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 June 30, 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 August 9, 2001: 1,102,954
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MIDDLEFIELD BANC CORP.
INDEX
Page
Number
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of
June 30, 2001 and December 31, 2000 3
Consolidated Statement of Income (Unaudited)
for the Six and Three Months ended June 30, 2001 and 2000 4
Consolidated Statement of Changes in Stockholders' Equity (Unaudited) 5
Consolidated Statement of Cash Flows (Unaudited)
for the Six Months ended June 30, 2001 and 2000 6
Notes to Unaudited Consolidated Financial Statements 7 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 - 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Default Upon Senior Securities 20
Item 4. Submissions of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8 - K 21
SIGNATURES 22
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MIDDLEFIELD BANC CORP.
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
2001 2000
------------- ------------
ASSETS
Cash and due from banks $ 3,402,353 $ 3,574,875
Federal funds sold 760,000 1,265,000
------------ ------------
Cash and cash equivalents 4,162,353 4,839,875
Interest-bearing deposits in other institutions 1,339,441 984,441
Investment securities available for sale 17,717,172 11,868,337
Investment securities held to maturity (estimated
market value of $13,219,824 and $17,942,255)) 13,002,736 17,942,310
Loans 143,271,589 135,304,215
Less allowance for loan losses 2,016,580 2,037,322
------------ ------------
Net loans 141,255,009 133,266,893
Premises and equipment 5,495,816 5,432,472
Accrued interest and other assets 2,465,364 2,154,485
------------ ------------
TOTAL ASSETS $185,437,891 $176,488,813
============ ============
LIABILITIES
Deposits:
Noninterest-bearing demand $ 23,246,211 $ 23,155,904
Interest-bearing demand 7,336,736 6,116,094
Money market 8,059,240 9,127,760
Savings 34,959,850 32,260,775
Time 81,973,277 76,505,513
------------ ------------
Total deposits 155,575,314 147,166,046
Short-term borrowings 299,835 543,222
Other borrowings 9,746,005 9,861,596
Accrued interest and other liabilities 749,962 674,587
------------ ------------
TOTAL LIABILITIES 166,371,116 158,245,451
------------ ------------
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 14,063,843 13,343,980
Accumulated other comprehensive income 192,361 88,811
Treasury stock, at cost (45,722 shares) (1,476,440) (1,476,440)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 19,066,775 18,243,362
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $185,437,891 $176,488,813
============ ============
See accompanying notes to unaudited consolidated financial statements.
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MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
2001 2000 2001 2000
---------- ---------- ---------- -----------
INTEREST INCOME
Interest and fees on loans $5,771,403 $5,224,382 $2,949,453 $2,663,403
Interest-bearing deposits in 29,189 60,228 14,085 26,767
other institutions
Federal funds sold 96,882 27,050 54,215 19,708
Investment securities:
Taxable interest 625,116 607,771 325,235 296,676
Tax-exempt interest 239,470 272,397 119,646 134,787
---------- ---------- ---------- ----------
Total interest income 6,762,060 6,191,828 3,462,634 3,141,341
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 3,099,466 2,472,136 1,584,742 1,268,788
Short-term borrowings 9,103 29,818 4,209 10,480
Other borrowings 272,208 264,772 136,200 130,148
---------- ---------- ---------- ----------
Total interest expense 3,380,777 2,766,726 1,725,151 1,409,416
---------- ---------- ---------- ----------
NET INTEREST INCOME 3,381,283 3,425,102 1,737,483 1,731,925
Provision for loan losses 80,000 150,000 41,000 75,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,301,283 3,275,102 1,696,483 1,656,925
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 455,660 384,074 233,619 195,478
Other income 70,780 60,156 34,156 28,855
---------- ---------- ---------- ----------
Total noninterest income 526,440 444,230 267,775 224,333
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 1,150,031 1,098,372 604,664 582,364
Occupancy expense 148,212 163,054 68,051 79,238
Equipment expense 141,802 101,913 80,966 53,583
Data processing costs 139,053 125,698 74,139 60,709
Ohio state franchise tax 120,050 115,676 60,000 54,503
Other expense 628,386 537,868 349,406 266,770
---------- ---------- ---------- ----------
Total noninterest expense 2,327,534 2,142,581 1,237,226 1,097,167
---------- ---------- ---------- ----------
Income before income taxes 1,500,189 1,576,751 727,032 784,091
Income taxes 471,500 467,370 235,600 232,000
---------- ---------- ---------- ----------
NET INCOME $1,028,689 $1,109,381 $ 491,432 $ 552,091
========== ========== ========== ==========
EARNINGS PER SHARE
Basic $ 0.94 1.00 $ 0.45 $ 0.50
Diluted 0.94 1.00 0.44 0.50
See accompanying notes to unaudited consolidated financial statements.
