out-of-state bank.
Capital -- Risk-Based Capital Requirements. The Federal Reserve Board and
the FDIC employ similar risk-based capital guidelines in their examination and
regulation of bank holding companies and financial institutions. If capital
falls below the minimum levels established by the guidelines, the bank holding
company or bank may be denied approval to acquire or establish additional banks
or non-bank businesses or to open new facilities. Failure to satisfy capital
guidelines could subject a banking institution to a variety of enforcement
actions by federal bank regulatory authorities, including the termination of
deposit insurance by the FDIC and a prohibition on the acceptance of "brokered
deposits."
In the calculation of risk-based capital, assets and off-balance sheet
items are assigned to broad risk categories, each with an assigned weighting
(0%, 20%, 50% and 100%). Most loans are assigned to the 100% risk category,
except for first mortgage loans fully secured by residential property, which
carry a 50% rating. Most investment securities are assigned to the 20% category,
except for municipal or state revenue bonds, which have a 50% risk-weight, and
direct obligations of or obligations guaranteed by the United States Treasury or
United States Government agencies, which have a 0% risk-weight. Off-balance
sheet items are also taken into account in the calculation of risk-based
capital, with each class of off-balance
15
sheet item being converted to a balance sheet equivalent according to
established "conversion factors." From these computations, the total of
risk-weighted assets is derived. Risk-based capital ratios therefore state
capital as a percentage of total risk-weighted assets and off-balance sheet
items. The ratios established by guideline are minimums only.
Current risk-based capital guidelines require bank holding companies and
banks to maintain a minimum risk-based total capital ratio equal to 8% and a
Tier 1 capital ratio of 4%. Intangibles other than readily marketable mortgage
servicing rights are generally deducted from capital. Tier 1 capital includes
stockholders' equity, qualifying perpetual preferred stock (within limits and
subject to conditions, particularly if the preferred stock is cumulative
preferred stock), and minority interests in equity accounts of consolidated
subsidiaries, less intangibles, identified losses, investments in securities
subsidiaries, and certain other assets. Tier 2 capital includes --
. the allowance for loan losses, up to a maximum of 1.25% of
risk-weighted assets,
. any qualifying perpetual preferred stock exceeding the amount
includable in Tier 1 capital,
. mandatory convertible securities, and
. subordinated debt and intermediate term preferred stock, up to 50% of
Tier 1 capital.
The FDIC also employs a market risk component in its calculation of capital
requirements for nonmember banks. The market risk component could require
additional capital for general or specific market risk of trading portfolios of
debt and equity securities and other investments or assets. The FDIC's
evaluation of an institution's capital adequacy takes account of a variety of
other factors as well, including interest rate risks to which the institution is
subject, the level and quality of an institution's earnings, loan and investment
portfolio characteristics and risks, risks arising from the conduct of
nontraditional activities, and a variety of other factors.
Accordingly, the FDIC's final supervisory judgment concerning an
institution's capital adequacy could differ significantly from the conclusions
that might be derived from the absolute level of an institution's risk-based
capital ratios. Therefore, institutions generally are expected to maintain
risk-based capital ratios that exceed the minimum ratios discussed above. This
is particularly true for institutions contemplating significant expansion plans
and institutions that are subject to high or inordinate levels of risk.
Moreover, although the FDIC does not impose explicit capital requirements on
holding companies of institutions regulated by the FDIC, the FDIC can take
account of the degree of leverage and risks at the holding company level. If the
FDIC determines that the holding company (or another affiliate of the
institution regulated by the FDIC) has an excessive degree of leverage or is
subject to inordinate risks, the FDIC may require the subsidiary institution(s)
to maintain additional capital or the FDIC may impose limitations on the
subsidiary institution's ability to support its weaker affiliates or holding
company.
The banking agencies have also established a minimum leverage ratio of 3%,
which represents Tier 1 capital as a percentage of total assets, less
intangibles. However, for bank holding companies and financial institutions
seeking to expand and for all but the most highly rated banks and bank holding
companies, the banking agencies expect an additional cushion of at least 100 to
200 basis points. At December 31, 2001, the bank was in compliance with all
regulatory capital requirements.
Prompt Corrective Action. To resolve the problems of undercapitalized
institutions and to prevent a recurrence of the banking crisis of the 1980s and
early 1990s, the Federal Deposit Insurance Corporation Improvement Act of 1991
established a system known as "prompt corrective action." Under the prompt
16
corrective action provisions and implementing regulations, every institution is
classified into one of five categories, depending on its total risk-based
capital ratio, its Tier 1 risk-based capital ratio, its leverage ratio, and
subjective factors. The categories are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." A financial institution's operations can be
significantly affected by its capital classification. For example, an
institution that is not "well capitalized" generally is prohibited from
accepting brokered deposits and offering interest rates on deposits higher than
the prevailing rate in its market, and the holding company of any
undercapitalized institution must guarantee, in part, aspects of the
institution's capital plan. Financial institution regulatory agencies generally
are required to appoint a receiver or conservator shortly after an institution
enters the category of weakest capitalization. The Federal Deposit Insurance
Corporation Improvement Act of 1991 also authorizes the regulatory agencies to
reclassify an institution from one category into a lower category if the
institution is in an unsafe or unsound condition or engaging in an unsafe or
unsound practice. Undercapitalized institutions are required to take specified
actions to increase their capital or otherwise decrease the risks to the federal
deposit insurance funds.
The following table illustrates the capital and prompt corrective action
guidelines applicable to the bank, as well as its total risk-based capital
ratio, Tier 1 capital ratio and leverage ratio as of December 31, 2001.
At December 31, 2001 Minimum Necessary to be Minimum Necessary to be
Well Capitalized Adequately Capitalized
-------------------- ----------------------- -----------------------
Total Risk-Based Capital Ratio...... 17.82% 10.00% 8.00%
Tier 1 Risk-Based Capital Ratio..... 16.56% 6.00% 4.00%
Leverage Ratio...................... 9.94% 5.00% 4.00%
Limits on Dividends and Other Payments. Middlefield's ability to obtain
funds for the payment of dividends and for other cash requirements depends on
the amount of dividends that may be paid to it by the bank. Under Ohio bank law,
an Ohio-chartered bank may not pay a cash dividend if the amount of the dividend
exceeds "undivided profits," which is defined in Ohio bank law to mean the
cumulative undistributed amount of the bank's net income. But with the approval
of two thirds of the outstanding shares and approval of the superintendent of
the Division of Financial Institutions, an Ohio-chartered bank may pay cash
dividends from surplus. Lastly, approval of the superintendent is also required
if the total of all dividends and distributions declared on the bank's shares in
any year exceeds the total of the bank's net income for the year plus retained
net income for the two preceding years.
State-chartered banks' ability to pay dividends may be affected by capital
maintenance requirements of their primary federal bank regulatory agency as
well. Moreover, regulatory authorities may prohibit banks and bank holding
companies from paying dividends if payment of dividends would constitute an
unsafe and unsound banking practice.
A 1985 policy statement of the Federal Reserve Board declares that a bank
holding company should not pay cash dividends on common stock unless the
organization's net income for the past year is sufficient to fully fund the
dividends and the prospective rate of earnings retention appears consistent with
the organization's capital needs, asset quality, and overall financial
condition.
Transactions with Affiliates. Although the bank is not a member bank of the
Federal Reserve System, it is required by the Federal Deposit Insurance Act to
comply with section 23A and section 23B of the Federal Reserve Act -- pertaining
to transactions with affiliates -- as if it were a member bank. These statutes
are intended to protect banks from abuse in financial transactions with
affiliates, preventing federally insured deposits from being diverted to support
the activities of unregulated entities engaged in
17
nonbanking businesses. An affiliate of a bank includes any company or entity
that controls or is under common control with the bank. Generally, section 23A
and section 23B of the Federal Reserve Act --
. limit the extent to which a bank or its subsidiaries may lend to or
engage in various other kinds of transactions with any one affiliate
to an amount equal to 10% of the institution's capital and surplus,
limiting the aggregate of covered transactions with all affiliates to
20% of capital and surplus,
. impose restrictions on investments by a subsidiary bank in the stock
or securities of its holding company,
. impose restrictions on the use of a holding company's stock as
collateral for loans by the subsidiary bank, and
. require that affiliate transactions be on terms substantially the
same, or at least as favorable to the institution or subsidiary, as
those provided to a non-affiliate.
The bank's authority to extend credit to insiders -- meaning executive
officers, directors and greater than 10% stockholders -- or to entities those
persons control, is subject to section 22(g) and section 22(h) of the Federal
Reserve Act and Regulation O of the Federal Reserve Board. Among other things,
these laws require insider loans to be made on terms substantially similar to
those offered to unaffiliated individuals, place limits on the amount of loans a
bank may make to insiders based in part on the bank's capital position, and
require that specified approval procedures be followed. Loans to an individual
insider may not exceed the legal limit on loans to any one borrower, which in
general terms is 15% of capital but can be higher in some circumstances. And the
aggregate of all loans to all insiders may not exceed the bank's unimpaired
capital and surplus. Insider loans exceeding the greater of 5% of capital or
$25,000 must be approved in advance by a majority of the board, with any
"interested" director not participating in the voting. Lastly, loans to
executive officers are subject to special limitations. Executive officers may
borrow in unlimited amounts to finance their children's education or to finance
the purchase or improvement of their residence, and they may borrow no more than
$100,000 for most other purposes. Loans to executive officers exceeding $100,000
may be allowed if the loan is fully secured by government securities or a
segregated deposit account. A violation of these restrictions could result in
the assessment of substantial civil monetary penalties, the imposition of a
cease-and-desist order or other regulatory sanctions.
Community Reinvestment Act. Under the Community Reinvestment Act of 1977
and implementing regulations of the banking agencies, a financial institution
has a continuing and affirmative obligation -- consistent with safe and sound
operation -- to address the credit needs of its entire community, including low-
and moderate-income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions, nor does it limit an
institution's discretion to develop the types of products and services it
believes are best suited to its particular community. The CRA requires that bank
regulatory agencies conduct regular CRA examinations and provide written
evaluations of institutions' CRA performance. The CRA also requires that an
institution's CRA performance rating be made public. CRA performance evaluations
are based on a four-tiered rating system: Outstanding, Satisfactory, Needs to
Improve and Substantial Noncompliance.
Although CRA examinations occur on a regular basis, CRA performance
evaluations have been used principally in the evaluation of regulatory
applications submitted by an institution. CRA performance evaluations are
considered in evaluating applications for such things as mergers, acquisitions,
and applications to open branches. Over the 25 years that the CRA has existed,
and particularly in the last decade, institutions have faced increasingly
difficult regulatory obstacles and public interest group
18
objections in connection with their regulatory applications, including
institutions that have received the highest possible CRA ratings.
A bank holding company cannot elect to be a "financial holding company" --
with the expanded securities, insurance and other powers that designation
entails -- unless all of the depository institutions owned by the holding
company have a CRA rating of satisfactory or better. The Gramm-Leach-Bliley Act
also provides that a financial institution with total assets of $250 million or
less will be subject to CRA examinations no more frequently than every 5 years
if its most recent CRA rating was "outstanding," or every 4 years if its rating
was "satisfactory." Following a CRA examination as of August 10, 1999, the bank
received a rating of "Outstanding." Lastly, the Gramm-Leach-Bliley Act requires
public disclosure of private CRA agreements entered into between banking
organizations and other parties, and annual reporting by banking organizations
of actions taken under the private CRA agreements. This last provision of the
Gramm-Leach-Bliley Act addresses the increasingly common practice whereby a bank
or holding company undertaking acquisition of another bank or holding company
enters into an agreement with parties who might otherwise file with bank
regulators a CRA protest of the acquisition. The details of these agreements
have not been universally disclosed by acquiring institutions in the past.
Federal Home Loan Banks. The Federal Home Loan Banks serve as credit
sources for their members. As a member of the FHLB of Cincinnati, The
Middlefield Banking Company is required to maintain an investment in the capital
stock of the FHLB of Cincinnati in an amount calculated by reference to its and
the amount of loans, or "advances," from the FHLB. The bank is in compliance
with this requirement, with an investment in FHLB stock of $1,070,600 at
December 31, 2001.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLB. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers.
State Banking Regulation. As an Ohio-chartered bank, the bank is subject to
regular examination by the Ohio Division of Financial Institutions. State
banking regulation affects the internal organization of the bank as well as its
savings, lending, investment, and other activities. State banking regulation may
contain limitations on an institution's activities that are in addition to
limitations imposed under federal banking law. The Ohio Division of Financial
Institutions may initiate supervisory measures or formal enforcement actions,
and if the grounds provided by law exist it may take possession and control of
an Ohio-chartered bank.
Monetary Policy. The earnings of financial institutions are affected by the
policies of regulatory authorities, including monetary policy of the Federal
Reserve Board. An important function of the Federal Reserve System is regulation
of aggregate national credit and money supply. The Federal Reserve Board
accomplishes these goals with measures such as open market transactions in
securities, establishment of the discount rate on bank borrowings, and changes
in reserve requirements against bank deposits. These methods are used in varying
combinations to influence overall growth and distribution of financial
institutions' loans, investments and deposits, and they also affect interest
rates charged on loans or paid on deposits. Monetary policy is influenced by
many factors, including inflation, unemployment, short-term and long-term
changes in the international trade balance, and fiscal policies of the United
States government. Federal Reserve Board monetary policy has had a significant
effect on the operating results of financial institutions in the past, and it
can be expected to influence operating results in the future.
Risk Factors
19
Our market is very competitive. We face competition both in making loans
and in attracting deposits. Competition is based on interest rates and other
credit and service charges, the quality of services rendered, the convenience of
banking facilities, the range and type of products offered and, in the case of
loans to larger commercial borrowers, lending limits, among other factors.
Competition for loans comes principally from commercial banks, savings banks,
savings and loan associations, credit unions, mortgage banking companies,
insurance companies, and other financial service companies. Our most direct
competition for deposits has historically come from commercial banks, savings
banks, and savings and loan associations. We face additional competition for
deposits from non-depository institutions such as mutual funds, securities and
brokerage firms, and insurance companies.
Competition among financial institutions and other financial service
organizations is increasing with the continuing consolidation of the financial
services industry. Additionally, legislative and regulatory changes could affect
competition. Congress' elimination in 1994 of many restrictions on interstate
branching could increase competition from large banks headquartered outside of
northeastern Ohio. Congress' repeal in late 1999 of much of the Glass-Steagall
Act (which had separated the commercial and investment banking industries) and
elimination of the barriers between the banking and insurance industries might
make competition even more intense. Because of our smaller size, we may have
less opportunity to take advantage of the flexibility offered by that new
legislation.
The bank does not have the financial and other resources that larger
competitors have; this could affect its ability to compete for large commercial
loan originations and its ability to offer products and services competitors
provide to customers. The northeastern Ohio market in which The Middlefield
Banking Company operates has a high concentration of financial institutions.
