1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20552
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from to
Commission File Number 33-23094
-------------------------------
Middlefield Banc Corp.
(Exact name of registrant as specified in its charter)
Ohio 34 - 1585111
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
15985 East High Street, Middlefield, Ohio 44062-9263
(Address of principal executive offices)
(440) 632-1666
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes ___ No __X__
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date:
Class: Common Stock, without par value
Outstanding at July 9, 2001: 1,102,954
2
MIDDLEFIELD BANC CORP.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of 3
March 31, 2001 and December 31, 2000
Consolidated Statement of Income (Unaudited)
for the Three Months ended March 31, 2001 and 2000 4
Consolidated Statement of Changes in Stockholders' Equity (Unaudited) 5
Consolidated Statement of Cash Flows (Unaudited)
for the Three Months ended March 31, 2001 and 2000 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 - 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Default Upon Senior Securities 15
Item 4. Submissions of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8 - K 15 - 17
SIGNATURES 18
3
MIDDLEFIELD BANC CORP.
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, December 31,
2001 2000
------------- -------------
ASSETS
Cash and due from banks $ 3,815,091 $ 3,574,875
Federal funds sold 4,325,000 1,265,000
------------- -------------
Cash and cash equivalents 8,140,091 4,839,875
Interest-bearing deposits in other institutions 984,441 984,441
Investment securities available for sale 14,249,335 11,868,337
Investment securities held to maturity (estimated
market value of $15,502,947 and $17,942,255)) 15,613,917 17,942,310
Loans 136,844,756 135,304,215
Less allowance for loan losses 2,048,538 2,037,322
------------- -------------
Net loans 134,796,218 133,266,893
Premises and equipment 5,484,895 5,432,472
Accrued interest and other assets 2,106,290 2,154,485
------------- -------------
TOTAL ASSETS $ 181,375,187 $ 176,488,813
============= =============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 21,811,983 $ 23,155,904
Interest-bearing demand 7,888,849 6,116,094
Money market 8,585,625 9,127,760
Savings 33,731,454 32,260,775
Time 79,753,422 76,505,513
------------- -------------
Total deposits 151,771,333 147,166,046
Short-term borrowings 413,744 543,222
Other borrowings 9,804,262 9,861,596
Accrued interest and other liabilities 657,715 674,587
------------- -------------
TOTAL LIABILITIES 162,647,054 158,245,451
------------- -------------
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 13,726,823 13,343,980
Accumulated other comprehensive income 190,739 88,811
Treasury stock, at cost (45,722 shares) (1,476,440) (1,476,440)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 18,728,133 18,243,362
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 181,375,187 $ 176,488,813
============= =============
See accompanying notes to unaudited consolidated financial statements.
4
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Three Months Ended
March 31,
2001 2000
---------- ----------
INTEREST INCOME
Interest and fees on loans $2,821,950 $2,560,979
Interest-bearing deposits in other institutions 15,104 33,461
Federal funds sold 42,667 7,342
Investment securities:
Taxable interest 299,881 311,095
Tax-exempt interest 119,824 137,610
---------- ----------
Total interest income 3,299,426 3,050,487
---------- ----------
INTEREST EXPENSE
Deposits 1,514,724 1,203,348
Short-term borrowings 4,894 31,860
Other borrowings 136,008 122,102
---------- ----------
Total interest expense 1,655,626 1,357,310
---------- ----------
NET INTEREST INCOME 1,643,800 1,693,177
Provision for loan losses 39,000 75,000
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,604,800 1,618,177
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 222,041 188,596
Other income 36,624 31,301
---------- ----------
Total noninterest income 258,665 219,897
---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 545,367 516,008
Occupancy expense 80,161 83,816
Equipment expense 60,836 48,330
Data processing costs 64,914 64,989
Ohio state franchise tax 60,050 61,173
Other expense 278,980 271,098
---------- ----------
Total noninterest expense 1,090,308 1,045,414
---------- ----------
Income before income taxes 773,157 792,660
Income taxes 235,900 235,370
---------- ----------
NET INCOME $ 537,257 $ 557,290
========== ==========
EARNINGS PER SHARE
Basic $ 0.49 $ 0.50
Diluted 0.49 0.50
See accompanying notes to unaudited consolidated financial statements.