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MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Other Total
Common Retained Comprehensive Treasury Stockholders' Comprehensive
Stock Earnings Income Stock Equity Income
---------- ----------- ------------- ----------- ------------- --------------
Balance, December 31, 2000 $6,287,011 $13,343,980 $ 88,811 $(1,476,440) $18,243,362
Net income 1,028,689 1,028,689 $1,028,689
Other comprehensive income:
Unrealized gain on available
for sale securities net of
taxes of $53,345 103,550 103,550 103,550
---------
Comprehensive income $1,132,239
==========
Cash dividends ($.28 per share) (308,826) (308,826)
---------- ----------- -------- ----------- -----------
Balance, June 30, 2001 $6,287,011 $14,063,843 $192,361 $(1,476,440) $19,066,775
========== =========== ======== =========== ===========
See accompanying notes to unaudited consolidated financial statements.
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MIDDLEFIELD BANC CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2001 2000
----------- -----------
OPERATING ACTIVITIES
Net income $ 1,028,689 $ 1,109,381
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 80,000 150,000
Depreciation and amortization 147,114 136,170
Amortization of premium and
discount on investment securities 30,619 36,189
Amortization of net deferred loan costs (fees) 3,801 21,967
Decrease (increase) in accrued interest receivable (3,774) 7,537
Increase (decrease) in accrued interest payable 122,335 (19,924)
Other, net (300,609) (196,513)
----------- -----------
Net cash provided by operating activities 1,108,175 1,244,807
----------- -----------
INVESTING ACTIVITIES
Decrease (increase) in interest-bearing deposits in other
institutions, net (355,000) 1,989,346
Investment securities available for sale:
Proceeds from repayments and maturities 2,990,291 950,000
Purchases (8,682,229) (220,500)
Investment securities held to maturity:
Proceeds from repayments and maturities 4,908,952 1,294,326
Increase in loans, net (8,071,917) (8,895,768)
Purchase of Federal Home Loan Bank stock (106,800) (103,500)
Purchase of premises and equipment (210,458) (30,020)
----------- -----------
Net cash used for investing activities (9,527,161) (5,016,116)
----------- -----------
FINANCING ACTIVITIES
Net increase in deposits 8,409,268 5,344,673
Decrease in short-term borrowings, net (115,591) (1,135,552)
Repayment of other borrowings (243,387) --
Proceeds from other borrowings -- 1,073,820
Purchase of treasury stock -- (1,311,050)
Sale of treasury stock -- 32,500
Cash dividends (308,826) (231,399)
----------- -----------
Net cash provided by financing activities 7,741,464 3,772,992
----------- -----------
Increase (decrease) in cash and cash equivalents (677,522) 1,683
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 4,839,875 3,210,556
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 4,162,353 $ 3,212,239
=========== ===========
SUPPLEMENTAL INFORMATION
Cash paid during the year for:
Interest on deposits and borrowings $ 3,258,442 $ 2,786,650
Income taxes 510,000 547,000
See accompanying notes to unaudited consolidated financial statements.
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MIDDLEFIELD BANC CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of Middlefield Banc Corp. ("Middlefield")
includes its wholly-owned subsidiary, The Middlefield Banking Company (the
"Bank"). All significant intercompany items have been eliminated.
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and the instructions for Form 10-Q and Article 10
of Regulation S-X. In Management's opinion, the financial statements include all
adjustments, consisting of normal recurring adjustments, that Middlefield
considers necessary to fairly state Middlefield's financial position and the
results of operations and cash flows. The balance sheet at December 31, 2000,
has been derived from the audited financial statements at that date but does not
include all of the necessary informational disclosures and footnotes as required
by accounting principles generally accepted in the United States of America. The
accompanying financial statements should be read in conjunction with the
financial statements and notes thereto included with Middlefield's Amended Form
10 (File No. 33-23094). Certain amounts in the 2000 financial statements have
been reclassified to conform to 2001 presentation. The results of Middlefield's
operations for any interim period are not necessarily indicative of the results
of Middlefield's operations for any other interim period or for a full fiscal
year.