Many of the financial institutions operating in our market are branches of
significantly larger institutions headquartered in Cleveland or in other major
metropolitan areas, with significantly greater financial resources and higher
lending limits. More geographically diversified than The Middlefield Banking
Company, they are therefore less vulnerable to adverse changes in our local
economy. And many of these institutions offer services that we do not or cannot
provide. For example, the larger competitors' greater resources offer advantages
such as the ability to price services at lower, more attractive levels, and the
ability to provide larger credit facilities than The Middlefield Banking Company
can provide. Likewise, some of the competitors are not subject to the same kind
and amount of regulatory restrictions and supervision to which The Middlefield
Banking Company is subject. Because The Middlefield Banking Company is smaller
than many commercial lenders in its market, it is on occasion prevented from
making commercial loans in amounts competitors can offer. The Middlefield
Banking Company accommodates loan volumes in excess of its lending limits from
time to time through the sale of loan participations to other banks.
The business of banking is changing rapidly with changes in technology,
which poses financial and technological challenges to small and mid-sized
institutions. With frequent introductions of new technology-driven products and
services, the banking industry is undergoing rapid technological changes. In
addition to enhancing customer service, the effective use of technology
increases efficiency and enables financial institutions to reduce costs.
Financial institutions' success is increasingly dependent upon use of technology
to provide products and services that satisfy customer demands and to create
additional operating efficiencies. Many of The Middlefield Banking Company's
competitors have substantially greater resources to invest in technological
improvements, which could enable them to perform various banking functions at
lower costs than The Middlefield Banking Company, or to provide products and
services that The Middlefield Banking Company is not able to provide
economically. We cannot assure you that we will be able to develop and implement
new technology-driven products or services or that we will be successful in
marketing these products or services to customers.
Because of the demand for technology-driven products, banks rely
increasingly on unaffiliated vendors to provide data processing services and
other core banking functions. The use of
20
technology-related products, services, delivery channels, and processes exposes
banks to various risks, particularly transaction, strategic, reputation, and
compliance risk. We cannot assure you that we will be able to successfully
manage the risks associated with our dependence on technology.
The banking industry is heavily regulated; the compliance burden to the
industry is considerable; the principal beneficiary of federal and state
regulation is the public at large and depositors, not stockholders. Middlefield
Banc Corp. and The Middlefield Banking Company are and will remain subject to
extensive state and federal government supervision and regulation. Affecting
many aspects of the banking business, including permissible activities, lending,
investments, payment of dividends, the geographic locations in which our
services can be offered, and numerous other matters, state and federal
supervision and regulation are intended principally to protect depositors, the
public, and the deposit insurance funds administered by the FDIC. Protection of
stockholders is not a goal of banking regulation.
Applicable statutes, regulations, agency and court interpretations, and
agency enforcement policies have undergone significant changes, some
retroactively applied, and could change significantly again. Changes in
applicable laws and regulatory policies could adversely affect the banking
industry generally or Middlefield and The Middlefield Banking Company in
particular. The burdens of federal and state banking regulation could place
banks in general at a competitive disadvantage compared to less regulated
competitors. We give you no assurance that we will be able to adapt successfully
to industry changes caused by governmental actions.
Federal and state banking agencies require banks and bank holding companies
to maintain capital. Failure to maintain adequate capital or to comply with
applicable laws, regulations, and supervisory agreements could subject a bank or
bank holding company to federal or state enforcement actions, including
termination of deposit insurance, imposition of fines and civil penalties, and,
in the most severe cases, appointment of a conservator or receiver for a
depositary institution.
Success in the banking industry requires disciplined management of lending
risks. There are many risks in the business of lending, including risks
associated with the duration over which loans may be repaid, risks resulting
from changes in economic conditions, risks inherent in dealing with individual
borrowers, and risks resulting from changes in the value of loan collateral. We
maintain an allowance for loan losses based on historical experience, an
evaluation of economic conditions, and regular reviews of delinquencies and loan
portfolio quality, among other things. Our judgment about the adequacy of the
loan loss allowance is based on assumptions that we believe are reasonable but
that might nevertheless prove to be incorrect. We can give you no assurance that
the allowance will be sufficient to absorb future charge-offs. Additions to the
loan loss allowance could occur, which would decrease net income and capital.
Changing interest rates have a direct and immediate impact on financial
institutions. The risk of nonpayment of loans -- or credit risk -- is not the
only lending risk. Lenders are subject also to interest rate risk. Fluctuating
rates of interest prevailing in the market affect a bank's net interest income,
which is the difference between interest earned from loans and investments, on
one hand, and interest paid on deposits and borrowings, on the other. In the
early 1990s, many banking organizations experienced historically high interest
rate spreads, meaning the difference between the interest rates earned on loans
and investments and the interest rates paid on deposits and borrowings. Since
then, however, interest rate spreads have generally narrowed due to changing
market conditions and competitive pricing pressures. It has become increasingly
difficult for depository institutions to maintain deposit growth at the same
rate as loan growth. Under these circumstances, to maintain deposit growth an
institution might have to offer more attractive deposit terms, further narrowing
the institution's interest rate spread. Middlefield cannot assure you that
interest rate spreads will not narrow even more or that higher interest rate
spreads will return.
21
Banks manage interest rate risk exposure by closely monitoring assets and
liabilities, altering from time to time the mix and maturity of loans,
investments, and funding sources. Changes in interest rates could result in an
increase in higher-cost deposit products within a bank's existing portfolio, as
well as a flow of funds away from bank accounts into direct investments (such as
U.S. Government and corporate securities, and other investment instruments such
as mutual funds) if the bank does not pay competitive interest rates. The
percentage of household financial assets held in the form of deposits is
shrinking. Banking customers are investing a growing portion of their financial
assets in stocks, bonds, mutual funds, and retirement accounts. Changes in
interest rates also affect the volume of loans originated, as well as the value
of loans and other interest-earning assets, including investment securities.
An economic downturn in our market area would adversely affect our loan
portfolio and our growth prospects. Our lending market area is concentrated in
northeastern Ohio, particularly Geauga, Portage, Trumbull and Ashtabula
Counties. A high percentage of our loan portfolio is secured by real estate
collateral, primarily residential mortgage loans. Commercial and industrial
loans to small and medium-sized businesses also represent a significant
percentage of our loan portfolio. The asset quality of our loan portfolio is
largely dependent upon the area's economy and real estate markets. A downturn in
the economy in our primary lending area would adversely affect our operations
and limit our future growth potential.
Middlefield common stock is very thinly traded, and it is therefore
susceptible to wide price swings. Middlefield's common stock is not traded or
authorized for quotation on any exchanges or on Nasdaq. However, bid prices for
Middlefield common stock appear from time to time in the pink sheets under the
symbol "MBCN." The "pink sheets" is a static paper quotation service for
over-the-counter securities that is printed weekly and distributed by the
National Quotation Bureau, LLC to broker-dealers. Thinly traded, illiquid stocks
are more susceptible to significant and sudden price changes than stocks that
are widely followed by the investment community and actively traded on an
exchange or Nasdaq. The liquidity of the common stock depends upon the presence
in the marketplace of willing buyers and sellers. We cannot assure you that you
will be able to find a buyer for your shares. Two regional broker/dealers
facilitate trades of Middlefield common stock, matching interested buyers and
sellers.
We currently do not intend to seek listing of the common stock on a
securities exchange and we do not intend to seek authorization for trading of
the shares on Nasdaq. Even if we successfully list the common stock on a
securities exchange or obtain Nasdaq trading authorization, we nevertheless
could not assure you that an organized public market for the securities will
develop or that there will be any private demand for the common stock. We could
also fail subsequently to satisfy the standards for continued exchange listing
or Nasdaq trading, such as standards having to do with the minimum number of
public shareholders or the aggregate market value of publicly held shares.
A stock that is not listed on a securities exchange or authorized for
Nasdaq trading might not be accepted as collateral for loans. If accepted as
collateral, the stock's value could nevertheless be substantially discounted.
Consequently, investors should regard the common stock as a long-term investment
and should be prepared to bear the economic risk of an investment in the common
stock for an indefinite period. Investors who need or desire to dispose of all
or a part of their investments in the common stock might not be able to do so
except by private, direct negotiations with third parties.
Government regulation could restrict our ability to pay cash dividends.
Dividends from the bank are the only significant source of cash for Middlefield.
Statutory and regulatory limits could prevent the bank from paying dividends or
transferring funds to Middlefield. As of December 31, 2001 the bank could have
declared dividends of approximately $2.5 million to Middlefield without having
to obtain advance regulatory approval. We cannot assure you that the bank's
profitability will continue to allow it to pay
22
dividends to Middlefield, and we therefore cannot assure you that Middlefield
will be able to continue paying regular, quarterly cash dividends.
We could incur liabilities under federal and state environmental laws if we
foreclose on commercial properties. A high percentage of the bank's loans are
secured by real estate. Although the vast majority of these loans are
residential mortgage loans with little associated environmental risk, some are
commercial loans secured by property on which manufacturing and other commercial
enterprises are carried on. The bank currently does not own any property
acquired by foreclosure. However, the bank has in the past and could again
acquire property by foreclosing on loans in default. Under federal and state
environmental laws, the bank could face liability for some or all of the costs
of removing hazardous substances, contaminants, or pollutants from properties
acquired in this fashion. Although other persons might be primarily responsible
for these costs, they might not be financially solvent or they might be unable
to bear the full cost of clean up. Regardless of whether it forecloses on
property, it is also possible that a lender exercising unusual influence over a
borrower's commercial activities could be required to bear a portion of the
clean-up costs under federal or state environmental laws.
Middlefield does not have acquisition experience. Many financial
institutions and holding companies achieve growth through mergers and
acquisitions. Although Middlefield has never undertaken acquisition of another
institution, from time to time Middlefield explores potential acquisitions.
Management holds informal discussions about possible acquisitions of other
institutions with some frequency, as it believes management of many institutions
do. In the vast majority of cases, however, those discussions never progress
beyond the most preliminary or exploratory stages. Sometimes preliminary
discussions do progress beyond that point, but for one reason or another they
nevertheless do not progress to the point of negotiating terms of an
acquisition. Discussions of this sort have become routine among financial
institutions both large and small. Investors may generally assume that these
discussions have occurred and will occur again, but Middlefield cautions
investors not to assume that discussions will actually lead to an acquisition by
Middlefield, although that could occur.
There are risks associated with assessing the values, strengths,
weaknesses, and profitability of acquisition candidates, including adverse
short-term effects of acquisitions on operating results, diversion of
management's attention, dependence on retaining key personnel, and risks
associated with unanticipated problems. An acquisition's success depends in part
on the acquiror's ability to integrate the operations of the acquired
institution or assets and capitalize on synergies for cost savings. Without
experience integrating acquired companies, Middlefield therefore would face
greater risk that acquisition costs will exceed projections and that the
benefits will be less than projected or harder to attain.
Item 2 -- Properties
--------------------
The bank's offices are:
Location County Owned/Leased Other Information
---------------------------- ------- ------------ -----------------
Main Office:
15985 East High Street Geauga owned
Middlefield, Ohio 44062-1666
Branches:
West Branch Geauga owned
15545 West High Street
Middlefield, Ohio
Garrettsville Branch
8058 State Street Portage owned
Garrettsville, Ohio
23
Location County Owned/Leased Other Information
---------------------------- ------- ------------ ------------------------------------------
Mantua Branch Portage leased three-year lease renewed in November 2001,
10519 South Main Street with option to renew for seven additional
Mantua, Ohio consecutive three-year terms
Chardon Branch Geauga owned opened in September, 2001
348 Center Street
Chardon, Ohio
At December 31, 2001 the net book value of the bank's investment in
premises and equipment totaled $6.2 million.
The bank's electronic data processing functions are performed under
contract with an electronic data processing services firm that performs services
for financial institutions throughout the Midwest.
Item 3 -- Legal Proceedings
---------------------------
From time to time the bank is involved in various legal proceedings that
are incidental to its business. In the opinion of management, no current legal
proceedings are material to the financial condition of Middlefield or the bank,
either individually or in the aggregate.
Item 4 -- Submission of Matters to a Vote of Security Holders
-------------------------------------------------------------
No matters were submitted to a vote of Middlefield Banc Corp.'s security
holders during the fourth quarter of 2001.
Part II
Item 5 -- Market for Registrant's Common Equity and Related Stockholder Matters
--------------------------------------------------------------------------------
Middlefield had approximately 577 Stockholders of record as of March 1,
2002. There is no established market for Middlefield common stock. The stock is
traded very infrequently. Bid prices are quoted from time to time on the
National Quotation Bureau's "pink sheets" under the symbol "MBCN." The following
table shows the high and low bid prices of and cash dividends paid on
Middlefield common stock in 2000 and 2001, adjusted for stock splits and stock
dividends. This information does not reflect retail mark-up, mark-down or
commissions, and does not necessarily represent actual transactions.
Cash
dividends
High bid Low bid per share
-------- ------- ---------
2001:
First Quarter............ $28.500 $24.000 $0.140
Second Quarter........... $28.500 $27.500 $0.140
Third Quarter............ $27.500 $23.250 $0.140
Fourth Quarter........... $25.500 $24.000 $0.280
2000:
First Quarter............ $31.000 $30.000 $0.100
Second Quarter........... $32.500 $31.000 $0.110
Third Quarter............ $31.000 $19.625 $0.115
Fourth Quarter........... $25.000 $24.000 $0.215
24
Because Middlefield is dependent on its bank subsidiary for earnings and
funds necessary to pay dividends, the ability of Middlefield to pay dividends to
its stockholders is subject to bank regulatory restrictions.
Item 6 -- Selected Financial Data
---------------------------------
The summary financial information to follow is not a substitute for
Middlefield's historical financial information and other detailed financial
information we provide elsewhere in this document. You should read the summary
financial information together with the historical financial information and
other detailed financial information we provide elsewhere in this document. We
derived the financial data from Middlefield's audited financial statements for
the fiscal years ended December 31, 1997 through 2001.