5
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Other Total
Common Retained Comprehensive Treasury Stockholders' Comprehensive
Stock Earnings Income Stock Equity Income
---------- ----------- ------------- ------------ ------------- -------------
Balance, December 31, 2000 $6,287,011 $13,343,980 $ 88,811 $(1,476,440) $18,243,362
Net income 537,257 537,257 $537,257
Other comprehensive income:
Unrealized gain on available for sale
securities net of taxes of $52,508 101,928 101,928 101,928
--------
Comprehensive income $639,185
========
Cash dividends ($.14 per share) (154,414) (154,414)
---------- ----------- -------- ----------- -----------
Balance, March 31, 2001 $6,287,011 $13,726,823 $190,739 $(1,476,440) $18,728,133
========== =========== ======== =========== ===========
See accompanying notes to unaudited consolidated financial statements.
6
MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
2001 2000
----------- -----------
OPERATING ACTIVITIES
Net income $ 537,257 $ 557,290
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 39,000 75,000
Depreciation and amortization 71,796 67,835
Amortization of premium and
discount on investment securities 12,116 16,830
Amortization of net deferred loan costs (fees) 9,204 5,320
Increase in accrued interest receivable (61,772) (31,801)
Increase (decrease) in accrued interest payable 90,151 (20,855)
Other, net (32,363) 39,366
----------- -----------
Net cash provided by operating activities 665,389 708,985
----------- -----------
INVESTING ACTIVITIES
Decrease in interest-bearing deposits in other
institutions, net -- 1,770,425
Investment securities available for sale:
Proceeds from repayments and maturities 1,368,956 500,000
Purchases (3,610,741) (221,400)
Investment securities held to maturity:
Proceeds from repayments and maturities 2,314,300 715,169
Increase in loans, net (1,577,529) (2,333,006)
Purchase of premises and equipment (124,219) (24,693)
----------- -----------
Net cash provided by (used for)
investing activities (1,629,233) 406,495
----------- -----------
FINANCING ACTIVITIES
Net increase in deposits 4,605,287 3,129,985
Decrease in short-term borrowings, net (129,479) (1,971,785)
Repayment of other borrowings (57,334) (67,236)
Purchase of treasury stock -- (1,311,051)
Cash dividends (154,414) (110,155)
----------- -----------
Net cash provided by (used for)
financing activities 4,264,060 (330,242)
----------- -----------
Increase in cash and cash equivalents 3,300,216 785,238
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 4,839,875 3,210,556
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 8,140,091 $ 3,995,794
=========== ===========
SUPPLEMENTAL INFORMATION Cash paid during the year for:
Interest on deposits and borrowings $ 1,745,777 $ 1,336,455
Income taxes -- 35,000
See accompanying notes to unaudited consolidated financial statements.
7
MIDDLEFIELD BANC CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of Middlefield Banc Corp. ("Middlefield")
includes its wholly-owned subsidiary, The Middlefield Banking Company (the
"Bank"). All significant intercompany items have been eliminated.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the instructions for Form 10-Q and Article 10 of Regulation S-X. In Management's
opinion, the financial statements include all adjustments, consisting of normal
recurring adjustments, that Middlefield considers necessary to fairly state
Middlefield's financial position and the results of operations and cash flows.
The balance sheet at December 31, 2000, has been derived from the audited
financial statements at that date but does not include all of the necessary
informational disclosures and footnotes as required by generally accepted
accounting principles. The accompanying financial statements should be read in
conjunction with the financial statements and notes thereto included with
Middlefield's Amended Form 10 (File No. 33-23094). Certain amounts in the 2000
financial statements have been reclassified to conform to 2001 presentation. The
results of Middlefield's operations for any interim period are not necessarily
indicative of the results of Middlefield's operations for any other interim
period or for a full fiscal year.
NOTE 2 - EARNINGS PER SHARE
Middlefield provides dual presentation of Basic and Diluted earnings per share.
Basic earnings per share utilizes net income as reported as the numerator and
the actual average shares outstanding as the denominator. Diluted earnings per
share includes any dilutive effects of options, warrants, and convertible
securities. For the three months ended March 31, 2001, the diluted number of
shares outstanding from employee stock options was 1,350. There was no diluted
effect for the three months ended March 31, 2000.