NOTE 2 - EARNINGS PER SHARE
Middlefield provides dual presentation of Basic and Diluted earnings per share.
Basic earnings per share utilizes net income as reported as the numerator and
the actual average shares outstanding as the denominator. Diluted earnings per
share includes any dilutive effects of options, warrants, and convertible
securities. For the six and three months ended June 30, 2001, the diluted number
of shares outstanding from employee stock options was 1,811 and 1,740,
respectively. There was no diluted effect for the six or three months ended June
30, 2000.
NOTE 3 - COMPREHENSIVE INCOME
The components of comprehensive income consist exclusively of unrealized gains
and losses on available for sale securities. For the six months ended June 30,
2001, this activity is shown under the heading Comprehensive Income as presented
in the Consolidated Statement of Changes in Stockholders' Equity (Unaudited).
For the six months
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ended June 30, 2000, comprehensive income totaled $992,781. For the three months
ended June 30, 2001 and 2000, comprehensive income totaled $493,054 and
$478,071, respectively.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 141, Business Combinations, effective for
all business combinations initiated after June 30, 2001, as well as all business
combinations accounted for by the purchase method that are completed after June
30, 2001. The new statement requires that the purchase method of accounting be
used for all business combinations and prohibits the use of the
pooling-of-interests method. The adoption of Statement No. 141 is not expected
to have a material affect on Middlefield's financial position or results of
operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. The new statement changes the accounting for goodwill
from an amortization method to an impairment-only approach. Thus, amortization
of goodwill, including goodwill recorded in past business combinations, will
cease upon adoption of this Statement. The adoption of Statement No. 142 is not
expected to have a material affect on Middlefield's financial position or
results of operations.
NOTE 5 - INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market values of securities available for sale
are as follows:
2001
--------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ---------- -----------
U.S. Government agency
securities $ 4,151,570 $127,591 $ (402) $4,278,759
Obligations of states and
political subdivisions:
Taxable 1,407,443 19,194 -- 1,426,637
Tax-exempt 4,072,482 99,419 -- 4,171,901
Corporate securities 550,859 17,766 -- 568,625
Mortgage-backed securities 7,243,362 59,282 (31,394) 7,271,250
----------- -------- -------- -----------
Total $17,425,716 $323,252 $(31,796) $17,717,172
=========== ======== ======== ===========
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NOTE 5 - INVESTMENT SECURITIES AVAILABLE FOR SALE (Continued)
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 29,282 -- 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 June 30,
2001, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
----------- -----------
Due in one year or less $ 1,283,957 $ 1,298,346
Due after one year through five years 7,935,451 8,177,929
Due after five years through ten years 1,287,302 1,323,043
Due after ten years 6,919,006 6,917,854
----------- -----------
Total $17,425,716 $17,717,172
=========== ===========
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NOTE 6 - INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost and estimated market values of securities held to maturity
are as follows:
2001
--------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ---------- ---------- -----------
U.S. Government agency
securities $ 500,000 $ 1,718 $-- $ 501,718
Obligations of states and
political subdivisions:
Taxable 2,665,990 50,29 -- 2,718,019
Tax-exempt 6,564,210 110,980 -- 6,675,190
Corporate securities 3,022,883 45,550 -- 3,068,433
Mortgage-backed securities 249,653 6,811 -- 256,464
----------- -------- --- -----------
Total $13,002,736 $217,088 $-- $13,219,824
=========== ======== === ===========
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
=========== ======= ======== ===========
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NOTE 6 - INVESTMENT SECURITIES HELD TO MATURITY (Continued)
The amortized cost and estimated market value of debt securities at June 30,
2001, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
----------- -----------
Due in one year or less $ 4,851,248 $ 4,893,947
Due after one year through five years 7,660,776 7,821,957
Due after five years through ten years 141,059 146,517
Due after ten years 349,653 357,403
----------- -----------
Total $13,002,736 $13,219,824
=========== ===========
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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 June 30, 2001 and December 31, 2000.
- -------------------------------------------------------------------------
Total assets increased $8.9 million to $185.4 million at June 30, 2001 from
$176.5 million at December 31, 2000. This increase primarily resulted from an
increase in net loans receivable of $8.0 million that was funded by an $8.4
million net increase in deposits.