As of or For the Years Ended December 31,
--------------------------------------------------------------
(In thousands, except share and per share amounts and ratios) 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Income Statement Data:
Interest income............................................ $ 13,707 $ 12,770 $ 11,449 $ 10,901 $ 10,600
Interest expense........................................... 6,748 5,910 5,048 5,085 5,084
---------- ---------- ---------- ---------- ----------
Net interest income........................................ 6,959 6,860 6,400 5,817 5,516
Provision for loan losses.................................. 170 275 296 270 200
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses........ 6,789 6,585 6,104 5,547 5,316
Noninterest income, including securities gains (losses).... 1,194 983 804 599 546
Noninterest expense........................................ 4,741 4,409 4,254 3,825 3,493
---------- ---------- ---------- ---------- ----------
Income before income taxes................................. 3,242 3,159 2,654 2,321 2,369
Income taxes............................................... 967 923 735 630 624
---------- ---------- ---------- ---------- ----------
Net income........................................ $ 2,271 $ 2,237 $ 1,920 $ 1,690 $ 1,745
========== ========== ========== ========== ==========
Balance Sheet Data:
Investment securities...................................... $ 31,409 $ 29,811 $ 31,818 $ 36,656 $ 38,460
Loans, net................................................. $ 152,828 $ 133,267 $ 119,472 $ 102,728 $ 88,320
Total deposits............................................. $ 167,383 $ 147,166 $ 135,094 $ 128,828 $ 121,482
FHLB Cincinnati advances................................... $ 9,301 $ 9,862 $ 9,602 $ 9,576 $ 4,849
Total stockholders' equity................................. $ 19,791 $ 18,243 $ 17,689 $ 16,657 $ 15,465
Total assets............................................... $ 197,862 $ 176,489 $ 165,512 $ 155,558 $ 142,276
Per Common Share Data: /(1)/
Basic net income........................................... $ 2.06 $ 2.02 $ 1.68 $ 1.47 $ 1.52
Diluted net income......................................... $ 2.06 $ 2.02 $ 1.68 N/A N/A
Book value................................................. $ 17.94 $ 16.54 $ 15.49 $ 14.50 $ 13.46
Weighted Average Number of Shares:
Basic...................................................... 1,102,954 1,105,972 1,145,250 1,148,676 1,148,676
Diluted.................................................... 1,104,100 1,105,972 1,145,250 N/A N/A
Selected Ratios:
Return on average total stockholders' equity............... 11.89% 12.83% 11.17% 10.43% 11.79%
Return on average total assets............................. 1.22% 1.31% 1.21% 1.15% 1.26%
Dividend payout ratio...................................... 33.94% 26.61% 29.82% 29.53% 24.98%
Efficiency ratio /(2)/..................................... 58.16% 56.21% 59.05% 59.62% 57.62%
Asset Quality Ratios:
Reserve for loan losses to ending total loans.............. 1.35% 1.51% 1.45% 1.48% 1.49%
Net loan charge-offs to average loans...................... 0.10% --% 0.07% 0.07% --%
Capital Ratios:
Average stockholders' equity to average assets............. 10.24% 10.20% 10.83% 11.04% 10.72%
25
(In thousands, except share and per share amounts and ratios) As of or For the Years Ended December 31,
--------------------------------------------------------------
Leverage ratio /(3)/....................................... 9.94% 10.32% 10.93% 11.35% 10.80%
Total risk-based capital ratio /(3)/....................... 17.82% 17.75% 18.39% 18.37% 18.54%
(1) Per share amounts are adjusted for a 10% stock dividend paid in 1998
and 1997 and a 2-for-1 stock split in 2000.
(2) Efficiency ratio is noninterest expense divided by the sum of net
interest income plus noninterest income minus nonrecurring items.
(3) Computed in accordance with Federal Reserve Board and FDIC guidelines.
The following table shows quarterly results of operations for 2001 and
2000.
2001 Quarters 2000 Quarters
------------------------------------ ---------------------------------
(In thousands, except Fourth Third Second First Fourth Third Second First
per share data)
------- ------ ------- ------- ------ ------ ------ ------
Interest income........... 3,534 3,508 3,463 3,299 $3,310 $3,269 $3,141 $3,050
Net interest income....... 1,898 1,777 1,737 1,644 1,709 1,726 1,732 1,693
Provision for loan
losses................. 45 45 41 39 50 75 75 75
Income before income
taxes ................. 793 948 727 773 757 826 784 793
Net income................ 582 660 491 557 556 572 552 557
Basic earnings per
common share /(1)/..... 0.53 0.60 0.45 0.49 0.50 0.52 0.50 0.50
Diluted earnings per
common share /(1)/..... 0.53 0.60 0.44 0.49 0.50 0.52 0.50 0.50
(1) Per share amounts are adjusted for a 2-for-1 stock split in 2000.
Item 7 -- Management's Discussion and Analysis of Financial Condition and
--------------------------------------------------------------------------------
Results of Operations
---------------------
Overview
The consolidated review and analysis of Middlefield Banc Corp. is intended
to assist the reader in evaluating the performance of Middlefield for the years
ended December 31, 2001 and 2000. This information should be read in conjunction
with the consolidated financial statements and accompanying notes to the
financial statements.
Middlefield is an Ohio corporation organized to become the holding company
of The Middlefield Banking Company. 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 five 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
26
more of these risks of uncertainties occurs or if the underlying assumptions
prove incorrect, actual results in 2002 and beyond could differ materially from
those expressed in or implied by the forward-looking statements.
Forward-looking statements are based upon a variety of estimates and
assumptions. The estimates and assumptions involve judgments about a number of
things, including future economic, competitive, and financial market conditions
and future business decisions. These matters are inherently subject to
significant business, economic, and competitive uncertainties, all of which are
difficult to predict and many of which are beyond Middlefield's control.
Although Middlefield believes its estimates and assumptions are reasonable,
actual results could vary materially from those shown. Inclusion of
forward-looking information 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.
Results of Operations
Middlefield recorded net income of $2.3 million in 2001, which represents
an increase of $34,000, or 1.5%, over 2000. Net income for 2000 of $2.2 million
represented an increase of $318,000, or 16.6%, over 1999. Basic and diluted
earnings per share have increased each of the past three years to $2.06 per
share for 2001, $2.02 per share for 2000, and $1.68 per share for 1999.
Net Interest Income -- 2001 Compared to 2000. Net interest income for 2001
increased slightly to $7.0 million, compared to $6.9 million for 2000. Interest
income of $13.7 million in 2001 represents an increase of $0.9 million, or 7.3%,
over 2000, and 2001 was influenced primarily by an increase in interest earned
on loans receivable of $1.0 million. Correspondingly, interest expense of $6.7
million in 2001 increased by $0.8 million, or 14.2%, and resulted almost
entirely from an increase in interest expense on deposits. The average balance
of interest-earning assets increased $16.4 million for 2001 and was comprised of
increases in loans receivable, specifically real estate mortgages, of $14.9
million, or 11.6%, to $143.6 million, and interest-bearing deposits with other
banks of $1.8 million, or 47.3%, to $5.6 million. Due to the declining rate
environment in 2001, the tax-equivalent yield on interest-earning assets
declined to 7.79% from 8.02% for 2000. While the yield on loans receivable and
interest-bearing deposits with other banks was reduced by 21 and 190 basis
points, respectively, the investment securities yield remained unchanged as
management engaged in restructuring the investment securities portfolio to
include higher yielding mortgage-backed securities with longer maturity periods.
Partially offsetting increases in interest income in 2001 was an increase in the
average balances of time deposits of $13.3 million, or 19.1%, to $83.2 million
and savings deposits of $3.4 million, or 10.6%, to $35.4 million. The average
cost of funds on interest-bearing liabilities increased to 4.71% in 2001 from
4.58% in 2000, primarily resulting from an increase of 14 basis points for the
more competitively priced certificates of deposit products.
2000 Compared to 1999. Net interest income for 2000 was $6.9 million, a
7.2% increase over 1999. Interest income of $12.8 million in 2000 represented an
increase of $1.3 million, or 11.5%, over 1999. Interest expense of $5.9 million
in 2000 increased by $0.9 million, or 17.1%, over 1999. Although there was an
increase in general interest rate levels during these periods, 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, specifically real estate mortgages, increased
$16.9 million, or 15.1%, to $128.7 million as of December 31, 2000. The
tax-equivalent yield on interest earning assets increased to 8.02% for the year
ended 2000 from 7.84% for the year ended 1999 and was mainly driven by a 16
basis-point increase in investment securities. Partially offsetting increases to
net interest income was an increase in the average balance of certificates of
deposit of $9.5 million, coupled with a 36 basis-point increase in the cost of
such funds. This increase to interest expense is attributable to marketing
27
efforts and higher-yielding promotional products, resulting in an overall
increase in the cost of funds from 4.26% to 4.58% from 1999 to 2000.
28
Average Balances, Interest Rates and Yields. The following table sets forth
certain information relating to our average balance sheet, and it reflects the
average yield on assets and average cost of liabilities for the periods
indicated and the average yields earned and rates paid. Such yields are derived
by dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods presented. Average balances are derived from daily
average balances.
Year ended December 31,
---------------------------------------------------
2001
---------------------------------------------------
Average
(Dollars in thousands) Average balance Interest /(1)/ yield/cost /(4)/
--------------- -------------- ----------------
Interest-earning assets:
Loans receivable................... $143,560 $11,808 8.23 %
Investment securities.............. 29,887 1,625 6.24 %
Interest-earning deposits with
other banks........................ 5,647 274 4.85 %
-------- ------- ------
Total interest-earning assets......... 179,094 13,707 7.79 %
-------
Non-interest-earning assets........... 7,455
--------
Total assets.......................... $186,549
========
Interest-bearing liabilities:
Interest-bearing demand deposits... $ 6,296 153 2.43 %
Money market deposits.............. 8,123 244 3.00 %
Savings deposits................... 35,432 954 2.69 %
Certificates of deposit............ 83,177 4,847 5.83 %
Borrowings......................... 10,211 550 5.39 %
-------- ------- ------
Total interest-bearing liabilities.... 143,239 6,748 4.71 %
-------
Non interest-bearing liabilities:
Other liabilities.................. 24,216
Stockholders' equity.................. 19,094
--------
Total liabilities and stockholders'
equity................................ $186,549
========
Net interest income................... $ 6,959
=======
Interest rate spread /(2)/............ 3.08 %
Net yield on interest-earning assets
/(3)/................................. 3.89 %
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................... 125.03 %
Year ended December 31,
---------------------------------------------------
2000
---------------------------------------------------
Average
(Dollars in thousands) Average balance Interest /(1)/ yield/cost /(4)/
--------------- -------------- ----------------
Interest-earning assets:
Loans receivable................... $128,661 $10,852 8.43 %
Investment securities.............. 30,162 1,658 6.39 %
Interest-earning deposits with
other banks........................ 3,833 259 6.76 %
-------- ------- ------
Total interest-earning assets......... 162,656 12,769 8.02 %
-------
Non-interest-earning assets........... 8,231
--------
Total assets.......................... $170,887
========
Interest-bearing liabilities:
Interest-bearing demand deposits... $ 6,268 174 2.78 %
Money market deposits.............. 10,310 308 2.99 %
Savings deposits................... 32,036 855 2.67 %
Certificates of deposit............ 69,866 3,975 5.69 %
Borrowings......................... 10,641 598 5.62 %
------- ------- ------
Total interest-bearing liabilities.... 129,121 5,910 4.58 %
-------
Non interest-bearing liabilities:
Other liabilities.................. 24,336
Stockholders' equity.................. 17,430
--------
Total liabilities and stockholders'
equity................................ $170,887
--------
Net interest income................... $ 6,859
=======
Interest rate spread /(2)/............ 3.44 %
Net yield on interest-earning assets
/(3)/................................. 4.22 %
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................... 125.97 %
Year ended December 31,
----------------------------------------------------
1999
----------------------------------------------------
Average
(Dollars in thousands) Average balance Interest /(1)/ yield/cost /(4)/
--------------- -------------- ----------------
Interest-earning assets:
Loans receivable................... $111,745 $ 9,409 8.42 %
Investment securities.............. 33,983 1,819 6.24 %
Interest-earning deposits with
other banks........................ 4,254 220 5.17 %
-------- ------- -------
Total interest-earning assets......... 149,982 11,448 7.83 %
-------
Non-interest-earning assets........... 8,674
--------
Total assets.......................... $158,656
========
Interest-bearing liabilities:
Interest-bearing demand deposits... $ 5,473 139 2.54 %
Money market deposits.............. 15,249 454 2.98 %
Savings deposits................... 28,183 726 2.58 %
Certificates of deposit............ 60,390 3,220 5.33 %
Borrowings......................... 9,224 509 5.52 %
-------- ------- -------
Total interest-bearing liabilities.... 118,519 5,048 4.26 %
-------
Non interest-bearing liabilities:
Other liabilities.................. 22,950
Stockholders' equity.................. 17,187
--------
Total liabilities and stockholders'
equity................................ $158,656
========
Net interest income................... $ 6,400
=======
Interest rate spread /(2)/............ 3.58 %
Net yield on interest-earning assets
/(3)/................................. 4.27 %
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................... 126.55 %
/(1)/ Interest income and expense are for the period that banking operations
were in effect.
/(2)/ Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
/(3)/ Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
/(4)/ Average yields are computed using annualized interest income and expense
for the periods.
29
Rate/Volume Analysis. The following table sets forth certain information
regarding the changes in our interest income and interest expense for the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume (changes in average volume multiplied by prior year rate),
and (2) changes in rates (changes in rate multiplied by prior year average
volume). Increases and decreases due to both rate and volume have been allocated
proportionally to the change due to volume and the change due to rate.
Changes in net interest income for the year ended
December 31, 2001
-------------------------------------------------
2001 vs. 2000
Increase (decrease) due to
-------------------------------------------------
(Dollars in thousands) Volume Rate Total
------ ----- -----
Interest income:
Loans receivable....................... $1,217 $(262) $955
Investment securities.................. (9) (24) (33)
Other interest-earning assets.......... 37 (22) 15
------ ----- ----
Total interest income............... 1,245 (308) 937
------ ----- ----
Interest expense:
Interest-bearing demand................ 1 (22) (21)
Money market........................... (66) 2 (64)
Savings................................ 91 8 99
Certificates of deposit................ 774 98 872
Other interest-bearing liabilities..... (24) (24) (48)
------ ----- ----
Total interest expense.............. 776 62 838
------ ----- ----
Change in net interest income............. $ 469 $(370) $ 99
====== ===== ====
Changes in net interest income for the year
ended December 31,
--------------------------------------------
2000 vs. 1999
Increase (decrease) due to
--------------------------------------------
(Dollars in thousands) Volume Rate Total
------ ----- ------
Interest income:
Loans receivable....................... $1,427 $ 17 $1,444
Investment securities.................. 221 (382) (161)
Other interest-earning assets.......... (19) 57 38
------ ----- ------
Total interest income............... 1,629 (308) 1,321
------ ----- ------
Interest expense:
Interest-bearing demand................ 21 14 35
Money market........................... (148) 2 (146)
Savings................................ 102 27 129
Certificates of deposit................ 529 226 755
Other interest-bearing liabilities..... 79 10 89
------ ----- ------
Total interest expense.............. 583 279 862
------ ----- ------
Change in net interest income............. $1,046 $(587) $ 459
====== ===== ======
Loan Loss Provision -- 2001 Compared to 2000. The provision for loan losses
was $170,000 in 2001 as compared to $275,000 in 2000. The loan loss provision is
based upon management's assessment of a variety of factors, including types and
amounts of nonperforming loans, historical loss experience, collectibility of
collateral values and guaranties, pending legal action for collection of loans
and related guaranties, and current economic conditions. The loan loss provision
reflects management's judgment of the current period cost-of-credit risk
inherent in the loan portfolio. Although management believes the loan loss
provision has been sufficient to maintain an adequate allowance for loan losses,
actual loan losses could exceed the amounts that have been charged to
operations. The change in the loan loss provision in 2001 was principally a
result of a reduction in the amount of classified assets from 2000 to 2001, as
well as the mix of such assets.