NOTE 3 - COMPREHENSIVE INCOME
The components of comprehensive income consist exclusively of unrealized gains
and losses on available for sale securities. For the three months ended March
31, 2001, this activity is shown under the heading Comprehensive Income as
presented in the Consolidated Statement of Changes in Stockholders' Equity
(Unaudited). For the three months ended March 31, 2000, comprehensive income
totaled $429,330.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
The Private Securities Litigation Act of 1995 contains safe harbor provisions
regarding forward-looking statements. Forward-looking statements can be
identified by terminology such as "believes," "expects," "anticipates,"
"estimates," "intends," "should," "will," "plans," "potential" and similar
words. Forward-looking statements are also statements that are not statements of
historical fact. Forward-looking statements necessarily involve risks and
uncertainties. They are merely predictive or statements of probabilities,
involving known and unknown risks, uncertainties and other factors.
If one or more of these risks of uncertainties occurs or if the underlying
assumptions prove incorrect, actual results in 2001 and beyond could differ
materially from those expressed in or implied by the forward-looking statements.
Forward-looking statements are based upon a variety of estimates and
assumptions. The estimates and assumptions involve judgments about a number of
things, including future economic, competitive, and financial market conditions
and future business decisions. These matters are inherently subject to
significant business, economic and competitive uncertainties, all of which are
difficult to predict and many of which are beyond Middlefield's control.
Although Middlefield believes its estimates and assumptions are reasonable,
actual results could vary materially from those shown. Inclusion of
forward-looking information in this Form 10-Q does not constitute a
representation by Middlefield or any other person that the indicated results
will be achieved. Investors are cautioned not to place undue reliance on
forward-looking information.
Comparison of Financial Condition at March 31, 2001 and December 31, 2000.
Total assets increased $4.9 million to $181.4 million at March 31, 2001 from
$176.5 million at December 31, 2000. Cash and cash equivalents and net loans
receivable increased $3.3 million and $1.5 million, respectively, and were
funded by a $4.6 million net increase in deposits.
Cash and cash equivalents increased to $8.1 million at March 31, 2001 from $4.8
million at December 31, 2000. Funding from deposit growth that was not used to
meet loan demand was temporarily invested in federal funds while management
reviews current market conditions for prudent investment opportunities.
Management believes that the liquidity needs of Middlefield are satisfied by the
current balance of cash and cash equivalents, readily available access to
traditional funding sources, FHLB advances, and the portion of the investment
and loan portfolios that mature within one year. These sources of funds will
enable Middlefield to meet cash obligations and off-balance sheet commitments as
they come due.
9
Total investment securities of $29.9 million remained relatively unchanged at
March 31, 2001 as the proceeds from maturities and principal repayments were
primarily reinvested in available for sale U.S. Government Agency securities in
general, and mortgage-backed securities in specific. Management focused on
supplementing loan demand primarily by lengthening the maturities of the
investment portfolio through an increase in higher yielding, mortgage-backed
securities. This has resulted in a slight shift in the composition of the
investment securities portfolio at March 31, 2001, as U.S. Government Agency
securities now comprise 31.9% of the total portfolio as compared to 26.5% at
December 31, 2000. Furthermore, available for sale securities now comprise 48.8%
of the investment securities portfolio as compared to 41.3% at December 31,
2000.
The allowance for loan losses represents the amount that management estimates is
adequate to provide for probable losses inherent in the loan portfolio, as of
the balance sheet date. Accordingly, all loan losses are charged to the
allowance, and all recoveries are credited to it. At March 31, 2001,
Middlefield's allowance for loan losses remained relatively unchanged at $2.0
million. The allowance for loan losses is established through a provision for
loan losses, which is charged to operations. The provision is based on
management's periodic evaluation of the adequacy of the allowance for loan
losses, taking into account the overall risk characteristics of the various
portfolio segments, past experience with losses, the impact of economic
conditions on borrowers, and other relevant factors. The estimates used to
determine the adequacy of the allowance for loan losses including the amounts
and timing of future cash flows expected on impaired loans are particularly
susceptible to significant change in the near term. The total allowance for loan
losses is a combination of a specific allowance for identified problem loans, a
formula allowance, and an unallocated allowance.
Total deposits increased to $151.8 million at March 31, 2001 from $147.2 million
at December 31, 2000. Growth was primarily concentrated in time deposits and
resulted from continual marketing efforts by management. Time deposits continue
to account for approximately 52.5% of the total deposit portfolio.
Total stockholders' equity increased $485,000 to $18.7 million at March 31,
2001. Net income of $537,000 and increases in unrealized gains on investment
securities available for sale of $102,000, were offset somewhat by a dividend
payment of $154,000. Accumulated other comprehensive income increased as a
result of changes in the net unrealized gain on investment securities available
for sale due to fluctuations in interest rates. Because of interest rate
volatility, accumulated other comprehensive income could materially fluctuate
for each interim period and year-end period depending on economic and interest
rate conditions. In addition, future dividend policies will be determined by the
Board of Directors in light of the earnings and financial condition of
Middlefield, including applicable governmental regulations and policies.