Total investment securities of $30.7 million at June 30, 2001 increased slightly
from $29.8 million at December 31, 2000 as the proceeds from maturities and
principal repayments were primarily reinvested in available for sale
mortgage-backed securities. Management focused on supplementing loan demand
primarily by lengthening the maturities of the investment portfolio through an
increase in higher yielding, mortgage-backed securities of $5.3 million. This
has resulted in a slight shift in the composition of the investment securities
portfolio at June 30, 2001, as mortgage-backed securities now comprise 24.5% of
the total portfolio as compared to 7.5% at December 31, 2000.
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Furthermore, available for sale securities now comprise 57.7% of the investment
securities portfolio as compared to 41.3% at December 31, 2000.
Total loans increased to $143,272,000 at June 30, 2001 from $135,304,000 at
December 31, 2000. The increase in net loans receivable resulted from the
economic health of Middlefield's market area and the strategic, service-oriented
marketing approach taken by management to meet the lending needs of the area.
The majority of lending activity is predominately mortgage loans secured by
one-to-four family residential property. Such loans grew $4.7 million to $106.1
million at June 30, 2001. Management attributes the increases in residential
real estate properties to continued customer referrals and Middlefield's overall
relationship with its customers. Also impacted by the local economic conditions
were commercial and commercial real estate loans which increased in total by
$2.9 million to $29.2 million. This growth was boosted by a loan of
approximately $1.0 million to a local church.
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 June 30, 2001,
Middlefield's allowance for loan losses remained relatively unchanged at $2.0
million. The allowance for loan losses is established through a provision for
loan losses, which is charged to operations. The provision is based on
management's periodic evaluation of the adequacy of the allowance for loan
losses, taking into account the overall risk characteristics of the various
portfolio segments, past experience with losses, the impact of economic
conditions on borrowers, and other relevant factors. The estimates used to
determine the adequacy of the allowance for loan losses, including the amounts
and timing of future cash flows expected on impaired loans, are particularly
susceptible to significant change in the near term. The total allowance for loan
losses is a combination of a specific allowance for identified problem loans, a
formula allowance, and an unallocated allowance.
Total deposits increased to $155.6 million at June 30, 2001 from $147.2 million
at December 31, 2000. Growth was primarily concentrated in time and savings
deposits and resulted from continual marketing efforts by management. Time
deposits account for approximately 52.7% of the total deposit portfolio and
continue to be a dominate resource for funds.
Total stockholders' equity increased $823,000 to $19.1 million at June 30, 2001
due to net retained income of $720,000 and increases in unrealized gains on
investment securities available for sale of $104,000. These increases in
stockholders' equity were offset by dividend payments of $309,000. 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
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the earnings and financial condition of Middlefield, including applicable
governmental regulations and policies.
Comparison of Results of Operations for the Six and Three Months Ended June 30,
- -------------------------------------------------------------------------------
2001 and 2000.
- --------------
Net income for the six-months ended June 30, 2001 of $1,029,000 decreased from
$1,109,000 for the same period ended 2000. Basic and diluted earnings per share
declined slightly from $1.00 per share in 2000 to $.94 per share in 2001. Net
income for the three-months ended June 30, 2001 of $491,000 decreased from
$552,000 for the same period ended 2000.
Net interest income for the six months ended June 30, 2001 was $3,381,000,
compared to $3,425,000 for the same period ended 2000. The decrease was
primarily related to an increase in interest expense, in general, and interest
incurred on deposits of $627,000, in specific. Interest income for the first
half of 2001 was influenced mainly by increases in interest earned on loans
receivable of $547,000 and federal funds sold of $70,000, while offset by
decreases in interest-bearing deposits in other institutions of $31,000 and
interest earned on investment securities of $16,000. The increase 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 10.9%, to $138.1 million as of June 30, 2001, and
resulted in an increase in interest-earning assets of $16.1 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 7.87% for the
six-months ended June 30, 2001 from 7.97% for the same period ended 2000. In
addition, the average balance of time deposits increased $14.3 million, or
21.6%, to $80.6 million as of June 30, 2001, and resulted in an increase in
interest-bearing liabilities of $13.1 million. Middlefield's competitively
priced deposit products and continual marketing efforts contributed to the
overall increase in the cost of funds to 4.86% for the six-month period ended
June 30, 2001 from 4.39% for the same period ended 2000.