2000 Compared to 1999. The provision for loan losses was $275,000 in 2000,
compared to $296,000 in 1999, a 7.1% reduction. The change in the loan loss
provision in 2000 was principally a result of a reduction in the amount of new
commercial and commercial real estate loans originated during 2000 as compared
to 1999. Furthermore, there was an improvement in asset quality reflected by a
decrease in nonperforming loans from $131,000 at the end of 1999 to $5,000 at
the end of 2000.
Noninterest Income -- 2001 Compared to 2000. Total noninterest income was
$1.2 million in 2001, an increase of 21.5% over 2000. The increase is accounted
for principally by fee income from deposit accounts, which grew commensurate
with deposit growth, coupled with the recognition of investment security gains
of $98,000.
30
2000 Compared to 1999. Total noninterest income was $983,000 in 2000, an
increase of 22.2% over 1999. The increase is also principally fee income from
deposit accounts that correspond with the growth in deposit accounts during the
period.
Transaction deposit accounts grew at a steady pace in 2001, 2000, and 1999.
In general, management prices deposits at rates competitive with rates offered
by the other banks in Middlefield's market, which rates tend to be somewhat
lower than rates offered by thrift institutions and credit unions. Middlefield
generally has not imposed service charges and fees to the same extent as other
local institutions. Although a wider range of service charges and fees and
higher service charges and fees would yield more income for each dollar of
deposits, imposing service charges and fees on a basis equivalent to those
imposed by many other area banks might adversely affect deposit growth. To
promote deposit growth and provide cross-selling opportunities, Middlefield has
not adopted the most aggressive fee structure. Deposit growth is generated by
developing strong customer relationships and cross-selling deposit relationships
to loan customers. Management intends to continue promoting demand deposit
products, particularly noninterest-bearing deposit products, in order to obtain
additional interest-free lendable funds.
Noninterest Expense -- 2001 Compared to 2000. Noninterest expense increased
7.6% to $4.7 million for 2001 as compared to $4.4 million for 2000. Compensation
and employee benefits increased $76,000, or 3.4%, primarily as a result of
normal merit raises. Data processing expenses increased $47,000, or 14.9%, as a
result of increased transaction activity with the opening of the Chardon branch.
Professional fees increased $35,000, or 16.5%, and resulted from outside
assistance in complying with the increased levels of regulatory compliance of a
publicly reported company. Other expenses increased $178,000 due to the
marketing of the 100th anniversary of the Bank, costs incurred with the addition
of internet banking, as well as increases in other expenses such as telephones,
supplies, etc., that relate to increases in volume that corresponds with the
sustained growth of the Bank.
2000 Compared to 1999. Noninterest expense increased 3.6% to $4.4 million
for 2000 as compared to $4.3 million for 1999. The change in total noninterest
expense from 1999 to 2000 is attributable to a 12.1% increase in other expenses,
which increased steadily year-to-year primarily as a result of the overall
growth of the Bank. Such expenses include additional costs relating to an
increase in volume of ATM transactions, and increases in various professional
fees and regulatory assessments. There were smaller increases in equipment and
data processing expenses as a result of added capital expenditures in prior
years from building and furnishing a new branch office in Garrettsville,
additional ATMs, and increased transaction activity from operating a larger
organization.
Provision for Income Taxes. The provision for income taxes fluctuated in
2001, 2000, and 1999 in direct correlation to the changing level of pre-taxable
income during these periods.
Financial Condition
Assets and Liabilities. Middlefield's total assets increased $21.4 million,
or 12.1%, to $197.9 million at December 31, 2001 from $176.5 million at December
31, 2000. This increase primarily resulted from a $17.5 million, or 13.1%,
increase in net loans receivable to $150.8 million at December 31, 2001 that was
funded by an $20.2 million, or 13.7%, net increase in customer deposits. The
increase in net loans receivable resulted from the economic health of
Middlefield's market area, the Federal Reserve Board's approach to aggressively
reducing interest rates, and the strategic, service-oriented marketing approach
taken by management to meet the lending needs of the area. The majority of
Middlefield's lending activity consists of mortgage loans secured by one-to-four
family residential property. Such loans grew $11.6 million, or 11.5%, to $113.0
million at December 31, 2001, representing 74.0% of the loan portfolio.
Management attributes the increases in residential real estate properties to
continued customer referrals
31
and Middlefield's overall relationship with its customers. Also affected by the
local economic conditions were commercial and commercial real estate loans,
which increased in total by $5.4 million to $31.7 million.
Total investment securities increased $1.6 million to $31.4 million at
December 31, 2001 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 $9.0 million continues, although less aggressively, and reflects
the Nation's general economic trends. This has resulted in a shift in the
composition of the investment securities portfolio at December 31, 2001, as
mortgage-backed securities now comprise 36.0% of the total portfolio as compared
to 7.5% at December 31, 2000. Furthermore, available for sale securities now
comprise 67.4% of the investment securities portfolio as compared to 41.3% at
December 31, 2000.
Total deposits increased $20.2 million, or 13.7%, to $167.4 million at
December 31, 2001 from $147.2 million at December 31, 2000. Growth was primarily
concentrated in time and savings deposits, which increased $9.9 and $9.3
million, respectively, and resulted from continual marketing efforts by
management, as well as management's competitive pricing of such products. Time
deposits at December 31, 2001 accounted for approximately 51.2% of the total
deposit portfolio and remain a dominant resource for funds.
Total stockholders' equity increased $1.5 million, or 8.5%, to $19.8
million at December 31, 2001 due to net income of $2.3 million that was offset
somewhat by dividend payments of $0.8 million. 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, taking into account Middlefield's
earnings and financial condition and applicable governmental regulations and
policies.
Allowance for Loan Losses. The allowance for loan losses represents the
amount 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 December
31, 2001, Middlefield's allowance for loan losses increased slightly to $2.1
million from $2.0 million at December 31, 2000, and now represents 1.35% of the
gross loan portfolio. 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, 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.
The specific allowance incorporates the results of measuring impaired loans
as provided in Statement of Financial Accounting Standard ("FAS") No. 114,
"Accounting by Creditors for Impairment of a Loan," and FAS No. 118, "Accounting
by Creditors for Impairment of a Loan--Income Recognition and Disclosures."
These accounting standards prescribe the measurement methods, income recognition
and disclosures for impaired loans.
The formula allowance is calculated by applying loss factors to outstanding
loans by type, excluding loans for which a specific allowance has been
determined. Loss factors are based on
32
management's determination of the amounts necessary for concentrations and
changes in mix and volume of the loan portfolio, and consideration of historical
loss experience.
The unallocated allowance is determined based upon management's evaluation
of existing economic and business conditions affecting the key lending areas of
the bank and other conditions, such as new loan products, credit quality trends,
collateral values, specific industry conditions within portfolio segments that
existed as of the balance sheet date, and the impact of those conditions on the
collectibility of the loan portfolio. Management reviews these conditions
quarterly. The unallocated allowance is subject to a higher degree of
uncertainty because it considers risk factors that may not be reflected in the
historical loss factors.
Although management believes that it uses the best information available to
make such determinations and that the allowance for loan losses was adequate at
December 31, 2001, future adjustments could be necessary if circumstances or
economic conditions differ substantially from the assumptions used in making the
initial determinations. A downturn in the local economy and employment could
result in increased levels of nonperforming assets and charge-offs, increased
loan loss provisions, and reductions in income. Additionally, as an integral
part of the examination process bank regulatory agencies periodically review a
bank's loan loss allowance. The banking agencies could require the recognition
of additions to the loan loss allowance based on their judgment of information
available to them at the time of their examination.
The following table sets forth information concerning the Middlefield's
allowance for loan losses at the dates and for the periods presented.
Loan Loss Experience for the Year Ended December 31,
----------------------------------------------------
(Dollars in thousands) 2001 2000 1999
-------- -------- --------
Loan loss allowance, beginning of period ..................... $ 2,037 $ 1,756 $ 1,539
Loans charged off:
Commercial and industrial ................................. (74) (3) (22)
Real estate construction .................................. -- -- --
Mortgage:
Residential ......................................... (21) -- (7)
Commercial .......................................... (92) -- --
Consumer installment ...................................... (71) (52) (89)
-------- -------- --------
Total loans charged off ................................ (258) (55) (118)
-------- -------- --------
Recoveries of loans previously charged off:
Commercial and industrial ................................. 4 2 8
Real estate construction .................................. -- -- --
Mortgage:
Residential ......................................... -- -- --
Commercial .......................................... 87 -- --
Consumer installment ...................................... 22 59 31
-------- -------- --------
Total recoveries ....................................... 113 61 39
-------- -------- --------
Net loans recovered (charged off) ............................ (145) 6 (79)
Provision charged to operations .............................. 170 275 296
-------- -------- --------
Loan loss allowance, end of period ........................... $ 2,062 $ 2,037 $ 1,756
======== ======== ========
Loans outstanding:
Average ................................................... $143,560 $128,661 $111,745
End of period, net ........................................ $152,828 $135,304 $121,228
Ratio of allowance for loan losses to loans outstanding at end
of period .................................................... 1.35% 1.51% 1.45%
33
Loan Loss Experience for the Year Ended December 31,
----------------------------------------------------
(Dollars in thousands) 2001 2000 1999
-------- -------- --------
Net recoveries (charge offs) to average loans ................ (0.10)% 0.00% (0.07)%
The following table illustrates the allocation of the Middlefield's
allowance for probable loan losses for each category of loan for each reported
period. The allocation of the allowance to each category is not necessarily
indicative of future loss in a particular category and does not restrict our use
of the allowance to absorb losses in other loan categories.
Allocation of the Allowance for Loan Losses at December 31,
---------------------------------------------------------------------------------
2001 2000 1999
------------------------- ------------------------- -------------------------
Percent of loans Percent of loans Percent of loans
(Dollars in thousands) Amount in each category Amount in each category Amount in each category
to total loans to total loans to total loans
------ ---------------- ------ ---------------- ------ ----------------
Type of loan:
Commercial and industrial $ 722 18.53% $ 723 15.90% $ 340 15.33%
Real estate construction 37 2.09% 26 1.90% 23 1.86%
Mortgage:
Residential ........ 781 73.97% 684 74.95% 721 73.63%
Commercial ......... 161 2.22% 281 3.55% 331 5.71%
Consumer installment .... 111 3.19% 107 3.70% 85 3.47%
Unallocated ............. 250 -- 216 -- 256 --
------ ------ ------ ------ ------ ------
Total ..................... $2,061 100.00% $2,037 100.00% $1,756 100.00%
====== ====== ====== ====== ====== ======
Accrual of interest is discontinued on a loan when management believes,
after considering economic and business conditions, the borrower's financial
condition is such that collection of interest is doubtful. Interest received on
nonaccrual loans is recorded as income against principal according to
management's judgment as to the collectibility of principal.
A loan is considered impaired when it is probable the borrower will not
repay the loan according to the original contractual terms of the loan
agreement. Management has determined that first mortgage loans on one-to-four
family properties and all consumer loans represent large groups of
smaller-balance homogeneous loans that are to be collectively evaluated. Loans
that experience insignificant payment delays, which are defined as 90 days or
less, generally are not classified as impaired. A loan is not impaired during a
period of delay in payment if the bank expects to collect all amounts due,
including interest accrued at the contractual interest rate for the period of
delay. All loans identified as impaired are evaluated independently by
management. The bank estimates credit losses on impaired loans based on the
present value of expected cash flows, or the fair value of the underlying
collateral if loan repayment is expected to come from the sale or operation of
the collateral. Impaired loans, or portions thereof, are charged off when it is
determined a realized loss has occurred. Until that time, an allowance for loan
losses is maintained for estimated losses. Unless otherwise required by the loan
terms, cash receipts on impaired loans are applied first to accrued interest
receivable, except when an impaired loan is also a nonaccrual loan, in which
case the portion of the payment related to interest is recognized as income.
Nonperforming loans as a percentage of total loans at December 31, 2001
increased to 0.19% from 2000. The bank had nonaccrual loans of $48,000 and
$125,000 at December 31, 2001 and 1999, respectively. There were no loans on
nonacrrual status at December 31, 2000. Interest income recognized on nonaccrual
loans during all of the periods was insignificant. Management does not believe
the
34
nonaccrual loans or any amounts classified as nonperforming will have a
significant effect on operations or liquidity in 2002. Furthermore, management
is not aware of any trends or uncertainties related to any loans classified as
doubtful or substandard that might have a material effect on earnings,
liquidity, or capital resources. Management is not aware of any information
pertaining to material credits that would cause it to doubt the ability of
borrowers to comply with repayment terms.
The following table summarizes nonperforming assets by category.
Nonperforming Assets at December 31,
------------------------------------
(Dollars in thousands) 2001 2000 1999
------ --------- --------
Commercial and industrial:
Nonaccrual ................................ $ 48 $-- $ 17
Past due 90 days or more .................. 9 -- --
Real estate construction:
Nonaccrual ................................ -- -- --
Past due 90 days or more .................. -- -- --
Mortgage-- Residential:
Nonaccrual ................................ -- -- 103
Past due 90 days or more .................. 216 -- --
Mortgage-- Commercial:
Nonaccrual ................................ -- -- --
Past due 90 days or more .................. -- -- --
Consumer installment:
Nonaccrual ................................ -- -- 5
Past due 90 days or more .................. 20 5 6
Total nonperforming loans ............. 293 5 131
Other real estate owned ........................ -- -- --
Total nonperforming assets ............ $293 $ 5 $131
Loans outstanding, net ......................... $ $ $
Nonperforming loans to total net loans ......... 0.19% 0.00% 0.11%
Nonperforming loans to total assets ............ 0.15% 0.00% 0.08%
Allowance for loan losses to total loans ....... 1.35% 1.51% 1.45%
Allowance for loan losses to nonperforming loans 703.75% 40,740.00% 1,340.46%
/(1)/ Represents accruing loans delinquent greater than 90 days that are
considered by management to be well secured and that are in the process of
collection.
Liquidity. Liquidity management for Middlefield is measured and monitored
on both a short- and long-term basis, 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 investments securities, loan repayments 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 for satisfying 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 December 31, 2001, cash and cash
equivalents totaled $5.9 million or 3.0% of total assets while investment
securities classified as available for sale totaled $21.2 million or 10.7% 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
35
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 $2.7 million, $3.0 million, and
$2.5 million for 2001, 2000, and 1999, respectively, generated principally from
net income of $2.3 million, $2.2 million, and $1.9 million in each of these
respective periods.
Investing activities consist primarily of loan originations and repayments
and investment purchases and maturities. These activities used $20.7 million in
funds during 2001, principally for the net origination of loans and the purchase
of investment securities of $17.6 million and $16.6 million, respectively. Such
usage of cash was offset by proceeds from repayments and maturities and sales of
investment securities of $13.0 million and $2.1 million, respectively. For the
same period ended 2000, investing activities used $9.8 million in funds,
principally from the net origination of loans of $14.1 million and the purchases
of investment securities of $2.6 million. In 2000, these cash usages were offset
somewhat by an increase in investment securities repayments and maturities of
$4.8 million coupled with a decline in interest-bearing deposits in other
institutions from maturities of certificates of deposits of $2.4 million. In
1999, investing activities used $14.1 million from the net origination of loans
and the purchase of investment securities of $16.9 million and $9.8 million.