Middlefield will use treasury shares for general corporate purposes, including
the issuance of shares in connection with the exercise of stock options.
10
Comparison of Results of Operations for the Three Months Ended March 31, 2001
and 2000.
Net income for the three months ended March 31, 2001 of $537,000 decreased
slightly from $557,000 for the same period ended 2000. The $49,000 decrease in
net interest income for the three months ended March 31, 2001 was primarily due
to an increase in interest expense of $299,000 that was partially offset by an
increase of $249,000 in interest income. Basic and diluted earnings per share
declined slightly from $.50 per share in 2000 to $.49 per share in 2001.
Net interest income for the three months ended March 31, 2001 was $1,644,000,
compared to $1,693,000 for the same period ended 2000. The increase in interest
income for the first quarter of 2001 was influenced mainly by increases in
interest earned on loans receivable of $261,000 and federal funds sold of
$35,000, while offset by decreases in interest earned on investment securities
of $29,000 and interest-bearing deposits in other institutions of $18,000. The
increase in interest expense was influenced by an increase in interest incurred
on deposits of $311,000 that was offset by a decrease in interest incurred on
borrowings of $13,000. 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 $13.6 million, or 11.2%, to $135.6
million as of March 31, 2001, and resulted in an increase in interest-earning
assets of $13.5 million. Lessening the impact of the increase in volume of
interest-earning assets was a slight decline on the tax-equivalent yield on
interest earning assets to 7.90% for the three-months ended March 31, 2001 from
7.97% for the same period ended 2000. In addition, the average balance of time
deposits increased $12.9 million, or 19.7%, to $78.4 million as of March 31,
2001, and resulted in an increase in interest-bearing liabilities of $11.7
million. Middlefield's competitively priced deposit products and continual
marketing efforts contributed to the overall increase in the cost of funds to
4.85% for the three-month period ended March 31, 2001 from 4.35% for the same
period ended 2000.
Total noninterest income for the three-months ended March 31, 2001 increased
$39,000 as compared to the same period ended 2000. Noninterest income items are
primarily comprised of service charges and fees on deposit account activity,
along with fee income derived from other financial related services. Service
fees on deposit accounts increased $33,000 and have progressively increased as
the number of accounts and volume of related transactions have increased.
Total noninterest expenses increased $45,000 for the three-months ended March
31, 2001 as compared to the same period ended 2000. Compensation and employee
benefits increased $29,000 or 5.7% primarily as a result of normal merit raises.
In addition, equipment expenses and other expenses increased $13,000 and $8,000,
respectively, as a result of added capital expenditures in prior years from
building and furnishing a new branch office in Garrettsville, additional ATMs,
increased transaction activity from operating a larger organization, and the
marketing of the 100th anniversary of the Bank.
11
LIQUIDITY
Liquidity management for Middlefield is measured and monitored on both a short
and long-term basis, thereby allowing management to better understand and react
to emerging balance sheet trends. After assessing actual and projected cash flow
needs, management seeks to obtain funding at the most economical cost to
Middlefield. Both short and long-term liquidity needs are addressed by
maturities and sales of investment securities, loan payments and maturities, and
liquidating money market investments such as federal funds sold. The use of
these resources, in conjunction with access to credit, provide the core
ingredients to meet depositor, borrower, and creditor needs.
Middlefield's liquid assets consist of cash and cash equivalents, which include
investments in highly 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 March 31, 2001, cash and cash equivalents
totaled $8.1 million or 4.5% of total assets while investment securities
classified as available for sale totaled $15.2 million or 8.4% of total assets.
Furthermore, the bank has additional credit arrangements available with the
Federal Home Loan Bank of Cincinnati, the Federal Reserve Bank of Cleveland, and
The State Bank and Trust Company, an unaffiliated institution.
Operating activities provided net cash of $0.7 million for both three month
periods ended March 31, 2001 and 2000, generated principally from net income of
$0.5 million and $0.6 million, respectively.
Investing activities consist primarily of loan originations and repayments, and
investment purchases and maturities. These activities used $1.6 million in funds
during the first three months of 2001, principally for the purchase of
investment securities and the net origination of loans. For the same period
ended 2000, investing activities provided $0.4 million in funds, principally
from a decline in interest-bearing deposits in other institutions and a
reduction in investment securities purchased. These cash usages were offset
somewhat by an increase in net loan originations.