Net interest income for the three-months ended June 30, 2001 and 2000 remained
relatively unchanged. Interest income increased $321,000 during this time period
and consisted primarily of increases in interest earned on loans receivable of
$286,000 and interest on federal funds sold of $35,000. As noted previously,
increases in the average balances of related interest-earning assets of $13.6
million and $2.4 million, respectively, primarily contributed to the
fluctuations in the corresponding interest income accounts. Increases in
interest expense of $316,000 for the three-months ended June 30, 2000 resulted
from interest incurred on deposits. The primary contributors for this
fluctuation was an increase in the average balances of time deposits of $15.6
million coupled with an increase in the related cost of such funds of 45 basis
points from 5.56% for 2000 to 6.01% for 2001. These competitively priced
products were heavily marketed throughout Middlefield's market area.
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Total noninterest income for both the six-months and three-months ended June 30,
2001 increased $82,000 and $43,000, respectively, as compared to the same period
ended 2000. Noninterest income items are primarily comprised of service charges
and fees on deposit account activity, along with fee income derived from other
financial related services. Service fees on deposit accounts increased $72,000
and $38,000, respectively, and have progressively increased as the number of
accounts and volume of related transactions have increased.
Total noninterest expenses increased $185,000 and $140,000 for the six and
three-months ended June 30, 2001, respectively, as compared to the same period
ended 2000. Compensation and employee benefits increased $52,000 and $22,000,
respectively, primarily as a result of normal merit raises. Additionally,
equipment expenses and other expenses increased $40,000 and $91,000 for the
six-months ended June 30, 2001, as compared to $27,000 and $83,000 for the same
periods ended 2000, 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, the
marketing of the 100th anniversary of the Bank, costs incurred with the addition
of internet banking, and increased professional fees associated with outside
assistance in complying with the increased levels of regulatory compliance of a
publicly reported company.
LIQUIDITY
Liquidity management for Middlefield is measured and monitored on both a short
and long-term basis, thereby allowing management to better understand and react
to emerging balance sheet trends. After assessing actual and projected cash flow
needs, management seeks to obtain funding at the most economical cost to
Middlefield. Both short and long-term liquidity needs are addressed by
maturities and sales of investment securities, loan payments and maturities, and
liquidating money market investments such as federal funds sold. The use of
these resources, in conjunction with access to credit, provide the core
ingredients to meet depositor, borrower, and creditor needs.
Middlefield's liquid assets consist of cash and cash equivalents, which include
investments in very short-term investments (i.e. federal funds sold), and
investment securities classified as available for sale. The level of these
assets is dependent on Middlefield's operating, investing, and financing
activities during any given period. At June 30, 2001, cash and cash equivalents
totaled $4.2 million or 2.2% of total assets while investment securities
classified as available for sale totaled $17.7 million or 9.6% of total assets.
Management believes that the liquidity needs of Middlefield are satisfied by the
current balance of cash and cash equivalents, readily available access to
traditional funding sources, FHLB advances, and the portion of the investment
and loan portfolios that mature within one year. These sources of funds will
enable Middlefield to meet cash obligations and off-balance sheet commitments as
they come due.
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Operating activities provided net cash of $1.1 million and $1.2 million for the
six-month periods ended June 30, 2001 and 2000, respectively, and were generated
principally from net income of $1.0 million and $1.1 million, respectively.
Investing activities consist primarily of loan originations and repayments, and
investment purchases and maturities. These activities used $9.5 million in funds
during the first six months of 2001, principally for the purchase of investment
securities and the net origination of loans. For the same period ended 2000,
investing activities used $5.0 million in funds, principally from the net
origination of loans. In 2000, these cash usages were offset somewhat by an
increase in net investment repayments and maturities coupled with a decline in
interest-bearing deposits in other institutions from maturities of certificates
of deposits.
Financing activities consist of the solicitation and repayment of customer
deposits, borrowings and repayments, treasury stock activity, and the payment of
dividends. During the six months ended June 30, 2001, net cash provided by
financing activities totaled $7.7 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 $3.8 million,
and consisted of an increase in deposit accounts that was offset by the net
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.