These were offset somewhat by proceeds from repayments and maturities of $13.2
million.
Financing activities consist of the solicitation and repayment of customer
deposits, borrowings and repayments, treasury stock activity, and the payment of
dividends. During 2001, net cash provided by financing activities totaled $19.0
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 $8.5 million, and consisted of an increase
in deposit accounts of $12.1 million that was offset by the net acquisition of
treasury stock of $1.3 million and the repayment of other borrowings of $1.7
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 Middlefield's commitment to make loans, as well as management's
assessment of Middlefield's ability to generate funds. Middlefield anticipates
that it will have sufficient liquidity to satisfy estimated short-term and
long-term funding needs.
Capital Resources. Middlefield's primary source of capital has been
retained earnings. Historically, Middlefield has generated net retained income
to support normal growth and expansion. Management has developed a capital
planning policy to not only ensure compliance with regulations, but also to
ensure capital adequacy for future expansion.
Middlefield is subject to federal regulations imposing 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 to assess
compliance with regulatory guidelines. At December 31, 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 17.82%, 16.56%, and 9.94%, and the Bank's were 17.36%,
16.10%, and 9.76%, respectively, at December 31, 2001.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued FAS
No. 141, Business Combinations, effective for all business combinations
initiated after June 30, 2001, as well as all business
36
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 effect 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 statement changes the accounting for
goodwill from an amortization method to an impairment-only approach. Thus,
amortization of goodwill, including goodwill recorded in past business
combinations, will cease upon adoption of this statement. However, the new
statement did not amend FAS 72, Accounting for Certain Acquisitions of Banking
or Thrift Institutions, which requires recognition and amortization of
unidentified intangible assets relating to the acquisition of financial
institutions or branches thereof. The FASB has decided to undertake a limited
scope project to reconsider the provisions of FAS 72 in 2002. Therefore, the
adoption of Statement No. 142 is not expected to have a material effect on
Middlefield's financial position or results of operations.
In August 2001, the FASB issued FAS No. 143, Accounting for Asset
Retirement Obligations, which requires that the fair value of a liability be
recognized when incurred for the retirement of a long-lived asset and the value
of the asset be increased by that amount. The statement also requires that the
liability be maintained at its present value in subsequent periods and outlines
certain disclosures for such obligations. The adoption of this statement, which
is effective January 1, 2003, is not expected to have a material effect on
Middlefield's financial statements.
In October 2001, the FASB issued FAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. FAS 144 supercedes FAS 121 and applies to all
long-lived assets (including discontinued operations) and consequently amends
APB Opinion No. 30, Reporting Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business. FAS 144 requires that long-lived assets
that are to be disposed of by sale be measured at the lower of book value or
fair value less costs to sell. FAS 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001 and, generally, its
provisions are to be applied prospectively. The adoption of this statement is
not expected to have a material effect on Middlefield's financial statements.
Impact of Inflation and Changing Prices
Middlefield's consolidated financial statements and related data herein
have been prepared in accordance with accounting principles generally accepted
in the United States of America, which require measurement of financial
condition and results of operations in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.
Because the primary assets and liabilities of Middlefield and the Bank are
monetary in nature, changes in the general level of prices for goods and
services have a relatively minor impact on total expenses. Increases in
operating expenses such as salaries and maintenance are in part attributable to
inflation. However, interest rates have a far more significant effect than
inflation on the performance of financial institutions, including the Bank. See,
"-- Quantitative and Qualitative Disclosures About Market Risk."
Item 7A -- 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
37
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 a static gap analysis to evaluate the risk associated with
changes in interest rates. The table below illustrates the maturities or
repricing of the Bank's assets and liabilities at December 31, 2001, based upon
the contractual maturity or contractual repricing dates of loans and the
contractual maturities of time deposits. Prepayment assumptions have not been
applied to fixed-rate mortgage loans. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
due in one year or less. Allocation of deposits other than time deposits to the
various maturity and repricing periods is based upon management's best estimate,
taking into account, among other things, the proposed policy statement issued by
federal bank regulators on August 4, 1995.
Maturing or Repricing Periods
----------------------------------------------
38
(Dollars in thousands) Within 3 Months 4 - 12 Months 1 - 5 Over 5
Years Years Total
--------------- ------------- ------- -------- --------
Interest-earning assets:
Interest-bearing deposits in other
institutions ................................. $ 2,800 $ 602 $ 288 $ -- $ 3,690
Investment securities ..................... 2,726 10,591 15,172 2,717 31,206
Commercial and industrial loans /(1)/ ..... 8,650 8,462 7,549 3,652 28,313
Real estate construction loans /(1)/ ...... 484 2,000 180 536 3,200
Real estate mortgage loans /(1)/ .......... 23,818 27,170 56,514 8,935 116,437
Consumer installment loans /(1)/ .......... 803 1,360 2,029 686 4,878
------- ------- ------- -------- --------
Total interest-earning assets ....... $39,281 $50,185 $81,732 $ 16,526 $187,724
------- ------- ------- -------- --------
Interest-bearing liabilities:
Interest-bearing demand ................... $ 978 $ 652 $ 1,305 $ 3,588 $ 6,523
Money market .............................. 3,189 822 909 3,021 7,941
Savings ................................... 6,228 4,152 8,304 22,835 41,519
Time ...................................... 11,791 30,900 43,756 -- 86,447
Short-term borrowings ..................... 661 -- -- -- 661
Other borrowings .......................... 57 2,170 6,904 170 9,301
------- ------- ------- -------- --------
Total interest-bearing liabilities... $22,904 $38,696 $61,178 $ 29,614 $152,392
------- ------- ------- -------- --------
Interest sensitivity gap ..................... $16,377 $11,489 $20,554 $(13,088) $ 35,332
======= ======= ======= ======== ========
Cumulative interest sensitivity gap .......... $16,377 $27,866 $48,420 $ 35,332
Cumulative interest sensitivity gap
as a percent of total assets .............. 9.28% 15.79% 27.44% 20.02%
/(1)/ For purposes of the gap analysis, loans are not reduced by the allowance
for loan losses and nonperforming loans.
The Bank's policy is that the one-year cumulative interest rate sensitivity
gap should generally be within a range of negative 20% to positive 20%. As the
table above shows, the one-year gap was within this range as of December 31,
2001, with a positive one-year gap of 15.79%. The cumulative gap at December 31,
2001 is due principally to fixed-rate securities and loans in the "over one year
to five years" category to maximize yield on assets.
One way to minimize interest rate risk is to maintain a balanced or matched
interest-rate sensitivity position. However, profits are not always maximized by
matched funding. To increase net interest income, the Bank selectively
mismatches asset and liability repricing to take advantage of short-term
interest rate movements. The magnitude of the mismatch depends on a careful
assessment of the risks presented by forecasted interest rate movements. The
risk inherent in such a mismatch, or gap, is that interest rates might not move
as anticipated.
Interest rate risk exposure is reviewed in quarterly meetings of the
Asset/Liability Committee. At each meeting, guidelines are established for the
following quarter and longer-term exposure. Risk is mitigated by matching
maturities or repricing more closely. The Bank does not use derivative financial
instruments to manage interest rate risk.
Limitations are inherent in any method of measuring interest rate risk.
Actual results can differ significantly from simulated results if, for example,
market conditions and management strategies vary from the assumptions used in
the analysis. The static "gap" analysis is based on assumptions concerning such
matters as when assets and liabilities will reprice in a changing interest rate
environment. Because these assumptions are no more than estimates, certain
assets and liabilities indicated as maturing or repricing within a stated period
might actually mature or reprice at different times and at different volumes
from those estimated. The actual prepayments and withdrawals experienced by the
Bank after a change in interest rates could deviate significantly from those
assumed in calculating the data shown in the table. Adjustable-rate loans, for
example, commonly have provisions that limit changes in interest
39
rates each time the interest rate changes and on a cumulative basis over the
life of the loan. Also, the renewal or repricing of some assets and liabilities
can be discretionary and subject to competitive and other pressures. The ability
of many borrowers to service their debt could diminish after an interest rate
increase. Therefore, the gap table above does not and cannot necessarily
indicate the actual future impact of general interest movements on net interest
income.
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 would result in a variation in net interest income of minus 7.57
percent and a variation of minus 9.95 percent in total equity. It is important
to note, however, that this exercise would be of worst-case scenario. It would
be more likely to have incremental changes in interest rate, rather that a
single significant increase or decrease. When management believes interest rate
movements will occur, it can restructure the balance sheet and thereby the
ration of rate sensitive assets to rate sensitive liabilities which in turn will
effect the net interest income. As mentioned earlier, in gap analysis, as well
as simulation analysis, not all assets and liabilities with similar maturities
and repricing opportunities will reprice at the same time or to the same degree
and therefore, could affect forecasted results.
Item 8 -- Financial Statements and Supplementary Data
-----------------------------------------------------
Index to Consolidated Financial Statements: Page No.
Report of Independent Auditors................................................. 41
Consolidated Financial Statements as of December 31, 2001 and 2000
and for each of the three years in the period ended December 31, 2001:
Consolidated Balance Sheets............................................. 42
Consolidated Statements of Income....................................... 43
Consolidated Statements of Changes in Stockholders' Equity.............. 44
Consolidated Statements of Cash Flows................................... 45
Notes to Consolidated Financial Statements.............................. 46
40
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors and Stockholders
Middlefield Banc Corp.
We have audited the accompanying consolidated balance sheet of Middlefield Banc
Corp. and subsidiary as of December 31, 2001 and 2000, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Middlefield Banc
Corp. and subsidiary as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ending
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
Wexford, PA
February 22, 2002
41
MIDDLEFIELD BANC CORP.
CONSOLIDATED BALANCE SHEET
December 31,
2001 2000
------------ ------------
ASSETS
Cash and due from banks $ 3,443,435 $ 3,574,875
Federal funds sold 2,450,000 1,265,000
------------ ------------
Cash and cash equivalents 5,893,435 4,839,875
Interest-bearing deposits in other institutions 1,240,207 984,441
Investment securities available for sale 21,179,786 11,868,337
Investment securities held to maturity (estimated
market value of $10,471,978 and $17,942,255) 10,229,068 17,942,310
Loans 152,828,355 135,304,215
Less allowance for loan losses 2,062,252 2,037,322
------------ ------------
Net loans 150,766,103 133,266,893
Premises and equipment 6,244,797 5,432,472
Accrued interest and other assets 2,304,568 2,154,485
------------ ------------
TOTAL ASSETS $197,857,964 $176,488,813
============ ============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 24,952,407 $ 23,155,904
Interest-bearing demand 6,523,152 6,116,094
Money market 7,940,807 9,127,760
Savings 41,518,906 32,260,775
Time 86,447,456 76,505,513
------------ ------------
Total deposits 167,382,728 147,166,046
Short-term borrowings 660,678 543,222
Other borrowings 9,301,334 9,861,596
Accrued interest and other liabilities 726,417 674,587
------------ ------------
TOTAL LIABILITIES 178,071,157 158,245,451
------------ ------------
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 14,842,519 13,343,980
Accumulated other comprehensive income 133,717 88,811
Treasury stock, at cost (45,722 shares) (1,476,440) (1,476,440)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 19,786,807 18,243,362
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $197,857,964 $176,488,813
============ ============
See accompanying notes to consolidated financial statements.
42
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
2001 2000 1999
----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans $11,807,799 $10,853,292 $ 9,408,603
Interest-bearing deposits in other institutions 61,718 97,037 81,211
Federal funds sold 138,415 99,320 90,676
Investment securities:
Taxable 1,235,922 1,195,504 1,281,341
Tax-exempt 462,715 525,017 586,788
----------- ----------- -----------
Total interest income 13,706,569 12,770,170 11,448,619
----------- ----------- -----------
INTEREST EXPENSE
Deposits 6,198,365 5,311,657 4,539,351
Short-term borrowings 15,411 64,031 8,425
Other borrowings 534,146 534,196 500,500
----------- ----------- -----------
Total interest expense 6,747,922 5,909,884 5,048,276
----------- ----------- -----------
NET INTEREST INCOME 6,958,647 6,860,286 6,400,343
Provision for loan losses 170,000 275,000 296,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,788,647 6,585,286 6,104,343
----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 930,431 823,888 667,220
Investment securities gains (losses) 97,807 -- (606)
Other income 165,955 158,775 137,744
----------- ----------- -----------
Total noninterest income 1,194,193 982,663 804,358
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits 2,316,342 2,240,522 2,258,779
Occupancy expense 291,706 320,539 334,199
Equipment expense 292,168 283,174 235,703
Data processing costs 361,839 315,011 292,059
Professional fees 247,222 212,298 152,346
Ohio state franchise tax 225,081 208,457 222,240
Other expense 1,007,016 828,616 759,048
----------- ----------- -----------
Total noninterest expense 4,741,374 4,408,617 4,254,374
----------- ----------- -----------
Income before income taxes 3,241,466 3,159,332 2,654,327
Income taxes 970,859 922,661 735,318
----------- ----------- -----------
NET INCOME $ 2,270,607 $ 2,236,671 $ 1,919,009
=========== =========== ===========
EARNINGS PER SHARE
Basic $ 2.06 $ 2.02 $ 1.68
Diluted 2.06 2.02 1.68
See accompanying notes to consolidated financial statements.
43
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Other
Common Stock Retained Comprehensive
Shares Amount Earnings Income (Loss)
------------ ---------- ----------- -------------
Balance, December 31, 1998 1,148,676 $6,287,011 $10,355,898 $ 13,888
Net income 1,919,009
Other comprehensive income:
Unrealized loss on available for sale
securities net of tax benefit of (104,519)
$53,843
Comprehensive income
Cash dividends ($.50 per share) (572,343)
Purchase of treasury stock
Sale of treasury stock
---------- ---------- ----------- ---------
Balance, December 31, 1999 1,148,676 6,287,011 11,702,564 (90,631)
Net income 2,236,671
Other comprehensive income:
Unrealized gain on available for sale
securities net of taxes of $92,440 179,442
Comprehensive income
Cash dividends ($.54 per share) (595,255)
Purchase of treasury stock
Sale of treasury stock
---------- ---------- ----------- ---------
Balance, December 31, 2000 1,148,676 6,287,011 13,343,980 88,811
Net income 2,270,607
Other comprehensive income:
Unrealized gain on available for sale
securities net of taxes of $23,133 44,906
Comprehensive income
Cash dividends ($.70 per share) (772,068)
---------- ---------- ----------- ---------
Balance, December 31, 2001 1,148,676 $6,287,011 $14,842,519 $ 133,717
========== ========== =========== =========
2001
------------
Components of comprehensive income (loss):
Change in net unrealized gain (loss)
on investments available for sale $ 109,459
Realized (gains) losses included in net income,
net of (taxes) benefit of $(33,254), $0, and $206 (64,553)
---------
Total $ 44,906
=========
Total
Treasury Stockholders' Comprehensive
Stock Equity Income
----------- ------------- -------------
Balance, December 31, 1998 $ -- $16,656,797
Net income 1,919,009 $1,919,009
Other comprehensive income:
Unrealized loss on available for sale
securities net of tax benefit of (104,519) (104,519)
$53,843
----------
Comprehensive income $1,814,490
==========
Cash dividends ($.50 per share) (572,343)
Purchase of treasury stock (306,175) (306,175)
Sale of treasury stock 96,286 96,286
----------- ------------
Balance, December 31, 1999 (209,889) 17,689,055
Net income 2,236,671 $2,236,671
Other comprehensive income:
Unrealized gain on available for sale
securities net of taxes of $92,440 179,442 179,442
----------
Comprehensive income $2,416,113
==========
Cash dividends ($.54 per share) (595,255)
Purchase of treasury stock (1,311,050) (1,311,050)
Sale of treasury stock 44,499 44,499
----------- ------------
Balance, December 31, 2000 (1,476,440) 18,243,362
Net income 2,270,607 $2,270,607
Other comprehensive income:
Unrealized gain on available for sale
securities net of taxes of $23,133 44,906 44,906
----------
Comprehensive income $2,315,513
==========
Cash dividends ($.70 per share) (772,068)
----------- ------------
Balance, December 31, 2001 $(1,476,440) $19,786,807
=========== ============
2000 1999
----------- -------------
Components of comprehensive income (loss):
Change in net unrealized gain (loss)
on investments available for sale $ 179,442 $ (104,919)
Realized (gains) losses included in net income,
net of (taxes) benefit of $(33,254), $0, and $206 -- 400
----------- ------------
Total $ 179,442 $ (104,519)
=========== ============
See accompanying notes to consolidated financial statements.