Financing activities consist of the solicitation and repayment of customer
deposits, borrowings and repayments, treasury stock acquisitions, and the
payment of dividends. During the three months ended March 31, 2001, net cash
provided by financing activities totaled $4.3 million, principally derived from
an increase in deposit accounts. During the same period ended 2000, net cash
used for financing activities was $0.3 million, and consisted of an increase in
deposit accounts that was offset by repayments on borrowings and the acquisition
of treasury stock.
Liquidity may be adversely affected by unexpected deposit outflows, excessive
interest rates paid by competitors, and similar matters. Management monitors
projected liquidity needs and determines the level desirable, based in part on
the bank's commitment to make loans, as well as management's assessment of
Middlefield's ability to generate funds. Middlefield anticipates it will have
sufficient liquidity available to meet estimated short-term and long-term
funding needs.
12
CAPITAL RESOURCES
Middlefield is subject to federal regulations that impose certain minimum
capital requirements. Management monitors both Middlefield's and the Bank's
Total risk-based, Tier I risk-based and Tier I leverage capital ratios in order
to assess compliance with regulatory guidelines. At March 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 18.10%, 16.85%, 10.38%, and the bank's were 17.29%, 16.03%,
9.99%, respectively, at March 31, 2001.
RISK ELEMENT
The table below presents information concerning nonperforming assets including
nonaccrual loans, renegotiated loans, loans 90 days or more past due, other real
estate loans, and repossessed assets. A loan is classified as nonaccrual when,
in the opinion of management, there are serious doubts about collectibility of
interest and principal. At the time the accrual of interest is discontinued,
future income is recognized only when cash is received. Renegotiated loans are
those loans which terms have been renegotiated to provide a reduction or
deferral of principal or interest as a result of the deterioration of the
borrower.
March 31, December 31,
2001 2000
---- ----
(Dollars in thousands)
Loans on nonaccrual basis $135 $ 0
Loans past due 90 days or more and still accruing 125 5
---- ----
Total nonperforming loans $260 $ 5
---- ----
Nonperforming loans as a percent of total loans 0.19% 0.00%
==== ====
Nonperforming assets as a percent of total assets 0.14% 0.00%
==== ====
At March 31, 2001 and December 31, 2000, no real estate or other assets were
held as foreclosed or repossessed property.
Management monitors impaired loans on a continual basis. As of March 31, 2001,
impaired loans had no material effect on the Company's financial position or
results of operations.
13
During the three month period ended March 31, 2001, loans increased $1.5 million
while nonperforming loans increased $255,000. Although the allowance for loan
losses only increased $11,000 during this same period, the percentage of
allowance for loan losses to loans outstanding remained relatively stable at
1.50% as compared to 1.51% at December 31,2000. Nonperforming loans are
primarily made up of residential and commercial mortgages. The collateral
requirements on such loans reduce the risk of potential losses to an acceptable
level in management's opinion.
Management believes the level of the allowance for loan losses at March 31, 2001
is sufficient; however, there can be no assurance that the current allowance for
loan losses will be adequate to absorb all future loan losses. The relationship
between the allowance for loan losses and outstanding loans is a function of the
credit quality and known risk attributed to the loan portfolio. The ongoing loan
review program and credit approval process is used to determine the adequacy of
the allowance for loan losses.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Like other financial institutions, the bank is subject to interest rate risk.
The bank's interest-earning assets could mature or reprice more rapidly than or
on a different basis from its interest-bearing liabilities (primarily borrowings
and deposits with short- and medium-term maturities) in a period of declining
interest rates. Although having assets that mature or reprice more frequently on
average than liabilities will be beneficial in times of rising interest rates,
that asset/liability structure will result in lower net interest income in
periods of declining interest rates.
Interest rate sensitivity, or interest rate risk, relates to the effect of
changing interest rates on net interest income. Interest-earning assets with
interest rates tied to the prime rate for example, or that mature in relatively
short periods of time, are considered interest-rate sensitive. Interest-bearing
liabilities with interest rates that can be repriced in a discretionary manner,
or that mature in relatively short periods of time, are also considered
interest-rate sensitive. The differences between interest-sensitive assets and
interest-sensitive liabilities over various time horizons are commonly referred
to as sensitivity gaps. As interest rates change, a sensitivity gap will have
either a favorable effect or an adverse effect on net interest income. A
negative gap -- with liabilities repricing more rapidly than assets -- generally
should have a favorable effect when interest rates are falling, and an adverse
effect when rates are rising. A positive gap -- with assets repricing more
rapidly than liabilities -- generally should have the opposite effect: an
adverse effect when rates are falling and a favorable effect when rates are
rising.