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 June 30, 2001, both
Middlefield and the Bank exceeded the Minimum risk-based and leverage capital
ratio requirements. Middlefield's Total risk-based, Tier I risk-based and Tier I
leverage ratios were 17.39%, 16.13%, 10.31%, and the bank's were 16.94%, 15.69%,
10.12%, respectively, at June 30, 2001.
RISK ELEMENT
The table below presents information concerning nonperforming assets including
nonaccrual loans, renegotiated loans, loans 90 days or more past due, other real
estate loans, and repossessed assets. A loan is classified as nonaccrual when,
in the opinion of management, there are serious doubts about collectibility of
interest and principal. At the time the accrual of interest is discontinued,
future income is recognized only when cash is received. Renegotiated loans are
those loans which terms have been renegotiated to
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provide a reduction or deferral of principal or interest as a result of the
deterioration of the borrower.
June 30, December 31,
2001 2000
-------- ------------
(Dollars in thousands)
Loans on nonaccrual basis $ 0 $ 0
Loans past due 90 days or more and still accruing 10 5
--- ---
Total nonperforming loans $10 $ 5
--- ---
Nonperforming loans as a percent of total loans 0.01% 0.00%
==== ====
Nonperforming assets as a percent of total assets 0.01% 0.00%
==== ====
At June 30, 2001 and December 31, 2000, no real estate or other assets were held
as foreclosed or repossessed property.
Management monitors impaired loans on a continual basis. As of June 30, 2001,
impaired loans had no material effect on the Company's financial position or
results of operations.
During the six-month period ended June 30, 2001, loans increased $8.0 million
while nonperforming loans remained relatively unchanged. The allowance for loan
losses decreased $21,000 during this same period and resulted in the percentage
of allowance for loan losses to loans outstanding to decline to 1.41% as
compared to 1.51% at December 31, 2000. Nonperforming loans are primarily made
up of residential and commercial mortgages. The collateral requirements on such
loans reduce the risk of potential losses to an acceptable level in management's
opinion.
The allowance for loan losses represents the amount that management estimates is
adequate to provide for probable losses inherent in the loan portfolio, as of
the balance sheet date. The relationship between the allowance for loan losses
and outstanding loans is a function of the credit quality and known risk
attributed to the loan portfolio. The on-going loan review program and credit
approval process is used to determine the adequacy of the allowance for loan
losses.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Like other financial institutions, the bank is subject to interest rate risk.
The bank's interest-earning assets could mature or reprice more rapidly than or
on a different basis from its interest-bearing liabilities (primarily borrowings
and deposits with short- and medium-term maturities) in a period of declining
interest rates. Although having assets that mature or reprice more frequently on
average than liabilities will be beneficial in times of rising interest rates,
that asset/liability structure will result in lower net interest income in
periods of declining interest rates.
Interest rate sensitivity, or interest rate risk, relates to the effect of
changing interest rates on net interest income. Interest-earning assets with
interest rates tied to the prime rate for example, or that mature in relatively
short periods of time, are considered interest-rate sensitive. Interest-bearing
liabilities with interest rates that can be repriced in a discretionary manner,
or that mature in relatively short periods of time, are also considered
interest-rate sensitive. The differences between interest-sensitive assets and
interest-sensitive liabilities over various time horizons are commonly referred
to as sensitivity gaps. As interest rates change, a sensitivity gap will have
either a favorable effect or an adverse effect on net interest income. A
negative gap -- with liabilities repricing more rapidly than assets -- generally
should have a favorable effect when interest rates are falling, and an adverse
effect when rates are rising. A positive gap -- with assets repricing more
rapidly than liabilities -- generally should have the opposite effect: an
adverse effect when rates are falling and a favorable effect when rates are
rising.
Middlefield and the bank have no financial instruments entered into for trading
purposes. Interest rates change daily on federal funds purchased and sold.
Federal funds are therefore the most sensitive to the market and have the most
stable fair values. Loans and deposits tied to indices such as the prime rate or
federal discount rate are also market sensitive, with stable fair values. The
least sensitive instruments include long-term, fixed-rate loans and securities
and fixed-rate savings deposits, which have the least stable fair value.
Management of maturity distributions of assets and liabilities between these
extremes is as important as the balances maintained. Management of maturity
distributions involves matching interest rate maturities as well as principal
maturities, and it influences net interest income significantly. In periods of
rapidly changing interest rates, a negative or positive gap can cause major
fluctuations in net interest income and earnings. Managing asset and liability
sensitivities to enhance growth regardless of changes in market conditions is
one of the objectives of the bank's asset/liability management strategy.