44
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
2001 2000 1999
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 2,270,607 $ 2,236,671 $ 1,919,009
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 170,000 275,000 296,000
Depreciation and amortization 300,531 352,613 287,641
Amortization of premium and
discount on investment securities 69,237 75,563 93,664
Amortization of net deferred loan costs (fees) (31,666) 35,489 (112,126)
Investment securities (gains) losses (97,807) -- 606
Deferred income taxes 54,403 (87,521) (58,739)
Decrease (increase) in accrued interest receivable 140,147 (59,663) 85,288
Increase in accrued interest payable 38,927 84,301 18,700
Other, net (211,763) 39,943 (19,926)
------------ ------------ ------------
Net cash provided by operating activities 2,702,616 2,952,396 2,510,117
------------ ------------ ------------
INVESTING ACTIVITIES
Decrease (increase) in interest-bearing deposits
in other institutions, net (255,766) 2,361,081 (1,107,918)
Investment securities available for sale:
Proceeds from repayments and maturities 5,144,986 766,880 4,931,129
Purchases (16,392,621) (2,561,359) (9,842,151)
Proceeds from sales 2,092,980 -- 149,885
Investment securities held to maturity:
Proceeds from repayments and maturities 7,853,057 3,997,990 8,280,098
Purchases (200,000) -- --
Proceeds from sales -- -- 1,054,648
Increase in loans, net (17,637,544) (14,105,641) (16,927,161)
Purchase of regulatory stock (143,100) (136,100) (128,800)
Purchase of premises and equipment (1,112,856) (150,361) (520,313)
------------ ------------ ------------
Net cash used for investing activities (20,650,864) (9,827,510) (14,110,583)
------------ ------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 20,216,682 12,071,587 6,266,570
Increase (decrease) in short-term borrowings, net 117,456 (1,964,448) 2,507,670
Proceeds from other borrowings -- 2,000,000 1,000,000
Repayment of other borrowings (560,262) (1,740,900) (973,706)
Purchase of treasury stock -- (1,311,050) (306,175)
Sale of treasury stock -- 44,499 96,286
Cash dividends (772,068) (595,255) (572,343)
------------ ------------ ------------
Net cash provided by financing activities 19,001,808 8,504,433 8,018,302
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 1,053,560 1,629,319 (3,582,164)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 4,839,875 3,210,556 6,792,720
------------ ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 5,893,435 $ 4,839,875 $ 3,210,556
============ ============ ============
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings $ 6,708,995 $ 5,825,583 $ 5,029,576
Income taxes 980,000 1,097,000 735,756
See accompanying notes to consolidated financial statements.
45
MIDDLEFIELD BANC CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting and reporting policies applied in
the presentation of the accompanying financial statements follows:
Nature of Operations and Basis of Presentation
----------------------------------------------
Middlefield Banc Corp. (the "Company") is an Ohio corporation organized to
become the holding company of The Middlefield Banking Company (the "Bank").
The Bank is a state-chartered bank located in Ohio. The Company and its
subsidiary derive substantially all of their income from banking and
bank-related services which include 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 five locations. The Company is supervised by the Board of
Governors of the Federal Reserve System, while the Bank is subject to
regulation and supervision by the Federal Deposit Insurance Corporation and
the Ohio Division of Financial Institutions.
The consolidated financial statements of the Company include its
wholly-owned subsidiary, the Bank. Significant intercompany items have been
eliminated in preparing the consolidated financial statements.
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America. In preparing
the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as
of the balance sheet date and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
Investment Securities
---------------------
Investment securities are classified at the time of purchase, based on
management's intention and ability, as securities held to maturity or
securities available for sale. Debt securities acquired with the intent and
ability to hold to maturity are stated at cost adjusted for amortization of
premium and accretion of discount which are computed using a level yield
method and recognized as adjustments of interest income. Certain other debt
securities have been classified as available for sale to serve principally
as a source of liquidity. Unrealized holding gains and losses for available
for sale securities are reported as a separate component of stockholders'
equity, net of tax, until realized. Realized security gains and losses are
computed using the specific identification method. Interest and dividends
on investment securities are recognized as income when earned.
Common stock of the Federal Home Loan Bank ("FHLB") represents ownership in
an institution that is wholly-owned by other financial institutions. This
equity security is accounted for at cost and classified with other assets.
Loans
-----
Loans are reported at their principal amount net of the allowance for loan
losses. Interest income is recognized as income when earned on the accrual
method. The accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions, the
borrower's financial condition is such that collection of interest is
doubtful. Interest received on nonaccrual loans is recorded as income
against principal according to management's judgment as to the
collectibility of such principal.
46
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
-----
Loan origination fees and certain direct loan origination costs are being
deferred and the net amount amortized as an adjustment of the related
loan's yield. Management is amortizing these amounts over the contractual
life of the related loans.
Allowance for Loan Losses
-------------------------
The allowance for loan losses represents the amount which management
estimates is adequate to provide for probable loan losses inherent in its
loan portfolio. The allowance method is used in providing for loan losses.
Accordingly, all loan losses are charged to the allowance, and all
recoveries are credited to it. 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 which encompasses 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 in determining 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.
A loan is considered impaired when it is probable the borrower will not
repay the loan according to the original contractual terms of the loan
agreement. Management has determined that first mortgage loans on
one-to-four family properties and all consumer loans represent large groups
of smaller-balance homogeneous loans that are to be collectively evaluated.
Loans that experience insignificant payment delays, which are defined as 90
days or less, generally are not classified as impaired. A loan is not
impaired during a period of delay in payment if the Company expects to
collect all amounts due including interest accrued at the contractual
interest rate for the period of delay. All loans identified as impaired are
evaluated independently by management. The Company estimates credit losses
on impaired loans based on the present value of expected cash flows or the
fair value of the underlying collateral if the loan repayment is expected
to come from the sale or operation of such collateral. Impaired loans, or
portions thereof, are charged off when it is determined a realized loss has
occurred. Until such time, an allowance for loan losses is maintained for
estimated losses. Cash receipts on impaired loans are applied first to
accrued interest receivable unless otherwise required by the loan terms,
except when an impaired loan is also a nonaccrual loan in which case the
portion of the payment related to interest is recognized as income.
Premises and Equipment
----------------------
Premises and equipment are stated at cost net of accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated
useful lives of the assets. Expenditures for maintenance and repairs are
charged against income as incurred. Costs of major additions and
improvements are capitalized.
Income Taxes
------------
The Company and the Bank file a consolidated federal income tax return.
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
Earnings Per Share
------------------
The Company provides dual presentation of basic and diluted earnings per share.
Basic earnings per share is
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
47
calculated utilizing net income as reported in the numerator and average
shares outstanding in the denominator. The computation of diluted earnings
per share differs in that the dilutive effects of any stock options,
warrants, and convertible securities are adjusted in the denominator.
Stock Options
-------------
The Company maintains a stock option plan for key officers, employees, and
non-employee directors. When the exercise price of the Company's stock
options is greater than or equal to the market price of the underlying
stock on the date of the grant, no compensation expense is recognized in
the Company's financial statements. Pro forma net income and earnings per
share are presented to reflect the impact of the stock option plan assuming
compensation expense had been recognized based on the fair value of the
stock options granted under the plan.
Stockholders' Equity
--------------------
On August 14, 2000, the Board of Directors approved a two-for-one stock
split. Average shares outstanding and all per share amounts included in the
consolidated financial statements are based on the increased number of
shares giving retroactive effect to the stock split.
Cash Flow Information
---------------------
The Company has defined cash and cash equivalents as those amounts included
in the consolidated balance sheet captions Cash and due from banks and
Federal funds sold.
Recent Accounting Pronouncements
--------------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 141, Business
Combinations, effective for all business combinations initiated after 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 effect on
the Company'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 statement changes the accounting for
goodwill from an amortization method to an impairment-only approach. Thus,
amortization of goodwill, including goodwill recorded in past business
combinations, will cease upon adoption of this statement. However, the new
statement did not amend FAS 72, Accounting for Certain Acquisitions of
Banking or Thrift Institutions, which requires recognition and amortization
of unidentified intangible assets relating to the acquisition of financial
institutions or branches thereof. The FASB has decided to undertake a
limited scope project to reconsider the provisions of FAS 72 in 2002.
Therefore, the adoption of Statement No. 142 is not expected to have a
material effect on the Company's financial position or results of
operations.
In August 2001, the FASB issued FAS No. 143, Accounting for Asset
Retirement Obligations, which requires that the fair value of a liability
be recognized when incurred for the retirement of a long-lived asset and
the value of the asset be increased by that amount. The statement also
requires that the liability be maintained at its present value in
subsequent periods and outlines certain disclosures for such obligations.
The adoption of this statement, which is effective January 1, 2003, is not
expected to have a material effect on the Company's financial statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
48
In October 2001, the FASB issued FAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. FAS 144 supercedes FAS 121 and applies to
all long-lived assets (including discontinued operations) and consequently
amends APB Opinion No. 30, Reporting Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business. FAS 144 requires that
long-lived assets that are to be disposed of by sale be measured at the
lower of book value or fair value less costs to sell. FAS 144 is effective
for financial statements issued for fiscal years beginning after December
15, 2001 and, generally, its provisions are to be applied prospectively.
The adoption of this statement is not expected to have a material effect on
the Company's financial statements.
Reclassification of Comparative Amounts
---------------------------------------
Certain items previously reported have been reclassified to conform with
the current year's format. Such reclassifications did not affect net income
or stockholders' equity.
2. EARNINGS PER SHARE
There are no convertible securities which would affect the numerator in
calculating basic and diluted earnings per share; therefore, net income as
presented on the Consolidated Statement of Income will be used as the
numerator. The following table sets forth the composition of the
weighted-average common shares (denominator) used in the basic and diluted
earnings per share computation.
2001 2000 1999
--------- --------- ---------
Weighted-average common shares
outstanding 1,148,676 1,148,676 1,148,676
Average treasury stock shares (45,722) (42,704) (3,426)
--------- --------- ---------
Weighted-average common shares and
common stock equivalents used to
calculate basic earnings per share 1,102,954 1,105,972 1,145,250
Additional common stock equivalents
(stock options) used to calculate
diluted earnings per share 1,146 -- --
--------- --------- ---------
Weighted-average common shares and
common stock equivalents used
to calculate diluted earnings per share 1,104,100 1,105,972 1,145,250
========= ========= =========
Options to purchase 9,500 shares of common stock at prices from $31.00 to
$31.75 per share were outstanding during 2001 but were not included in the
computation of diluted EPS because to do so would have been anti-dilutive.
49
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market values of securities available for
sale are as follows:
2001
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ---------- ---------- -----------
U.S. Government agency
securities $ 2,152,877 $ 60,470 $ -- $ 2,213,347
Obligations of states and
political subdivisions:
Taxable 1,411,166 16,700 (2,957) 1,424,909
Tax-exempt 5,822,240 107,864 (15,099) 5,915,005
Corporate securities 550,472 25,809 -- 576,281
Mortgage-backed securities 11,040,429 69,408 (59,593) 11,050,244
----------- -------- -------- -----------
Total $20,977,184 $280,251 $(77,649) $21,179,786
=========== ======== ======== ===========
2000
---------------------------------------------------
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 December 31,
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 $ 3,002,083 $ 3,016,125
Due after one year through five years 5,601,912 5,754,035
Due after five years through ten years 1,460,622 1,503,912
Due after ten years 10,912,567 10,905,714
----------- -----------
Total $20,977,184 $21,179,786
=========== ===========
50
3. INVESTMENT SECURITIES AVAILABLE FOR SALE (Continued)
Investment securities with an approximate carrying value of $9,381,000 and
$6,634,000 at December 31, 2001 and 2000, respectively, were pledged to
secure deposits and other purposes as required by law.
The following is a summary of proceeds received, gross gains, and gross
losses realized on the sale of investment securities available for sale for
the years ended December 31, 2001 and 1999. The Company had no sales in
2000.
2001 1999
---------- --------
Proceeds from sales $2,092,980 $149,885
Gross gains 97,807 --
Gross losses -- 116
4. INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost and estimated market values of investment 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 $ 2,255,342 $ 57,931 $-- $ 2,313,273
Tax-exempt 5,561,426 120,456 -- 5,681,882
Corporate securities 2,213,060 59,896 -- 2,272,956
Mortgage-backed securities 199,240 4,627 -- 203,867
----------- -------- --- -----------
Total $10,229,068 $242,910 $-- $10,471,978
=========== ======== === ===========
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
=========== ======= ======== ===========
51
4. INVESTMENT SECURITIES HELD TO MATURITY (Continued)
The amortized cost and estimated market value of debt securities at
December 31, 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 $ 3,759,548 $ 3,808,002
Due after one year through five years 6,119,000 6,296,593
Due after five years through ten years 51,278 53,548
Due after ten years 299,242 313,835
----------- -----------
Total $10,229,068 $10,471,978
=========== ===========
Investment securities held to maturity with carrying values of
approximately $3,205,000 and $7,742,000 and estimated market values of
approximately $3,424,000 and $7,743,000 at December 31, 2001 and 2000,
respectively, were pledged to secure public deposits and other purposes
required by law.
The following is a summary of proceeds received, gross gains, and
gross losses realized on the sale of investment securities held to maturity
for the year ended December 31, 1999. These sales occurred within 90 days
of maturity of the security. The Company had no sales in 2001 or 2000.