Middlefield and the bank have no financial instruments entered into for trading
purposes. Interest rates change daily on federal funds purchased and sold.
Federal funds are therefore the most sensitive to the market and have the most
stable fair values. Loans and deposits tied to indices such as the prime rate or
federal discount rate are also market sensitive, with stable fair values. The
least sensitive instruments include long-term, fixed-rate loans and securities
and fixed-rate savings deposits, which have the least stable fair value.
14
Management of maturity distributions of assets and liabilities between these
extremes is as important as the balances maintained. Management of maturity
distributions involves matching interest rate maturities as well as principal
maturities, and it influences net interest income significantly. In periods of
rapidly changing interest rates, a negative or positive gap can cause major
fluctuations in net interest income and earnings. Managing asset and liability
sensitivities to enhance growth regardless of changes in market conditions is
one of the objectives of the bank's asset/liability management strategy.
Evaluating the bank's exposure to changes in interest rates is the
responsibility of the Asset/Liability Committee, a committee of bank directors
and officers. The Asset/Liability Committee assesses both the adequacy of the
management process used to control interest rate risk and the quantitative level
of exposure, ensuring that appropriate policies, procedures, management
information systems and internal controls are in place to maintain interest rate
risk at appropriate levels. Evaluating the quantitative level of interest rate
risk exposure requires assessment of existing and potential effects of changes
in interest rates on the bank's financial condition, including capital adequacy,
earnings, liquidity and asset quality.
The bank uses an asset/liability model to support its balance sheet strategies.
Gap analysis, one of the methods used by management to analyze interest rate
risk, does not necessarily show the precise impact of specific interest rate
movements on our Middlefield's net interest income because the re-pricing of
certain assets and liabilities is discretionary and is subject to competitive
and other pressures. In addition, assets and liabilities within the same period
may, in fact, be repaid at different times and at different rate levels.
Middlefield has not experienced the kind of earnings volatility that might be
indicated from gap analysis.
Middlefield's use of a simulation model to better measure the impact of interest
rate changes on net interest income is incorporated into the risk management
process to effectively identify, measure, and monitor Middlefield's risk
exposure. Interest rate simulations using a variety of assumptions are employed
by Middlefield to evaluate its interest rate risk exposure. A shock analysis at
March 31, 2001 indicated that a 200 basis point movement in interest rates in
either direction would have had a minor impact on Middlefield's anticipated net
interest income and the market value of assets and liabilities over the next 12
months, well within Middlefield's ability to manage effectively.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in rights of the Company's security holders
None
Item 3. Defaults by the Company on its senior securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included in this Report or
incorporated herein by reference:
3.1 Second Amended and Restated Articles of Incorporation of
Middlefield Banc Corp.*
3.2 Regulations of Middlefield Banc Corp.*
4 Specimen Stock Certificate*
10.1 1999 Stock Option Plan of Middlefield Banc Corp.*
10.2 Severance Agreement of President and Chief Executive
Officer*
10.3 Severance Agreement of Executive Vice President*
10.4 Federal Home Loan Bank of Cincinnati Agreement for
Advances and Security Agreement dated
September 14, 2000*
10.5 Collateral Assignment Split Dollar Agreements between
the President and Chief Executive Officer and The
Middlefield Banking Company*
21 Subsidiaries of Middlefield Banc Corp.*
99.1 Form of Indemnification Agreement with directors of
Middlefield Banc Corp. and executive officers of
Middlefield Banc Corp. and The Middlefield Banking
Company*
99.2 Independent Accountants Report
* Incorporated by reference to the identically numbered exhibit to the
registration statement on Form 10 (File No. 033-23094) filed on April 17,
2001 and subsequently amended on June 14, 2001.
(b) No reports on Form 8-K were filed by Middlefield Banc Corp. during the
quarter ended March 31, 2001.
16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned and hereunto duly authorized.
MIDDLEFIELD BANC CORP.
Date: By: /s/Thomas G. Caldwell
--------------------------------------
Thomas G. Caldwell
President and Chief Executive Officer
Date: By: /s/Donald L. Stacy
--------------------------------------
Donald L. Stacy
Principal Financial and Accounting
Officer