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Evaluating the bank's exposure to changes in interest rates is the
responsibility of the Asset/Liability Committee, a committee of bank directors
and officers. The Asset/Liability Committee assesses both the adequacy of the
management process used to control interest rate risk and the quantitative level
of exposure, ensuring that appropriate policies, procedures, management
information systems and internal controls are in place to maintain interest rate
risk at appropriate levels. Evaluating the quantitative level of interest rate
risk exposure requires assessment of existing and potential effects of changes
in interest rates on the bank's financial condition, including capital adequacy,
earnings, liquidity and asset quality.
The bank uses an asset/liability model to support its balance sheet strategies.
Gap analysis, one of the methods used by management to analyze interest rate
risk, does not necessarily show the precise impact of specific interest rate
movements on Middlefield's net interest income because the re-pricing of certain
assets and liabilities is discretionary and is subject to competitive and other
pressures. In addition, assets and liabilities within the same period may, in
fact, be repaid at different times and at different rate levels. Middlefield has
not experienced the kind of earnings volatility that might be indicated from gap
analysis.
Middlefield's use of a simulation model to better measure the impact of interest
rate changes on net interest income is incorporated into the risk management
process to effectively identify, measure, and monitor Middlefield's risk
exposure. Interest rate simulations using a variety of assumptions are employed
by Middlefield to evaluate its interest rate risk exposure. A shock analysis at
June 30, 2001 indicated that a 200 basis point movement in interest rates in
either direction would have had a minor impact on Middlefield's anticipated net
interest income and the market value of assets and liabilities over the next 12
months, well within Middlefield's ability to manage effectively.
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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
The following represents the results of matters submitted to a
vote of the stockholders at the annual meeting held on May 9,
2001:
(a) The following Class I directors were elected to a one year term expiring in
2002:
Name SHARES FOR SHARES WITHHELD
---- ---------- ---------------
George F. Hasman 869,230 15,628
Thomas C. Halstead 869,230 15,628
David D. Villers 869,230 15,628
Frances H. Frank 869,230 15,628
The following Class II directors were elected to a two-year term
expiring in 2003:
Name SHARES FOR SHARES WITHHELD
---- ---------- ---------------
Thomas G. Caldwell 869,230 15,628
Richard T. Coyne 869,230 15,628
Donald D. Hunter 869,230 15,628
Martin S. Paul 869,230 15,628
(b) The recommendation of the Board of Directors to ratify the form and use of
indemnification agreements for directors, as described in the Proxy
Statement for the Annual Meeting, was approved with 827,890 shares in
favor, and 12,590 shares against, and 30,958 shares abstaining.
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(c) The recommendation of the Board of Directors to ratify the appointment of
S.R. Snodgrass, A.C. as the Company's independent auditors, as described
in the Proxy Statement for the Annual Meeting, was approved with 875,440
shares in favor, and 9,338 shares against, and 20,708 shares abstaining.
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included in this Report or incorporated
herein by reference:
3.1 Second Amended and Restated Articles of Incorporation of
Middlefield Banc Corp. *
3.2 Regulations of Middlefield Banc Corp. *
4 Specimen Stock Certificate *
10.1 1999 Stock Option Plan of Middlefield Banc Corp. *
10.2 Severance Agreement of President and Chief Executive
Officer *
10.3 Severance Agreement of Executive Vice President *
10.4 Federal Home Loan Bank of Cincinnati Agreement for
Advances and Security Agreement dated September 14, 2000 *
10.5 Collateral Assignment Split Dollar Agreement between the
President and Chief Executive Officer and The Middlefield
Banking Company *
21 Subsidiaries of Middlefield Banc Corp. *
99.1 Form of Indemnification Agreement with directors of
Middlefield Banc Corp. and executive officers of Middlefield
Banc Corp. and The Middlefield Banking 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 June 30, 2001.
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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: August 13, 2001 By: /s/ Thomas G. Caldwell
----------------- -------------------------------------
Thomas G. Caldwell
President and Chief Executive Officer
Date: August 13, 2001 By: /s/ Donald L. Stacy
----------------- ------------------------------------
Donald L. Stacy
Principal Financial and
Accounting Officer
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