1999
----------
Proceeds from sales $1,054,648
Gross gains --
Gross losses 490
5. LOANS
Major classifications of loans are summarized as follows:
2001 2000
------------ ------------
Commercial and industrial $ 28,313,488 $ 21,508,391
Real estate - construction 3,199,738 2,568,095
Real estate - mortgage:
Residential 113,048,775 101,403,937
Commercial 3,387,969 4,809,088
Consumer installment 4,878,385 5,014,704
------------ ------------
152,828,355 135,304,215
Less allowance for loan losses 2,062,252 2,037,322
------------ ------------
Net loans $150,766,103 $133,266,893
============ ============
52
5. LOANS
The Company's primary business activity is with customers located within
its local trade area, eastern Geauga County, and contiguous counties to the
north, east, and south. Commercial, residential, consumer, and agricultural
loans are granted. Although the Company has a diversified loan portfolio at
December 31, 2001 and 2000, loans outstanding to individuals and businesses
are dependent upon the local economic conditions in its immediate trade
area.
6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December
31, are as follows:
2001 2000 1999
---------- ---------- ----------
Balance, January 1 $2,037,322 $1,756,137 $1,538,726
Add:
Provisions charged to operations 170,000 275,000 296,000
Recoveries 120,814 61,002 39,822
Less loans charged off 265,884 54,817 118,411
---------- ---------- ----------
Balance, December 31 $2,062,252 $2,037,322 $1,756,137
========== ========== ==========
7. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows:
2001 2000
---------- ----------
Land and land improvements $1,104,646 $1,094,685
Building and leasehold improvements 6,018,245 5,203,258
Furniture, fixtures, and equipment 2,349,709 1,977,013
Construction in-progress -- 84,788
---------- ----------
9,472,600 8,359,744
Less accumulated depreciation 3,227,803 2,927,272
---------- ----------
Total $6,244,797 $5,432,472
========== ==========
Construction in-progress at December 31, 2000 represents the costs
incurred to date for a new branch office of the Bank that was completed in
2001. Depreciation charged to operations was $300,531 in 2001, $337,158 in
2000, and $287,641 in 1999.
53
8. OTHER ASSETS
The components of other assets are as follows:
2001 2000
---------- ----------
FHLB stock $1,056,000 $ 912,900
Accrued interest on investment securities 329,312 397,582
Accrued interest on loans 423,752 495,629
Deferred tax asset, net 190,848 268,385
Other 304,656 79,989
---------- ----------
Total $2,304,568 $2,154,485
========== ==========
9. DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000
or more. Such deposits aggregated $15,866,131 and $11,529,786 at December
31, 2001 and 2000, respectively.
Maturities on time deposits of $100,000 or more at December 31, 2001, are
as follows:
Within three months $ 3,336,786
Beyond three but within six months 1,828,665
Beyond six but within twelve months 2,803,985
Beyond one year 7,896,695
-----------
Total $15,866,131
===========
10. SHORT-TERM BORROWINGS
The outstanding balances and related information of short-term borrowings
which includes securities sold under agreements to repurchase and federal
funds purchased are summarized as follows:
2001 2000
-------- ----------
Balance at year-end $660,678 $ 543,222
Average balance outstanding 637,106 1,059,042
Maximum month-end balance 833,008 3,581,491
Weighted-average rate at year-end 0.79% 5.43%
Weighted-average rate during the year 2.42% 6.05%
Average balances outstanding during the year represent daily average
balances, and average interest rates represent interest expense divided by
the related average balance.
The Company maintains a $4,000,000 line of credit at an adjustable rate,
currently 4.25 percent, from The State Bank and Trust Company. At December
31, 2001 and 2000, there were no outstanding balances on this line.
11. OTHER BORROWINGS
54
Other borrowings consist of fixed rate advances from the FHLB as follows:
Interest
Maturity Rate 2001 2000
----------------- -------- ---------- ----------
July 1, 2007 6.40% $1,301,334 $1,861,596
September 4, 2008 5.36% 4,000,000 4,000,000
October 2, 2008 4.53% 2,000,000 2,000,000
July 28, 2010 6.45% 2,000,000 2,000,000
---------- ----------
Total $9,301,334 $9,861,596
========== ==========
Advances from FHLB maturing July 1, 2007 require monthly principal and
interest payments and a 20 percent paydown of outstanding principal every
July 1. Monthly principal and interest payments are adjusted after each 20
percent paydown. Under terms of a blanket agreement, collateral for the
FHLB borrowings are secured by certain qualifying assets of the Bank which
consist principally of first mortgage loans.
12. OTHER LIABILITIES
The components of other liabilities are as follows:
2001 2000
-------- --------
Accrued interest on deposits $607,204 $568,277
Other 119,213 106,310
-------- --------
Total $726,417 $674,587
======== ========
13. INCOME TAXES
The provision for federal income taxes consists of:
2001 2000 1999
-------- ---------- --------
Current payable $916,456 $1,010,182 $794,057
Deferred 54,403 (87,521) (58,739)
-------- ---------- --------
Total provision $970,859 $ 922,661 $735,318
======== ========== ========
55
13. INCOME TAXES (Continued)
The tax effects of deductible and taxable temporary differences that give
rise to significant portions of the deferred tax assets and deferred tax
liabilities are as follows:
2001 2000
-------- --------
Deferred tax assets:
Allowance for loan losses $632,233 $621,654
-------- --------
Gross deferred tax assets 632,233 621,654
-------- --------
Deferred tax liabilities:
Deferred origination fees, net 164,450 141,232
Premises and equipment 119,082 96,982
Net unrealized gain on securities 68,885 45,751
Other 88,968 69,304
-------- --------
Gross deferred tax liabilities 441,385 353,269
-------- --------
Net deferred tax assets $190,848 $268,385
======== ========
No valuation allowance was established at December 31, 2001 and 2000
in view of the Company's ability to carryback to taxes paid in previous
years and certain tax strategies, coupled with the anticipated future
taxable income as evidenced by the Company's earnings potential.
The reconciliation between the federal statutory rate and the Company's
effective consolidated income tax rate is as follows:
2001 2000 1999
-------------------- -------------------- -------------------
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
---------- ------- ---------- ------- --------- -------
Provision at statutory
rate $1,102,098 34.0% $1,074,173 34.0% $ 902,471 34.0%
Tax-free income (157,362) (4.9) (178,520) (5.7) (200,165) (7.5)
Nondeductible interest
expense 26,068 0.8 19,966 0.6 24,813 0.9
Other 55 0.1 7,042 0.3 8,199 0.3
---------- ---- ---------- ---- --------- ----
Actual tax expense
and effective rate $ 970,859 30.0% $ 922,661 29.2% $ 735,318 27.7%
========== ==== ========== ==== ========= ====
56
14. EMPLOYEE BENEFITS
Retirement Plan
---------------
The Bank maintains a section 401(k) employee savings and investment plan
for all full-time employees and officers of the Bank with more than one
year of service. The Bank's contribution to the plan is based on 50 percent
matching of voluntary contributions up to 6 percent of compensation. An
eligible employee can contribute up to 15 percent of salary. Employee
contributions are vested at all times, and the Bank contributions are fully
vested after 6 years beginning at the second year in 20 percent increments.
Contributions for 2001, 2000, and 1999 to this plan amounted to $49,130,
$44,411, and $42,149, respectively.
Supplemental Retirement Plan
----------------------------
Effective December 1, 2001, the Directors Retirement Plan was adopted to
provide post-retirement payments over a ten-year period to members of the
Board of Directors who have completed five or more years of service. The
Plan requires payment of 25 percent of the final average annual board fees
paid to a director in the three years preceding the director's retirement.
The expense of the plan for the year ended December 31, 2001 amounted to
$4,107.
Stock Option Plan
-----------------
At the annual meeting in May 1999, the Board of Directors approved and
stockholders ratified the formation of the 1999 Stock Option Plan (the
"Plan"). The Plan provides for granting incentive stock options and
non-qualified stock options for key officers and employees and non-employee
directors of the Company. A total of 114,866 shares of authorized and
unissued or issued common stock are reserved for issuance under the Plan,
which expires ten years from the date of stockholder ratification. The per
share exercise price of an option granted will not be less than the fair
value of a share of common stock on the date the option is granted. No
option shall become exercisable earlier than one year from the date the
Plan was approved by the stockholders.
The following table presents share data related to the outstanding options:
Weighted- Weighted-
average average
Exercise Exercise
2001 Price 2000 Price
------ --------- ------- ---------
Outstanding, January 1 20,980 $27.42 9,900 $31.53
Granted -- -- 11,480 24.00
Exercised -- -- -- --
Forfeited -- -- (400) 31.00
------ ------
Outstanding, December 31 20,980 $27.42 20,980 $27.42
Exercisable at year-end ====== ======
20,980 27.42 9,500 31.55
Exercisable at year-end ====== ======
57
14. EMPLOYEE BENEFITS (Continued)
Stock Option Plan (Continued)
-----------------
The following table summarizes the characteristics of stock options at
December 31, 2001:
Outstanding Exercisable
------------------------------- -----------------
Contractual Average Average
Exercise Average Exercise Exercise
Grant Date Price Shares Life Price Shares Price
----------------- -------- ------ ----------- -------- ------ --------
June 14, 1999 $31.75 7,000 7.45 $31.75 7,000 $31.75
November 23, 1999 31.00 2,500 7.89 31.00 2,500 31.00
December 11, 2000 24.00 11,480 8.95 24.00 11,480 24.00
------ ------
20,980 27.42 20,980 27.42
====== ======
The Company accounts for the Plan under provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Under this Opinion, no compensation expense has been recognized with
respect to the Plan because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the grant
date.
For purposes of computing pro forma results, the Company estimated the fair
values of stock options using the Black-Scholes option pricing model. The
model requires the use of subjective assumptions which can materially
affect fair value estimates. Therefore, the pro forma results are estimates
of results of operations as if compen-sation expense had been recognized
for the stock option plans. The fair value of each stock option granted was
estimated using the following weighted-average assumptions for grants in
2000 and 1999: (1) expected dividend yield was 2.50 percent and 2.00
percent, respectively; (2) risk-free interest rate of 5.29 percent and 5.34
percent, respectively; (3) expected volatility of 5.00 percent; and (4)
expected lives of options of ten years.
2001 2000
---------- ----------
Net income applicable to common stock:
As reported $2,270,607 $2,236,671
Pro forma 2,232,963 2,195,370
Basic net income per common share:
As reported $ 2.06 $ 2.02
Pro forma 2.02 1.97
Diluted net income per common share:
As reported $ 2.06 $ 2.02
Pro forma 2.02 1.97
15. COMMITMENTS
In the normal course of business, there are various outstanding
commitments and certain contingent liabilities which are not reflected in
the accompanying consolidated financial statements. These commitments and
contingent liabilities represent financial instruments with off-balance
sheet risk. The contract or notional amounts of those instruments reflect
the extent of involvement in particular types of financial instruments
which were comprised of the following:
58
15. COMMITMENTS (Continued)
2001 2000
----------- -----------
Commitments to extend credit $17,265,756 $10,103,358
Standby letters of credit 72,692 100,692
----------- -----------
Total $17,338,448 $10,204,050
=========== ===========
The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet.
The same credit policies are used in making commitments and conditional
obligations as for on-balance sheet instruments. Generally, collateral is
not required to support financial instruments with credit risk. The terms
are typically for a one-year period with an annual renewal option subject
to prior approval by management.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the loan
agreement. These commitments are comprised primarily of available
commercial and personal lines of credit. Standby letters of credit are
conditional commitments issued to guarantee the performance of a customer
to a third party.
The exposure to loss under these commitments is limited by subjecting them
to credit approval and monitoring procedures. Substantially all commitments
to extend credit are contingent upon customers maintaining specific credit
standards at the time of the loan funding. Management assesses the credit
risk associated with certain commitments to extend credit in determining
the level of the allowance for loan losses. Since many of the commitments
are expected to expire without being drawn upon, the contractual amounts do
not necessarily represent future funding requirements.
16. REGULATORY RESTRICTIONS
Loans
-----
Federal law prevents the Company from borrowing from the Bank unless the
loans are secured by specific obligations. Further, such secured loans are
limited in amount of ten percent of the Bank's common stock and capital
surplus.
Dividends
---------
The Bank is subject to a dividend restriction which generally limits the
amount of dividends that can be paid by an Ohio state-chartered bank. Under
the Ohio Banking Code, cash dividends may not exceed net profits as defined
for that year combined with retained net profits for the two preceding
years less any required transfers to surplus. Under this formula, the
amount available for payment of dividends in 2002 is $2,477,000 plus 2002
profits retained up to the date of the dividend declaration.
59
17. REGULATORY CAPITAL
Federal regulations require the Company and the Bank to maintain minimum
amounts of capital. Specifically, each is required to maintain certain
minimum dollar amounts and ratios of Total and Tier I capital to
risk-weighted assets and of Tier I capital to average total assets.
In addition to the capital requirements, the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") established five capital categories
ranging from "well capitalized" to "critically undercapitalized." Should
any institution fail to meet the requirements to be considered "adequately
capitalized," it would become subject to a series of increasingly
restrictive regulatory actions.
As of December 31, 2001 and 2000, the FDIC categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To
be classified as a well capitalized financial institution, Total
risk-based, Tier 1 risk-based, and Tier 1 Leverage capital ratios must be
at least ten percent, six percent, and five percent, respectively.
The Company's actual capital ratios are presented in the following table
which shows the Company met all regulatory capital requirements. The
capital position of the Bank does not differ significantly from the
Company's.
2001 2000
------------------- ------------------
Amount Ratio Amount Ratio
----------- ----- ---------- -----
Total Capital
(to Risk-weighted Assets)
-------------------------
Actual $21,147,628 17.82 19,534,601 17.75%
%$
For Capital Adequacy Purposes 9,493,703 8.00 8,802,236 8.00
To Be Well Capitalized 11,867,129 10.00 11,002,795 10.00
Tier I Capital
(to Risk-weighted Assets)
-------------------------
Actual $19,657,090 16.56 18,154,551 16.50%
%$
For Capital Adequacy Purposes 4,746,851 4.00 4,401,118 4.00
To Be Well Capitalized 7,120,277 6.00 6,601,677 6.00
Tier I Capital
(to Average Assets)
-------------------
Actual $19,657,090 9.94 18,154,551 10.32%
%$
For Capital Adequacy Purposes 7,906,376 4.00 7,037,304 4.00
To Be Well Capitalized 9,882,970 5.00 8,796,631 5.00
18. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
60
The estimated fair value of the Company's financial instruments at December
31, are as follows:
2001 2000
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ------------ ------------ ------------
Financial assets:
Cash and due from banks $ 3,443,435 $ 3,443,435 $ 3,574,875 $ 3,574,875
Federal funds sold 2,450,000 2,450,000 1,265,000 1,265,000
Interest-bearing deposits
in other institutions 1,240,207 1,240,207 984,441 984,441
Investment securities:
Available for sale 21,179,786 21,179,786 11,868,337 11,868,337
Held to maturity 10,229,068 10,471,978 17,942,310 17,942,255
Net loans 150,766,103 157,569,103 133,266,893 135,415,893
Regulatory stock 1,056,000 1,056,000 912,900 912,900
Accrued interest receivable 753,064 753,064 893,211 893,211
------------ ------------ ------------ ------------
Total $191,117,663 $198,163,573 $170,707,967 $172,856,912
============ ============ ============ ============
Financial liabilities:
Deposits $167,382,728 $170,258,728 $147,166,046 $147,424,151
Short-term borrowings 660,678 660,678 543,222 543,222
Other borrowings 9,301,334 9,679,000 9,861,596 9,907,000
Accrued interest payable 607,204 607,204 568,277 568,277
------------ ------------ ------------ ------------
Total $177,951,944 $181,205,610 $158,139,141 $158,442,650
============ ============ ============ ============
61
18. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS (Continued)
Financial instruments are defined as cash, evidence of ownership interest
in an entity, or a contract which creates an obligation or right to receive
or deliver cash or another financial instrument from/to a second entity on
potentially favorable or unfavorable terms.
Fair value is defined as the amount at which a financial instrument could
be exchanged in a current transaction between willing parties other than in
a forced liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based
upon the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for
financial instruments should be based upon management's judgment regarding
current economic conditions, interest rate risk, expected cash flows,
future estimated losses, and other factors as determined through various
option pricing formulas or simulation modeling. As many of these
assumptions result from judgments made by management based upon estimates
which are inherently uncertain, the resulting estimated fair values may not
be indicative of the amount realizable in the sale of a particular
financial instrument. In addition, changes in assumptions on which the
estimated fair values are based may have a significant impact on the
resulting estimated fair values.
As certain assets such as deferred tax assets and premises and equipment
are not considered financial instruments, the estimated fair value of
financial instruments would not represent the full value of the Company.
The Company employed simulation modeling in determining the estimated fair
value of financial instruments for which quoted market prices were not
available based upon the following assumptions:
Cash and Due from Banks, Interest-bearing Deposits in Other Institutions,
-------------------------------------------------------------------------
Federal Funds Sold, Regulatory Stock, Accrued Interest Receivable, Accrued
--------------------------------------------------------------------------
Interest Payable, and Short-term Borrowings
-------------------------------------------
The fair value is equal to the current carrying value.
Investment Securities
---------------------
The fair value of investment securities available for sale and held to
maturity is equal to the available quoted market price. If no quoted market
price is available, fair value is estimated using the quoted market price
for similar securities.
Loans, Deposits, and Other Borrowings
-------------------------------------
The fair value of loans, certificates of deposit, and other borrowings is
estimated by discounting the future cash flows using a simulation model
which estimates future cash flows and constructs discount rates that
consider reinvestment opportunities, operating expenses, noninterest
income, credit quality, and prepayment risk. Demand, savings, and money
market deposit accounts are valued at the amount payable on demand as of
year-end.
Commitments to Extend Credit
----------------------------
These financial instruments are generally not subject to sale, and
estimated fair values are not readily available. The carrying value,
represented by the net deferred fee arising from the unrecognized
commitment or letter of credit, and the fair value, determined by
discounting the remaining contractual fee over the term of the commitment
using fees currently charged to enter into similar agreements with similar
credit risk, are not considered material for disclosure. The contractual
amounts of unfunded commitments and letters of credit are presented in Note
15.
62
19. PARENT COMPANY
Following are condensed financial statements for the Company.
CONDENSED BALANCE SHEET
December 31,
2001 2000
----------- -----------
ASSETS
Cash and due from banks $ 167,074 $ 502,849
Interest-bearing deposits in other institutions 377,207 26,441
Investment in subsidiary bank 19,242,526 17,681,862
Other assets -- 32,210
----------- -----------
TOTAL ASSETS $19,786,807 $18,243,362
=========== ===========
STOCKHOLDERS' EQUITY $19,786,807 $18,243,362
=========== ===========
CONDENSED STATEMENT OF INCOME
Year Ended December 31,
2001 2000 1999
---------- ---------- ----------
INCOME
Dividends from subsidiary bank $ 854,703 $1,335,994 $ 765,617
Interest income 4,709 25,600 49,823
---------- ---------- ----------
Total income 859,412 1,361,594 815,440
EXPENSES 152,626 120,243 55,704
---------- ---------- ----------
Income before income tax benefit 706,786 1,241,351 759,736
Income tax benefit (48,063) (34,178) --
Income before equity in undistributed
net income of subsidiary 754,849 1,275,529 759,736
Equity in undistributed net income
of subsidiary 1,515,758 961,142 1,159,273
---------- ---------- ----------
NET INCOME $2,270,607 $2,236,671 $1,919,009
========== ========== ==========
63
19. PARENT COMPANY (Continued)
CONDENSED STATEMENT OF CASH FLOWS
Year Ended December 31,
2001 2000 1999
----------- ----------- -----------
OPERATING ACTIVITIES
Net income $ 2,270,607 $ 2,236,671 $ 1,919,009
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed net
income of subsidiary (1,515,758) (961,142) (1,159,273)
Other 32,210 (32,176) (898)
----------- ----------- -----------
Net cash provided by
operating activities 787,059 1,243,353 758,838
----------- ----------- -----------
INVESTING ACTIVITIES
Decrease (increase) in interest-bearing
deposits in other institutions (350,766) 1,002,177 (389,814)
Investment securities available for sale:
Proceeds from repayments and maturities -- -- 1,500,000
Purchases -- -- (1,500,000)
Investment securities held to maturity:
Proceeds from repayments and maturities -- -- 500,000
----------- ----------- -----------
Net cash provided by (used for)
investing activities (350,766) 1,002,177 110,186
----------- ----------- -----------
FINANCING ACTIVITIES
Purchase of treasury stock -- (1,311,050) (306,175)
Sale of treasury stock -- 44,499 96,286
Cash dividends (772,068) (595,255) (572,343)
----------- ----------- -----------
Net cash used for financing activities (772,068) (1,861,806) (782,232)
----------- ----------- -----------
Increase (decrease) in cash (335,775) 383,724 86,792
CASH AT BEGINNING OF YEAR 502,849 119,125 32,333
----------- ----------- -----------
CASH AT END OF YEAR $ 167,074 $ 502,849 $ 119,125
=========== =========== ===========
64
20. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
Three Months Ended
------------------------------------------------------
March 31, June 30, September 30, December 31,
2001 2001 2001 2001
---------- ---------- ------------- ------------
Total interest income $3,299,426 $3,462,634 $3,508,111 $3,534,205
Total interest expense 1,655,626 1,725,151 1,730,710 1,636,435
---------- ---------- ---------- ----------
Net interest income 1,643,800 1,737,483 1,777,401 1,897,770
Provision for loan losses 39,000 41,000 45,000 45,000
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 1,604,800 1,696,483 1,732,401 1,852,770
Total noninterest income 258,665 267,775 365,793 204,153
Total noninterest expense 1,090,308 1,237,226 1,149,978 1,263,862
---------- ---------- ---------- ----------
Income before income taxes 773,157 727,032 948,216 793,061
Income taxes 235,900 235,600 288,326 211,033
---------- ---------- ---------- ----------
Net income $ 537,257 $ 491,432 $ 659,890 $ 582,028
========== ========== ========== ==========
Per share data:
Net income
Basic $ 0.49 $ 0.45 $ 0.60 $ 0.53
Diluted 0.49 0.44 0.60 0.53
Average shares outstanding
Basic 1,102,954 1,102,954 1,102,954 1,102,954
Diluted 1,104,304 1,104,694 1,103,475 1,103,395
65
20. SELECTED QUARTERLY FINANCIAL DATA (unaudited)(Continued)
Three Months Ended
------------------------------------------------------
March 31, June 30, September 30, December 31,
2000 2000 2000 2000
---------- ---------- ------------- ------------
Total interest income $3,050,487 $3,141,341 $3,268,702 $3,309,640
Total interest expense 1,357,310 1,409,416 1,542,773 1,600,385
---------- ---------- ---------- ----------
Net interest income 1,693,177 1,731,925 1,725,929 1,709,255
Provision for loan losses 75,000 75,000 75,000 50,000
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 1,618,177 1,656,925 1,650,929 1,659,255
Total noninterest income 219,897 224,333 247,238 291,195
Total noninterest expense 1,045,414 1,097,167 1,072,384 1,193,652
---------- ---------- ---------- ----------
Income before income taxes 792,660 784,091 825,783 756,798
Income taxes 235,370 232,000 254,000 201,291
---------- ---------- ---------- ----------
Net income $ 557,290 $ 552,091 $ 571,783 $ 555,507
========== ========== ========== ==========
Per share data:
Net income
Basic $ 0.50 $ 0.50 $ 0.52 $ 0.50
Diluted 0.50 0.50 0.52 0.50
Average shares outstanding
Basic 1,117,069 1,101,675 1,101,554 1,101,663
Diluted 1,117,069 1,101,675 1,101,554 1,101,663
Item 9 -- Changes in and Disagreements with Accountants on Accounting and
-------------------------------------------------------------------------
Financial Disclosure
--------------------
None
Part III
Item 10 -- Directors and Executive Officers of the Registrant
-------------------------------------------------------------
Incorporated by reference to the definitive proxy statement for the 2002
annual meeting of shareholders, which will be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 2001.
Item 11 -- Executive Compensation
---------------------------------
Incorporated by reference to the definitive proxy statement for the 2002
annual meeting of shareholders, which will be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 2001.
66
Item 12 -- Security Ownership of Certain Beneficial Owners and Management
-------------------------------------------------------------------------
Incorporated by reference to the definitive proxy statement for the 2002
annual meeting of shareholders, which will be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 2001.
Item 13 -- Certain Relationships and Related Transactions
---------------------------------------------------------
Incorporated by reference to the definitive proxy statement for the 2002
annual meeting of shareholders, which will be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 2001.
Part IV
Item 14 -- Exhibits, Financial Statement Schedules, and Reports on Form 8-K
---------------------------------------------------------------------------
(a)(1) Financial Statements
--------------------
The following financial statements are included in this document in Item 8:
. Report of Independent Auditors
. Consolidated Balance Sheets at December 31, 2001 and 2000
. Consolidated Statements of Income for the Years Ended December 31,
2001, 2000, and 1999
. Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 2001, 2000, and 1999
. Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000, and 1999
. Notes to Consolidated Financial Statements
67
(a)(2) Financial Statement Schedules
-----------------------------
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown elsewhere in the document
in the Financial Statements or Notes thereto, or in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(a)(3) Exhibits
--------
See the list of exhibits below
(b) Reports on Form 8-K Filed During the Quarter ended December 31, 2001
--------------------------------------------------------------------
68
On November 23, 2001 Middlefield Banc Corp. filed a Report on Form 8-K. The
Form 8-K contained a copy of a November 20, 2001 press release announcing the
declaration of regular and special dividends and expansion of the board of
directors.
(c) Exhibits Required by Item 601 of Regulation S-K
-----------------------------------------------
Exhibit
Number Description Location
------- ----------------------------------------- ----------------------------------------------------------
3.1 Second Amended and Restated Articles of Incorporated by reference to the identically numbered
Incorporation of Middlefield Banc Corp. exhibit to the registration statement on Form 10 (File No.
033-23094) filed on April 17, 2001
3.2 Regulations of Middlefield Banc Corp. Incorporated by reference to the identically numbered
exhibit to the registration statement on Form 10 (File No.
033-23094) filed on April 17, 2001
4 Specimen Stock Certificate Incorporated by reference to the identically numbered
exhibit to the registration statement on Form 10 (File No.
033-23094) filed on April 17, 2001
10.1* 1999 Stock Option Plan of Middlefield Incorporated by reference to the identically numbered
Banc Corp. exhibit to the registration statement on Form 10 (File No.
033-23094) filed on April 17, 2001
10.2* Severance Agreement of President and filed herewith
Chief Executive Officer
10.3* Severance Agreement of Executive Vice filed herewith (executive officers Teresa M. Hetrick, Jack
President L. Lester, Nancy C. Snow, and Donald L. Stacy also entered
into severance agreements in the form included as Exhibit
10.3)
10.4 Federal Home Loan Bank of Cincinnati Incorporated by reference to the identically numbered
Agreement for Advances and Security exhibit to the registration statement on Form 10 (File No.
Agreement dated September 14, 2000 033-23094) filed on April 17, 2001
10.5* Collateral Assignment Split Dollar Incorporated by reference to the identically numbered
Agreement between the President and Chief exhibit to Amendment No. 1 of the registration statement
Executive Officer and The Middlefield on Form 10 (File No. 033-23094) filed on June 14, 2001
Banking Company
10.6* Director Retirement Agreement with filed herewith
Richard T. Coyne
10.7* Director Retirement Agreement with filed herewith
Frances H. Frank
10.8* Director Retirement Agreement with Thomas filed herewith
C. Halstead
10.9* Director Retirement Agreement with George filed herewith
F. Hasman
10.10* Director Retirement Agreement with Donald filed herewith
D. Hunter
10.11* Director Retirement Agreement with Martin filed herewith
S. Paul
10.12* Director Retirement Agreement with Donald filed herewith
E. Villers
69
Exhibit
Number Description Location
------- ----------------------------------------- ----------------------------------------------------------
21 Subsidiaries of Middlefield Banc Corp. Incorporated by reference to the identically numbered
exhibit to the registration statement on Form 10 (File No.
033-23094) filed on April 17, 2001
23 Consent of S.R. Snodgrass, A.C., filed herewith
independent auditors of Middlefield Banc
Corp.
99.1* Form of Indemnification Agreement with Incorporated by reference to the identically numbered
directors of Middlefield Banc Corp. and exhibit to Amendment No. 1 of the registration statement
executive officers of Middlefield Banc on Form 10 (File No. 033-23094) filed on June 14, 2001
Corp. and The Middlefield Banking Company
* Management contract or compensatory plan or arrangement
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Middlefield Banc Corp.
By: /s/ Thomas G. Caldwell
------------------------------------
Thomas G. Caldwell
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Thomas G. Caldwell March 26, 2002
------------------------------------------------------ --
Thomas G. Caldwell
President, Chief Executive Officer, and Director
/s/ Donald L. Stacy March 26, 2002
------------------------------------------------------ --
Donald L. Stacy, Treasurer and Chief Financial Officer
(Principal accounting and financial officer)
/s/ Richard T. Coyne March 26, 2002
------------------------------------------------------ --
Richard T. Coyne, Director
/s/ Frances H. Frank March 26, 2002
------------------------------------------------------ --
Frances H. Frank, Director
/s/ Thomas C. Halstead March 26, 2002
------------------------------------------------------ --
Thomas C. Halstead, Director
/s/ George F. Hasman March 26, 2002
------------------------------------------------------ --
George F. Hasman, Director
/s/ James R. Heslop, II March 26, 2002
------------------------------------------------------ --
James R. Heslop, II, Executive Vice President,
Chief Operating Officer, and Director
/s/ Donald D. Hunter March 26, 2002
------------------------------------------------------ --
Donald D. Hunter, Chairman of the Board
and Director
/s/ Martin S. Paul March 26, 2002
------------------------------------------------------ --
Martin S. Paul, Director
/s/ Donald E. Villers March 26, 2002
------------------------------------------------------ --
Donald E. Villers, Director
71